Big Media Rivals Plan for AOL Time Warner's World By William Drozdiak
Washington Post Foreign Service
Tuesday, December 26, 2000; Page E01
BRUSSELS -- As heads of three of the world's biggest media conglomerates, the men are of course competitors, always trying to top each other. But they're also old friends, to the point that Steve Case, Thomas Middelhoff and Jean-Marie Messier are on each other's America Online "buddy lists." Whenever they are online at the same time, automatic messages pop up on their screens to let them know.
The paradox of their personal relationship -- the three frequently meet at international retreats for chief executives -- is found at the corporate level as well. As Case's plan to combine America Online Inc. and Time Warner Inc. heads toward fruition, the other two men and the European-based companies they head are looking to confront the new giant head-on in some businesses and cooperate with it in others.
The days when corporate giants squared off against one another in mortal combat appear over. To survive in an era of exorbitant investment demands and corporate penny-pinching, rival companies are being prodded into temporary partnerships that they once would have shunned.
"Things are changing so fast that as companies adjust the profile and nature of their business to keep up with markets, they find that your rival in one field can be your partner in another," said Middelhoff, chief executive of the German media giant Bertelsmann AG, which over the years has been an AOL ally and a Time Warner competitor.
As a former AOL board member and a close pal of AOL chief Case, Middelhoff owes his rapid ascent of the corporate ladder to $50 million of Bertelsmann money that he invested in AOL six years ago, betting that the Virginia-based company would surmount troubles it faced at the time and become a leading force in the Internet age.
When Case began looking for a full merger partner, he hoped that Bertelsmann -- as 50 percent owner of AOL Europe -- would be the one. But Reinhard Mohn, the company patriarch, refused to surrender control, and Case turned to Bertelsmann's rival, Time Warner. With great reluctance, Middelhoff resigned from AOL's board and agreed to dispose of Bertelsmann's vastly appreciated stake, which will provide $12 billion that the German firm can use to swallow up other rivals.
Middelhoff said Bertelsmann's decision to remain privately owned will help the company maintain the kind of flexibility he thinks will be necessary to adapt to fickle shifts in the global economy.
"It's true we don't have a currency like inflated shares to finance acquisitions, but then again we don't have to answer to a lot of shareholders and analysts who would want us to explain everything we do," he said with a laugh. "And we don't have to worry about loans. If we decided to take on as much debt as AOL Time Warner, we could easily qualify as number one."
Middelhoff still has every intention of emerging as top dog, and the main competitive arena he has chosen at the moment is the global music business. After Time Warner was forced to drop plans to merge with Britain's EMI Group PLC, Bertelsmann swooped in. It hopes to conclude a deal early next year that would link EMI with its BMG music business. EMI is now the world's third-largest music firm, while BMG is fifth.
The combination would create the world's biggest music company, with a vast array of recording artists, including the Beatles, Santana, Whitney Houston and Puff Daddy. But to do so, the two companies must persuade the European Union's Executive Commission to approve a deal that would reduce the number of major global music companies from five to four. The same concern led the EU commission to reject EMI's plans to hook up with Warner Music two months ago.
But Middelhoff's biggest gamble yet may be his decision to break ranks with other music majors and propose an alliance with renegade Napster Inc., whose software allows people to trade music on the Web free. Napster's file-sharing technology is considered enough of a threat that the music industry has sued, alleging copyright infringement. Bertelsmann lent Napster $50 million and said it would drop out of the suit once Napster develops a system to make people pay for downloading music.
Middelhoff says the music industry has no other choice but to find a way to give Napster a legitimate business model. "You cannot ignore the fact that there are 38 million people using Napster," Middelhoff said. "They have more simultaneous users in a week than AOL had last year. And we believe a lot of those people are ready to pay for that service, which would generate considerable business potential."
Middelhoff's ability to make the deal work with Napster will depend on his ability to persuade other music majors to go along. And that means getting Case and Messier to give their approval. But the brash Middelhoff is confident that he can convince his old friends, arguing that there really is no other course, that in the Internet age the fast will always devour the slow.
"Our conversations are going very well so far," Middelhoff said. "And music is just the beginning of the file-sharing model we are developing with Napster. In the future, you will see that films, games, private photographs, just about everything that is imaginable and can be digitized will be exchanged over the Internet."
Similarly, the other big European rival to AOL Time Warner, Messier's Vivendi Universal, is seeking to follow the twin paths of cooperation and confrontation. The Paris-based company, which links the Vivendi water utility-turned entertainment company with the Universal music and film properties owned by Canada's Seagram, is seeking to emulate the AOL Time Warner model by gambling that old and new media are bound to converge with the revolution in high-speed transmission technology, or broadband.
Messier, the French investment banker who orchestrated the Vivendi merger, hopes to build a synergistic enterprise that will distribute Universal's film and music archives through properties such as Canal Plus (Europe's biggest pay-TV firm with more than 14 million subscribers) the SFR mobile telephone service that is France's second largest, and the Vizzavi portal established with Britain's Vodafone Group PLC that is designed to compete with Yahoo.
But to gain regulatory approval for his new media empire, Messier is being called upon to dispose of Vivendi's 55 percent stake in AOL France to prevent future conflicts of interest. And like AOL, Vivendi agreed to promise that it would not seek exclusivity in access to Universal's film and music library but would open the archives to rivals on fair terms.
While some analysts say the sheer size of AOL Time Warner will compel its rivals to follow its lead in combining content with distribution access, others say there is no proof that you need to have a massive presence in all markets to succeed in the Internet age.
"Just being huge does not mean you can steal the game," said Guy Lamming, chief media analyst for Lehman Brothers Inc. in London. "Sure, you can distribute your content easier on a global scale, but you also wind up having a much tougher time managing such a large, diverse and unruly creature. All this talk about synergy is greatly exaggerated, and in some cases just plain wrong." |
