Cover

Triumph of the New Media

Internet provider AOL plans to take over Time Warner

Robert Sheppard January 24 2000
Cover

Triumph of the New Media

Internet provider AOL plans to take over Time Warner

Robert Sheppard January 24 2000
You would have to think that Bugs Bunny is the most surprised wabbit on the Web wight now. There he was one day languishing on Time Warner's Cartoon Network, a nostalgic symbol of the gilded age of Baby Boomers—so Twentieth Century. The next he is suddenly catapulted into the brave new world of the so-called new media, the fuzzy' front man (front bunny?) in Time Warner's media hutch, which also boasts such hot properties as Humphrey Bogart and Tom Hanks movies, the cast of Friends, Neil Young, Madonna, Time magazine and CNN. But the blockbuster merger last week of Internet giant America Online Inc. and media colossus Time Warner Inc. shook the ground in more than Bugs’s world. It also raised the question of whether Canada is missing the wave of the mega-Net revolution, as does a comprehensive new study obtained by Macleans (page 34).

For the business world, it was the sheer size of the AOL deal—and its potential to career through the news and entertainment industry—that seized the day. The mammoth takeover of Time Warner, the largest, though debt-ridden, media conglomerate in the world, by AOL, the largest Internet provider, is the new pacesetter in a spate of worldwide mergers and acquisitions. The takeover, a stock swap valued at $156 billion (U.S.) on the day it was announced, is nearly twice the size, for example, of giant Exxon Corp.’s acquisition of Mobil Corp. in 1998. And some analysts predict it will ignite a trillion-dollar shift in corporate assets in Canada and the United States as the giant auto companies, film-making houses, banks, television networks, retailers and sports leagues forge their own set of vertically integrated Internet alliances.

Technocrats saw the arrangement as the inevitable triumph of the new media—flush with its dot-com dollars and marketing savvy—over the old. The face of victory: Steve Case, the 41-year-old AOL chairman, Internet zealot and former topping developer with Pizza Hut. He has bought himself a chunk of blue-chip respectability—just a few symbolic ticks of the clock into the 21st century. Move over Bill Gates, the headlines screamed. And that is exactly what happened. By weeks end, the 44-year-old titan of Microsoft added to the drama by handing over the reins of the giant software maker to his longtime No. 2, Steve Ballmer—just as rumors surfaced of an antitrust breakup of Microsoft by the U.S. government. Unlike Case, who will be a hands-on chairman of the proposed new AOL Time Warner Inc., Gates intends to stay on as a kind of visionary overseer.

And what a future they see. For most of its brief but spectacular rise in public consciousness, the Internet has been a tool to look things up, a cyber-place of information. But with the onset of high-speed access via cable and digital phone lines— what is called broadband service—the Internet is poised to unleash a wealth of high-quality music and videos to homeowners, interactive and on-demand. The late communications guru Marshall McLuhan said that every new medium absorbs its predecessor for content. To paraphrase the comic strip character Pogo: we have seen the future and it is television.

“The AOL deal was no surprise to anyone in the new media,” observes new media guy Keith Kocho. “But it sure surprised the hell out of everyone in the traditional media— which was telling.” Kocho is the 31-year-old CEO of Toronto-based ExtendMedia Inc., one of the emerging incubator companies trying to help broadcasters and others master the Net, and he says the real lesson of the deal is that content is king. With the new digital and broadband technology coming to the fore, the Web will soon become a showcase for what people want to see and play with and ultimately buy. “And,” says Kocho, “AOL is going to push all this through its new entertainment brands, which are extremely powerful marketing tools.”

AOL of Dulles, Va., and Time Warner of New York City have made no secret of this strategy. In three to five years’ time, when high-speed broadband or wireless delivery is expected to be the norm, they see themselves as a kind of electronic supermarket. Theirs will be a totally integrated offering in which they can push through the Internet their direct-to-home movies, TV shows and magazines, and sell, not only the advertising that goes with them, but the products viewers see on the show and the screens, services and portable equipment they will want to watch them with.

Competitors like the giant AT&T Corp. cable and telephone company in the United States and Rogers Communications Inc. and Shaw Communications Inc. cable companies in Canada are also into bundling. Customers can be offered wireless, long-distance connections and the Internet on the same bill. The next step might be service packages of so many minutes to be used on any of the common offerings. The step after that: interactive connections to partnered news or business services or special group discounts to electronic retailers. In current e-jargon, this practice is called “nesting”—as in those Russian dolls that nestle inside each other. “The competitive battle of the future will be over who has control of the consumer mind-share,” predicts Kocho. The question of the moment: who will nest with whom?

