Media merger hopefuls must remember AOL-TW
Media merger hopefuls must remember AOL-TW
Aug 8, 2006
CHICAGO -- During the next 18 months, media companies will emerge from their frenzied indoctrination into the rapidly evolving digital marketplace to engage in a new round of mergers and acquisitions. When that happens, they should remember the hard lessons learned from the 2001 merger of Time Warner and AOL.
Accelerated asset sales and industry consolidation are inevitable as content and distribution companies settle into a new economic framework that reflects changes in their fundamental relationships with consumers and advertisers. Transactions will continue to be powered by the robust growth in online advertising, content delivery and overall value.
It is just a matter of time before major and midsized broadcast companies merge their common station bases; DirecTV and EchoStar Communications merge their domestic satellite operations; and cable operators Cablevision and Charter Communications are absorbed by Comcast Corp. or Time Warner Cable, the two largest players who have just carved up the assets of bankrupt cable operator Adelphia.
However, as the so-called new- and old-media companies move closer to the center in their orientation to a consumer-driven competitive landscape, they will be tempted to respond with a more unified approach that reaches beyond the crossover alliances they are forging now. A swell of private equity and venture capital is available and ready to help support transactions.
Inevitably, there will be some corporate restructuring that redefines the media business. Speculators say that could lead to explosive combinations: Comcast and Sprint Nextel, EchoStar and AT&T-Cingular, Google and Lionsgate Entertainment, or Yahoo! and Time Warner's cable and publishing content, perhaps after the planned spinoff of its cable systems and probable sale of AOL.
A new-media player could buy Tribune Co. to achieve closer ties to local print and television resources. CBS Corp. could leverage its television brands by merging with a new-media player.
Google and Microsoft, the two new-media players with the largest cash reserves of about $8 billion each, are the biggest wild cards, focused on smaller service and tool providers, with an eye on social networking. This week's FCC auction of wireless mobile broadband spectrum, which could raise at least $10 billion from WiFi and broadband wannabes, could see the first wave of deals outside of the obvious that will combine unique assets and change media's competitive dynamic.
Whatever the combination, the companies leading the interactive revolution, with their command of the Internet and functions like search, will seek closer alignment with media companies providing critical core content as well as the long-standing subscriber and advertising ties. When that occurs, the players must ask themselves how to avoid the problems, pitfalls and all-around debacles that have plagued Time Warner and AOL during the past six years.
The single biggest reason why media's biggest and boldest marriage has failed to produce dramatic synergies is because AOL's Internet operations were dropped into an old-time corporate media structure, whose means of quantification, production and overall psychology were wholly different.
The two companies were never truly integrated or reconciled. The most telling case in point was how Time Warner's Road Runner service and AOL were never combined to aggressively drive high-speed Internet access at Time Warner Cable. And to this day, Google owns AOL's search business, in addition to a 5% equity stake in the company.
AOL -- which complicated things with its advertising and accounting irregularities that yielded more than $500 million in fines last year from the Justice Department and Securities and Exchange Commission -- was only allowed to grow and change according to the will of a Time Warner corporate hierarchy that still does not fully comprehend the service's lost past or present potential in the context of a new-media universe. An anticipated changing of the guard won't matter. Time Warner president and chief operating officer Jeff Bewkes is as well regarded an operator as Time Warner chairman and CEO Richard Parsons is a laudable peacemaker, but they still are part of the same ruling executive team.
Other Internet scions such as Google, Microsoft's MSN, Yahoo! and InterActiveCorp. are sliding into their next phase of development, in which their services and focus are becoming more refined and more challenged. Meanwhile, AOL is playing catch-up by dispensing with its monthly subscription fee to broadband users and relying more on online advertising's exploding sales.
Time Warner management has yet to formulate and clearly articulate a plan for making AOL services more competitive against its tough-minded rivals. The piecemeal corrections, additions and advancements made in recent years under capable AOL chairman and CEO Jonathan Miller, while well-intended, have been mostly too little, too late.
As Pali Research analyst Richard Greenfield recently put it in a report titled "AOL: A Brand in Search of a Strategy," AOL is struggling to give consumers a reason to use the site regularly, outside of their historic e-mail relationship with the service.
Shifting to a free service will stabilize the loss of paid subscribers the same way that creating the AOL.com portal has stabilized page views. However, Time Warner has yet to outline plans for further differentiating AOL's service and increasing its competitive muscle against sharp rivals.
