The megamerger will create a media and high-speed Internet powerhouse with unrivaled access to TV programming, Internet content and networks, with tens of millions of subscribers who have proved they're willing to pay for these rich resources.
No other Internet company today has anything like this vast array of resources. If rivals such as AT&T, Microsoft or Excite@Home want to compete head-to-head with the new AOL Time Warner, they'll have to step up the pace of acquisitions or partnerships to fill in their strategic gaps--or retreat, according to some industry analysts.
AOL and Time Warner are looking to create a new kind of media company for the Internet age, offering consumers high-quality TV programming, high-speed Net access, and the type of content that comes with AOL's dial-up service.
"They've dramatically changed the landscape in what it means to be a next-generation interactive services/media company," said Jim Preissler, a PaineWebber financial analyst. "No one else is close, and if you take the possible combinations, you're not any closer."
After the merger announcement today, rivals scrambled to assess just how the deal would affect their businesses. Most were initially upbeat; but it was nevertheless clear that the new partnership presented a huge threat for many in the media and Net industries.
Content companies like Disney and Yahoo have staked out a lasting place in the Net content business, but it's not clear how their models can compete against AOL's new mix of content and high-speed access.
Some believe that Excite@Home, which is trying to build a high-speed Internet subscriber list that rivals AOL's, is under increased pressure as a result of the merger. AOL's new access to Time Warner's cable network and Road Runner service--along with new leverage in bargaining with Excite@Home's own partners, like AT&T--has cast dark clouds over that future, some analysts say.
But Excite@Home chief executive George Bell was optimistic, saying the deal validated his company's strategy. Other media giants will also be looking for broadband strategies, and his company is well-placed to take advantage of that, he said.
"I think this puts us at the center of whatever comes next," Bell said.
Both Excite@Home and parent AT&T will benefit as AOL drops its fight for government regulation of cable Internet access, a drive that has soaked up considerable time and resources from all three companies.
By joining forces with Time Warner, AOL gains access to what is now the largest cable network in the country; it has already backed away from its quest for open access to the broadband networks.
"Essentially, what you're going to see is we're going to take the open access issue out of Washington and out of city hall and put it into the marketplace," Gerald Levin, Time Warner's CEO, said in press conference today.
AT&T initially had little to say about the merger, other than to note that it had planned to open its cable networks to companies like AOL in a few years anyway, once its contracts with partner Excite@Home expire.
"Our position is that this has not changed our strategy," AT&T spokeswoman Rochelle Cohen said. "We are committed to giving customers a choice of (Internet access providers) for high-speed Internet access over our fixed wireless or cable systems."
Disney, one of Time Warner's biggest competitors in the media business, declined to comment on today's merger.
But analysts did say the deal would put more pressure on the media giant and other major media companies, as they try to compete without an in-house cable or Internet access distribution channel for their own content.
Some have speculated that Disney or another media company could buy one of the few remaining cable companies. Shares of cable operators Cox Communications and Comcast were up sharply on the merger news.
But Disney can compete effectively as long as it keeps pumping out quality material, analysts said.
"We don't see the deal as a direct competitive threat to Disney," said Matthew Maillian, a financial analyst with Raymond James. "Disney has a fairly credible Internet strategy itself with the Go.com portal."
Yahoo and other new media portals also need to keep producing content and services that distinguish their services from AOL's, or they risk losing market share to the new AOL Time Warner, analysts said.
Microsoft, the sole giant with the scale to take on AOL and Time Warner, says it's not interested in playing the content game. Microsoft is primarily a software company; it wants to provide software and services freely online and not through a proprietary network, a spokesman said.
"We think this demonstrates how differently people can view the market and how divergent AOL and Microsoft's paths have become," said Tom Pilla, a Microsoft spokesman.