Aol Time Warner Inc

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AOL TIME WARNER INC.

AOL Time Warner Inc., formed by the merger of America Online, Inc. and Time Warner Inc., is a major media conglomerate that combines the power of the Internet with highly recognized information and entertainment brands. According to the combined companies' first annual report, released in early 2001, AOL Time Warner reached more than 130 million subscribers, 266 million Web users, 268 million magazine readers, 1.4 billion monthly prime-time television viewers, and 50 million monthly home video viewers. Altogether, AOL Time Warner estimated that it touched consumers more than 2.5 billion times each month.

When America Online, Inc. and Time Warner Inc. completed their merger on January 11, 2001, they created the first—and largest—Internet-powered media and communications company. Following the merger, America Online and Time Warner each became wholly-owned subsidiaries of AOL Time Warner. The firm's numerous businesses and brands were organized into seven fundamental areas:

AMERICA ONLINE.

The world's leader in consumer-oriented interactive services, Web brands, Internet technologies, and electronic commerce services, AOL's operations include the AOL service, which had more than 28 million members as of March 31, 2001, and the CompuServe service, which had about 3 million members. Also included among AOL's operations are Netscape; local brands such as Digital City, AOL Moviefone, and MapQuest; AOL messaging services, including AOL Instant Messenger; and AOL's music properties, such as Spinner.com, Winamp, and SHOUTcast.

Other AOL operations have been organized under "AOL Anywhere" services, including AOLTV, an interactive television service; the AOL Mobile Communicator service, which offered wireless access to e-mail and instant messaging using pager-sized two-way wireless devices; and the AOL-byPhone service. The company's "AOL Anywhere" strategy was designed to offer key features and content of the AOL service through multiple platforms and devices, including mobile phones, pagers, and other handheld devices.

Finally, through its strategic alliance with Sun Microsystems, Inc., AOL is involved with the development of electronic commerce and enterprise solutions under the brand iPlanet E-Commerce Solutions, developed and marketed through the Sun-Netscape alliance.

CABLE TV AND INTERNET ACCESS.

As of December 30, 2000, Time Warner Cable served some 12.8 million subscribers through cable systems that it either owned or managed. Approximately 92 percent of its cable systems had been upgraded to deliver more channels and provide two-way transmission capability, the key to offering high-speed Internet access and other interactive services via the cable line. These upgrades permit roll-out of such advanced services as digital and high-definition television (HDTV) programming, video-on-demand, telephony, and other services. As of March 31, 2001, Time Warner Cable had launched its high-speed Internet service, Road Runner, in 36 of its 39 field divisions.

FILMED ENTERTAINMENT.

The company's filmed entertainment businesses comprise several well-known brands, including Warner Bros. Pictures, New Line Cinema Corporation, Warner Home Video, and Warner Bros. Television. Also included with AOL Time Warner's film unit are the Turner classic film and animation libraries.

NETWORKS.

AOL Time Warner's networks include domestic and international basic cable networks, pay-television programming services, a broadcast television network, and sports franchises. The principal cable networks and sports franchises are owned by Turner Broadcasting System, Inc., a wholly-owned subsidiary of AOL Time Warner. They include TBS Superstation, TNT, Cartoon Network, Turner Classic Movies, and the CNN network. Turner Broadcasting also operates the CNN family of Internet destinations and other large advertiser-supported online sites. AOL Time Warner's pay television programming services include HBO and Cinemax. The WB Television Network is the company's sole broadcast television network. In sports, a source of programming and merchandising content for the firm, it owns professional teams in baseball (Atlanta Braves), basketball (Atlanta Hawks), and hockey (Atlanta Thrashers).

MUSIC.

AOL Time Warner's worldwide recorded music and music publishing businesses are conducted under the umbrella name Warner Music Group (WMG). Principal U.S.-based record labels include Warner Bros. Records Inc., Atlantic Recording Corporation, Elektra Entertainment Group Inc., and London-Sire Records Inc., and their affiliated labels, as well as WEA Inc. companies. WMG's music publishing companies, Warner/Chappell, own or control the rights to more than 1 million musical compositions.

PUBLISHING.

Time Inc., a wholly-owned subsidiary, is AOL Time Warner's largest concern in the publishing business. As of March 1, 2001, Time Inc. published 64 magazines, including Time, Sports Illustrated, Fortune, Money, Entertainment Weekly, and In Style. During 2000 Time Inc. acquired Times Mirror Magazines, whose titles included Golf, Ski, Skiing, Popular Science, Field and Stream, and Yachting. In addition to those mainstays, the company also has recently launched new periodicals like Real Simple, a lifestyle magazine, and eCompany Now, a business magazine and Web site focused on electronic commerce. Time Inc.'s trade-book publishing operations are conducted primarily by Time Warner Trade Publishing Inc. through its two major publishing houses, Warner Books and Little, Brown. During 2000 Time Warner Trade Publishing had 27 titles on the New York Times best-seller lists.

