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AOL Time Warner Merger: Creating a Colossus

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    AOL Time Warner is a giant media corporation created from the merger of two leaders in the entertainment industry, namely AOL LLC and Time Warner Inc. The two companies announced the planned merger in the year 2000; a year after, the merger was approved by both the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC).

    AOL LLC is the world’s leading internet service provider. Founded in 1983, the company formed its roots in online gaming and in the creation of bulletin board systems. The company gradually grew with the introduction of other computer services, including Internet access, chat rooms, instant messaging and e-commerce, and the acquisition of key players in the company. In 1991, the company was renamed America Online.

    Meanwhile, Time Warner Inc. is a media conglomerate, with sectors in music, television, film, publishing and telecommunications. Time Warner Inc. was created in 1989 from the merger of Warner Communications, which spawned Warner Bros. Pictures and Warner Music Group; and Time Inc., a renowned publishing company carrying magazines such as Time and People. In 1996, the company purchased Turner Broadcasting System (TBS), which incorporated the CNN channel, among others, into the company.

    The merger of AOL and Time Warner was the most expensive in corporate history, with AOL buying Time Warner for more than $180 billion in stock and debt. The new AOL Time Warner company was estimated to be worth $350 billion, with over 100 million subscribers.

    The creation of AOL Time Warner resulted in the birth of a “powerhouse” in entertainment, integrating new and old media to answer the need for faster Internet speed. The major strengths of AOL Time Warner are the company’s products, specifically high-speed broadband Internet access, which can be achieved by AOL making use of Time Warner’s cable systems. Another asset of the company is the massive amount of Time Warner content available for distribution, which include over 5,700 movies and 32,000 television shows, at least 30 publications and various recording artists. There are also more accessible mediums for cross-promotion – Time Warner products can be marketed and distributed exclusively to AOL subscribers, while AOL can be advertised in Time Warner’s offline properties. This leads to a decrease in the need for sponsors and materials, and subsequently, a decrease in production costs. The ability of both companies to generate revenues should also be noted, with a combined amount of more than $30 billion expected annually. Also part of the company’s strengths is its available manpower, with over 12,000 AOL employees and over 67,000 Time Warner employees.

    On the other hand, the new company also has its weaknesses. Taking into account the large size of the company, with approximately 80,000 employees, this would most likely result to a longer time before decisions are formed and executed. This could be harmful to the company, given that technology is rapidly changing and requires that a company develop a fast reaction time to avoid being left behind. Also, since the two businesses are different, the culture and environment the employees are used to are likewise different. Another weakness is that stocks were overvalued during those times, which could result in a sizeable amount lost when devaluation occurs.

    Aside from the company’s weaknesses, threats should also be addressed. The major threat to the company is the competition. Most people were against the formation of AOL Time Warner, believing that it would result in a monopoly, wherein competition would be eliminated. Due to these trust issues, the FTC and FCC imposed special conditions that would protect other companies and promote competition in the industry. These include allowing competitor ISPs to use their system and prohibiting the company from interfering with content passing through the system and assuring interoperability of their instant messaging service, among others. Aside from these regulations, the emergence of free dial-up access and the lower fees offered by other companies promotes competition and makes these alternatives more attractive to consumers.

    Opportunities do exist, however, which can lessen the effects of these threats. The biggest opportunity to the company is the massive consumer base to whom the companies can market their products, with more than 13 million Time Warner cable subscribers and more than 20 million AOL subscribers. The company’s extensive resources also make it easy for the company to further the development of interactive technology and thus, address the needs of its consumers.

    Considering that the merger combines two of the most successful companies in the industry, the newly formed company appears to be in a strong competitive position. Initially, the value of AOL Time Warner stocks increased; however, the demand for Internet services gradually declined, leading to a decrease in profitability of Internet companies, including AOL. In 2002, the company reported a $99 billion loss, resulting to changes in administrative positions. Currently, the company is undergoing restructuring in all levels, and is gradually recovering.

    At present, the strategy of AOL Time Warner is to continue with cross-promotions and combine related media. Their foremost joint initiatives included featuring CNN and other Time Warner content on AOL services, and providing exclusive offers to AOL subscribers. Meanwhile, AOL CDs were included in Time Warner give-away products and deliveries. Links have also been made between AOL’s MovieFone and Warner Bros. promotional clips and movies.

    The structure of the new company is a shift from the structures of the separate companies. The levels of hierarchy have changed; initially, the executive chairman came from AOL while the CEO came from Time Warner. Also, the profits are no longer exclusively dependent on subscription fees to Internet services; other avenues to gain revenue are available, via ad-sponsored Internet sites, e-commerce and earnings coming from the other divisions of AOL Time Warner.

    For AOL Time Warner to continue being the leader in the entertainment industry, the company must make available dependable and affordable services to the public. The company must differentiate their product from other ISPs, and emphasize the advantages of high-speed Internet connection, such as video streaming and music downloads. Continued cross-promotion is essential to effectively market their products to the consumers. The different cultures of both companies should also be addressed, via team building activities. The company must also anticipate potential technological shifts, to be able to act ahead of time and remain ahead of the competition.

    References:

    1. AOL Time Warner Analysis. Anti Essays. Retrieved December 23, 2006, from the World Wide Web: http://www.antiessays.com/free-essays/1537.html
    2. AOL Time Warner Merger. Anti Essays. Retrieved December 22, 2006, from the World Wide Web: http://www.antiessays.com/free-essays/1538.html
    3. AOL. Wikipedia, the Free Encyclopedia. Retrieved December 22, 2006, from the World Wide Web:
    4. http://en.wikipedia.org/wiki/AOL
    5. Time Warner. Wikipedia, the Free Encyclopedia. Retrieved December 22, 2006, from the World Wide Web:
    6. http://en.wikipedia.org/wiki/Time_Warner

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