Irreconcilable Differences - The AOL-Time Warner Marriage

Approved by the FCC in January 2001, the $165 billion mega-merger between AOL and Time Warner was the largest media merger in history. It was also one of the most hyped, trumpeted to be the convergence win-win of the new century. Yet with plunging stocks, soaring debt and several CEO shifts under the bridge, what is becoming clear now is not how well matched the country's largest ISP and the media conglomerate were, but how incompatible.

By Elliot Borin

November 18, 2002

Sing a song of sad young men, glasses full of rye...
All the news is bad again, kiss your dreams goodbye...
-- Francis Landesman

By any standard, the business plan was a joke. Unfortunately for its architects and, most of all, their respective shareholders, it was birthed at a time when jokes--if writ large enough--were the pearls of greatest price in a hyperventilating stock market.

Enron, Worldcom, Pet.com, Etoys, Webvan, TouchAmerica, ValueAmerica, Lucent (as if Bell Labs without the "bell" could have possibly been worth the paper its executives' checks were printed on) and so many others, all jokes. Wonderful hink-jinks to those who bought stock the day before each of the thousands of helium-filled press releases were dropped and sold the day after; sick jokes indeed for those who grabbed for the junk-paper ring right before one of Wall Street's techno-darling's defaulted on its overdue PR Newswire bill.

Well, AOL-Time Warner isn't about to burn PR Newswire. That's the good news. There may be other good news, but if there is none of the spinmeisters holed up in the corporate bunker have managed to cobble it into a press release yet.

Given the subject matter at hand it seems somehow appropriate to play "let's pretend." Let's pretend that John Deere announced plans to merge with the Old Order Amish. One of the world's leading manufacturers of tractors united in martial bliss with the nation's preeminent users of horse-drawn farm implements. Would any day-trader cogent enough to remember his account password invest in that happy couple?

Consider Time Warner. Arguably the world's foremost content provider. A corporate culture on revolution based for 70 years it has been. Though it is almost never thought of in these terms, Time-Warner was a company built on cutting-edge technology. This is the corporation that almost single-handedly developed and perfected photojournalism as we know it today, that brought the human voice to the silver screen, that revolutionized financial and sports journalism, that invented the mass distribution of records, tapes and CDs through monthly club plans, that drove the all-night-movie used-car pitchmen off television with HBO and, years later, used that same medium to redefine American culture with programs as diverse as The Sopranos and Def Poetry.

Now consider AOL. Keyword: LudditeCentral. Forever chasing a red-eyed herd of the lowest-common denominator of Internet users across endless cyber-skies. The day after the planned AOL-Time Warner merger was announced the oft-reported boast among AOL's rank-and-file was "they can't call us the Internet-with-training wheels anymore."

But Steve Case knew better. He'd built the world's biggest ISP from nothing on the premise that if you lead water (or a diskette) to a horse often enough he'll eventually drink some of it if only out of curiosity. In a world where "perception is reality" was a key mantra, he perceived that if he brayed "AOL is Easy, AOL is Simple, AOL is for Dummies" loud enough and long enough, it would become reality. He also understood that most people, understandably, prefer to do things the easy way--even if the so-called easier way consists of typing "abcsports" instead of "abcsports.com."

Case understood, in other words, that AOL without the real or perceived "training wheels" was nothing but a list of dialup access numbers; Juno for $21.95 a month instead of $9.95.

Case also understands--at least in his nightmares--that what the Time-Warner merger has really done for AOL is bring it to the brink of extinction. He understands that without its perceived simplicity and family-values (the latter perception increasingly undermined by porno-spammers using "aol.com" e-mail to con recipients into opening their solicitations), AOL stands defenseless against a gloves-off assault by MSN.

Defenseless, AOL? Sounds absurd, doesn't it? Maybe so. But Microsoft can afford, without any undue fiscal deep-breathing, to put 25,000,000 free MSN discs in every supermarket stand in the country with an offer of a year's free service to everyone who converts from AOL. Can AOL afford to match that offer? Pre-Time-Warner, probably yes--one way or another. Today, buried under $28 billion in post-merger debt and devalued credit ratings, maybe. But it would have to spin off Time-Warner and give very heavy concessions to its lenders to pull it off.

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