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AOL TIME WARNER

AOL TIME WARNER. A Failure of Synergy?. Reasons for the Merger in 2000. Concentration of value : Value of merger: $300bn when announced, $145-183 bn in Jan. 2000 and down to $96-106 when deal complete in 2001 Original combined annual revenues of $30 billion

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AOL TIME WARNER

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  1. AOL TIME WARNER A Failure of Synergy?

  2. Reasons for the Merger in 2000 Concentration of value: • Value of merger: $300bn when announced, $145-183 bn in Jan. 2000 and down to $96-106 when deal complete in 2001 • Original combined annual revenues of $30 billion • AOL-TW became world’s fourth largest corp & twice as big as nearest direct competitor, Viacom • AOL had high capital value but lower in revenues; TW had lower capital value but higher in revenues

  3. Reasons for Later Disappointment • Original value of deal significantly overpriced • AOL paid for TW with stock was to fall, so TW stockholders lost out badly • Growth now very slow • Many people who go high speed choose not to maintain AOL subscription

  4. Attractions of Synergy Fusion of • old media with new media • content with content delivery • clients

  5. Economies of scale: • deliver same media products to more outlets • deliver existing product over Internet • cross-promotion of AOL & TW media products • selling of audiences to advertisers • create giant database of private information • more muscle for international expansion

  6. Innovation • create new media product & services for Internet delivery • facilitate online music revolution • accelerate race to high-speed service • accelerate development of “narrowcasting” – linking products with niche consumer demographic groups

  7. Concerns at the Time • High-speed movie delivery not yet matured • Most households not yet receiving high-speed • AOL privacy concerns • News media properties sold to company with no commitment to news • Open access for content providers • No benefits to general public: • competition weakened • Higher entry costs • popular culture content

  8. One Year Later (Apr. 2002) • Value of stock down by two-thirds • Advertising downturn crippled AOL • High debt plus falling stock price made it difficult to do deals (e.g. with Comcast) • Market hostility to spin exaggerations of performance

  9. Potential loss of cable subs • Slowdown in new AOL clients & loss of high-speed service clients • Some big film hits (e.g. Lord of the Rings), boosted in part by AOL cross-promotions • Customers resent exclusivity • Synergy benefits reduced by need to use content from other sources and to distribute through other channels. • Different divisions value editorial independence

  10. Two Years Later • Debt at $27.5 bn • Selling off “non-core” assets to ease debt burden • not all easy to sell in poor market • Link with entertainment assets has been of little value to AOL, and TW does not need AOL

  11. AOL founder Steve Chase resigns as chairman of the group • Vice-chairman Ted Turner resigns • AOL operating profit falls from $1.4 bn in 2002 to under $800 m in 2003 • Dumping AOL not easy because few buyers (many lawsuits against AOL) • Reduced intra-company spending on advertising on its own cable systems

  12. 2003 and Onwards • AOL members begin to defect to cut-rate dial-up competitors & broadband rivals in a price war. • Loses 846,000 subs April-June 2003 alone • Almost all its $9 bn revs come from “narrowband” subs who pay $23.90 monthly + log on by phone • Only 10% of new broadband subscribers choose AOL. • AOL competitors (MSN, Yahoo) are cheaper.

  13. AOL strategic response to competition is not to reduce prices, but improve content • AOL’s new offerings: • Billed as door-way to brand-new online content • Help subs tap into growing # of TW music, video, mag content • Live online performances and concerts • Net-only TV vignettes • Bundles content at discount (e.g. ABC News and People mag)

  14. In Progress • Numerous suitors lining up to buy AOL, potential profit for TW

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