HISTORY OF AMERICA ONLINE

America Online's roots go back to 1985, when Steve Case and Jim Kimsey founded Quantum Computer Services. Quantum provided online services for users of Commodore computers, then a popular brand of home computers. Two years later Quantum began providing online services for Apple Computer, Inc.'s operating system and developing software for both the Macintosh and the Apple II. After that Quantum grew quickly and was soon providing online services and related software for other companies, including Tandy Corporation and computer industry-leader IBM.

Quantum's costs were high, and it quickly ran through its capital. In 1991 Quantum was renamed American Online (AOL), with Case taking Kimsey's place as CEO and Kimsey becoming chairman of the company. AOL held its initial public offering in March 1992 and raised $66 million, with shares initially selling for $1.64.

At that time, the two leaders in providing online services were Prodigy and CompuServe. Case focused on achieving market dominance and pursued a strategy that included forming alliances with companies that would benefit AOL. He dropped membership prices below that of the major competitors and shipped out huge quantities of software diskettes to potential customers, offering them a free trial period using the AOL service. These marketing efforts paid off in rapid membership growth for AOL, and by the end of 1993 the company had more than 600,000 subscribers.

AOL was the subject of two takeover attempts in 1993, one from Microsoft cofounder Paul Allen, the other from Microsoft head Bill Gates. Allen, who had already left Microsoft, acquired a 24.9 percent interest in AOL and attempted to secure a seat on its board of directors. Both takeover attempts were thwarted by Case and AOL, eventually prompting Microsoft to develop its own online service, the Microsoft Network.

Key acquisitions in late 1994 helped AOL provide its subscribers with access to the World Wide Web, a part of the Internet that was quickly becoming popular because of its open platform and ease of use via graphical browsers like Netscape. Until this time AOL was essentially a closed network that offered subscribers access only to its own content providers, vendors, and other AOL subscribers. Content agreements with the New York Times, Time, NBC, and others had expanded AOL's content, but it was an essential part of the company's strategy to become a gateway to the Internet. This strategy was facilitated by the acquisition of Advanced Network Services, Inc., which built fiber optic networks to support Internet access. This was followed by the acquisition of BookLink Technologies and the Global Network Navigator, which enabled AOL customers to browse the Internet using graphic browsing software from BookLink. Later, in 1996, AOL would reach agreements with Netscape and Microsoft, who were competing heavily in the browser market, to use their browsers.

AOL began to grow more rapidly as it added new content providers and gave its subscribers greater access to the public Internet. In March 1995 AOL's subscriber base reached 2 million, and by August 1996 the company had 6 million subscribers. In October 1996 AOL introduced flat-rate service for a monthly fee of $19.95. In 1996 Bob Pittman, founder of MTV and considered a successful brand-builder, was hired to improve AOL's customer service and strengthen AOL's brand among consumers. After Pittman reduced AOL's subscriber growth to a sustainable level and improved the company's customer service reputation, he was promoted to president and chief operating officer. Case gave up his title of president and remained chairman and CEO.

By 1997 AOL had 9 million subscribers. During the year it gained 2.6 million CompuServe subscribers, which it continued to operate as a separate business. After WorldCom had acquired CompuServe from H&R Block, WorldCom traded CompuServe's subscriber base to AOL in exchange for AOL's network integration division.

AOL's stock rose 600 percent in 1998 and even more in 1999. This infusion of market capital gave it the power to make more and bigger acquisitions. In November 1998 AOL announced it would acquire Netscape Communications Corp. for $4.2 billion in stock, about 10 percent of AOL's market value. Included in the acquisition were the Web browser Nets-cape Navigator and Netscape's Web portal, Netcenter. A third party to the acquisition was Sun Microsystems, which agreed to pay $350 million over three years to license Netscape's software, while AOL agreed to purchase $500 million worth of servers from Sun. The Sun-Netscape alliance adopted the brand iPlanet to market the next generation of Nets-cape Web and application servers. During 2000 AOL recast Netscape Netcenter as a business professional's portal, and in fall 2000 AOL unveiled its new Nets-cape Netbusiness service, which was designed to help small businesses build Web-based storefronts and engage in business-to-business e-commerce.

In January 2000 AOL announced its bid to acquire Time Warner Inc. for approximately $165 billion in stock, with the exact value to be determined by the stock prices of both firms after the acquisition was finalized. As of June 30, 2000, the end of AOL's fiscal 2000, AOL had 23.2 million subscribers, plus 2.8 million CompuServe subscribers. By that point AOL alone had four major lines of business: the Interactive Services Group, the Interactive Properties Group, the AOL International Group, and the Nets-cape Enterprise Group.

THE AOL TIME WARNER MERGER

When AOL announced its intention to acquire Time Warner, AOL's stock was near its all-time high. In the month following the announcement AOL's stock lost about 30 percent of its value. The announcement caused Time Warner's stock to rise nearly 50 percent before settling back some 20 percent off its peak.

