"This merger will launch the next Internet revolution," America Online Inc. chief executive Steve Case said at yesterday's news conference announcing the company's acquisition of Time Warner Inc.
Long before that, the deal is likely to launch the next wave of Internet consolidation. The stock of nearly every big media company spiked upward yesterday on rumors that it might be the next bride.
CBS Corp. closed at $62.37 1/2 a share, up $4.37 1/2, while Viacom Inc. rose $5.62 1/2 to finish at $59.50. Walt Disney Co. added $4.75 to $35.87 1/2, and News Corp. jumped $7.31 1/4 to $45.06 1/4 in trading of American depositary receipts.
"There will be half a dozen more major deals within a year," predicted Larry Rice, chief investment officer of Josephthal Lyon & Ross, a retail broker based in New York. "Every company is fair game."
Agreed Peter Ausnit of Volpe Brown Whelan in San Francisco: "Disney's got to be looking at Yahoo and Microsoft and thinking, 'How can we respond to this? How can we step up given this new competitive environment?' "
The Web companies are seeking things that people want to read, experience and play with online, a grab bag that has been labeled content. The traditional media covet that direct connection into people's homes that the Web companies have spent the past few years acquiring. And everybody wants to reach the consumer over high-speed pipes, also known as broadband, that can display the Internet in all its glory.
Yahoo Inc., which is second to AOL as the most successful Internet company, was one of the biggest movers yesterday, jumping $28.81 1/4 to close at $436.06 1/4. Like AOL, Yahoo has been among the best performers of the past five years, routinely doubling, then splitting, then doubling again. Its market cap is now $114 billion.
"The Internet has created huge valuations for many stocks," said analyst Rice. "A lot will never make it. A lot will survive. The smart ones, like AOL, will take advantage of these huge valuations to exchange their paper [for] other assets that are cheaper, like Time Warner. It's just a matter of time before Yahoo does the same."
Disney and CBS have been rumored as possible Yahoo partners. Yesterday, Yahoo issued a statement that it was not looking to align itself with one major partner.
So many mergers and alliances are being rumored so quickly that some analysts see the Internet as quickly ending up looking something like television in the 1960s: Viewers had a choice between the three major networks, and that was it. It's a switch from the original model of the Net as empowering everyone to act as a mini-broadcaster.
"The economic reality is that you need more and more capital to play in integrated businesses," said International Data Corp. analyst Roger Kay. "The anarchy of the high seas of the old Internet was a great place for entrepreneurs to float their little boats. A lot of that opportunity will be cut off, or at least taxed, by these big companies."
Dennis McAlpine, an analyst with Ryan Beck & Co., took a counter view, saying the AOL deal makes sense in a way that others would not. This deal, in his view, was largely about AOL getting Time Warner's high-speed cable access into millions of homes. AOL was faced with the possibility of being largely left behind as the Internet moved to full video and sound transmission. AOL now serves more than 20 million customers through slow-speed phone lines.
"The concern AOL had, and that all Internet service providers like AOL have, is how can they compete with a broadband service?" McAlpine said. "And the answer is, they can't. Without Time Warner's cable connections, this deal would have gone by the wayside."
Nearly every Internet, high-tech and media company was reassessing its view of the landscape yesterday. Those that commented on the record often said they found the prospects improved.
"This deal validates that broadband is the future," said Mark Stevens, an executive vice president for Excite At Home, which combines an Internet portal with high-speed access through cable lines.
He pointed out that Time Warner, after a pending deal or two is completed, will have access to 20 million cable homes. Excite At Home, which is partially owned by AT&T Corp., has deals with three times that many.
Microsoft Corp., which has the technology side of the equation but not much original content, said the AOL-Time Warner deal is a "net positive" for it.
"This deal cements what AOL has been trying to do for some time," said Yusuf Mehdi, director of the MSN marketing group. "At Microsoft, we'll work with everyone who wants to use our platform."
As a result, Mehdi said, "This is going to make us a more attractive partner for companies that compete with Time Warner."
Don Luskin, president of the investment site Metamarkets.com, had the most original approach to the merger--that essentially it doesn't matter much to the future of the Internet.
"Think of AOL as being a snappy kid from the wrong side of the tracks and somehow through wit and courage and luck and pluck, managed to lift himself up and become a huge success," Luskin said. "Like many people from that background, there's a tremendous temptation to join polite society. You want to marry royalty. The question in these marriages is, does that improve the bloodline or dilute it?"
The spin in the current deal, Luskin noted, is the traditionally upbeat one: "The aristocratic bloodline of Henry Luce and the animal vigor of the Internet are going to produce some marvelous offspring."
But what usually happens is that "the upstart accepts all the rules they've spent their lives rebelling against. The real invigoration of the bloodline is coming from the Steve Cases we'll learn about three years from now. The Internet is an infinitely protean thing. Giant companies like AOL and Time Warner end up like rocks in the river. The water will go around them."
CAPTION: AOL chief Steve Case, left, and Time Warner chief Gerald Levin shake hands before the start of a news conference to announce their deal.