SILICON VALLEY, CA (January 14, 2000) -- It is not always easy to judge the importance of events as they're happening or in their immediate aftermath. In order to claim our attention, run-of-the-mill product upgrades get presented as "next generation," and every merger is trumpeted as the start of a "new era."
But if a real new era came to pass for every new era announced, this Rule Breaker report might be dated January 14, 3000, since there are just so many new eras that any one millennium can hold. I wonder what this portfolio's historic returns will be on that date. On the other hand, if you're wondering how we've done as of today, the answers you seek are at the bottom of this page.
Although Monday's announcement by Celera (NYSE: CRA) that it had sequenced 90% of the human genome qualifies as important (an understatement, indeed), I have to admit it was Monday's proposed merger of America Online (NYSE: AOL) and Time Warner (NYSE: TWX) that more immediately captured my imagination and evoked an authentic "This Is Big" reaction. Is "big" important? Maybe not by itself. For now, though, the combination of the world's largest interactive services conglomerate merging with the world's largest intellectual capital conglomerate would seem to meet the criteria.
I happened to be online as the news hit early Monday morning. As people woke up to the news (which is something you can literally feel on our message boards, by the way) it was immediately clear this wasn't going to be an easy one to wrap your mind around: AOL is merging with Time Warner. Time Warner? What does this mean for AOL? What does this mean for AOL's stock? Does this mean AOL gets CNN? And Time Magazine? And Loony Tunes? Aren't "old media" companies supposed to spin-out their Internet divisions? Is this synergy? Or an exit strategy? Is AOL still an Internet company?
But as interesting as what the deal means for AOL are questions about what it means to AOL's competitors.
The merger gives AOL access to Time Warner's cable TV network, its 12 million subscribers, and the Road Runner cable Internet service, raising questions about the deal's impact on Excite@Home (Nasdaq: ATHM). The deal is said to "validate" cable Internet access, but was that really in doubt? It is also said that Road Runner is now a more formidable competitor to Excite@Home. However, the two do not compete head to head for customers because cable franchises are fixed and do not overlap.
In addition, the number of subscribers available to Road Runner is only one-third that of Excite@Home. As far as cable access goes, it is far from clear what the deal means for Excite@Home, much less how cable broadband factored into AOL's plans and the decision to merge. This added to the uncertainty that has for months surrounded Excite@Home and fueled takeover and break-up speculation, AT&T (NYSE: T) and Microsoft (Nasdaq: MSFT) among those mentioned as possible buyers, co-buyers, or sub-dividers.
It was of course impossible to think about the AOL-Time Warner merger and not wonder what implications it held for Microsoft, and how it might effect the complex "coopetition" between the two. Though there was surely no cause and effect, yesterday's announcement that Bill Gates was turning over his CEO job to current Microsoft president Steve Ballmer, having created a new role for himself as chairman and Chief Software Architect, has to be read in light of the changes at AOL, if only because each is among the other's most significant competitors.
Not surprisingly, Gates and Ballmer were repeatedly asked yesterday if Microsoft would now have to buy a media company too in order to compete with AOL. Yet the company's ever-changing Internet strategies and mixed results over the years have led to speculation that it would actually divest itself of MSN and its Web properties. After all, media isn't what the giant software company is really about. Last year's sale and spin-out of two online properties would support that view, as does the fact MSN and media weren't on the agenda at yesterday's press conference where Microsoft's new boss declared that "Software is the key to the future."
A Fool might be tempted to say Microsoft was at long last ceding the Internet war to America Online. But that hardly sounds like the company that announced yesterday it was about to transform itself around the "Internet User Experience," and wondering whether Microsoft is an Internet company makes no more sense than wondering about AOL.
Microsoft increasingly thinks and talks about its Web properties not as a collection of Web sites and destinations, but as a suite of Internet-based software applications and services. It helps to think of the Microsoft Network as being similar to Microsoft Office, and individual websites as being like specific Office programs, different, but integrated to work together and share a look and feel and goal. To Microsoft -- for whom the Office application suite is probably its single greatest achievement -- a website is a software application.
That difference between a website and a Web service or application might be a subtle one, but it brings out the differences between America Online and Microsoft and their always-evolving approaches to the "century" and "future" that each made a great show of inaugurating this past week:
Microsoft sees the Internet primarily as a platform for developing services -- "building great software" -- that consumers will want and find useful.
America Online sees the Internet primarily as a platform for attracting consumers -- "building community" -- with services that keep them coming back.
What a crazy pair!
