The European Commission's approval of the AOL-Time Warner merger is just one step forward for the $135 billion deal and does not offer any guarantee of what U.S. regulators will decide.
If AOL simply wanted to buy access into homes, it could buy many cable companies for less than $135 billion, particularly given the effect of the continuing market downturn on the valuations of those companies. The only way we see that this deal makes sense is if AOL leverages Time Warner's business content--for instance, Fortune and CNN--to further penetrate the small-to-midsize enterprise market.
Time Warner has strong content for home markets that AOL can use to retain its large population of home customers and attract more members. However, any advantage that AOL gets from owning the Time Warner cable systems--on which the stock market and, apparently, the regulators have focused--is likely to be minor. The FCC will certainly require that the merged company not restrict the cable system access of competing services such as MSN.
So far, the super-ISPs have focused on the consumer market. Although this will remain important, they may soon refocus on the small-to-midsize enterprise market, where the less expensive, "normal" ISPs have dominated.
The super-ISPs' entry into that market must include services that justify higher subscription charges. Business information is the starting point for their development of these services, but it's also likely they will develop collaborative services to support employees working together from homes and companies working together worldwide. Eventually, AOL and its competitors will want to offer transactional services such as business-to-business marketplaces.
Although the European regulators' ruling will probably not have a decisive influence on U.S. regulators, the latter have given no reason so far to believe that they will not approve the deal with some fairly small changes.
But even with regulatory approval, this deal is far from secure, and the final arbiters will be the stockholders in both companies, particularly in Time Warner. While AOL has not suffered as badly as many of the dot-coms, its stock is down 50 percent from its high, and it may fall further in the present bear market, making the deal less attractive to those stockholders.
Also, although it is clear that AOL gets huge amounts of valuable content plus some control over cable access into homes, the advantages of the merger to Time Warner are less obvious. This buyout may have looked more attractive to investors when it was announced last year--in the middle of the dot-com euphoria--than it will in the colder light of today's market.
(To listen to an audio discussion of the AOL/Time Warner deal, go to METAView.)
META Group analysts Dale Kutnick, William Zachmann, Peter Burris, and Jack Gold contributed to this article.
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