Media: All About ... Time Warner's sale of AOL

Sky is set to pick up the ISP and signal the birth of an era.

Time Warner's piecemeal sale of its AOL properties will be charged with symbolism - especially if, as is expected, parts of the UK business are sold to BSkyB. After BT signalled last week that it is pulling out of the bidding for AOL's UK internet service provider operation, it looks as if Sky has been left as the sole bidder - though it is understood to be anxious about the £600 million price tag.

The ISP business will be sold minus the AOL branding, which will increasingly apply only to websites retained by its parent company, Time Warner. How the mighty are fallen - and the judgment of history is unlikely to be kind to AOL, which helped shape the closing years of the 20th century but will probably be remembered for all the wrong reasons.

Its burgeoning fortunes in the late 90s helped inflate the dotcom bubble; and the absurdly over-valued deal in 2001 which saw Time Warner acquire it to create a merged company with equity worth $165 billion was a prime cause of the bubble bursting.

And yet, around 1996, it almost became one of those immortal brands with transcendental generic status, like a Hoover or a Biro. Had history not taken a couple of unpredictable turns, we might even now be surfing the AOL. There's a slight echo of that when we talk, as some of us still do, of going online.

But it will ultimately be remembered as a pioneer company that backed the wrong business model. America Online, as it was in its pre-acronym days, was successful primarily because it was the internet for dummies.

You paid a set monthly fee for its dial-up service and you'd get e-mail and access to an electronic theme park. True, this walled garden had a gate at the back that would allow you out into the wilds of the web; but AOL did its best to keep you from straying.

On the plus side, it drove penetration of the internet by making sure its software was embedded in new PCs and by giving away millions of free software CDs. But AOL struggled to come to terms with the public's growing appetite for broadband - largely because broadband (especially when delivering video-on-demand) looked too much like another of Time Warner's heartland businesses, cable TV. The fit with Sky, which has no cable interests and has discovered a wild enthusiasm for the internet, may now be better.

1. The merger of AOL and Time Warner, engineered by Steve Case, the chairman of America Online, and Gerald Levin, the Time Warner chairman and chief executive, created "the world's first internet-age media and communications company". The theory was that, in the new media age, ownership both of content and the means of distribution would be essential. With equity worth in excess of $165 billion, the company came into being in January 2001.

2. The valuation of internet stocks plummeted later that year and resulted in AOL Time Warner reporting a loss of $99 billion in 2002 - the largest loss in corporate history. Case and Levin soon departed.

3. When the dust settled, Time Warner attempted to reinvent AOL , making it more of a conventional ISP, giving unhindered internet access . It attempted to migrate customers to broadband and began developing websites as standalone businesses.

4. In the UK, AOL now has 2.2 million customers, of whom only one million are broadband subscribers.

5. Since the dotcom crash, many Murdoch-controlled businesses have steered clear of the internet; but now both News International and BSkyB appear convinced the new dotcom growth phase will be viable. Last year, News Corp announced it had a $1 billion war chest for buying internet companies. Its most prominent recent move was the $580 million acquisition of

6. And Sky now clearly believes in the vertical integration model first posited by Levin and Case. Last year it purchased the broadband telecoms provider EasyNet for £211 million and subsequently announced it was using the EasyNet infrastructure to launch a Sky Broadband service. Sky believes that in the digital media age it will be vital to offer a triple play of TV services, broadband internet and telephony - and it accelerated its plans in this area when the rival company Talk Talk launched a free broadband offer in April this year.



- It has always been the $64 billion question in the digital arena: how much infrastructure utility (wires in the ground, switching technology, interface software and services) do you have to own to safeguard your position as a major player in the new-media economy?

- Two of the world's largest media entities now seem to be travelling in opposite directions - and the handover of AOL will signal their crossing.

- Time Warner ultimately came to regret mortgaging the farm to buy AOL. But the new factor that has emerged since 2000 is the inexorable rise of broadband - and the realisation that the internet will be an important pipeline for next-generation television services as the century unfolds.

- Arguably, Rupert Murdoch's media vehicles, stretching from his many newspapers to BSkyB, have been less than deft in their internet strategies.

But if anyone can make vertical integration work, it will be Sky. After all, it has managed pretty well with that model in the satellite TV business.


- Users are likely to be beneficiaries, especially if this intensifies into a broadband price war.


- Broadband growth may not be unreservedly good for advertisers - new techniques may bring advertisers closer to some consumers, but they will also accelerate the evolution of more sophisticated ad-avoidance technologies.

At the very least, however, this development proves that broadband has to be on the strategic agenda. Convergence is not an issue you can avoid.