More on the AOL-Time Warner Deal
Some further notes on this AOL-Time Warner blockbuster (multiple
conflict-of-interest note: I write for Fortune , which is owned by Time
Warner; I actually owned shares of AOL until around lunchtime, when I sold
them; and I'm writing this column for Microsoft, which is probably affected by
this deal in some way):
1) There's no doubt that acquiring Time Warner will immediately solve many
of AOL's current and future dilemmas. It will strengthen AOL's ability to
provide content to its subscribers, which isn't insignificant insofar as AOL is
still in part a proprietary service. It will speed the convergence of the
Internet and television. The deal creates really interesting possibilities in
terms of the delivery of downloadable music and video over the Net, because of
the size of Time Warner's catalogs. And, perhaps most importantly, it appears
to eliminate a lot of the concerns about AOL's ability to make a transition
into the world of broadband access. AOL will now be one of the country's key
cable providers, which means that it can position itself as a dominant player
in the high-speed-cable-modem world.
What's interesting, though, is that it's not clear AOL needed actually to
buy Time Warner in order to make any of these solutions work. Content,
especially Internet content, is eminently licensable, and as far as the
music/video business goes, it's really easy to imagine a deal in which AOL
would have given Time Warner access to its users in exchange for a cut of the
business. Even when it comes to broadband, AOL's strategy seemed to be working
well. It had cut deals with key telcos to have access to DSL customers, a deal
with AT&T (once its exclusive arrangement with Excite@Home expired) felt
like a foregone conclusion, and again cutting a deal with Time Warner could not
have been that hard a proposition. And when you consider that Steve Case said
today he's committed to open access over Time Warner's wires--that is, people
who get high-speed Internet access from Time Warner cable will be able to use
ISPs other than AOL--actually owning the wires doesn't seem to add that much to
the value of AOL.
The point is that most of the business components of the deal seem to make
perfect sense. It's just that acquiring all of Time Warner to get them,
especially at such a high price, doesn't automatically follow. The odd thing is
that at this moment when markets are replacing hierarchies all across the
American business landscape, you also have all these companies--like AOL, like
Viacom/CBS, like DaimlerChrysler, like AT&T--doing the exact opposite,
making deals on the assumption that you need to have everything under one roof
to really reap all the benefits.
2) At today's press conference, Time Warner CEO Gerald Levin explained that
he thought it made more sense to buy an Internet presence rather than try to
build one organically. Which would be an interesting thing to think about,
if he were buying an Internet presence . Instead, of course, AOL
is buying an offline/cable presence . And if you turn Levin's statement
around, that leads you to an interesting conclusion about AOL's wisdom in doing
this deal.
3) The great beneficiaries of the deal, of course, are the people who owned
Time Warner shares on Friday. It's interesting, though, that even after today's
close there was a significant gap--almost 20 percent--between the price of Time
Warner's shares and the price that AOL will pay for them when the deal closes.
In other words, if the deal were a sure thing, there's a rather nice risk-free
return just sitting there waiting to be picked up. What that means is that
arbitrageurs think the deal is not a sure thing.
(It's also unclear whether there's a collar on the deal. Time Warner
shareholders are going to get 1.5 shares for every AOL share. But that means
that if the value of AOL's shares falls, so too will the value of the deal for
Time Warner shareholders. A collar would essentially put a floor on that value,
so that if AOL's share price fell below a certain point, Time Warner
shareholders would get more shares.)
4) Despite the scope of the deal, though, antitrust concerns don't really
seem to be much of a factor here. Because the two companies' businesses are
complementary rather than competitive (that is, Time Warner doesn't offer
regular Internet access, AOL isn't in TV or magazines or music), the deal will
probably go through without much of a hitch. It would be interesting, though,
if the Justice Department or the FCC were to embrace a broader definition of
"competition" and to see Time Warner and AOL as essentially competitors in this
amorphous thing we call "media." In that case, the conglomeration of so many
different kinds of assets might be seen as anti-competitive. But it's a
stretch.
5) I'm a Time Warner cable customer, living in Brooklyn, whose cable system
is still so antiquated that I can't even get Turner Classic Movies (which Time
Warner actually owns), let alone high-speed Internet access. If this deal will
get me TCM and true broadband access, then all I can say is: "Good going,
guys!"