The AOL-Time Warner deal, which will face regulatory hurdles in Europe as well as the United States, unleashed a global stock market frenzy. AOL's stock took a battering: last week, it lost 13.9 per cent of its value, or $10.19 a share. The big investment houses applauded the deal almost in chorus. But technology funds and individual investors seemed to resent losing one of their favorite highfliers. Another big Internet player, Yahoo! Inc., also took a drubbing, despite repeated statements that it had no intention of making a media industry acquisition. But most potential targets—entertainment giant Walt Disney Co., film and music firms like the revamped Seagram Co. Ltd. of Montreal, news groups like Rupert Murdoch’s News Corp, and Internet carriers like Toronto-based Rogers, a cable, wireless phone and media company with ties to Microsoft and AT &T—all floated skyward on a wave of dreamy speculation.

To some degree, the shock wave from the mega-merger stopped at the Canada-U.S. border

Who will make the first move? In this country, most observers were looking at Rogers, BCE Inc. of Montreal—a wary entrant to the Internet sweepstakes—and television networks CTV Inc. and Can West Global Communications Corp. But to some degree, the AOL shock wave stopped at the 49th parallel. “The difference is the border,” says Brahm Eiley, president of Toronto-based Convergence Consulting Group. Foreign ownership rules make it impossible for the big U.S. dot-coms to take control of Canada's cable or telephone companies. Nor do they need to: the Canadian Radio-television and Telecommunications Commission decreed in 1996 that access to high-speed cable and telephone lines will be open to all comers, which is not the case in the United States.

Another factor is the Canadian conundrum. According to a recent PricewaterhouseCoopers survey, 43 per cent of Canadians have access to the Internet, about the same proportion as in the United States and nearly twice that of Europe. Canada also has a higher proportion of highspeed Internet users than in the United States, notes Brian Segal, the head of Rogers’ publishing and new media ventures. But the numbers are still relatively small and the market for electronic business, he notes, “is running about two years behind the Americans.” Time enough to develop an Internet strategy? Perhaps, but the clock is ticking. The CRTC has also said that it will not regulate the Internet even when it arrives full-bore in living colour and fast-paced video. That means that AOL Time Warner or CBS will someday be able to funnel their programs directly into Canadian homes, totally bypassing Canadian television networks and Canadian regulators to boot. “Do we see this AOL deal as something to be feared or something to be embraced?” asks Henry Eaton, vice-president of strategic planning at CTV in Toronto. “Well, a little bit of both.”

Both CTV and Can West Global of Winnipeg are pursuing their own Internet strategies, attempting to use TV to sell their new Web sites and vice versa. CTV has both its new Sportsnet and Newsnet television channels on Web sites, Newsnet can actually be viewed on a high-speed site; and it is planning an interactive all-news channel later this year. Global is in the midst of launching 10 local news and information Web sites across Canada, to be pitched aggressively by its television stations and to interact where possible with local shows. “I see us basically as content providers and destination sites,” says Tom Strike, the chief operating officer at Global. “Owning the pipeline, whether it’s satellite transmission, cable or telephone lines, is not where I want to be.”

Eaton at CTV concurs. Television viewing is declining slightly, more precipitously among 16 to 22-year-olds where Internet use is high, but revenues remain strong ($1.8 billion in 1998 among the private broadcasters) and TV’s share of the advertising pie is still the largest. “The research shows we can add audience,” says Eaton. “A significant number of viewers stay with us at the end of each show. They come to us for our newscasts, the things we do well. TV on the Internet will squeeze in and make room for itself. But if we can get the most eyeballs, we can afford to pay more for the shows we want to carry.”

Canada's content providers seem to want to hedge their bets over what pipeline to use or marry—cable company or telco. Even AOL Canada Inc., a relatively modest Internet player with just over 170,000 accounts but ambitious plans, envisions spreading its broadband eggs among different suppliers over the next 18 months, says CEO Stephen Bartkiw. But do the big electronic pipeline companies want their own content suppliers, their own vertically integrated operations to match what is shaping up south of the border?

BCE is sitting on a $5-billion-plus war chest, courtesy of a strategic sell-off and rising stock prices, and also owns the largest Internet provider in the country. Its Sympatico service boasts over 660,000 subscribers. But Bell has been taking its “own sweet time,” in the words of boss Jean Monty, in expanding its operation through an acquisition because of the high valuations of some of the big U.S. Internet portals. But with traditional telephone profits shrinking, Eiley of Convergence Consulting is one of those who think Bell should actively seek out a major partner like CTV—using the threat of AOL Time Warner to overturn regulatory restrictions.

