Challenges at Time Warner

Introduction

Time Warner, Inc. is one of the largest companies in the world. In the media industry, Time Warner, Inc. which was formed in 1990 by merging Time, Inc. and Warner Communications becomes the one of the largest companies. The business of Time Warner, Inc. (Time Warner) almost covered the all areas of media: film entertainment, programming networks, cable systems, and publishing. Thus, Time Warner has experienced the glory in its business. However, with the development of technology, the emerging media seems to impact on the traditional media. Thus, Time Warner, Inc. merged AOL in order to increase its revenues through the Internet. But this merger was thought the worse deal at that time because the merger caused a huge loss for Time Warner. In addition, there are several huge competitors in the media industry to erode Time Warner's market share. This paper evaluates each business unit of AOL Time Warner, Inc. through the five-forces, opportunity and threat analysis in order to know which business units have potential abidingly to benefit AOL Time Warner, Inc. (AOL Time Warner) or probably are not able to maintain current growth and profitability. Finally, this paper also provides recommends to benefit AOL Time Warner for a long-term developing.

Environmental Analysis

The media industry structure has changed during the past two decades. In his article, Croteau et al (2007) examines that integration becomes a trend in media industry. More and more media companies pursue to approach global markets because American media companies have experienced the situation that domestic markets have saturated. In can be seen some American media companies tried to merge the other media companies to become media giants. Due to integration, and globalization strategies, the concentration of media ownership becomes a significant phenomenon. The reason about this is that those media giants such as Time Warner, Disney, Viacom and News Corp. have more competitiveness than those local companies so that these media giants can increase their total revenues (p. 33).

With the development of the Internet, the emerging media becomes more popular over the past years. More and more viewers attend to get information through the Internet rather than traditional channels. According to Internet Growth Statistics, the table shows that the percent of world population who use the Internet increases significantly from 0.4% to 11.1% during 1995 and 2003. This trend has been found until now and impacted on the traditional media companies (Internet Growth Statistics, 2012, p. 2).

Analysis

In his article, Baye (2010) examines that AOL Time Warner includes five business areas: AOL, filmed entertainment, publishing, programming, and cable systems. In 2003, each business unit of AOL Time Warner made profits; the percentages of net income of each business unit are 11%, 20%, 11%, 31%, and 26%, respectively (p. 549). Although AOL Time Warner is an excellent company in this industry, it still faces a lot of challenges on its business.

In order to figure out the strengths and weaknesses of AOL Time Warner, they will be analyzed through Porter's five forces, and Brandenburger and Nalebuff's concept of the value net. Besanko et. al, (2010) explains that five forces analysis is a method to evaluate an industry in deep. The five forces are internal rivalry, entry, substitute and complementary products, supplier power and buyer power (p. 328). In addition, the author reveals that the concept of value net, similar to the five forces. But the five forces analysis mainly evaluates the threats to profits while value net mainly assesses the opportunities to profits. Thus, a complete analysis should include the threats and opportunities of the five-forces (p. 334).

First, AOL was successful in operating its online business and increasing its subscriber. In 1995, the company had approximately 5 million subscribers. AOL had a rapid growth in subscribers around 20 million members by the end of 2000. But the number of members had the peak, reaching 24.7 million and then declined to 24.3 million during the fourth quarter (Baye, 2010, p. 549). AOL suffers a declining number of subscribers. In addition, Baye explains that there are two reasons. One is that most people prefer broadband than dial-up service because people enjoy the high-speed Internet. There are two substitutes for dial-up service: cable and DSL. Initially, 63 percent households used dial-up service to connect the Internet while 37 percent households connected to the Internet through a broadband connection (p. 549). However, in 2003, no more dial-up service was used. Cable and DSL have the two largest categories of broadband usage, accounting for 58.3% and 32.7%, respectively. As a result, the broadband service almost replaced the dial-up service after 2003. The other reason is that AOL's other products met strong competitors. For example, Netscape developed by AOL was a search engine that provided the search function for users but Microsoft provides the similar product, Internet Explorer to overtake the market. Further, AOL's instant messenger provides a communication system for subscribers to send messages or email to others. Other competitors such as Yahoo, Microsoft also involve this business. Thus, AOL's instant messenger loses its market share.

AOL might not sustain its revenue if AOL could not provide broadband service and create new applications for instant messenger to attract more subscribers because the revenues of AOL are derived from subscription service and advertising. Also, the numbers of subscribers have a positive relationship between advertising. The decreasing number of subscribers will have negative effects on the revenues from advertising.

A risk of AOL's business is that there were conflicts between AOL and Time Warner. Although Time Warner hoped to significantly increase its revenue through merging AOL, it seems fail. The author reveals that compared its annual reports during 2001 and 2003, the total revenues increased steadily during 2001 and 2003, representing 33,507million, 37,314milliom, and 39,565million, respectively and in 2003, although each business unit made net income, the percent of AOL's sales to overall Time Warner's sales only accounted 21% and the percent of AOL's net income to overall net income only accounted 11%. AOL did not contribute significant sales and net income for Time Warner (Baye, p. 549). Due to new accounting regulation, Time Warner had to suffer the huge loss, which was called "goodwill impairment" because the value of the merged company is not more than the buyer thought it was worth (Pellegrini, 2002, p. 1). If the executive managers of AOL Time Warner could not let