AOL TIME WARNER

1
AOL TIME WARNER

• A Failure of Synergy?

2
Reasons for the Merger in 2000

• Concentration of value
• Value of merger 300bn when announced, 145-183
  bn in Jan. 2000 and down to 96-106 when deal
  complete in 2001
• Original combined annual revenues of 30 billion
• AOL-TW became worlds fourth largest corp 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

3
Reasons for Later Disappointment

• Original value of deal significantly 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

4
Attractions of Synergy

• Fusion of
• old media with new media
• content with content delivery
• clients

5

• Economies of scale
• deliver same media products to more outlets
• deliver existing product over Internet
• cross-promotion of AOL TW media products
• selling of audiences to advertisers
• create giant database of private information
• more muscle for international expansion

6

• Innovation
• create new media product services for Internet
  delivery
• facilitate online music revolution
• accelerate race to high-speed service
• accelerate development of narrowcasting
  linking products with niche consumer demographic
  groups

7
Concerns at the Time

• High-speed movie delivery not yet matured
• Most households not yet receiving high-speed
• AOL privacy concerns
• News media properties sold to company with no
  commitment to news
• Open access for content providers
• No benefits to general public
• competition weakened
• Higher entry costs
• popular culture content

8
One Year Later (Apr. 2002)

• Value of stock down by two-thirds
• Advertising downturn crippled AOL
• High debt plus falling stock price made it
  difficult to do deals (e.g. with Comcast)
• Market hostility to spin exaggerations of
  performance

9

• Potential loss of cable subs
• Slowdown in new AOL clients loss of high-speed
  service clients
• Some big film hits (e.g. Lord of the Rings),
  boosted in part by AOL cross-promotions
• Customers resent exclusivity
• Synergy benefits reduced by need to use content
  from other sources and to distribute through
  other channels.
• Different divisions value editorial independence

10
Two Years Later

• Debt at 27.5 bn
• Selling off non-core assets to ease debt burden
  
• not all easy to sell in poor market
• Link with entertainment assets has been of little
  value to AOL, and TW does not need AOL

11

• AOL founder Steve Chase resigns as chairman of
  the group
• Vice-chairman Ted Turner resigns
• AOL operating profit falls from 1.4 bn in 2002
  to under 800 m in 2003
• Dumping AOL not easy because few buyers (many
  lawsuits against AOL)
• Reduced intra-company spending on advertising on
  its own cable systems

12
2003 and Onwards

• AOL members begin to defect to cut-rate dial-up
  competitors broadband rivals in a price war.
• Loses 846,000 subs April-June 2003 alone
• Almost all its 9 bn revs come from narrowband
  subs who pay 23.90 monthly log on by phone
• Only 10 of new broadband subscribers choose AOL.
  
• AOL competitors (MSN, Yahoo) are cheaper.

13

• AOL strategic response to competition is not to
  reduce prices, but improve content
• AOLs new offerings
• Billed as door-way to brand-new online content
• Help subs tap into growing of TW music, video,
  mag content
• Live online performances and concerts
• Net-only TV vignettes
• Bundles content at discount (e.g. ABC News and
  People mag)

14
In Progress

• Numerous suitors lining up to buy AOL, potential
  profit for TW