The CRTC also limits cable operators from controlling specialty channels. But they are getting around the regulations in their own way. The Shaw family of Calgary runs Shaw Communications, a cable provider, as well as, through a separate organization, the Corus Entertainment Inc. group of specialty channels and radio stations. Rogers has its own stable of well-known magazines, including Macleans. Plus, it is not prohibited from developing its own television-like content on its Internet sites, notes executive Segal. Dozens of small high-tech companies, like Kocho’s ExtendMedia, partially owned by the Alliance Atlantis Communications Inc. production company among others, are springing up to fill the gaps. At Rogers, plans are afoot for specialized Internet portals for women, financial planners and health providers. There is even talk of an interactive feature on its cable community channel so viewers can play along simultaneously with certain television game shows. “Keeping the issue of ownership aside,” says Segal, “you will see a fair bit of activity between us and broadcasters to enhance the broadcast experience.”

Small steps? Perhaps when compared with the dino-deal south of the border. But is AOL Time Warner the next wave, or did they just fall into each others arms like flailing heavyweights? Each had something the other wanted. With more than 20 million Internet subscribers, easily half the U.S. market, AOL has had several near-death experiences in its 15 years of operation and was being shut out of the high-speed cable market. Time Warner has the cable outlets, 13 million of them, that AOL desired. But Time Warner needed a successful strategy to manoeuvre its increasingly expensive array of infotainment onto the Internet. It may have also needed a way to satisfy its seemingly insatiable cravings for large mergers.Founded in 1922 by magazine visionary Henry Luce, the Time magazine chain bought Warner Communications Inc., including its film and music studios, 11 years ago in what was the blockbuster deal of the day. Four years ago, it acquired Ted Turners large broadcasting empire, including CNN, for $7.6 billion (U.S). Now, though Time Warner is the purchasee in a stock swap that leaves it with 45 per cent of the proposed new enterprise, it sees its latest incarnation as “the world’s first fully integrated media and communications company for the Internet century.”Given the old media/new media cultures of the two organizations, how integrated they become remains to be seen. “I am unconvinced that this merger makes much sense, except as a stock play,” says Canada’s veteran media watcher Ian Angus. “One thing you can say for absolute certainty about the Internet age is that the key to success is being agile enough to spin on a dime.”

Angus may be right. But if AOL can come up with a way to link CNN’s potential of a billion viewers worldwide with People magazine, Hollywood movies on demand and high-powered retailers at the click of a mouse, then it will be holding a pretty hot ticket. The gurus say we are entering a period of unlimited consumer choice, when Web usage will be as matter-of-fact as pop-up toast. Sign of the times: on the same day as AOL and Time Warner announced their merger, a London newspaper revealed that Queen Elizabeth II had purchased a five-per-cent stake (worth $238,000 Cdn.) in a dot-com company, an aerial mapping firm building a giant Internet map of Britain. The old order fades, the new pushes in, arcing wildly at first, and the view down the road— nothing but Net.

The Merger Partners

America Online

Chairman & CEO: Steve Case

Employees: 12,100

Market capitalization: $141.4 billion (U.S.)

1999 revenue: $4.8 billion (U.S.)

1999 profit: $762 million (U.S.)

Brands: America Online and CompuServe Internet service providers;

Netscape Communications; AOL, MovieFone; Digital City; Spinner Networks

Time Warner

Chairman & CEO: Gerald Levin

Employees: 68,800

Market capitalization: $105.5 billion (U.S.)

1998 revenue: $26.8 billion (U.S.)

1998 profit: $168 million (U.S.)*

Brands: CNN, TBS, TNT, Cartoon Network, HB0 cable networks; Time, People, Life, Sports Illustrated,Fortune magazines; Warner Music Group; Warner Bros.; Looney Tunes; Time Warner Cable

*after paying down $55 million in debt

What they’re worth

The market capitalization of the other big players (in Canadian dollars)

Information technology

MCI WorldCom $191.2 billion

AT&T 253.1 billion

Microsoft 838.9 billion

Internet

eBay 25.1 billion

Amazon.com 31.7 billion

Yahoo! 134.6 billion

Canadian contenders

Rogers Communications 13.0 billion

BCE 79.7 billion


Big and bigger

America Online’s $156-billion (U.S.) takeover of Time Warner ranks as the world’s largest. But some other proposed and recently completed mergers and acquisitions also involve mind-boggling numbers. The next five largest, to date (value at announcement date, excluding debt)

Billions of

Purchaser Acquisition dollars (U.S.)

Vodafone AirTouch Mannesmann $124.8

(U.K.) (Germany)

MCI WorldCom Sprint 113.6

(U.S.) (U.S.)

Pfizer Warner-Lambert 87.4

(U.S.) (U.S.)

Exxon Mobil 79

(U.S.) (U.S.)

Travelers Group Citicorp 72.6

(U.S.) (U.S.)