Like Bambi going up against Godzilla, it was not a fair fight.
On one side was a small online firm out in the technological and media wilderness, ridiculed by computer sophisticates and despised even by some of its customers.
On the other was a huge corporation with decades of experience in assessing exactly what the American consumer wants--one of the few to recognize from the beginning that the Internet was revolutionary, and to devote bucks and brains to trying to tame it.
"We saw the Internet was going to be the dominant force of the decade," said Bruce Judson, who ran Time Inc.'s New Media division in the mid-1990s. "But no one could have imagined the world we're living in now."
It's a world where that perpetually beleaguered Northern Virginia company, America Online Inc., last week announced plans to acquire that savvy Manhattan company, Time Warner Inc. The legendary Henry Luce, Time's founder, labeled the last 10 decades "the American Century"; his company made it only 10 days into what AOL's founder, Steve Case, is calling "the Internet Century."
No one knows whether this union will work. But the mere fact that it is happening is remarkable. Five years ago, the suggestion that AOL would be a dominant partner in such a deal would have been ridiculous. Three years ago, it would have been amusing. Last week, everyone said it was inevitable.
Long ago, Time Inc. considered buying AOL for what now seems like pocket change. When did the balance of power between the two companies shift? Was it in late 1998, when the value the stock market put on the 15-year-old AOL exceeded for the first time that of the 77-year-old Time Warner?
Was it in late 1996, when AOL realized that it had become the star, stopped paying for much of its big-name magazine content and demanded to be paid instead?
Or was it April 12, 1996, when an Internet search engine with minimal revenue and no profit, but millions of fans, sold its first shares?
"The day Yahoo went public was the day the world changed," said Phil Anderson, who teaches Internet strategies at Dartmouth College's business school. "Yahoo was nothing. It was a Web site. But suddenly it had a valuation of $800 million. And people said, 'Ohmygod, what would the largest online company be worth if Yahoo's worth all that?' "
From that moment, Anderson said, AOL was valued by the market as an Internet stock, which sent it into the stratosphere--$164 billion on the day before the proposed merger deal. That's enough to take over Time Warner, which despite all its magazine, movie, television, book and cable properties, was worth only $97 billion.
The weird thing is that AOL never really has been about the World Wide Web, which is what most people now mean when they refer to the Internet. AOL always has been a sort of parallel private Web, one that began before the real thing and then tried to keep its members away from it. AOL only grudgingly provided its subscribers with Web access, fearful they would desert. The growth of the Web was supposed to kill proprietary online services. That was why the New Media committee at Time Warner had recommended against buying AOL in 1994.
AOL always has seemed like a sucker bet. First its bad technology, which constantly crashed the system, was supposed to kill the company. Then larger, better-funded competitors, such as Prodigy Services Co. and CompuServe Inc., would crush it. Next, the executioner was AOL's forced move to flat-rate pricing, which meant some infuriated subscribers couldn't get online because everybody else already was there. Then came the Web, of course, followed by more technology problems. And finally, free access to the Internet.
Most recently the death knell has been the threat of superior Internet delivery systems like cable and wireless, which make AOL's dial-up phone connection seem as antiquated as tin cans and a string. The chance to use Time Warner's cable systems was a large impetus for AOL to propose the merger deal. But that doesn't mean there will be a happy ending. Some experts persuasively argue that a deal with Time Warner would really, finally, without question kill AOL. In the twinned tales of how AOL won and Time Warner lost the battle for online supremacy, the impending death of AOL is just about the only constant.
A Missed Opportunity
For last week's deal to have occurred, it was not enough for AOL to succeed; Time Warner had to fail. When companies are eclipsed, such as the way General Motors Corp. was hammered by the popularity of small Japanese cars in the early 1970s, it's because the incumbents were fat and lazy, sure that the world they built was fixed and immutable.
That sort of stupidity isn't the story of the Internet era. Other, more complicated factors handicapped the old and spurred on the new.
Go back seven years. In Internet time, 1993 might as well have been 1 million B.C. Amazon.com hadn't sold a book yet and eBay hadn't auctioned its first Pez dispenser. To go online meant subscribing to a service such as AOL, Prodigy or GEnie, which you could use to send what then was called electronic mail as well as post messages on bulletin boards. Cyberspace was text, not graphics; it was about communication, not shopping.
But sharper folks knew something was coming. In early 1993, Time magazine published a cover article on the latter-day hippie phenomenon called Cyberpunk, which glancingly referred to "the huge network called the Internet." By one estimate, there were 50 commercial Web sites then.
By the end of 1993, there were 10,000 Web sites and AOL was paying Time to repost the magazine on its site. Time executives smelled opportunity.
"They saw the Internet earlier than anyone else," said Michael Wolff, one of the first Web entrepreneurs and briefly a consultant to Time during that era.
Wolff credits Walter Isaacson--now the editor of Time magazine, then the guiding force behind the company's Internet efforts--with being the first to sense the Web's potential as a publishing and media platform.
"Walter argued with enormous force and energy that the Web was where the online world was going," Wolff said.
