RealTime IT News

Tip of the Convergence Iceberg

So much for America Online Inc.'s broadband problems.

The Internet access and content giant's blockbuster merger with media and entertainment conglomerate Time Warner (TWX) eliminates what many have called AOL's Achilles heel - its inability to offer high-speed 'Net access to its 20 million subscribers.

AOL's (AOL) broadband efforts to date have focused on the construction of a network of digital subscriber line (DSL) services through agreements with telecommunications and satellite companies. But DSL, which runs over existing phone lines, is beset with installation and technical problems. And unlike dial-up access, DSL is not available to everyone -- users must live within three miles of a phone company office to get quality service, if they can get it at all.

Executives at AOL know this, which is why they (and other dial-up ISPs) have been lobbying to gain access to cable lines controlled by AT&T, Time Warner and others.

Now the company has that access through Road Runner, the nation's No. 2 online cable access provider and a joint venture of Time Warner, MediaOne, Microsoft Corp. (MSFT), Compaq Computer Corp. (CPQ) and Advance/Newhouse.

Of course, the $350 billion merger creates much more than a screaming pipeline for AOL "buddies" to exchange instant messages even faster than before. The combined entity - to be called AOL Time Warner - is the most significant example yet of the convergence of "old media" and the Internet.

The potential power of these merged assets makes previous "mega-mergers" such as Excite and @Home (ATHM) seem puny in comparison. AOL brings to the marriage the most popular Internet service in the world. Besides high-speed cable access, Time Warner's holdings include the HBO cable channel, Time magazine, the Warner Bros. movie studio, Warner Music Group and Time Warner Cable.

The new company will trade on the New York Stock Exchange under the AOL symbol. Under terms of the $350 billion deal, Time Warner shareholders will receive 1.5 shares of AOL Time Warner for each share of TWX they own, and will own 45 percent of the new company. AOL shareholders will receive one share of the combined firm for each share of AOL they now own, giving them 55 percent of AOL Time Warner.

While it's impossible to determine the long-term impact of the merger for investors, the short-term market reaction underscores the premium given Time Warner shareholders. TWX was trading Monday afternoon at 92 13/16, a 43 percent jump, while AOL inched down 1.5 percent to 72-3/4.

One thing is certain, however: Soaring Internet valuations and competitive pressures will lead to similar, if less spectacular, deals in the near future. And as the trend toward convergence accelerates, the lines between Internet companies and other media and communications entities will begin to blur.

Consider this deal alone. AOL's $164 billion market capitalization was twice that of Time Warner's before Monday's trading drove up the latter's value. Yet Time Warner has far more revenues. So if AOL Time Warner derives most of its revenues from non-Internet sources, does that mean it won't be an Internet company?

Perhaps it's a moot question. But it's still an interesting one.


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