Greenfield poses all the right questions: Can content and programming still be a differentiator for AOL? Will members be repulsed by the presence of increased advertising on its content pages and within its Web-based e-mails?
For now, it is difficult to forecast the trade-off in lost subscription revenue and the increase in advertising revenue -- an area of business dominated by the ingenuity and aggressiveness of Google, MSN and Yahoo!
CitiGroup analyst Jason Bazinet estimates that AOL will have to grow online advertising almost 50% next year to keep EBITDA flat, "which is clearly an ambitious target." Even eliminating $1 billion in costs by the end of 2007, AOL's overall earnings contribution to Time Warner is expected to decline for the first time -- by 13% to $1.64 billion -- next year on an 11% decline in revenue to $6.9 billion, Bazinet said.
Merrill Lynch analyst Jessica Reif Cohen says the "significant uncertainty" continues to make AOL a "show-me story," which is what it has been since the merger.
Since then, AOL's portion of Time Warner's overall $70 billion market value has fallen to about 7%, or $5 billion, making "the degree of focus on AOL disproportionate to the value it represents," Bazinet contends.
That's because Time Warner and AOL clung to a "walled garden" and dial-up narrowband subscriber strategies that were clearly dated years ago.
With quarterly results jolted by costs associated with eliminating 5,000 AOL jobs (or 26% of its staff) and $200 million in restructuring costs, it will take Wall Street a while to see evidence of the new strategy working.
If Time Warner can't make more of a go of it with the fourth-largest Web audience and one of the highest shares of ad revenue, then it needs to give it up. A cable systems spinoff and potential AOL sale already are built into the pitifully low $16-a-share stock price, making that another big catch-up story.
Perhaps the lesson here is that despite the growing and changing appreciation for each other's place in the new-media universe, mainstream and Internet players don't belong under the same roof.
While their objectives are closer than ever, their means and methods are extremely different in ways that prohibit growth if made to fit into the same mold of financial expectations and measurements. Executive attitudes and agendas can't be altered smart enough, fast enough, to make new- and old-media mergers worthwhile. Maybe grand alliances remain the best option for obvious reasons: You can withdraw gracefully and with minimum damage, and you can continue to operate according to your own unique metrics and market drivers.
The painful example of Time Warner-AOL's star-crossed union will linger a while longer. Sadly, it is unlikely to deter any of the new- and old-media players posturing for deals during the next several years from making the same mistakes.
Accelerated asset sales and industry consolidation are inevitable as content and distribution companies settle into a new economic framework that reflects changes in their fundamental relationships with consumers and advertisers. Transactions will continue to be powered by the robust growth in online advertising, content delivery and overall value.
It is just a matter of time before major and midsized broadcast companies merge their common station bases; DirecTV and EchoStar Communications merge their domestic satellite operations; and cable operators Cablevision and Charter Communications are absorbed by Comcast Corp. or Time Warner Cable, the two largest players who have just carved up the assets of bankrupt cable operator Adelphia.
However, as the so-called new- and old-media companies move closer to the center in their orientation to a consumer-driven competitive landscape, they will be tempted to respond with a more unified approach that reaches beyond the crossover alliances they are forging now. A swell of private equity and venture capital is available and ready to help support transactions.
Inevitably, there will be some corporate restructuring that redefines the media business. Speculators say that could lead to explosive combinations: Comcast and Sprint Nextel, EchoStar and AT&T-Cingular, Google and Lionsgate Entertainment, or Yahoo! and Time Warner's cable and publishing content, perhaps after the planned spinoff of its cable systems and probable sale of AOL.
A new-media player could buy Tribune Co. to achieve closer ties to local print and television resources. CBS Corp. could leverage its television brands by merging with a new-media player.
Google and Microsoft, the two new-media players with the largest cash reserves of about $8 billion each, are the biggest wild cards, focused on smaller service and tool providers, with an eye on social networking. This week's FCC auction of wireless mobile broadband spectrum, which could raise at least $10 billion from WiFi and broadband wannabes, could see the first wave of deals outside of the obvious that will combine unique assets and change media's competitive dynamic.
Whatever the combination, the companies leading the interactive revolution, with their command of the Internet and functions like search, will seek closer alignment with media companies providing critical core content as well as the long-standing subscriber and advertising ties. When that occurs, the players must ask themselves how to avoid the problems, pitfalls and all-around debacles that have plagued Time Warner and AOL during the past six years.
