Exploring the Digital Age: AOL and Time Warner Merger

On January 10, 2000, the largest merger in history was conducted between Time Warner and American Online. On a surface level, this merger could be seen in light of its combined resources, or even its large market value. However, the merger between these two companies has repercussions in the life of every person who uses the Internet. Undoubtedly, the Internet has emerged as a leading technology poised to change the way the world will revolve. The Internet has ushered in the Digital Age where information is king and mass customization is possible.

Even the current economy, investors have recognized this and are heavily investing in companies that are a part of this Information Technology Industry. The logic of any merger is that with its combined resources, the new company would be able to exploit opportunities that by itself it would not be able to. Many companies in history have missed these opportunities and have paid dearly for it. IBM, for instance, lost its position as a market leader when it failed to understand the potential of the personal computer.

Xerox did not recognize the potential of a graphical user interface. Both these companies are examples of successful firms that missed the imminent arrival of a technology, and the prospect of taking advantage of the opportunities created by it. However, AOL made significant steps to acquire Time Warner, and through its strategic moves, it has shown clearly that it understands the significance of the emerging Internet technology. The merger of AOL Time Warner is still currently in the process of being fulfilled.

Through the analysis done of the merger, and of the individual organization and their past mergers, it is likely that the AOL Time Warner merger will, in time, prove to be a successful move by both companies. America Online—Context, Structure, Performance In order to predict the outcome of the merger, it is important to look at each organization separately. America Online incorporated under its original founding name, Quantum Computer Services, in May of 1985. After its first online service, “Q-Link” was launched on Commodore business machines, AOL went on to launch America Online for DOS, Macintosh, Apple II, and Windows.

Over the next decade, it went on to acquire many Internet-related companies, from developers of Internet applications to Internet publishers. AOL also launched its services in Australia, Japan, the UK, and many other countries across the world. By March of 2000, America Online’s membership surpassed 22 million. America Online’s most recent business strategy, “AOL Anywhere,” is to make AOL’s industry-leading brands, services, and features available to consumers across a range of products and devices.

Through its services, millions of consumers will be able to access popular AOL features whenever and wherever they need them: from the Web, the television, Internet-ready phones, handheld computers, and others personal wireless devices. However, America Online’s position in the industry is felt mainly through its presence on the Internet. This medium for AOL is growing exponentially. As of 1999, there were over 150 million subscribers. Thousands of businesses have moved online, and the information technology industry alone represents more than one-third of the real economic growth in the US over the last five years.

In terms of size, AOL is the world’s leading interactive service. It has over 22 million members worldwide, 1. 2 million peak simultaneous users, 110 million e-mails daily, 200 million stock quotes daily, 5. 2 billion Web URLs served daily, and 63 minutes online per member daily. (www. corp. aol. com) It has become the world’s first $4. 7 billion multi-brand new media company. Despite being part of the rapidly changing Internet movement, America Online is not a typical Internet based organization. Because of their sheer size, 12,100 employees, AOL is a highly bureaucratic firm.

Their workers have traditional titles like manager, senior manager, and senior vice president. These workers help make up an organization with distinct boundaries between business entities. The two major lines of business within the company divide into four product groups. The first line of business, the Interactive Online Services business, is comprised of the Interactive Services Group, the Interactive Properties Group and the AOL International Company. The other line of business, Enterprise Solutions, is comprised of the Netscape Enterprise group.

Functioning as separate entities, these product groups together form the largest Internet service provider in the world. Though having a largely bureaucratic system and entities acting separate from each other, AOL can also be seen as very entrepreneurial. To keep up with the fast paced industry, America Online feels they need resources in order to grow and be successful. Thus far, AOL has effectively been fulfilling their needs by diversifying and acquiring companies such as Netscape and CompuServe. In terms of performance, AOL is having record earnings.

For example, they earned $271 million this quarter, up from $104 million the previous year. Operating income for the quarter jumped more than 155% since last year’s quarter to $383 million. Revenue rose to $1. 8 billion, and advertising commerce and other revenues climbed about 103% over this quarter. In 1999, AOL added 1. 7 million members worldwide while CompuServe and Gateway. net increased their customer base as well. In total, AOL and its subsidiaries added 2 million members, ending with 25. 8 members. (America Online’s Annual Report 1999).

This quarter’s results underscore the tremendous strength of America Online’s operations, and demonstrate that we are on a clear path to continued strong growth and increased profitability. Since we announced our landmark merger with Time Warner, we haven’t missed a beat. ” – Steve Case, Chairman and CEO (www. corp. aol. com) Through its new “AOL Anywhere” campaign, AOL is moving to utilize the technology of Netscape to bring the power of the Internet into the hands of their consumers anywhere they go. In providing this service, AOL is positioning itself in the industry with key allies.

For example, with key alliances with companies like Motorola, AOL is looking to provide its services wirelessly. In hoping to establish dominance in the market, AOL is looking to become stronger in the fields of wireless and broadband content and to offer its services through other mediums besides the computer. America Online—Past Mergers In many ways, America Online has built their success through its corporate acquisitions. As with many mergers, the larger organization’s culture (in this case AOL) dominated the newly acquired company’s culture.

In several cases, America Online bought another company to gain a brand name or product image, rather than to hire the talented individuals working for it. As for the acquisition of Netscape, this was exactly the case. This quickly became apparent to former Netscape employees when AOL failed to convert its 11 million subscribers to the Netscape browser software. In November 1998, AOL and Sun Microsystems purchased Netscape in a three-way deal. Sun took over the business software division, while AOL took over the browser software and the Netcenter website.