Abishek Gami, an analyst with William Blair & Co., agreed. "They didn't miss the Internet like some companies did," Gami said, adding that if Time Warner had executed properly, "they would be the largest Internet company today, no doubt about it."
So why didn't they execute properly?
Even the smartest media companies, like Time, thought they had the luxury of time. Silicon Valley venture capitalist Geoff Yang, seeking a partner for the search engine Excite among East Coast media companies in 1995, remembers being told, "We're going to sit back and watch. If this Internet thing becomes real, we'll come in and buy some companies. It will be another medium that will plug into our empire."
Then, almost immediately, it was too late. Yahoo Inc. went public and was followed by other Web companies. Everyone said the companies were overpriced. But for the next four years, they only became more overpriced.
Time's primary Internet venture was Pathfinder, which began in late 1994 and provided an umbrella site for its magazines. It was popular, but it wasn't a strategy--it was only a Web site. Pathfinder went through many permutations and lost tens of millions of dollars before it was shut down last year.
"They said, 'Here's the slew of magazines we have, and we're putting them under one roof for you to look at,' " said Venkatesh Shankar, who teaches at the University of Maryland's Smith School of Business. "Time wasn't using the Web, adapting the Web to what the customers wanted, the way the Web companies were."
Giving AOL Legitimacy
Time's New Media committee, which primarily consisted of Isaacson, Wolff and Judson, had discussed buying the publicly traded AOL. "There's no question Time could have bought them for a reasonable sum," Wolff said. Isaacson said he doesn't remember any such discussions.
But there is little doubt that Time helped make the company that is now buying it. AOL had a half-million subscribers at the end of 1993, one-sixth the number of Time's flagship magazine. AOL paid Time $500,000 a year to put the magazine online.
"It became the deal that gave AOL its legitimacy," Wolff said. "All AOL was then was the chat rooms--dirty chat. This was the mechanism by which it became something else--a piece of media."
Wolff recommended against Time buying AOL. Proprietary online services were doomed, Isaacson agreed. And they were. Except for AOL.
It's possible that Time never was able to advance on its early convictions about the Net because Isaacson wasn't so brilliant after all. This is the view held by Isaacson.
"I didn't have any grand strategies that didn't get pursued, and I wasn't smart in seeing which way the world was going," he said.
No traditional corporate executive in America was smart enough then to harness the Internet. Anyone already running a profitable company would be mad to risk the whole thing on an unknown that might cost hundreds of millions of dollars before turning a profit. And if the executive wanted to, he likely would have been fired by the stockholders, management team or board of directors.
Adaptability That Paid
Last week Case kept talking about how he wanted to build the most "valuable and respected company in the world."
AOL has been valuable for a couple of years now, but respect has been much more elusive. AOL has been pursued by state attorneys general and sued by its members over various pricing snafus. In the early 1990s, some members of the AOL board considering putting bulletproof glass in Case's office, according to Kara Swisher's book "AOL.com." Board members also encouraged him to take a defensive driving course. During one Internet access crisis, Case got 17,000 outraged e-mail messages.
Incidents like that should have sunk the company, many analysts said. But Case said he "never gave much heed to people who predicted our doom. They were irrelevant because they never understood what the customer wanted." AOL had no magical formula, but it tried lots of things. And when something became a hit, such as instant messaging, the company was quick to reshape itself.
Then there was AOL's much-trumpeted simplicity. "AOL has proven they understand how to speak to people who are not in love with computers, who are not even in like with computers, better than anyone in the world," said Tim Bray, co-inventor of the programming language XML. "It's not particularly easy to use--have you ever tried to delete 35 e-mail messages?--but it's easy to learn."
But people still don't like AOL. "This deal is evidence of how powerful the Internet tide is," said Don Luskin, a mutual fund manager at OpenFund. "Even an inferior product that happens to have a well-known brand has been able to do well."
You've Got Junk Mail
Some think this merger might be a union of dinosaurs. "This is a survival measure, not the much-vaunted coronation of Steve Case," Dartmouth's Anderson said.
AOL's content is optimized for the slow connections that most people still use to hook up to the Internet. The site features pages that are static and don't have a lot of graphics because they load quickly.
That's narrowband, but broadband is coming. "Broadband can offer things like full-motion video that makes what AOL is doing look like movies from 1900," Anderson said.
One reason AOL bought Time Warner is to get access to its broadband cable properties. That means, Anderson said, the company will have to move ahead on two parallel tracks. AOL has to continue developing the site for its current users--new shopping services, new activities, and so on. But it also has to have another division working on broadband.
"When you have two groups working in parallel like that, they spend more time fighting each other than anything else," Anderson said.
Meanwhile, there is cross-marketing synergy to exploit. Here is how that will work, as explained by Internet consultant Frank Catalano:
"Time Warner has one of the biggest and best marketing organizations in the world. So they're essentially getting a list of 22 million names--all those AOL subscribers--for whatever they want to sell. It's an incredible asset. Instead of 'You've got mail,' they'll have to change the AOL slogan to 'You've got junk mail.' "
So far the best clue as to whether this merger will work is sartorial. Time Warner's Levin, 60, is famously a man who wears a suit and tie to bed. Case, 41, who would be chairman of the merged entity, is firmly in the casual high-tech tradition.
