The gigantic merger between
has altered the U.S. Internet and media horizons in one fell swoop. Its real importance, however, is likely to be global, giving AOL an instantly recognizable worldwide content and connectivity franchise.
Naysayers may have entered the market in the wake of Monday's news, complaining that the value of the combined entity was too high. Shares of both companies slipped in Tuesday trading with AOL off 10.5% at 65 and Time Warner down 6.6% at 86 1/8. But if the Internet is the global medium it is often trumpeted as being, AOL is positioning itself to dominate key sections of the Web around the world.
The big growth in the Internet, after all, is globally. Internet penetration in the U.S., while not at the saturation point, can only slow. In countries like Japan, where less than 15% of the population is online, the high-growth phase is about to begin. Over the next four years, Latin America and Asia are expected to sign up 64 million new Internet users. Growth in the Asia Pacific is expected to be double that of the U.S. What better way for AOL, which has had a spotty record abroad, to attract new subscribers than with established brands like
AOL is already in 15 countries and provides Internet access in nine languages. Not bad, considering the infancy of the Net outside of the U.S. Its entire overseas subscription base, however, is less than one-fifth the 20 million users it has at home.
In fact, AOL has been battered by a number of problems around the world. The company has faced competition by a number of small companies that have offered free Internet access. In the U.K., upstart
helped force AOL to offer
service. Prices have been slashed in Canada. And technical glitches have plagued AOL overseas, most notably in Brazil.
The merger won't put paid to those shortcomings. But it will give the company access to even more capital to address the concerns, says Ian Laming, Latin America equity strategist at
Morgan Stanley Dean Witter
. "If you are a media, telephony or cable company, and you look at a $180 billion monster in the U.S. that can come at you with cheap capital, it will cause you to rethink what economies of scale really means now."
Even more importantly, AOL now can offer subscribers anywhere in the world a package of some of the most easily recognizable content:
on Web TV, access to Warner Brothers movies and the downloadable music files from Warner Brothers, and well-known subsidiaries like
This, of course, is no different from the strategy AOL is employing in the U.S. It will be all the greater globally because of Time Warner's strong international presence.
is known around the world, and is in hotels from Bangkok to Rio.
publishes several international editions.
, the cable network that is also a member of the Time Warner family, is in several countries.
Imagine you are a first-time subscriber to the Internet in Kuala Lumpur, Tokyo or Buenos Aires. Your options are basic Internet service with some local company, or AOL with all the Time Warner bells and whistles. Imagine they both cost the same, which AOL is now able to offer because of its economies of scale. Which would you choose?
Thus, AOL now has an edge over competitors like
, as well as aggressive small companies like
, which last month announced it was offering free Internet service to Singapore, Brunei, Malaysia, Indonesia and Thailand. Similarly, AOL's newfound global advantage will likely eat into
, the Spanish-language portal that has its eyes on Latin America. And companies like India's
, which has been in talks with AOL, will likely see their hand strengthened.
Of course, AOL will run up against some daunting obstacles. First, its dominance as an Internet and media company may tempt others to compete by joining hands, says Peter Bradshaw of
And regulations are often baffling in the emerging markets that promise the highest growth. Look at the furor caused by China's reluctance to allow the foreign investment in Internet companies. Even in the industrialized world, governments are jealous of their power. When
merged in 1998, the
requested, and the U.S.
eventually agreed, that MCI sell off its entire Internet business.
Perhaps, however, AOL's greatest challenge is the fear and resentment around the globe of U.S. economic hegemony and cultural dominance. This deal does nothing to palliate those concerns. The company may have changed its name to the catchy acronym AOL, but doesn't everyone know it as America Online?
As long as AOL treads lightly, all of these issues should prove manageable. Handled with aplomb, AOL could quickly become the standard Internet service provider globally and thereby become one of the most important companies in the world, in any field.
Heather Bourbeau contributed to this article.