Before AOL, Netscape’s employees had a strong sense of loyalty to the company and to the product that they had created. One ex-employee said “[At Netscape], you really believed in the vision that [was] laid out and you had a great feeling about your company. ” (Zaret) Apparently, that feeling was not the same at AOL. They failed to recognize this aspect, or chose to ignore it. The Netscape browser development program has since been pushed under piles of bureaucratic correspondence and slowed tremendously.

It was apparent to many former Netscape workers that AOL purchased the company for its brand name, and even more importantly, for its Netcenter portal. Since the acquisition, many of these employees cashed-out their options and left to start new companies in search of the spirit that they felt when working for Netscape. America Online acquired CompuServe in early 1998 and now offers two different online services under the two brand names. At the time of the acquisition, AOL was known as the “dumbed-down” or consumer friendly Internet service provider.

CompuServe, on the other hand, was considered the technology oriented Internet service provider with consumers who were very technology and Internet savvy. Much criticism came from both sides when AOL and CompuServe announced their acquisition decision. AOL fans feared that their user-friendly interface would be corrupted and CompuServe users feared that AOL would attempt to simplify their service and take away the freedom. However, management realized the concerns and did not hamper the services offered to either provider.

Instead, they kept the two separate providers separate. In comparison, AOL is more bureaucratic, while CompuServe’s corporate culture is far more relaxed. AOL did not remove major players in CompuServe’s operational structure because they realized the value of running a business that catered to the more advanced Internet users, even if this was merely a ploy to improve AOL’s image. After the merger, the operational divisions of Web Development and System Support were kept separate, while most corporate support functions were taken over by AOL.

Time Warner—Context, Structure, Performance Time Warner, Inc. began in 1990 with a merger between Time, Inc. and Warner Communications, Inc. It is now the world’s leading media company and operates in the cable television, publishing, film, and music industries. The company has established a history of developing and utilizing the newest innovations. Time Warner strives to deliver sustainable growth and offer superior returns to its stakeholders.

To achieve this, it offers world-class brands such as Time and People Magazines, CNN, HBO, and Warner Brothers, and utilizes demographics, globalization, and technology in order to segment its markets. Presently, Time Warner has found opportunities in digital communications and the Internet that will help the company reach its digital audiences and to contend with its top competitors, Viacom and Disney. It is also looking to expand into the local phone business by partnering with AT&T to offer local phone service over cable networks. With employees numbering almost 70,000, this organization is managed as a rational system.

The company operates much like its competitors, existing with a hybrid organizational structure consisting of an executive board followed by essential operations and a divisional structure descending from this top level of the organizational chart. The five original divisions (Cable Networks, Publishing, Filmed Entertainment, Music, and Cable Systems) exist independently from one another in most situations. Recently (Summer 1999), a new division called Time Warner Digital Media was created to cross some boundaries between these divisions by exploring the possibilities of cross-platform products and new Internet opportunities for the company.

Time Warner is a structured organization but lacks a strong cultural element. In the past, they have attempted to evoke a feeling of personal ownership in the organization by offering stock options as incentives for its employees. However, the sheer size of the company makes it difficult for the company to shed its bureaucratic culture. Currently, the management of Time Warner is undertaking methods to identify and implement the values that they wish to stress most within the company. This company has been a successful holding company and has increased earnings each quarter for several years.

Time Warner has been on the cutting edge of technological breakthroughs. For instance, they were quick to adapt to the introduction of DVDs. The introduction of their high-speed Internet access, called Road Runner, launched a service that currently has 70+ million cable subscribers. (www. timewarne. com/corp) The company is the most advanced business as far as digital cable goes; rolling out its first phase in early 1999. Time Warner commands a very high CPM(cost per minute per thousand homes) from its advertisers buying spots on its cable networks.

With this high CPM and other performance measures, Time Warner is considered the market leader in the Media Conglomerates industry. Time Warner—Past Mergers The original merger between Time Inc. and Warner Communications Inc. was anything but ideal. In an article written about the merger, it was described as “years of personality clashes, turf battles, financial burdens, and business missteps that have hampered the combined companies’ ability to make its sum worth more than the parts. ” (Hofmeister, D1)

For one, Time Warner Inc. d a hard time leveraging its assets, which led to the question of whether or not the assets had become unmanageable. With a structure that is complicated and confusing, investors often stayed away from buying shares because they had neither the time nor the expertise to understand the company. Even before these issues were resolved, Time Warner decided to acquire Turner Broadcasting System, Inc. In many ways, this acquisition was strikingly similar to the first. It combined a bureaucratic company with a company of entrepreneurial concern.

In addition, the merger with Turner led to an “intersection of interests”. Not only were personalities conflicting, but there was also a duplication of operations. This resulted in job reductions at both Turner Broadcasting and Time Warner in an effort to eliminate any overlapping operations that took place with the merger. In order to alleviate the chaos that had just grown even larger, Levin believed the best way to organize was to “impose a tougher but simpler structure” in which he believed would “be very streamlined and focused”.

Hofmeister, D1) Although Time Warner’s top management had good intentions in addressing these problems, they failed to take control and get involved in divisional problems. Critics and supporters have often said that CEO Jerry Levin would let divisions fight it out among themselves instead of taking control and smoothing out the differences. (Okren, 42) In addition, the upper management of the company has always been considered extremely passive.

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