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