More on the AOL-Time Warner Deal

Some further notes on this AOL-Time Warner blockbuster (multiple conflict-of-interest note: I write for Fortune, which is owned by Time Warner; I actually owned shares of AOL until around lunchtime, when I sold them; and I’m writing this column for Microsoft, which is probably affected by this deal in some way):

1) There’s no doubt that acquiring Time Warner will immediately solve many of AOL’s current and future dilemmas. It will strengthen AOL’s ability to provide content to its subscribers, which isn’t insignificant insofar as AOL is still in part a proprietary service. It will speed the convergence of the Internet and television. The deal creates really interesting possibilities in terms of the delivery of downloadable music and video over the Net, because of the size of Time Warner’s catalogs. And, perhaps most importantly, it appears to eliminate a lot of the concerns about AOL’s ability to make a transition into the world of broadband access. AOL will now be one of the country’s key cable providers, which means that it can position itself as a dominant player in the high-speed-cable-modem world.

What’s interesting, though, is that it’s not clear AOL needed actually to buy Time Warner in order to make any of these solutions work. Content, especially Internet content, is eminently licensable, and as far as the music/video business goes, it’s really easy to imagine a deal in which AOL would have given Time Warner access to its users in exchange for a cut of the business. Even when it comes to broadband, AOL’s strategy seemed to be working well. It had cut deals with key telcos to have access to DSL customers, a deal with AT&T (once its exclusive arrangement with Excite@Home expired) felt like a foregone conclusion, and again cutting a deal with Time Warner could not have been that hard a proposition. And when you consider that Steve Case said today he’s committed to open access over Time Warner’s wires–that is, people who get high-speed Internet access from Time Warner cable will be able to use ISPs other than AOL–actually owning the wires doesn’t seem to add that much to the value of AOL.

The point is that most of the business components of the deal seem to make perfect sense. It’s just that acquiring all of Time Warner to get them, especially at such a high price, doesn’t automatically follow. The odd thing is that at this moment when markets are replacing hierarchies all across the American business landscape, you also have all these companies–like AOL, like Viacom/CBS, like DaimlerChrysler, like AT&T–doing the exact opposite, making deals on the assumption that you need to have everything under one roof to really reap all the benefits.

2) At today’s press conference, Time Warner CEO Gerald Levin explained that he thought it made more sense to buy an Internet presence rather than try to build one organically. Which would be an interesting thing to think about, if he were buying an Internet presence. Instead, of course, AOL is buying an offline/cable presence. And if you turn Levin’s statement around, that leads you to an interesting conclusion about AOL’s wisdom in doing this deal.

3) The great beneficiaries of the deal, of course, are the people who owned Time Warner shares on Friday. It’s interesting, though, that even after today’s close there was a significant gap–almost 20 percent–between the price of Time Warner’s shares and the price that AOL will pay for them when the deal closes. In other words, if the deal were a sure thing, there’s a rather nice risk-free return just sitting there waiting to be picked up. What that means is that arbitrageurs think the deal is not a sure thing.

(It’s also unclear whether there’s a collar on the deal. Time Warner shareholders are going to get 1.5 shares for every AOL share. But that means that if the value of AOL’s shares falls, so too will the value of the deal for Time Warner shareholders. A collar would essentially put a floor on that value, so that if AOL’s share price fell below a certain point, Time Warner shareholders would get more shares.)

4) Despite the scope of the deal, though, antitrust concerns don’t really seem to be much of a factor here. Because the two companies’ businesses are complementary rather than competitive (that is, Time Warner doesn’t offer regular Internet access, AOL isn’t in TV or magazines or music), the deal will probably go through without much of a hitch. It would be interesting, though, if the Justice Department or the FCC were to embrace a broader definition of “competition” and to see Time Warner and AOL as essentially competitors in this amorphous thing we call “media.” In that case, the conglomeration of so many different kinds of assets might be seen as anti-competitive. But it’s a stretch.

5) I’m a Time Warner cable customer, living in Brooklyn, whose cable system is still so antiquated that I can’t even get Turner Classic Movies (which Time Warner actually owns), let alone high-speed Internet access. If this deal will get me TCM and true broadband access, then all I can say is: “Good going, guys!”