The single biggest reason why media's biggest and boldest marriage has failed to produce dramatic synergies is because AOL's Internet operations were dropped into an old-time corporate media structure, whose means of quantification, production and overall psychology were wholly different.
The two companies were never truly integrated or reconciled. The most telling case in point was how Time Warner's Road Runner service and AOL were never combined to aggressively drive high-speed Internet access at Time Warner Cable. And to this day, Google owns AOL's search business, in addition to a 5% equity stake in the company.
AOL -- which complicated things with its advertising and accounting irregularities that yielded more than $500 million in fines last year from the Justice Department and Securities and Exchange Commission -- was only allowed to grow and change according to the will of a Time Warner corporate hierarchy that still does not fully comprehend the service's lost past or present potential in the context of a new-media universe. An anticipated changing of the guard won't matter. Time Warner president and chief operating officer Jeff Bewkes is as well regarded an operator as Time Warner chairman and CEO Richard Parsons is a laudable peacemaker, but they still are part of the same ruling executive team.
Other Internet scions such as Google, Microsoft's MSN, Yahoo! and InterActiveCorp. are sliding into their next phase of development, in which their services and focus are becoming more refined and more challenged. Meanwhile, AOL is playing catch-up by dispensing with its monthly subscription fee to broadband users and relying more on online advertising's exploding sales.
Time Warner management has yet to formulate and clearly articulate a plan for making AOL services more competitive against its tough-minded rivals. The piecemeal corrections, additions and advancements made in recent years under capable AOL chairman and CEO Jonathan Miller, while well-intended, have been mostly too little, too late.
As Pali Research analyst Richard Greenfield recently put it in a report titled "AOL: A Brand in Search of a Strategy," AOL is struggling to give consumers a reason to use the site regularly, outside of their historic e-mail relationship with the service.
Shifting to a free service will stabilize the loss of paid subscribers the same way that creating the AOL.com portal has stabilized page views. However, Time Warner has yet to outline plans for further differentiating AOL's service and increasing its competitive muscle against sharp rivals.
Greenfield poses all the right questions: Can content and programming still be a differentiator for AOL? Will members be repulsed by the presence of increased advertising on its content pages and within its Web-based e-mails?
For now, it is difficult to forecast the trade-off in lost subscription revenue and the increase in advertising revenue -- an area of business dominated by the ingenuity and aggressiveness of Google, MSN and Yahoo!
CitiGroup analyst Jason Bazinet estimates that AOL will have to grow online advertising almost 50% next year to keep EBITDA flat, "which is clearly an ambitious target." Even eliminating $1 billion in costs by the end of 2007, AOL's overall earnings contribution to Time Warner is expected to decline for the first time -- by 13% to $1.64 billion -- next year on an 11% decline in revenue to $6.9 billion, Bazinet said.
Merrill Lynch analyst Jessica Reif Cohen says the "significant uncertainty" continues to make AOL a "show-me story," which is what it has been since the merger.
Since then, AOL's portion of Time Warner's overall $70 billion market value has fallen to about 7%, or $5 billion, making "the degree of focus on AOL disproportionate to the value it represents," Bazinet contends.
That's because Time Warner and AOL clung to a "walled garden" and dial-up narrowband subscriber strategies that were clearly dated years ago.
With quarterly results jolted by costs associated with eliminating 5,000 AOL jobs (or 26% of its staff) and $200 million in restructuring costs, it will take Wall Street a while to see evidence of the new strategy working.
If Time Warner can't make more of a go of it with the fourth-largest Web audience and one of the highest shares of ad revenue, then it needs to give it up. A cable systems spinoff and potential AOL sale already are built into the pitifully low $16-a-share stock price, making that another big catch-up story.
Perhaps the lesson here is that despite the growing and changing appreciation for each other's place in the new-media universe, mainstream and Internet players don't belong under the same roof.
While their objectives are closer than ever, their means and methods are extremely different in ways that prohibit growth if made to fit into the same mold of financial expectations and measurements. Executive attitudes and agendas can't be altered smart enough, fast enough, to make new- and old-media mergers worthwhile. Maybe grand alliances remain the best option for obvious reasons: You can withdraw gracefully and with minimum damage, and you can continue to operate according to your own unique metrics and market drivers.
The painful example of Time Warner-AOL's star-crossed union will linger a while longer. Sadly, it is unlikely to deter any of the new- and old-media players posturing for deals during the next several years from making the same mistakes.
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