[America has long been the home ground of capitalism. I was fascinated by the high-profile game being played in the US media industry. This column was published in Business Standard of 24 January 2000.]
The biggest ever merger
Nine
mega-companies supply most of the information and entertainment in the world:
Time Warner, Disney, Sony, General Electric (the owner of NBC), AT&T, the
News Corporation, Seagram, Viacom (the parent of CBS), and Bertelsmann. The
list shows how companies that made their name and money in more traditional
industries have moved into the media: Sony was a manufacturer of audiovisual
equipment, GE was in electrical plant, AT&T was a telephone company, and
Seagram was a liquor manufacturer.
Of the nine, Time Warner is by far the biggest. It
started with the Time magazine, which
Henry R Luce and Briton Hadden brought out in 1923 with $86,375 they borrowed
from their Yale classmates and friends. With Hadden’s death in 1929, Luce
became the sole owner. Time Warner owns Fortune,
started in 1930, Sport Illustrated,
started in 1954, People, started in
1974, and In Style, started in 1983.
Often its magazines made losses for years before turning in a profit. Life, started in 1936, reached a
circulation of half a million within a month of publication, but had to be
closed down in 1972 as television stole away advertisements. Discover never made a profit and had to
be sold off. But the company as such was enormously successful. Today, Time sells 4 million, People 3¼ million, Sports Illustrated almost as
many, and Money almost 2 million.
Warner Brothers and New Line Cinema grossed $1.4 billion last year, almost a
fifth of the entire American film industry. Of its television cable networks,
WB connects 5 per cent of US households, TBS 1.6 per cent, HBO 1.5 per cent and
TNT 1.2 per cent. Time Warner sells a sixth of the records in the US.
It is America’s biggest media company, with sales of $28
billion and market valuation of $97 billion. It has dominated the industry
since it purchased Warner Brothers in 1989. At that time AOL had fewer than
100,000 subscribers; Time (which was still to buy Warner) could have had AOL
for breakfast. Now it is AOL that has bought Time Warner. Why did this old, established,
traditional company sell out to America Online? America Online’s biggest asset
is the 20 million paying subscribers. They are a huge potential market for Time
Warner’s products; conversely, AOL can expand its subscriber base through Time
Warner’s cable network, which connects 13 million families. Access to the
internet is much faster through television cables than through telephone
cables; this is what AOL covets. Still, the merger cannot have been easy for
the executives of either company. AOL was the second biggest IT company in the
world; only Microsoft, with a market capitalization of $579 billion, is bigger.
It had been courted by AT&T and rebuffed it. Forty-one-year-old Stephen
Case, chairman of AOL, met sixty-year-old Gerald Levin, chairman of Time
Warner, at a conference on e-commerce in Paris last October, and again the
following week in Shanghai at the Fortune Global Forum, and they felt
increasingly comfortable with each other.
The big obstacle was AOL’s outsize valuation. Many
investors in the world worry about IT valuations – are they real? Levin felt
the same. He wanted an equal partnership: his shareholders should get a 50 per
cent stake in AOL. With a market valuation almost twice that of Time Warner,
Case was not prepared to give a 50% stake. Finally, after weeks of
negotiations, they settled at a 45 per cent share for Time Warner. Case will be
chairman of the new company, and Levin the CEO.
Case holds 8.6 million AOL shares and 23 million options
worth $620 million; Levin, 876,000 shares of Time Warner and 5.9 million
options worth $79 million. But the big Mogul on the scene is Ted Turner who
sold out his Turner Broadcasting System to Time Warner in 1996. He holds 100
million Time Warner shares and 2.1 million options; after the merger their
value touched $9 billion. He becomes vice chairman of AOL Time Warner.
After this merger, Microsoft, which is being sued by
almost all the other major IT companies, suddenly looks less threatening, and
may be less threatened by punitive judicial action. The thoughts of other
companies in the media and IT will turn to what they can do to emulate the
AOL-Times Warner merger, and what they must do to ward off its threat. Three
media companies must be thinking especially hard: Walt Disney, Viacom (which
owns CBS and MTV), and News Corporation (which owns Fox and Sky). The most
eligible of the possible partners is Yahoo, with a market cap of $114 billion;
Amazon ($24 billion) and eBay ($18 billion) are smaller but still in the
running. Conversely, the giants of communication will be thinking of taking
over a media company; the chief amongst them are Microsoft ($580 billion),
AT&T ($162 billion) and MCI Worldcom ($132 billion) which only last October
bought Sprint for the then record $127 billion.
These big numbers do not simply signify money and stocks;
behind the big tickets are profits and prospects arising out of the synergy of
mergers. As Chris Dixon of Paine Webber told The New York Times, they combine
three elements – connectivity, content and scale. Information and entertainment
are products, the internet is a means of delivering them. It is an enormously
cheaper means of delivery than physical ones. It is cutting out intermediaries
and their margins. This is why its profits are so enormous, and will remain so
for long. That is why other businesses will be attracted to the internet like
bees to honey, and will pay a high price to enter. In this race for synergy,
stand-alone companies like VSNL and MTNL will be quickly marginalized. The
Indian entertainment industry is not even corporatized yet, and hence cannot
even enter the race. Although India boasts of formidable IT companies, the
domestic field in which they have to play is such that they cannot exploit any
synergies. Hence their future is bleak – unless, of course, they leave India
and become multinational.
