ALEXANDRIA, VA (Jan. 11, 2000) -- America Online (NYSE: AOL) and Time Warner (NYSE: TWX) required more than three months of discussion to reach a merger agreement, and management at AOL (at least) thought about the possibilities for much longer than that. It was amusing, then, when within one hour after the merger announcement, journalists and analysts were already sharing their insight regarding the combined company's future.

Of course, the press demanded a quick response from the "experts," but not surprisingly the initial response was largely what you'd expect. People reminded each other that:

-- This will be the largest media company in the world.

-- It will have a presence and distribution in every entertainment and information medium known to humankind, including TV, cable, Internet, music, film, and magazines.

-- This is arguably the first mega-merger where the companies are merging in order to prepare for the convergence of all mediums through broadband.

-- This harkens in a New Age (again) for the Internet and the rules are changing.

So What of It?

Similar to most people, my first reaction to the news was surprise. Doubt immediately followed. First reactions to large changes in business should be discounted, however -- if not outright ignored -- because they are typically devoid of real knowledge. A first reaction is a gut reaction. Mine was this: "'AOL Time Warner'? That's an ugly name! Plus, AOL is no longer a pure online company! Oh no."

So, as the excited stock market bid AOL higher on Monday morning, I felt that it should go lower. Then today was the opposite. Today investors sold the stock lower just as I began to believe that it should maybe go higher. Given one day to study the deal, I went from a negative first impression to a more positive second impression.

Let's Back Up and Think Far Ahead

First, AOL will grow more slowly when hitched to Time Warner, and the issuance of new shares for the proposed buyout will dilute shareholder value. These are both reasonable initial concerns. (In general, investors are not interested in the size of a business as much as they are in the growth of a business, and AOL's growth rate is going to drop.) It is far too early to tell, but AOL Time Warner may be able to grow about 25% to 35% annually following a merger. Beforehand, AOL was expected to grow 50% annually, so AOL's rate of growth has been clipped considerably.

Even given this, though, AOL's management obviously believes that it is doing the best thing possible for investors and it is ensuring long-term, steady growth by combining with Time Warner. But why did AOL do this now? It is the "Century of the Internet," according to AOL, and yet the first thing the company did this century was buy an "old media" dinosaur! At first glance, this makes no sense.

But on second glance...?

The combination of AOL with Time Warner was the idea of AOL's CEO, Steve Case, and I don't believe that his vision needs to be checked. He has been gifted with pioneering leadership in the online space since the 1980s, and I don't believe that has changed. He is thinking ahead five years and longer, and he is acting on the vision now.

What Vision?

When the convergence of TV, Internet, audio, video, commerce, and community takes place on a broadband network, just think what that'll mean regarding your choices as a consumer. At your fingertips, you will have thousands of entertainment and media choices readily available. Given the vast amount of selection, companies must own substantial amounts of leading content (and thus presumably have leading market share of traffic) in order to thrive on advertising, commerce, and subscription revenue. Having a small slice of the total traffic pie in the future won't be enough for a company to thrive, because they'll be competing with giants (like AOL Time Warner) that can serve almost all of a person's media and entertainment needs while keeping them within a wholly owned "content loop." Given this, most small or medium-sized content services looking for a niche will fight a losing battle.

Time Warner has over 120 million subscribers and AOL has over 20 million. In the future, don't segment these customers as some being just CNN users, or only AOL users or HBO subscribers. Consider them all "AOL Time Warner" users, period. Why? Because the company will cross-promote its services such that more and more customers will come to rely on every service of "AOL Time Warner," to the exclusion of other content providers. Assuming this, the potential size of advertising and commerce revenue for a leader in a two-way, broadband environment is mind-boggling. (A leading company can easily sell and cross-promote its own music, films, content services and so forth, again and again, just for a start.)

Plus, in an age of media giants, where do you believe 90% of advertising and commerce dollars are going to go? That's right: to the leading one or two giants. This is largely the case already. A majority of advertising and commerce dollars go to AOL and Yahoo! (Nasdaq: YHOO) online, and to the four leading TV networks on television. In a broadband world, content leaders (meaning traffic leaders) will continue to be the largest value creators. And the only way to compete successfully in a medium that combines all technologies (TV, Internet, audio, etc.) will be to offer leading services across all of the technologies, and then link them all together. Meaning, AOL Time Warner.

What about Providing Online Access? Isn't There Value to be Grabbed in That?

Eventually online access will become a commodity much like television access is today. Provided that this proves true (and there are many reasons why it should), it only reiterates the point that content resulting in advertising, commerce, and communication is where the most high-quality revenue will be made in the future.

AOL's absorption of Time Warner decreases America Online's dependence on Internet access revenue. In fact, the combined company could offer free dial-up access or even free broadband content access (if it wanted), and still thrive by building immense commerce and advertising partnerships.

Access is important. That should be clear. Building out high-speed access the next several years is one of the driving forces behind this deal. But in the longer run, when access is cheap and everywhere, content will prove to be much more important.

Another Flip Flop on the Way?

I see the long-term positives behind the proposed merger. I don't love the fact that AOL will grow more slowly or that it will acquire billions in debt, but I do see the 10-year and 20-year potential for media dominance (and with that, immense profit). However, I will probably flip from "leaning toward positive" on the merger to "leaning toward negative" again, and then I'll probably flip back yet again, and I can't say yet where I'll eventually land. The lesson here is that it takes time to really think things out, and long-term investors must commit themselves to thinking over long periods of time (especially regarding large changes), rather than making knee-jerk reactions.

We didn't even discuss AOL's cable access to 20 million homes on Time Warner's network, or the large goodwill charges that'll impact the company's numbers for years, or many other issues. We have plenty of time, however, to think this through. Right now, there is some good, some bad, and a whole lot to think about while trying to think 5 and 10 years ahead. Will AOL Time Warner stock aggressively beat the market?

Before ya leave, please read the Fool Radio Show announcement and other Foolish links below.

--Jeff Fischer, TMF Jeff on the boards

P.S. On this week's Motley Fool Radio Show, we're gonna discuss the AOL merger,
interview Yahoo! President Tim Koogle, and take your phone calls. Who do you
think are the winners and losers in the AOL/Time Warner merger? What would you like to ask Yahoo!? Our Fool Radio producer wants to hear from you. If you're interested in participating on this week's show, please email macg@fool.com with your question and comment and a daytime phone number.

Finally, do you think AOL is making the right move? Tell us in Polling All Fools. Cast your vote, and then check out this handy collection of our community's reaction to AOL's proposed merger with Time Warner.