By Bill Barker (TMF Max)

( February 2, 2000 ) -- The proposed merger between AOL and Time Warner does two main things for AOL shareholders -- it lowers the ceiling and it raises the floor on AOL's future. Paul, I imagine, is going to focus on the lowering of the ceiling aspect, or the ways in which AOL has limited some of its options by entering into matrimony with Time Warner. As I hope to show, however, the merger raises the floor more than it lowers the ceiling, and for that reason I'm a bull. The floor for AOL prior to the announced merger could have been very, very low for three reasons, and the merger not only fills in the holes perfectly, but there is no other company that could have achieved this as well as Time Warner.

1. The Broadband Threat

AOL is the number one provider of Internet access, by far, through standard telephone lines. But let's face it -- none of us are going to be accepting narrow band access forever, and a lot of us aren't going to be accepting it for too much longer. AOL had no real plan in place to get positioned for the broadband delivery of Internet access, what with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> having promised to lock up its cable lines and hand them over exclusively to At Home Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %> for a couple of years. Essentially Time Warner's Roadrunner system was the best alternative for AOL, and buying it, rather than striking a deal with it, was one of the ways to go.

2. The Free ISP Threat

Perhaps in an even shorter period of time, the ways in which narrow band delivery is shaping up was just as much of a threat. At the present time, AOL gets most of its money from subscription revenues for the dial-up service. Sure, there's plenty of advertising revenue that it is collecting as well, and it has the most eyeballs so it can command the best advertising deals, but the $22 a month for Internet access that it is currently collecting is the real source of AOL's profitability.

And that's going away.

There are legitimate names offering free Internet access now, including, but not limited to, CMGI's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %> AltaVista and At Home's Excite. Much of the rest of the world is already getting used to free Internet service provision. The headline last week was that AOL Brazil was considering offering free Internet access to compete with the other competitors whose free service was hurting AOL.

So the growth for AOL of offering its service to more and more people, both here and abroad, and being able to raise prices, or perhaps even maintain them, seemed pretty remote. And that was the core of AOL's business. AOL needed to diversify away from simply being a provider of expensive dial-up Internet access pretty badly -- unless you believe that people would pay more for AOL's content, and the numbers really don't bear that one out.

3. AOL's Weak Content

Although AOL is the number one name on the Internet in terms of revenue, profitability, and also in terms of unique visitors to its properties, it is not the most widely read property. Actually, in terms of page views it's in fourth place, and a pretty distant fourth at that. Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> is number one, Microsoft's MSN next, eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> after that, and then AOL. Actually, even Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> is pretty close to AOL.

In terms of monthly page views on the Web, AOL properties get less than half the traffic that Yahoo! does. Despite the fact that more people sign on with AOL than anybody else, and more people know the name, they just don't stick around the AOL properties for very long once they've left the walled AOL community. Once the Internet starts becoming about delivering more streaming video content and richer music offerings, this hole in AOL's content would have become a severe Achilles heel for the property.

Think about it this way. AOL has been around for several years now, and what AOL content comes to mind when you think about what's on AOL? I can't really think of very much at all that I use on AOL beyond stuff that it has purchased (e.g., Mapquest) or much that the rest of the world is likely to know or desire.

Now compare that with what Time Warner brings to the table content-wise. In many, if not most, entertainment categories that you can think of, Time Warner has one of the world's leading brands:

• Sports Illustrated
  
• HBO
  
• TBS
  
• Time Magazine
  
• People Magazine
  
• DC Comics
  
• Warner Bros. Studios
  
• WB Network
  
• CNN
  
• Headline News
  
• Warner Music
  

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