It has been a whirlwind week in high-tech, one that featured America Online Inc.'s $183 billion deal to buy Time Warner Inc.; the threatened breakup of Microsoft Corp., the world's biggest software company; and the stepping aside of Microsoft chief executive Bill Gates, the world's richest man.
But perhaps this will be best remembered as the week the Internet lost some of its speculative allure. That in essence is what AOL traded in when it opted for the relative security of life with a media graybeard. And even given the deal's landmark significance, some stock watchers are wondering if it might cast an unintended blanket on Wall Street's online fervor.
They echo variations on a theme: that AOL's decision to wed a media grown-up could stunt the wide-open potential of its Internet bachelorhood. What's easier to lament than lost youth and possibility? Like indulged kids, Internet firms have been largely free of the historic baggage and performance benchmarks that saddle their corporate elders, but that all changed this week at AOL.
"America Online is no longer a sexy young Internet company," said Pat Dorsey, a senior analyst at the Chicago investment group Morningstar Inc. "It is now a hideously complex media giant that will be held to real-world expectations."
This has unnerved some investors, who are suddenly confronting the reality that a significant part of the Internet's future might lie in old-line assets at magazines, movie studios and underground pipes. Shares of AOL have dropped by 14 percent this week after the merger was announced Monday morning.
It's worth noting that the tech-heavy Nasdaq index has remained relatively stable since it surged through the 4,000 barrier on Dec. 29--even with the expectation of tax-related sell-offs immediately after New Year's. Still, it has become an article of faith that the Internet holds boundless potential for growth and riches. The faith is shaky, yet it has been strong enough to catapult many cyberstocks skyward in recent months despite heavy losses and uncertain business plans.
After the AOL deal, "There's almost a sense of betrayal here," said Cynthia Latta, the principal U.S. economist at Standard & Poor's DRI in Lexington, Mass. "AOL was a signature company of the new economy. It represented this new way of doing things. Now suddenly they are casting their lot with an old-line company."
AOL has always shunned notions of being a mere online service, preferring the more open-ended mantle of "media company." Company officials couched the Time Warner deal as a match that will join old media's established brands (CNN, People Magazine, Warner Brothers Studios) with new media's hottest delivery systems (the Internet, cable lines).
Still, AOL also acquired some unavoidable baggage Monday--for starters, $17 billion in Time Warner debt, a massive capital investment in cable lines and a splintered, old-media culture that may or may not be calibrated to cyberspeed.
"I think a lot of investors are having a hard time wrapping their arms around what this all means," Dorsey said.
"Or some of them are just throwing up their hands on AOL, saying okay, it's a new tax year, maybe this is as good a time as any to unload it," he added.
The AOL-Time Warner deal has become a flash point for some of the growing pangs that have afflicted some Internet stock stalwarts in recent weeks. The problems have been rooted in these nagging real-world expectations.
On Wednesday, shares of Yahoo plummeted by 10 percent after the Web's biggest "portal" site reported booming sales but said its rate of revenue growth would slow. A week earlier, the stock of online retail powerhouse Amazon.com lost nearly 15 percent after it reported that its fourth-quarter losses would not diminish as some had expected. Another big-name retailer, EToys Inc., has lost more than two-thirds of its value since the end of November, in part because of reports that the company did not execute well enough to satisfy its flood of holiday customers.
"We're getting to a point where this unquantifiable realm of the Internet is being replaced with closer attention to real-world records," said Richard Cripps, an equity market strategist at Legg Mason Wood Walker in Baltimore. Amazon, for instance, is expected to become profitable in the first quarter of next year, he said, and Wall Street will be watching this target closely as an indicator of how well online commerce firms are meeting their potential.
In a broader sense, the AOL-Time Warner alliance was viewed by some as a tacit acknowledgment by AOL that it might not be capable of realizing the potential of its enormous stock valuation without help. "There's a bit of a concern here that gee, is this what happens to fuzzy-cheeked Internet companies when they grow up?" said Alfred Goldman, the chief stock market strategist at A.G. Edwards in St. Louis. "Is that all the Queen Bee of the Internet has to look forward to?" This, he said, was not a resonant question two weeks ago.
Goldman and other analysts said that the rationale behind the AOL-Time Warner marriage is sound, and that the long-term prospects for the company are solid. None of the half-dozen stock watchers interviewed for this report recommends that investors sell AOL shares.
But the deal could hurt AOL's short-term momentum, and momentum is one of the driving forces of a fevered stock market that often seems unencumbered by common sense. Momentum has become a prevailing obsession in a marketplace of instant information, knee-jerk reactions and push-button trading. "But there's an even greater obsession with making money," Goldman said. "If people feel they can make it on a company that has guys with gray hair, that's just as wonderful."
It's telling, he added, that AOL chief Steve Case was the one wearing a tie at the Monday news conference, not his Time Warner counterpart Gerald Levin. Chalk it up as a sign of maturity.
"The Internet is becoming more mature," said Debra McMahon, a vice president at Mercer Management Consulting in Washington, who specializes in the Internet and communications industries. Fifty percent of all U.S. households use the Internet, so it's not that new anymore, she said. "I think the romance has been off for a while," she said. "We're in a grown-up game now."