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AOL Time Warner to spin a wide web

The companies are on track to create an unprecedented company with significant market power--despite government-imposed restrictions on their merger.

America Online and Time Warner are on track to create an unprecedented company with significant market power--despite government-imposed restrictions on their merger.

Even a brief survey of the combined company's vast holdings indicates the AOL Time
Warner package stunning magnitude of the merger: the creation of a true media empire unparalleled in modern history.

AOL Time Warner, as the new company will be called, will reach virtually any household that uses the Internet, reads magazines, reads books, watches cable TV, or goes to the movies. America Online has more than 26 million paid subscribers and runs many high-profile Internet services, such as Netscape Netcenter, instant messaging products, and movie information service AOL MovieFone.

Time Warner's cable network reaches 20 percent of cable households in the United States, and the company owns an array of media and entertainment assets. Time Warner's operating divisions including Time Inc., the publisher of Time, People, Entertainment Weekly and Sports Illustrated; Turner Broadcasting, the parent of CNN; Warner Bros. Studios, which produced blockbusters such as "The Perfect Storm"; and Warner Music Group, which lists artists such as Madonna and the Red Hot Chili Peppers in its pantheon.

Yet the sheer size of the combination could be the mega-corporation's own worst enemy.

Stories of power struggles within each company have long been circulated throughout their respective industries, and the combination of their two different cultures conjures images of political turmoil worthy of ancient Rome.

The company will be led by a combination of AOL and Time Warner executives, with AOL Chairman Steve Case taking over as chairman of the new company, and Time Warner Chief Executive Gerald Levin stepping into the CEO slot. AOL President Bob Pittman and Time Warner President Richard Parsons will share co-chief operating officer responsibilities, although Pittman is considered likely to wield more influence in handling day-to-day operations.

Whoever survives the internal battles must then contend with increasingly agitated investors and the whims of Wall Street. Although management predicts savings of $1 billion within the first year after reducing overlap, with revenue growth of 12 percent to 15 percent, the stocks of both companies have declined steadily over the last year.

Nevertheless, analyst Youseff Squali of ING Barings rates the company a "strong buy" and said he believes that it can hit its numbers. He said its projections are relatively modest, with the companies' current operating costs running about $30 billion a year, and Time Warner's projected growth rate before the merger hovering around 8 percent to 10 percent.

"I think it's achievable," he said, "but the devil is in the details."

One area where the company expects to gain substantial savings is in marketing Time Warner publications to AOL members. An AOL promotion for Time Warner's flagship Time magazine, for example, signed up 500,000 new subscribers in five months, the companies have said.

In addition, AOL Time Warner will likely institute layoffs as a cost-saving measure. Although the companies have few overlapping businesses, staff cuts are widely expected at Turner Broadcast's CNN news operations, for one. CNN, which has about 4,000 employees, has announced a review of all staff positions. The reductions are not related to the merger, according to analysts, who note that softening advertising spending has hurt media companies across the board.

Beyond short-term strategies, however, AOL Time Warner faces the daunting task of building new businesses that aim to transform the traditional media business through online technology--a trick that Time Warner alone was unable to pull off despite years of effort and millions of dollars in investments on failed online ventures such as Pathfinder.

Some potential new features that may be in the works include an online music The P2P myth subscription service, in which AOL subscribers would pay a small monthly fee for the right to download or stream songs from Warner Music artists and perhaps other labels over the Internet. Subscriptions are considered the most viable business model for commercial online music distribution, which faces potent competition from free file-swapping services such as Napster.

AOL could also play a role in developing online distribution for Time Warner's movie studios as rivals such as Sony prepare to go live with video-on-demand schemes within the next few months.

Another area where AOL Time Warner could stake out a significant position is in telephony, through AOL's instant messaging businesses and Time Warner's cable properties.

With such developments months or years away from realization, however, the company's outlook for now rests on its ability to execute on relatively mundane cost-saving and cross-promotional opportunities, according to Squali.

"The promise of the combined companies is that they will be able to create new opportunities in their respective marketplaces," he said. "The problem is some of those markets aren't here yet."