NOT DEVIOUS, STUPID
Having always questioned the business savvy of the AOL Time Warner merger, I was particularly amused to read this piece on the Wharton site. It demonstrates the conventional wisdom in the Postrel house: that no one who applied economically informed strategic thinking to that merger would find any reason for it. What could these companies do as a single entity that they couldn't do through business contracts between separate companies?
And yet many experts had doubts about the AOL strategy from the start. In any merger, says [Wharton management and economics professor Daniel A.] Levinthal, the key question is whether it will accomplish something that could not be done more simply in other ways.
For example, in announcing the merger, executives of the two companies said they wanted to provide America Online's Internet subscribers the music and publishing information offered by Time Warner, and to use Time Warner's cable operations to deliver that data online at lightening speed.
Much of this, according to Levinthal, might have been accomplished with licensing agreements and joint ventures, while keeping the companies separate. That would have avoided all the difficulties of blending two very different corporate cultures, and it would have made it easier to abandon joint projects that weren't panning out.
"The fact that there is a potential leveraging doesn't automatically mean there ought to be a merger," he says. "There can be a big gap between the latent economic opportunities and the organizational challenges to making it happen."
The article's best passage is this one:
Gerald R. Faulhaber, professor of business and public policy and management, says that when the merger was announced, he and many other experts assumed the real motive was for AOL to get access to Time Warner's cable systems, even though the companies emphasized their goal of offering Time Warner's content to AOL customers. "Turns out we were wrong and they were telling the truth," Faulhaber says. "They thought it was about content ... I never thought that made any sense whatsoever."
AOL didn't need to pay a fortune for content, he says, since many content providers were eager to be on AOL. Many, in fact, were paying for the privilege. "I think the merger in some sense caused them to focus on the wrong stuff," suggests Faulhaber, who was chief economist at the Federal Communications Commission while it was evaluating the proposed merger. American Online "tried to become a content company. I think it was a huge mistake for them to do that."
[Posted 3/7.]