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Ingram: AOL growth engine has become an anchor BY MATHEW
INGRAM Steve Case must have to pinch himself now and then, just to make sure that he isn't dreaming. After all, he pulled off what has to rank as one of the biggest stock-market magic tricks of all time. The America Online CEO convinced Time Warner that it should not only accept his company's offer in what was then the largest takeover in history ($165-billion U.S.) but that AOL should take the upper hand following the merger. Fast forward about a year and a half, and it's like looking in a mirror — not so much because things are reflected, but because they are completely reversed. Now, at least according to some analysts who are trying to evaluate the merged company, the assets that America Online brought to the table haven't just dropped in value a bit from the $150-billion level; they are now worth (more or less) nothing. Zip. Zilch. Zero. When the merger deal was first announced in January, 2000, the two companies had a total market value of about $300-billion. And now? The combined company is worth only $80-billion. Shares of AOL Time Warner, which traded at more than $50 as recently as last summer, have now sunk to about $17. Since some analysts say Time Warner's cable and 'old media' assets are worth that much, that means the AOL assets are now either worth nothing, or may even be dragging down the overall company's value. If you're wondering whether that doesn't call into question the whole reason for the multibillion-dollar deal, you're probably not alone. Tens of thousands of Time Warner shareholders have to be wondering the same thing, not to mention (hopefully) the company's board of directors. Presumably, the point of merging with America Online, a titan of the on-line world, was not to either produce no value or to destroy existing value. It will come as no surprise that some critics are now proposing the two companies undo the merger and go their separate ways again. That might work for Time Warner, which has a whole stable of fairly boring but dependable assets it could go back to running, but America Online would wind up in the cold. When it gets right down to it, AOL was always the more desperate of the two partners, because it needed Time Warner's content and cable assets to bridge the gap between on-line and the real world. If anything, AOL has made it even more obvious in recent weeks that most of the reasons for the merger have vanished with the same dot-com breeze that blew them in. For example, one of the main strengths of the combined company was supposed to be the marriage of AOL's on-line content and branding with the high-speed cable network run by Time Warner, a win-win situation that would take AOL's traditional dial-up customers to a whole new level, producing plenty of growth and hefty profit margins. Instead of this magical world full of rainbows and sunshine, however, AOL Time Warner has wound up with the exact opposite. Not only has AOL failed to sign up new cable partners who can deliver its service through their broadband pipes, but the company can't even get that many users of its own Time Warner cable network to sign up for AOL. So what does chief operating officer Bob Pittman do? He tries the old 'sour grapes' argument: we don't really want those high-speed cable and DSL users anyway. In fact, Mr. Pittman — a former AOL star who has been sent back to turn around the flagging on-line division by CEO Richard Parsons — said something that is almost unbelievable. He said the new strategy is to rely on cable and DSL users to continue using their AOL account even after they get high-speed access. It's probably safe to assume that Mr. Pittman didn't run that idea up the flagpole when the biggest merger of all time was being put together. Why? Because it's idiotic, that's why. Forget for a moment that getting more broadband customers was seen as one of the linchpins of the whole AOL Time Warner merger to begin with. Why would any Internet user in their right mind decide that they should keep paying $20 or $25 a month for an AOL account, on top of the $50 a month they are paying for a high-speed cable or DSL account? Mr. Pittman is clearly doing his best to turn a liability — AOL's high proportion of dial-up users — into an asset, but it's a fool's errand. On top of that, the primary growth engine for AOL Time Warner was supposedly the delivery of Time Warner content, including movies, to AOL customers over high-speed pipes. Streaming movie trailers and other multimedia content to dial-up AOL users is not only functionally impossible, but the percentage of Internet users with dial-up accounts is also dwindling by the day. In other words, AOL has a dominant position in a shrinking market, and one where profit margins are also on a crash diet. It's no wonder that the AOL part of the company is now being given virtually zero value by investors. What is more amazing is that the company can't see that all the supposed benefits of the merger have been shown to be a fiction — even by AOL insiders themselves. E-mail Mathew Ingram at mingram@globeandmail.ca Look for exclusive Mathew Ingram commentary at GlobeInvestorGold
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