AOL TIME WARNER
A Failure of Synergy?
Reasons for the Merger in 2000
Concentration of value: Value of merger: $300bn when first announced, $145183 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 world’s 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
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
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 Warner’s 33 mags, listeners to TW’s 119m records, 20m. cable subs, 206m audience for CNN and cable network programming.
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
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
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
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
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
Two Years Later
Debt at $27.5 bn Selling off “non-core” assets to ease debt burden (e.g. Atlanta sports teams, TW’s 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
Two Years Later (2)
AOL’s 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 China’s Legend put on ice: too many ISPs in China right now Reduced intra-company spend on advertising on its own cable systems
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 $3050 a month they pay to phone or cable. Competition (MSN, Yahoo) is cheaper.
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)