AOL TIME WARNER

1
AOL TIME WARNER

• A Failure of Synergy?

2
Reasons for the Merger in 2000

• Concentration of value
• Value of merger 300bn when first announced,
  145-183 bn in Jan. 2000 and down to 96-106 when
  deal complete in Jan. 2001 (105bn in Apr. 2002)
• Original combined annual revenues of 30 billion
• AOL-TW became worlds fourth largest corp
• (after Microsoft, General Electric and Cisco)
  and twice as big as nearest direct competitor,
  Viacom
• AOL had high capital value but lower in revenues
  TW had lower capital value but higher in revenues

3
Reasons for Later Disappointment

• Original value of deal way overpriced
• AOL paid for TW with stock was to fall, so TW
  stockholders lost out badly
• Growth now very slow
• Many people who go high speed choose not to
  maintain AOL subscription

4
Attractions of Synergy (1)

• Fusion
• (1) old media with new media
• (2) content (e.g. Time, CNN, Warner, HBO, Cartoon
  Network) with content delivery
• (e.g. AOL, CompuServe, ICQ)
• (3) clients (e.g. 26m AOL subs, 2.2m Compuserve,
  100m users of ACQ and AIM, 120m readers of Time
  Warners 33 mags, listeners to TWs 119m records,
  20m. cable subs, 206m audience for CNN and cable
  network programming.

5
Attractions of Synergy (2)

• Economies of scale
• deliver same media products to more outlets
• deliver existing product over Internet
• cross-promotion of TW media products through AOL
• and AOL products through TW media
• ease the selling of audiences to advertisers
• create giant database of private information
• provide more muscle for international expansion

6
Attractions of Synergy (3)

• Innovation
• create new media product and services for
  Internet delivery
• facilitate online music revolution
• accelerate race to high-speed service
• would accelerate development of
  narrowcasting linking products with niche
  consumer demographic groups

7
Worries at the Time

• High-speed delivery for full-length movies not
  yet matured
• Most households not yet receiving high-speed
• AOL did not have strong reputation for privacy
• Subjugated reputable news media properties to a
  company that had no commitment to news
• Concerns about open access for content providers
  to AOL-TW delivery systems
• No benefits to general public competition would
  be weakened entry costs would be higher would
  push media more to popular culture content
• Forcing own content down own distribution systems
  might not be good for business higher prices
  could be sought elsewhere

8
One Year Later (Apr. 2002)

• Value of stock down by two-thirds
• Significant downturn in advertising crippled AOL
• High debt plus falling stock price made it
  difficult to do deals (e.g. with Comcast)
• Market hostility to spin exaggerations that made
  performance look better than it was
• Falling revenue leads to slash in European
  marketing company had to buy half of AOL Europe
  from Bertelsmann

9
One Year Later (2)

• Potential loss of cable subs as partner Newhouse
  withdraws 2.3m cable subs from AOL partnership
• Slowdown in new AOL clients, and loss of clients
  who move to other cable/telcom corps for
  high-speed service
• Some big film hits (e.g. Lord of the Rings),
  boosted in part by AOL cross-promotions
• Benefits of synergy reduced by continuing need to
  take content from other sources (customers resent
  exclusivity) and to distribute through other
  channels. Different divisions value editorial
  independence

10
Two Years Later

• Debt at 27.5 bn
• Selling off non-core assets to ease debt burden
  (e.g. Atlanta sports teams, TWs book publishing,
  50 stake in Comedy Central), but not all these
  may be easy to sell in poor market
• Link with entertainment assets has been of little
  value to AOL, and TW does not need AOL

11
Two Years Later (2)

• AOLs founder, Steve Chase, resigns as chairman
  of the group vice-chairman Ted Turner also to
  resign
• Operating profit at AOL to fall from nearly 1.4
  bn in 2002 to under 800 m in 2003
• Bitterness by TW towards AOL, but dumping AOL not
  easy because few buyers (many lawsuits against
  AOL)
• Proposed deal with Chinas Legend put on ice too
  many ISPs in China right now
• Reduced intra-company spend on advertising on its
  own cable systems

12
2003 and Onwards

• AOL sees its 25million U.S. members begin to
  defect to cut-rate dial-up competitors and to
  broadband rivals in a price war.
• Loses 846,000 subs April-June 20003 alone
• Almost all its 9 bn revs come from narrowband
  subs who pay 23.90 monthly log on by phone
• Customer base will fall 6, 2003, to 45 mn homes
  broadband homes to increase 40 to 25 mn. Only
  10 of this pop subscribe to AOL.
• AOL broadband customers pay 14.95 on top of
  30-50 a month they pay to phone or cable.
  Competition (MSN, Yahoo) is cheaper.

13
2003 and Onwards (2)

• AOL strategic response to competition is not to
  reduce prices, but improve content
• In July AOL announces AOL 9.0
• Billed as door-way to brand-new online content
• Help subs tap into growing no. of TW music,
  video, mag content
• Live online performances and concerts
• Net-only TV vignettes
• Will bundle content at discount (e.g. ABC News
  and People mag)