For Rivals, Bedlam in Boardroom

Technology and entertainment executives awoke to a transformed world Monday and began sorting out whether their place in it was better or worse.

Many analysts said that the breathtaking proposed merger of America Online and Time Warner would create a new media company so powerful that its very existence would diminish the position of almost every major rival.

“It’s hard to conceive of another partnership, another acquisition, that would create such a power base,” said Kathy Hale, an analyst at Dataquest in San Jose. The deal, she said, casts “dark clouds over entire economic sectors.”

Companies caught in that shadow could include every Internet service provider as well as technology and entertainment titans such as Yahoo Inc. and Walt Disney Co.

But if the deal accelerates the convergence of entertainment and technology, it could also bolster companies that provide the necessary content and equipment, analysts said.

Southern California companies ranging from Internet start-ups to Hollywood studios are already creating new breeds of interactive entertainment likely to be in ever-greater demand.

Likewise, Silicon Valley and Orange County companies that produce the software and hardware needed to build the high-speed networks that will carry tomorrow’s content are poised for continued growth.

Whatever the fallout, executives and analysts across the spectrum of technology and media industries agreed that Monday’s proposed deal is of such magnitude that it will be hard to find a company in either sector not affected by it.

And no companies will feel that impact more than the media giants that are Time Warner’s primary rivals, analysts said.

“Each of the major entertainment companies, whether it’s Disney, News Corp. Viacom or even NBC, is going to have to reassess its Internet strategy,” said Chris Dixon, analyst at PaineWebber in New York City. “By putting this kind of company together, AOL and Time Warner have the ability to set the agenda.”

Disney, for instance, has spent millions of dollars in recent years establishing a strong beachhead on the Internet. Disney operates some of the Web’s most popular sites, such as Go.com; it possesses a deep well of valuable content; and, through its ABC network and cable television properties, it is in a position to promote its Internet offerings to millions of viewers.

Yet analysts pointed out Monday that a combined AOL-Time Warner would have all of those ingredients, plus key assets that Disney does not have, including a cable-TV system capable of delivering high-speed Internet services to 20% of the nation’s households.

Similarly, Yahoo is often regarded as AOL’s most potent rival in cyberspace. Yahoo, the Santa Clara-based Internet portal, is the most popular site on the Web, and a master at aggregating information ranging from classified listings to sports scores to free e-mail services.

Yet America Online matches Yahoo piece for piece, and also has 20 million people who pay $20 every month for its service. By combining with Time Warner, AOL would widen that considerable revenue gap, add content ranging from magazines to music to movies, and gain control of a giant cable system.

AOL and Time Warner now “control content and delivery of that content,” said Rob Enderle, a Silicon Valley analyst with Giga Information Group. “This kind of thing should be particularly frightening for Yahoo or smaller portal sites.”

But if the conventional wisdom is that AOL-Time Warner poses a threat to Disney and Yahoo, it didn’t show in their stock prices. Yahoo surged to $436.06 on Monday, up $28.81 in trading on the Nasdaq market. Disney climbed to $35.88, up $4.75 in trading on the New York Stock Exchange.

The AOL-Time Warner merger could put enormous pressure on smaller Internet service providers, including AT&T;, EarthLink Network and its merger partner MindSpring Enterprises and practically every regional telephone company in the United States.

If AOL-Time Warner bundles high-speed Internet service, cable television and access to both companies’ proprietary content, ordinary dial-up ISP service “will start to look like a commodity,” Dataquest analyst Hale said.

But executives at Internet service providers argued that their focus on customer service will enable them to thrive even against AOL-Time Warner. “We’ve always been significantly behind AOL,” said Garry Betty, chief executive of EarthLink, “and every quarter we catch up.”

EarthLink and MindSpring combined are about one-fifth as large as AOL.

The threat from AOL-Time Warner for rivals hinges on the companies’ ability to merge quickly and efficiently, a prospect that some experts view with deep skepticism.

“I think there are going to be real integration problems,” said Stewart Alsop, a partner in the Menlo Park venture capital firm New Enterprise Associates. “Time Warner is not a centrally organized company, and AOL is extremely centralized. Trying to put together two organizations that dissimilar is extremely difficult.”

Beyond the tier of companies that compete head to head with Time Warner and America Online, the impact of the proposed merger is less clear.

Many in Hollywood said the region’s entertainment expertise will only become more valuable if Time Warner and America Online succeed in delivering high-speed Internet services to more households.

In that scenario, “there’s a huge market for content of the type that gets done in this town,” said Jake Winebaum, former head of Disney’s online business and co-founder of ECompanies, a Santa Monica-based incubator of Internet companies.

But Winebaum and others also expressed concern that by partnering with Time Warner, AOL may have less need for independently produced content. “If the owner of the pipe favors their own content,” Winebaum said, “then the economics of the content business may suffer.”

But most companies creating entertainment for the Internet said that Monday’s deal validates their vision of a global computer network as consumer-oriented as television is today.

“In one fell swoop, this establishes the primacy and importance of the content play in the Internet space,” said Nick Rothenberg, managing partner at USWeb/CKS Los Angeles and a member of the Digital Coast Roundtable.

For Silicon Valley companies left out of the deal--that is, nearly everybody--the good news is the Web companies have been for the first time admitted to the establishment club: Their stock prices are no longer automatically a joke.

Valuations of media companies both old and new rose on the deal, in part on expectations that more mergers lie ahead.

The deal also appeared to bolster “broadband” infrastructure companies such as Cisco Systems, which sells more networking gear to Time-Warner than any other cable operator, and providers of DSL and wireless technology.

“This is hugely exciting,” said Cisco Vice President Paul Bosco. “This is a profound validation of the growing importance of digital and interactive media as a core component in the asset portfolios of the world’s largest entertainment companies.”

Investors also were excited about the prospects of Irvine chip developer Broadcom Corp., which has been betting heavily on the merging of cable technology, interactive content and broadband Internet access. Its shares hit an all-time high of $304.88 on Monday, before settling at $295.56, up $29.06, or 11%, in Nasdaq trading.

Broadcom makes semiconductors for every segment of the broadband market. It also dominates the market for chips used in cable modems and set-top boxes, which allow consumers to access the interactive content analysts expect the newly merged AOL-Time Warner giant to produce.

Monday’s stock surge further boosted the growing fortunes of Broadcom co-founders Henry T. Nicholas III and Henry Samueli, to $5.6 billion each, from $5 billion on Friday.

Potential losers include Excite@Home, which started the content-access merger craze and is now dwarfed by AOL-Time Warner, and other old media firms.

But George Bell, chief executive of Excite@Home, said he has no doubt that his company will remain an attractive alternative to the AOL-Time Warner monolith.

“If the only choice is between Time Warner content and AOL content,” Bell said, “I think that’s a world that doesn’t serve the consumer well.”

Jim Clark, a founder of Netscape, Healtheon and Silicon Graphics, said he is puzzled by the proposed deal.

“The Net is a bit slow to take advantage of the content Time Warner has, so it’s clearly a future bet,” he said. “The future really develops rather slowly with respect to motion media.’

More Coverage

* Time Warner and America Online to merge in a $163.4-billion deal. A1

* It’s the coming of age of the Internet as an industry, experts say. A1

* Not so very long ago, AOL’s Steve Case was working for Pizza Hut. A1

* Time Warner’s Gerald Levin lands on his feet--once again. C9

* Microsoft may be prompted to seek new partnerships of its own. C10

* The news throws AT&T; Corp.’s cable-access plans into confusion. C10

* For Warner Bros., it could open new doors in movies and television. C10

* The proposed deal does not appear to raise major regulatory issues. C11