Why, the CBS-Viacom chairman asked, would a high-flying online player allow a more profitable but more traditional media company to drag down its value?
Good question. But the logic of the Internet economy prevailed last week. Brash teen-ager America Online stunned the business world by revealing a deal to effectively acquire Time Warner -- whose magazines and movies began making an impact during the Roaring '20s -- in the largest merger in corporate history.
"A little jarring," said veteran media consultant Erwin Ephron, partner at Ephron, Papazian & Ephron.
MORE TO COME?
Industry observers are split over the question of whether the formation of AOL Time Warner will spark a spate of similar marriages. Rumor mills churned speculation about deals that would link Microsoft Corp. with NBC, and Yahoo! with everyone from AT&T Corp. to Walt Disney Co.
Investors were unsure which path they'd rather see those companies go down. Shares in AOL and Time Warner dropped sharply in the days after the deal was announced as Wall Street worried that Time Warner would slow AOL's growth rate. At press time, the value of the deal had fallen from $182 billion to about $158 billion. Yahoo! shares also rode a roller coaster, rising in anticipation of a deal and falling when the company declared its desire to remain independent.
One thing is certain: The merger's reverberations will affect how media companies respond to the digital revolution, how advertising space and time is bought and sold, how e-commerce will develop, and how brands will be marketed. AOL Time Warner will boast a stable of consumer franchises that includes AOL Instant Messenger, Bugs Bunny, CNN, InStyle and Netscape Communications Corp.
"This deal literally blows the roof off our advertising and e-commerce ventures," said Bob Pittman, the MTV founder who will serve as co-chief operating officer of AOL Time Warner. AOL Chairman-CEO Steve Case will be chairman of the merged company, while Time Warner Chairman-CEO Gerald Levin will be CEO.
Confused investors aren't the combined company's only challenge. AOL needs to find ways to maximize the wealth of content and access to cable pipes it gets from Time Warner, while Time Warner must capitalize on the distribution possibilities opened up by AOL's 22 million subscribers.
TIME WARNER TRIALS
Time Warner has failed in cyberspace before. Its Pathfinder portal was abandoned last year. AOL, meanwhile, has yet to prove it can develop its own brand of content, relying instead on repurposed material from outside partners.
Observers expect AOL to transform its approach to content. The company has pushed for exclusive deals with content suppliers to boost subscriber and ad revenue. After the merger, it is likely to move to a more open model.
"AOL has less incentive to keep [content] exclusive to AOL subscribers and more incentive to seek the widest possible audience for it via Webwide distribution," said David Simons, managing director of Digital Video Investments. "What matters about AOL subscribers is keeping them in advertising space controlled by AOL. Today, when AOL subscribers go out to Time Warner sites, they leave AOL's ad space. When AOL and Time Warner are one, they will stay within it."
While Wall Street analysts gave the deal mixed reviews, Madison Avenue executives were rather bullish. Media buyers said they don't expect the company to simply package desirable properties with less desirable ones and discount the price. But they do believe AOL Time Warner will be better able to develop and execute ideas that will grow their clients' businesses.
`YOU NEED AN IDEA'
When Time Inc. and Warner Bros. merged a decade ago, "people assumed that 80% of the deals done with Time Warner would be done through cross-media selling," said Rich Hamilton, CEO of Zenith Media Services. "That didn't happen and that won't happen here."
Added Steve Farella, chief operating officer, SFM Media, New York, "A low cost per thousand is not going to build a brand. You need an idea."
Bandwidth is another buzzword in the AOL Time Warner merger. The deal paves the way for AOL to deliver e-mail and content through high-speed cable wires, and for Time Warner to offer interactive services to TV viewers.
"This agreement at its very least increases the likelihood that broadband rolls out quickly and maybe even accelerates the pace," said PaineWebber analyst Lee Westerfield.
The deal also opens up an array of cross-promotional opportunities. AOL can use Time Inc. magazines, for example, to distribute its software, while offering subscribers discounts to Warner Bros. films. Analysts also expect some brand names to be moved to new platforms. AOL could slap the CNN name on news content and the Sports Illustrated brand on scoreboards. But observers warned that the company has to be careful not to muddy its image.
"All these brands are strong brands by themselves," said Allen Adamson, managing director at Landor Associates. "If they put them all in a blender to try to get as much synergy as possible, they'll end up diluting them."
Contributing: Jennifer Gilbert