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AOL TIME WARNER. A Failure of Synergy?. Reasons for the Merger in 2000. Concentration of value : Value of merger: $300bn when announced, $145-183 bn in Jan. 2000 and down to $96-106 when deal complete in 2001 Original combined annual revenues of $30 billion

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aol time warner

AOL TIME WARNER

A Failure of Synergy?

reasons for the merger in 2000
Reasons for the Merger in 2000

Concentration of value:

  • Value of merger: $300bn when announced, $145-183 bn in Jan. 2000 and down to $96-106 when deal complete in 2001
  • Original combined annual revenues of $30 billion
  • AOL-TW became world’s fourth largest corp & twice as big as nearest direct competitor, Viacom
  • AOL had high capital value but lower in revenues; TW had lower capital value but higher in revenues
reasons for later disappointment
Reasons for Later Disappointment
  • Original value of deal significantly overpriced
  • AOL paid for TW with stock was to fall, so TW stockholders lost out badly
  • Growth now very slow
  • Many people who go high speed choose not to maintain AOL subscription
attractions of synergy
Attractions of Synergy

Fusion of

  • old media with new media
  • content with content delivery
  • clients
slide5
Economies of scale:
  • deliver same media products to more outlets
  • deliver existing product over Internet
  • cross-promotion of AOL & TW media products
  • selling of audiences to advertisers
  • create giant database of private information
  • more muscle for international expansion
slide6
Innovation
  • create new media product & services for Internet delivery
  • facilitate online music revolution
  • accelerate race to high-speed service
  • accelerate development of “narrowcasting” – linking products with niche consumer demographic groups
concerns at the time
Concerns at the Time
  • High-speed movie delivery not yet matured
  • Most households not yet receiving high-speed
  • AOL privacy concerns
  • News media properties sold to company with no commitment to news
  • Open access for content providers
  • No benefits to general public:
    • competition weakened
    • Higher entry costs
    • popular culture content
one year later apr 2002
One Year Later (Apr. 2002)
  • Value of stock down by two-thirds
  • Advertising downturn crippled AOL
  • High debt plus falling stock price made it difficult to do deals (e.g. with Comcast)
  • Market hostility to spin exaggerations of performance
slide9
Potential loss of cable subs
  • Slowdown in new AOL clients & loss of high-speed service clients
  • Some big film hits (e.g. Lord of the Rings), boosted in part by AOL cross-promotions
  • Customers resent exclusivity
    • Synergy benefits reduced by need to use content from other sources and to distribute through other channels.
  • Different divisions value editorial independence
two years later
Two Years Later
  • Debt at $27.5 bn
  • Selling off “non-core” assets to ease debt burden
  • not all easy to sell in poor market
  • Link with entertainment assets has been of little value to AOL, and TW does not need AOL
slide11
AOL founder Steve Chase resigns as chairman of the group
  • Vice-chairman Ted Turner resigns
  • AOL operating profit falls from $1.4 bn in 2002 to under $800 m in 2003
  • Dumping AOL not easy because few buyers (many lawsuits against AOL)
  • Reduced intra-company spending on advertising on its own cable systems
2003 and onwards
2003 and Onwards
  • AOL members begin to defect to cut-rate dial-up competitors & broadband rivals in a price war.
  • Loses 846,000 subs April-June 2003 alone
  • Almost all its $9 bn revs come from “narrowband” subs who pay $23.90 monthly + log on by phone
  • Only 10% of new broadband subscribers choose AOL.
  • AOL competitors (MSN, Yahoo) are cheaper.
slide13
AOL strategic response to competition is not to reduce prices, but improve content
  • AOL’s new offerings:
      • Billed as door-way to brand-new online content
      • Help subs tap into growing # of TW music, video, mag content
      • Live online performances and concerts
      • Net-only TV vignettes
      • Bundles content at discount (e.g. ABC News and People mag)
in progress
In Progress
  • Numerous suitors lining up to buy AOL, potential profit for TW