Once-Exotic Net Goes Mainstream

The proposed merger of America Online and Time Warner Corp. marks the passage of the Internet from an exotic technology into a mass media industry.

It means that AOL, the Internet service provider that has 20 million customers, will acquire in Time Warner’s cable systems a more expansive and easy-to-use system of distributing news and entertainment material to consumers and homes.

“We will look back on this year as marking the day that the Internet ceased to be a ‘technology’ and became a mass media industry,” said Paul Saffo, director of the Institute for the Future, a Silicon Valley think tank based in Menlo Park, Calif.

What the experts foresaw as they examined the proposed AOL-Time Warner deal is nothing less than the fulfillment of the Internet’s promise of interactive entertainment, education, medical diagnosis, retailing and scores of other services to homes and consumers.

The belief of companies and many experts is that millions of consumers--roughly 50% of the U.S. total--who have yet to go online would do so if the Internet were more accessible. For that to happen, though, appliances will have to be different from today’s computers. Don’t think computers, think televisions, said Frank Gens, senior vice president for Internet research at International Data Corp., a Framingham, Mass., research firm. The AOL merger with Time Warner, a $27-billion-revenue giant of movie, television and print communications, could bring the masses to the Internet. But television will have to be the key.

“You’re not going to get the next 50% by throwing CDs at them,” Gens said, referring to AOL’s strategy of mailing out millions of computer CDs to encourage consumers to sign up for its service. “You’ve got to get them through the television”--a medium that Time Warner has mastered through its cable systems and channels, such as HBO, CNN and others.

Why should this deal arouse hopes for that kind of change? Because of the consumer and the in-home orientation of AOL, the 15-year old company that last year had $4.8 billion in revenue from subscribers and advertising.

“I don’t think AOL is thinking of themselves purely as an Internet company,” said James Korris, executive director of USC’s Entertainment Technology Center. “I think they are thinking of themselves as a bridge, a conduit between the home and the rest of the world.

“What would probably please them more than anything is to have a completely idiot-proof set-top box that delivers everything you want directly and on demand,” Korris added.

AOL is the company that always has gone after the mass-market customers, with easy to use e-mail and chat rooms and other features. Technological sophisticates ridiculed it as “cyberspace on training wheels.” But the company attracted and held the subscribers, and made a profit from their $20-a-month fees.

AOL built a following among investors that gave it a market value high enough to be able to contemplate acquiring one of the world’s largest media companies, the descendant of Henry Luce’s Time Magazine empire and the famed film studio founded by the four Warner Brothers--Harry, Albert, Sam and Jack.

Most analysts Monday expressed a faith that AOL would “refashion, reuse Time Warner’s content,” in the words of Jon Goodman of the USC Annenberg Center for Communication. She was referring to Time Warner’s films and television channels, such as HBO and CNN and beyond that to the many other services of a broader Internet.

Indeed, many communications and investment experts saw the proposed deal as the first of many such arrangements. “All the movie studio conglomerates will be in play for mergers with Internet firms,” said Christopher Murray, chief of the entertainment practice at O’Melveny & Myers, a Los Angeles law firm.

But there were skeptics too. Gens, of IDC, noted that simply becoming a giant company is no guarantee of success on the Internet. Such services as interactive television could be easily tripped up by bad technology or execution.

Also, some analysts noted that AOL itself is under competitive pressure from Internet service providers offering free access--as opposed to AOL’s $20 monthly subscription fees. If it has to lower fees, AOL could become unprofitable.

And the proposed merger aroused fears in some experts. Jon Zittrain, head of the Berkman Center for Internet and Society at Harvard Law School, said the control of so much content on the Internet creates a kind of information monopoly in which AOL and Time Warner could push their own material and squeeze out all the wild diversity of the Web.

Music industry experts also pointed out that Internet delivery and copyright protection for songs and arrangements could come into conflict.

But working out such potential problems will be the central issue in building a new mass media industry.

There will be worldwide deals similar to AOL-Time Warner, said William Woodward of Avalon Investments, a Santa Monica venture capital firm. The deals will come about because Internet growth is accelerating internationally as computer sales pass 250 million a year and capabilities for broadband communications expand. Roughly 5,000 miles of fiber optic cable is laid every year.

In other words, the infrastructure of the “information highway” is being built every year. As that infrastructure grows, companies will invent new services to offer consumers, and more consumers will find things to try out on the new medium. Greater Internet capacity--called bandwidth--coupled with a company such as AOL that seems to know how to create services for consumers could spell a turning point for a new mass media industry.

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DEAL AT A GLANCE: AMERICA ONLINE-TIME WARNER

* COST: $163.4 billion in stock

* MERGER: AOL, the biggest name in new media, would acquire media company Time Warner, the largest producer of movies, music and magazines.

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* WHO’LL BE IN CHARGE: AOL’s Steve Case will be chairman. Time Warner’s Gerald Levin will be CEO.

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* WHEN: The companies hope to complete the deal by year-end.

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IMPACT OF THE MERGER

*ON CONSUMERS: Brings them closer to the day when they will access telephone, Internet, movies, television, music and news over the same network.

*ON THE INTERNET: Promises to bolster the Internet as a mass medium.

*ON CABLE: Gives AOL access to Time Warner’s 13 million cable subscribers, potentially influencing a national dispute over access to broadband Internet service.

*ON COMPETITORS: Raises the competitive stakes for entertainment conglomerates such as the Walt Disney Co. and Internet companies such as Yahoo. AOL Chairman and Chief Executive Steve Case, left, with Time Warner chief Gerald Levin after a news conference announcing the planned merger of their companies.