At Monday's press conference, however, they reversed themselves. Levin didn't wear a tie while Case did. The old media guy went funky just as the new media guy got formal.
At worst, this means these guys are not yet on the same wavelength. Time Warner's 67,500 employees might be about to have some near-death experiences of their own.
Staff writer Ariana Eunjung Cha contributed to this report.
A MERGER TO BOGGLE THE MIND
The scope of an AOL-Time Warner merger would be staggering on many levels. Here is a detailing of the holdings of both companies, along with a few suggestions on how some synergies might be deployed.
1922: Time is founded. First magazine is Time. That same year, Warner Brothers is founded by Harry, Abe, Jack and Sam Warner.
1989: America Online service is launched by Control Video.
1989: Time and Warner Communications merge, after a hostile bid for Time by Paramount is derailed.
1992: AOL goes public.
1998: AOL acquires CompuServe's online services division and Netscape Communications.
1996: Time Warner buys Turner Broadcasting System for $14 billion.
Jan. 10, 2000: Time Warner and America Online announce plans to merge.
CABLE & INTERNET:
* Time Warner has 13 million customers, about one-fifth of the U.S. market.
* Road Runner (high-speed Internet access; jointly owned with MediaOne Group, Microsoft and Compaq)
* Time Warner Digital Media (Internet operations and investments)
* Sports Illustrated
* Entertainment Weekly
Through Warner Bros.:
* MAD Magazine
* DC Comics
* Little, Brown
* Warner Books
* Oxmoor House
* Sunset Books
* Leisure Books
* Book-of-the-Month Club
Warner Music Group:
The Atlantic Group
* Tori Amos
* Hootie & the Blowfish
* Jelly Roll Morton
* Sinead O'Connor
* Kronos Quartet
* Jerry Lee Lewis
* Charlie Parker
* LeAnn Rimes
* The Three Tenors
Warner Bros. Records
* Eric Clapton
* Faith Hill
* Red Hot Chili Peppers
* Alanis Morissette
* Tom Petty
* Adam Sandler
Elektra Entertainment Group
* Jackson Browne
* Natalie Merchant
* Tracy Chapman
* Warner Music International
* Rhino Records
* Sire Records
* Columbia House (owned jointly with Sony; to be merged with online retailer CDNow)
Among recent movies
* Any Given Sunday
* Eyes Wide Shut
* The Matrix
* You've Got Mail
New Line Cinema:
* Austin Powers: The Spy Who Shagged Me
Among Time Warner's classic movies:
* Casablanca (1942)
* Rebel Without a Cause (1955)
* Cable News Network
* Turner Network Television
* Cartoon Network
* TBS Superstation
* Turner Classic Movies
* World Championship Wrestling
* The WB Network
* Home Box Office (nation's number one pay TV service)
* Court TV 50 percent)
* Comedy Central 50 percent)
TV shows T W produces:
* The Rosie O'Donnell Show
* The Drew Carey Show
* Dawson's Creek
Syndication rights to:
* Seinfeld (to air starting in 2002)
Professional sports teams:
* Atlanta Braves (baseball)
* Atlanta Hawks (basketball)
* Atlanta Thrashers (hockey)
* More than 180 Warner Bros. Studio stores
America Online; AOL, the leading Internet service provider, reaches 20 million homes.
CompuServe reaches 2 million.
OTHER NET SERVICES:
ICQ Instant Messaging Service
AOL Instant Messenger
Digital City, online local community guide targeting more than 60 cities.
Netscape Netcenter and AOL.com portals.
Netscape Navigator and Netscape Communicator browsers.
MapQuest*, one of the most popular sites for getting maps and directions.
MovieFone, a movie listing and ticketing service
TIME WARNER/AMERICA ONLINE COMBINED:
* A free trial subscription to Road Runner service (with AOL's content now prominently featured) could be offered for those who sign up with Time Warner Cable service, which now announces "You've Got Cable!" each time you tune in.
* Those who venture into an AOL chat room on house plants that thrive in the dark could be targeted by Time Warner's Book-of-the-Month Club, featuring a new book on in-home gardening. A two-month trial to People magazine also could be thrown in.
* Madonna could give a special interactive concert for AOL subscribers, who could select various outfits for her to wear (most votes win), including an Atlanta Hawks basketball hat. They also could request a special "Happy Birthday, Tommy" (or whoever) song sung by Adam Sandler, to be downloaded later.
* Digital City could vigorously promote "Austin Powers: The Spy Who Shagged Me," at local theaters in various cities. Free Mini-Me dolls could be offered to those who sign up for ICQ Instant Messaging Service.
* Netscape Netcenter could provide video clips from "ER," "Friends" and "The Rosie O'Donnell Show," and invite site visitors to edit them into a 10-minute clip, integrating their own home movies. The winner could get a guest appearance on "The Drew Carey Show."
* MapQuest could posts a special travel guide that promotes tickets to an Atlanta Braves game as well as discount coupons for shopping at Warner Bros. retail stores. The first 10 takers could get a complimentary map showing the homes of all the Atlanta Braves players.
Reporting by Jamie Baylis