In addition to requiring the shareholders' approval at both companies, the merger had to pass regulatory approval from the European Union, the U.S. Federal Trade Commission (FTC), and the U.S. Federal Communications Commission (FCC). While the merger was being reviewed, both companies undertook actions that would appease regulators. Both promised they would not block other Internet service providers or content providers from using their distribution system. In March 2000 AOL announced it would pay up to $8.25 billion to buy out German media conglomerate Bertelsmann AG's interest in AOL Europe and AOL Australia, a move to allay fears that Bertelsmann and AOL Time Warner would pool their interests to undermine other competitors. Bertelsmann, whose holdings included book publishers and record labels, was considered a competitor to Time Warner, particularly in the music business.

Several companies that were opposed to the merger joined together to lobby U.S. regulators to impose strict limits on the proposed company's business practices. Leading the group was the Walt Disney Co., which benefited from the keyword shortcut of "Disney" on the AOL service and also ran its Disney Channel over several Time Warner cable franchises. Disney proposed that regulators split AOL Time Warner into two companies, one for handling content and the other for handling distribution. Four consumer groups led by the Consumers Union filed a 120-page letter with the FCC expressing concerns about the concentration of power in television and Internet content and their distribution through telephone lines and broadband cable. In May 2000 the National Association of Broadcasters went on record with the FCC opposing the merger and asked the FCC to require that AOL Time Warner not discriminate against properties they didn't own. SBC Communications Inc. also joined the opposition to the merger, expressing concern about AOL Time Warner's interlocking business relationships with competing telephone carriers such as AT&T-Media One and Bell Atlantic-GTE (later reconfigured as Verizon).

Following a lengthy FCC hearing in July, Time Warner announced an agreement in August with Juno Online Services Inc. that gave the Internet service provider (ISP) access to Time Warner's cable subscribers. The agreement was Time Warner's first with an unaffiliated ISP and allowed Juno to offer its services to cable subscribers. As part of the deal the two companies would split the Internet access subscription revenue from the service.

The AOL Time Warner merger was also being scrutinized in Europe by the European Commission (EC), the antitrust regulatory body of the European Union (EU). Following a hearing in early September, AOL and Time Warner issued a list of concessions designed to win approval from the EC. The concessions focused on the EC's primary concern about discrimination in the delivery of online music. In general, the EC, like U.S. regulatory agencies, was concerned that AOL Time Warner would discriminate against competitors seeking access to its content and Internet services. To satisfy the EC, Time Warner agreed to call off its planned merger with British music company EMI Group PLC. Within a week the EC approved the AOL Time Warner merger.

Meanwhile, the U.S. House of Representatives was holding hearings on the proposed merger, and the FCC said it would wait until the FTC issued its ruling first. By November it was clear that the FTC wanted proof in the form of a cable-access agreement with a rival ISP before it would approve the merger. In November Time Warner and Earthlink, the second largest ISP in the United States, reached such an agreement. Under the agreement, Earthlink would be allowed to offer its service over Time Warner's high-speed cable lines starting in the second half of 2001.

The FTC gave its approval to the merger on December 14, 2000. Focusing on Time Warner's vast cable television network, the FTC required that Time Warner open its cable lines to ISPs that competed with AOL, in effect turning Time Warner's privately owned system into a kind of public channel for Internet access, much in the way telephone systems were treated under the telecommunications regulatory reforms of the middle and late 1990s. In addition to the agreement with Earthlink, AOL Time Warner was required to make deals with two other competing ISPs within 90 days of making AOL available to Time Warner subscribers in large markets. Such deals would also require the approval of the FTC. The FTC requirements were to remain in effect for five years.

FCC approval, with some additional conditions, quickly followed in January 2001. The value of the merger was estimated at approximately $110 billion, with AOL's stock trading at about half of its value at the time the merger was originally announced. The new company began business with about 88,500 employees.

Prominent figures from both companies were chosen for the executive team, but some favor was given to the acquirer, AOL. Steve Case became chairman of the new company, while Time Warner's chairman Gerald Levin was named CEO. Ted Turner was named vice chairman; however, within a year he was forced out of that role in a board reshuffling.

The executives put in charge of integrating the two companies included Kenneth Novack, AOL's vice chairman; Bob Pittman, AOL's president; Richard Parsons, Time Warner's president; and Richard Bressler, Time Warner Digital Media CEO. While AOL Time Warner's new headquarters would be located in New York City, Case and many other AOL executives would remain at the AOL campus in Dulles, Virginia. Board meetings would alternate between the two locations.

For the future, the company's management announced four priorities:

to transform the consumer experience and reinvent the way people communicate, do business, inform, educate, and entertain themselves
to become a truly global company
to foster an entrepreneurial culture and function as one company
to act in the public interest and make a difference, both locally and globally, in the communities where AOL Time Warner operates.