AOL and Time-Warner Merge (Part 4 of 4)
Net/Net
Fundamentally, what AOL may be doing with Time-Warner is really morphing
itself into a broadcasting company. While this sounds like a great idea, the
beauty of the Internet is that it allows for narrowcasting at virtually the
same cost as broadcasting. Yes, the number of eyeballs on a narrowcast may not
be as high, but they damn well will be the exact eyeballs the sponsor wants. It
is possible that AOL has decided that the Internet is really just another TV network.
If it treats it like a TV network, then much of the intrinsic value associated
with actually “knowing” the user/viewer disappears.
Then there’s the real rub: TV networks have “viewers,” most of whom have a
passive relationship with the content being broadcast. The Internet has
“users,” not altogether a complimentary term since the only other industry in
the world that calls its customers “users” is the illicit drug trade. But users
nonetheless, especially as relates to having an active relationship with the
content.
Over time, it is possible that the content value of Time-Warner will be
diminished as the cost and efforts associated with producing content falls to
levels that allow nearly everyone to produce and broadcast/narrowcast via the
Internet. But we may ultimately reach the McLuhanesque point of diminishing
interest: if everyone has a voice, then who’s left to listen?
This was a great deal for TimeWarner shareholders; they got a 30% premium
for their stock. While we’d like to think that this type of deal is a precursor
to the formation of more info-keiretsu, it is just as likely to be a watershed
in the history of AOL. The company may have transformed itself from an
Internet-based and -driven company, into an old-line media company. The upshot
is that we’re likely to see more of these mergers. So, in retrospect, perhaps
Lycos had the right idea, but wrong valuation, when it did the dance with Barry
Diller and USA Network.
This is the second time (see previous paragraph re: Lycos) in a year that an
Internet company – and a portal company, no less – has tried to do a mega-deal
with a traditional media company by appearing to offer itself up at a bargain
value. Or, if you choose to view it from the other side, by being willing to
value the traditional media company at a higher valuation. At some point in the
near future, we may look back at this particular deal as the one that burst the
Internet bubble by effectively discounting the premium that Internet-based
companies have been commanding. An even bigger impact of this is that it may
challenge many of the basic assumptions of the new e-conomy, forcing
traditional valuations on e-companies.
While we see keiretsu arrangements based on information as a major trend in
the market, we believe that AOL may well have overpaid for a traditional media
company, and instead of converting Time-Warner into a click and brick company,
it has converted itself into a brick and mortar company. But as AOL’s stock
price falls, the value of this deal to Time-Warner falls, and, at some point,
the value will become unattractive. If, and when, this occurs, we believe this
deal will either be renegotiated or terminated.
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