AOL merger yet to convince

Happy days: the men who conceived the merger had high hopes

By the BBC's Mark Gregory

It has been an embarrassing time for AOL Time Warner, the American internet and media giant created by a merger that was completed exactly a year ago.

Earlier this week, the company announced a charge of up to $60bn against its accounts to reflect the recent fall in its share price.

Basically that amounts to an admission that the business is worth vastly less than previously claimed.

Not a great start for a colossus that said it would revolutionise the way we all get our news and entertainment.

At the time, it seemed like a marriage made in heaven.

Upstart meets giant

America Online, the biggest internet service provider, was the upstart king of the new medium that seemed set to conquer the world.

Time Warner was the established giant of traditional information and entertainment, with its Hollywood studio, CNN news, music and publishing interests.

The deal was conceived at the absolute peak of dot.com mania.

At the time, AOL founder Steve Case said: "At America Online, we have worked hard to fulfil our mission as building a medium as central to people's lives as the telephone or television, but even more valuable. Time Warner shares that vision. This merger advances the day when that vision becomes a reality."

Shattered dreams

But reality didn't live up to the dream.

"This great merger between the new world of the internet and the old world of conventional media, it was supposed to above all else create new media products, that could be driven down the internet and create much more than the sum of its parts," Ray Snoddy, media editor of the Times said.

"What has actually happened is that the AOL internet operations have been used for little more than marketing Time Warner products. It is not insignificant, but it is not a huge revolutionary world and it certainly doesn't justify the huge expense of the merger," he added.

Of course the dot.com revolution went sour for a lot of companies.

But none of the others had raised quite such high expectations as the merged AOL Time Warner.

Unreal predictions

To make matters worse, it was among the last to abandon unrealistic predictions of future profits.

Investors realised the truth last summer - the share price slumped over 50%.

Only now has the company has got round to adjusting its books to reflect that collapse.

"They really hurt themselves by being so ambitious. They should have been much less optimistic in their projections and much more realistic. This deal is valued at $150bn by some experts, being the biggest deal of its kind ever in the media business," John Friedman, media analyst for CBSmarketwatch.com in New York, said.

"So of course there was more of a burden and a spotlight placed on these companies AOL and Time Warner. The size does matter in this case and people were expecting a lot from these companies," he said.

Many analysts now question whether the merger should have taken place at all.

Time Warner with its vast array of established information and entertainment businesses may well have done better on its own.

For AOL the equation is different.

It had grown from nothing in an incredibly short time with the new economy boom.

At the time of the merger its main asset was an astonishingly high share price based on what turned out to be unrealistic expectations of the internet.

"From the point of view of AOL, it was very clever. They took their share price and used it to become part of a very large and important traditional media company. The real question is should time Warner have done it. Time Warner had a wonderful established business...a $60bn write off in share value, that is absolutely enormous," the Times' Ray Snoddy said.

Still hope?

The figure just written off by the media giant is equal to the entire value of annual output in Pakistan, a country of a 130 million people with its own nuclear weapons.

But the story is not over yet.

AOL Time Warner has appointed a new chief executive, Richard Parsons.

He has already owned up to the mistakes of the past. The markets see him as a safe pair of hands.

The internet part of the business is still growing, just.

The Hollywood arm recently released Harry Potter and Lord of the Rings, set to become two of the most successful movies ever made.