Does AOL-Time Warner Make Technology As Well As Business Senses?

Like most people, CTR s editorial team was surprised by the AOL-Time Warner deal. Confusingly, some have called it a merger (or a megamerger). However, in reality AOL bought Time Warner, a once-unthinkable acquisition that even today seems unbelievable. AOL, an online company, buying a media giant? Not only that, but a giant with its fingers in just about every entertainment pie, including TV, publishing, music, and film. It sounds like a joke, until you consider the power of a bull market and a bullish stock like AOL. These corporate mergers generally involve not real cash but play money--that is, stock. And AOL's stock rise has made it a powerhouse.

But while we were taken off guard, in retrospect the merger looks like a smart move for the companies. AOL now has a steady new stream of content, which it can leverage to capture even more users, while Time Warner becomes a true Internet player overnight. Simple, right? Yes and no. In fact, AOL likes Time Warner not just for content but for cable.

Until now, AOL had no real entree into the broadband market, because cable companies control the cable infrastructure, and AOL was not such a company. AOL has been fighting tooth and nail to open up the cable business. The company is so concerned about being a wallflower at the broadband dance that AOL has given a $1.5 billion infusion to Hughes Electronics, the maker of satellite-based DIRECTV, still a relatively marginal player in the broadband market.

AOL-Time Warner will be the second largest cable operator after AT&T completes its acquisition of MediaOne this year. It will be interesting to see if the company continues to battle with such zeal to open up the cable market now that it's on the inside looking out. AOL and Time Warner officials have said that they intend to give competitors access to the company's cable infrastructure, but no details on how or when this might come about were available at press time.

Online Services, Now And Forever?

I must say that, personally, I find AOL's continued popularity surprising. With the fantastic rise of the Internet beginning in 1995 I, like many observers, felt the days of the online service were numbered (see also: CompuServe, Prodigy, Genie, et al). ISPs, I felt, would displace online services quickly. This prediction has turned out to be inaccurate, to say the least. While the rise of the Internet has indeed led to a consolidation of online services, those that remain are in good shape. I have always felt, and continue to feel, that online services are both aimed at, and appealing to, the Internet novice. But there are tens of millions of novices out there, and more are sure to follow. It also appears that even users who become experienced on the Internet do not abandon the online service experience for an ISP. I recently received an email in which I was one of ten recipients. Eight of the 10 had AOL addresses. Now that's marketshare.

There is another aspect of this marriage that has not been widely reported, probably because it has little to do with broadband. (In fact, it's in the opposite direction.) AOL and Motorola have been in joint development of a wireless (WAP-based) version of AOL Instant Messenger for mobile phones. This software--already available for CE and Palm devices--will move AOL into the multifunction mobile phone business, and should be available around the time you read this. With the amount of new, branded TW content soon to be available to AOL, I expect a serious push into the wireless market, either through further acquisitions or partnerships with wireless providers. You can bet your last nickel that AOL will soon have a fleet of WAP Gateway Servers to stream AOL content to the untethered masses.

Merger Mania

William Nuti, a senior Cisco executive, recently opined that more deals like the AOL-Time Warner marriage are likely in 2000, with Yahoo!, Lycos, and their ilk the logical choices. Kathryn Hale, principal analyst for Dataquest's e-business group, says that "major players such as RBOCs, Disney and Yahoo! need to acquire additional technologies, not build them, or they risk being sidelined." Hale feels that traditional media companies need to double their interactive media staff, or risk finding that AOL-Time Warner is streaming interactive entertainment to their former audiences. In particular, AT&T is likely to be looking for a suitor in the near future, to add some content to its cable business.

I think these predictions are probably accurate (and not necessarily a good thing, as discussed below), but I don't see these and other companies concentrating on cable--at least not pure cable companies with little added value to offer. Why? Because cable is not well suited for the Internet's future. With its shared bandwidth, limited upstream bandwidth, and low penetration in corporate markets, cable may be fast, but it isn't flexible. While low-grade DSL service isn't as fast as cable, it offers better guaranteed bandwidth, has better uplink speed, can (and soon will) scale up in throughput dramatically, and is part of a more open infrastructure. Cable may be an appropriate choice for consumers, but for your customers, it is not an appropriate solution.

Some continue to point out that the Internet is a downlink-based medium, with throughput important downstream but less so upstream. I agree that this is the case right now, but I don't see this model continuing much longer. Home- and office-based video streaming is coming, and that data needs a fat pipe in both directions. Cable may be appropriate right now for consumers--which is why a consumer-oriented company like AOL bought a piece of it--but it is not the future of Internet access. DSL may not be the solution either, but it is clearly better positioned for the future than standard cable. The future of bi-directional broadband cable is still uncertain, and satellites with high uplink throughput, while clearly on the way, have not yet arrived.

All this is not to suggest that AOL's cable grab is a strategic blunder; in fact it's probably a solid move for the near term. But as a technology publication, we like to take the long view here, and we try to determine the long-term viability of technologies, not just their instant gratification factor. Cable may be the broadband choice for consumers, but as professionals who integrate for business, you should have your eye on the big picture. And the big picture points to a future of dedicated bandwidth, not shared connections.

But there are other issues swirling around this new mega-company. And they do not bode well for those of us who (perhaps naively) still have hopes for the Internet as independent medium, free from the clutches of corporate behemoths. The AOL-TW deal is the most obvious indication that small, independent media outlets--once the staple of the Web--stand little chance of flourishing in the Internet of the future. They won't disappear, of course, but they won't be able to compete against the AOL-Time Warners of the world, except in very specific niches which won't allow them to make enough money to grow into viable competitors.

At some future date--and no one knows when that day will come--the small dot-coins with no revenue streams will fold up shop and look for the next big thing, leaving the Internet to hobbyists and those companies with other sources of revenue. And when that happens, we'll be right back where we started, with the big publishing conglomerates running the show.