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Tuesday, 11 January, 2000, 20:38 GMT
Can the internet save 'old media'?

By BBC News Online's Tim Weber

'Old media' executives in radio, television and publishing agree on two things:

  • The internet is a threat
  • It presents a huge opportunity
Online executives are worried people too. Yes, they are at the cutting edge of a new technology and the growth rates of their companies are spectacular, but do they have enough attractive content to lure users to return regularly and in large numbers to their websites?

But they have a problem. None of them is quite sure how to make the web work to their advantage.

The merger of America Online and Time Warner has been billed as the solution to both problems.

Combine the content and established brands of old media companies with the technological savvy of new media firms and you have the best of both worlds.

Share frenzy

This prospect has excited the imagination of investors and media executives alike, and driven up the price of technology and media company shares.

Speculation is rife. Which firms are next in line?

Traditional media companies have had a hard time understanding the dynamics of the web

Dan O'Brien
Forrester Research
There are plenty of candidates: Walt Disney, Sony, Viacom, Rupert Murdoch's News Corporation and German media giant Bertelsmann - all have struggled to come up with an internet strategy.

UK firms like Granada, Pearson and United News and Media have faced similar problems.

Getting it wrong can be costly. Time Warner, for example, set aside $500m last year to invest in new online efforts, before opting for the AOL merger.

Understanding the internet

Dan O' Brien, internet analyst with Forrester Research, says that traditional media companies "have had a hard time understanding the dynamics of the web".

"It's not just a matter of digesting your content, setting up a site and expecting people to beat a path to your door. It doesn't work that way", he says.

Walt Disney, for example, has spent millions of dollars building up its internet network go.com, but has not had much success in pushing its entertainment content.

There is a trend toward internet companies partnering with traditional media companies

Mark Mooradian
Jupiter Communications
Rupert Murdoch's News Corporation is another late convert to the web. Not long ago, the media magnate derided the growth potential of the internet.

Now he is rapidly notching up a string of web deals, although he has failed to provide any focus for News Corp's internet activities.

It is the likes of AOL, Yahoo, Lycos and Microsoft who have the necessary know-how - and hunger for attractive content.

Mark Mooradian, analyst with Jupiter Communication, predicts that there will be many more deals like the AOL - Time Warner partnership.

German media giant Bertelsmann, for example, has already tried to go that way. The company, one of the world's largest English-language publishers, has a 50% stake in AOL Europe, and its chairman has a seat on the board of AOL.

Even though Bertelsmann approved the Time Warner merger, the deal leaves the company's global ambitions in limbo.

Global ambitions

It is the global reach of the web that makes media mega-ergers so attractive.

Chris Dixon, a technology analyst with investment bank PaineWebber predicts that AOL Time Warner will be able to reach a stock market value of up to $500bn: "The key thing to look to is the extraordinary reach this company will have."

So who fits to whom?

Rumour has it that Microsoft could be eyeing News Corporation. Shares in the company have soared 28% since the AOL Time Warner deal.

Some analysts, however, argue that it is unlikely that Rupert Murdoch will allow a dilution of his control over the company.

In Japan, Sony could link its music and movie business with the internet operation of Fujitsu. However, Fumiaki Sato at Deutsche Morgan Grenfell in Tokyo warns that the country's internet industry is still too underdeveloped to seriously consider any media partnership.

Microsoft, on the other hand, already has a partnership with NBC, but this has not quite produced the synergies either company might have hoped for.

Broadband

The emerging media giants of the internet age are already eyeing their next battlefield. Forget browser wars; broadband is at the heart of the web revolution.

All the talk about pushing content over the web will remain somewhat meaningless, as long as the majority of internet users rely on poky modems with data transfer speeds of 56Kb or less.

That's what makes the AOL-Time Warner merger such a perfect fit.

America Online has so far shunned broadband technology. Through Time Warner, the company gets access to the second largest cable network in the United States, with a potential reach of a fifth of all households.

Microsoft has recognised the power of broadband as well. The software giant is busily buying stakes in cable companies around the world, investing more than $8bn in 1999 alone.

Microsoft claims that the AOL merger will not affect its internet strategy as it wants to specialise in offering services on the web, not content.

Nonetheless, as both companies stake claims in the broadband world, they are bound to clash yet again.

Growth and stability

And there is another compelling reason for media and internet mergers: The share prices of technology companies have been spectacularly successful - and stomach-churningly volatile.

Buying into more established companies could provide some much-needed stability.

Old media firms, in turn, hope to jump on the internet bandwagon and turn themselves into high-growth companies with stock market valuations to fit the image.

Squaring this stock market circle would probably be the biggest achievement of old media/new media mergers.

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