AOL, Time Warner Union To AffectTelecom, Cable Industries

Posted: 03/2000

AOL, Time Warner Union To Affect
Telecom, Cable Industries
BY LIZ MONTELBANO

The proposed $190 billion merger of the No. 1 Internet company and the world’s largest
multimedia conglomerate will change the way the Internet affects how telcos do business,
and could spur competition in the cable industry, according to telecom experts.

If the deal between America Online Inc. (AOL, www.aol.com)
and Time Warner Inc. (www.timewarner.com) is
approved, what would become AOL Time would give the industry’s dominant Internet access
com-pany ownership of the big daddy of every form of media under the sun, including some
of the biggest names in print, recording and cable TV industries.

It also would bolster AOL’s need for more capacity from its network partners, and make
the combined company a more formidable competitor in the cable industry.

One might not gather that from the way stockholders have reacted to the proposed
merger, announced early this year. After surging briefly after the initial announcement,
stock prices for both companies took a downward turn and, at press time, they hadn’t
regained steam. This is despite multibillion-dollar deals both companies have announced
since, including a $100 million marketing deal between AOL and AmericanGreetings.com (www.americangreetings.com) and another pending
merger between Time Warner and British record-ing company EMI Group plc (www.emigroup.com).

Even if stockholders don’t seem impressed, the proposed merger has telecom industry
watchers buzzing. In press statements, FCC (www.fcc.gov) Chairman William Kennard said he
was optimistic about the merger. So did MCI WorldCom Inc. (www.wcom.com)
Chairman and CEO Bernie Ebbers, who is waiting to see if the FCC will approve the merger
of his company and Sprint Corp. (www.sprint.com).

In a recent speech to the National Press Club, Ebbers said he sees the merger as a sign
of the continued explosive growth of the Internet, and that he expects MCI WorldCom to be
a big part of that.

"Internet is one of the fastest growing parts of our business," Ebbers says.
"And with all the talk about e-commerce, e-mail and chat rooms, many of the most
important transformations are largely hidden from public view. For example, the Internet
is changing fundamentally the way more traditional telecommunications is structured and
sold."

He’s referring to the buying, selling and leasing of network capacity, and added the
reason why he may be biased in favor of the merger: AOL is one of MCI’s largest customers,
with MCI supplying underlying capacity for its Internet service.

"This will increase the need for pipes from us," Ebbers says.

Jeffery Kagan (www.jeffkagan.com), an
independent telecom industry analyst based in Atlanta, also sees the AOL-Time Warner deal
changing the way the Internet affects the telecom industry.

"This merger clearly illustrates how the convergence of the telephone, computer,
television and the Internet is restructuring industries and reshaping marketplaces,"
Kagan says.

He says the deal makes sense for both sides and represents how all media are melding,
adding that since many rely on the Internet as a source of news and information, Time
Warner is responding to pressure to be "a leader, not just a player in the Internet
space."

As for AOL, Kagan says the company has had no intention of merely staying an online
service, but rather to embrace its "mantra" of "AOL Anywhere."

"They want to put AOL into every device, and have it accessible to subscribers
everywhere they turned and on every device they used," he says of the Internet giant.
Taking over the largest media organization in the world makes perfect sense to achieve
this end, Kagan adds.

There’s no denying the new company would be the force in the multimedia industry, if
not a pioneer of a new breed of media communications company. The new company would house
17 multimedia organizations–including TV stations, recording companies, magazines and
Internet companies–under one roof. Time Warner’s Time magazine, Cable News Network
(CNN), Warner Bros., People magazine, Home Box Office (HBO), Sports Illustrated
magazine, Cartoon Network, Warner Music Group, Fortune magazine, Entertainment
Weekly and Looney Tunes, and AOL’s CompuServe Interactive Services Inc., Netscape, ICQ
Inc., Digital City Inc. and AOL Moviefone all would cozy up under the AOL-Time Warner
blanket.

Time Warner also is a 48 percent owner of Time Warner Telecom Inc. (www.twtelecom.com), a CLEC based in Denver. Time
Warner Telecom operates synchronous optical network (SONET)-based local rings in 23 major
cities across the continental United States and Hawaii, targeting business customers with
high-speed Internet and local exchange services, and local carriers with transport
services.

While Bob Meldrum, senior director of marketing and communications at Time Warner
Telecom, says the announcement has no direct impact on his company’s business, the merger
reinforces "the market demand for bandwidth and the migration towards new
applications and services."

According to Meldrum, Time Warner Telecom will capitalize on this need for
next-generation applications and services by continuing its strategy to deploy optical
networks, which it currently does in 21 U.S. markets.

On the long-distance front, though there’s little apparent threat to the core business
of the major IXCs, including AT&T Corp. (www.att.com),
MCI WorldCom and Sprint, Kagan thinks the AOL-Time Warner merger may give the Internet
giant more bargaining power with AT&T for open access to AT&T’s cable network, and
also make it a competitor with punch.

"AOL has been negotiating with AT&T without a lot of success for open access
to AT&T’s cable network," Kagan says. "This deal clearly gives AOL a lot
more clout in negotiating with AT&T on the open access issue." This is because if
AT&T wants access to Time Warner cable customers, it now will have to give AOL a fair
shake on the open access issue, Kagan says.

Researchers at The Phillips Group (www.thephillipsgroup.net),
a telecom research and consulting firm, see AOL’s merger with Time Warner as a sly way to
go around AT&T on the issue.

In a study that preceded the merger announcement, The Phillips Group predicted AOL
needed to beef up its broadband access if it wanted to continue to grow in light of the
fact that cable dominates the residential broadband market, according to Rick Kent, vice
president, global professional services at The Phillips Group.

"AOL’s legal battles with telecom and cable leader AT&T, its slowly evolving
relationship with several of the regional Bell operating companies . . . forced AOL to
look at other cable operators such as Time Warner," Kent said in a press release.
"Time Warner offers AOL both distribution and content, something other cable
operators could not provide."