Net Hits the Big Leagues

Time Warner Inc. and America Online’s announcement Monday that they will merge stunned investors with the sheer size of the deal and further blurred the already hazy lines between telecommunications, media and entertainment companies. It may take a year or so to put the pieces together and for regulators to sort out the legal consequences. Consumers are expected to benefit if economies of scale result in cheaper and better services--and if the merger does not monopolize markets. There are also more subtle concerns about how ownership will affect content.

Competitors providing Internet services, news and entertainment are bound to feel the pressure that such mega-mergers create. Clearly, the torch of mass media for video, voice and data is being passed to the Internet. Other deals are bound to come, and soon.

More than anything else, the $163.4-billion purchase, by far the biggest corporate merger yet, shows the speed of growth of the Internet. AOL, since it went public in 1992, and despite significant growing pains in its early years, has seen its shares appreciate more than 800-fold. AOL shares today are worth some $160 billion, more than Time Warner and the Walt Disney Co. combined.

The merger appears to make business sense. Both companies are profitable, but Time Warner hasn’t made much progress building its Pathfinder Internet network and, like all media companies, has been struggling to harness the power of the Internet. A merger with AOL will provide answers. AOL’s 20 million subscribers will provide a huge audience for Time Warner’s CNN and the Warner Brothers network, WB movies, music and some 20 magazines, including Time, Fortune and People.

Like other Internet companies with few tangible assets, AOL is subject to considerable market volatility. The merger with a traditional media and entertainment company like Time Warner gives it substance.

AOL’s big challenge has been retaining customers who seek fast service. It teamed up with Bell Atlantic last year to deliver such services via phone lines, but rival cable companies took the lead. The merger will give AOL access to 12 million Time Warner cable subscribers--including 350,000 in the Los Angeles area--hastening the process of delivering high-speed Internet services.

AOL has been in the forefront of the battle to gain open access to cable for Internet service providers. The announcement of the merger didn’t say outright that the new company, AOL Time Warner, will provide open access, and that is regrettable. But the two companies said in a letter to members of Congress that they “are committed to ensuring consumer choice of Internet service providers and content.” They also challenged AT&T;, the biggest cable company, to do likewise.

As huge as the merger is, size itself will not determine whether the deal should be approved by the government. What matters is how the merger will affect access of the media, entertainment companies and other “content providers” to a huge subscriber base.

The decisions by antitrust and communication authorities will set a precedent for other similar mergers that are bound to follow. Entertainment companies, such as Disney or Sony, are expected to strike Internet deals of their own, and technology companies such as Yahoo, AT&T; and Microsoft are looking for content providers.

Consumers should receive increased quality in phone, Internet and video service, which will be delivered faster and more conveniently. They are also likely to find that those who deliver the news are the ones who wrote it and may be the subject of its content. It’s a trade-off they will have to consider.