Countering AOL's behemoth

By backing Napster, Bertelsmann could create an online rival to AOL/Time Warner

By backing Napster, Bertelsmann could create an online rival to AOL/Time Warner

Glyn Moody

Even though the merger between AOL and media giant Time Warner was announced a year ago, it is only recently that the relevant US regulatory body, the FTC, has given its blessing to the union. The FTC's document is hardly likely to re-ignite much interest in the matter. It is full of rather dull stuff about AOL agreeing to ensure open access to the cable networks that it will gain as part of the deal.

But if the long delay and unspectacular details were to result in a lack of interest in this merger, it would be a great pity and dangerous. For we are witnessing nothing less than the forging of the most important company in the online world and perhaps the successor to Microsoft.

As a previous column commented, AOL's rise is the story of the dogged ambition, skill and shrewdness displayed by its founder and CEO, Steve Case. For this once rather raggedy, downmarket service provider to swallow up a series of bellwether companies CompuServe, once the undisputed online leader, Netscape, the first Internet company, and now Time Warner is an extraordinary achievement.

It is of course far too early to tell what Case's strategy will be, but the regulatory constraints placed upon the new online behemoth hint at the possible dangers notably that of a tight, vertical integration of content and connectivity.

Initially, these risks will be mainly confined to the US, but there is no doubt that, were the worst fears of some of AOL's opponents realised, the excessive power such integration could bring would soon be extended elsewhere.

As a result, Case will surely be extremely cautious in his first moves so as not to raise the suspicions of his critics or the hackles of his rivals. Moreover, the integration of two global enterprises each with its own, very different culture is a huge undertaking, and success is by no means guaranteed.

But if Case and AOL must take things slowly, the opposite is true for other online players. The longer they fail to respond to the coming together of AOL and Time Warner, the weaker their position will be. The previous feature on the subject noted that as a result there is likely to be a substantial redrawing of the online media map, as large and not-so-large companies join forces in an attempt to counterbalance the might of Case.

This much is obvious; what may be less obvious is the fact that one extremely interesting effect of the AOL/Time Warner merger has already made itself felt. The German publisher Bertelsmann's announcement that it was not only lending $50m to the beleaguered Napster company in return for an option to buy a stake in it, but that it would withdraw from the lawsuit against it once a paid-for music download service had been put in place, and make its own music catalogue available, came as something of a bombshell.

But it looks almost certain that this bold move was in part motivated by a desire to seize the initiative in the face of AOL's new dimensions.

In fact, not only did AOL provide the stimulus for this move but it even gave Bertelsmann's switched-on CEO Thomas Middelhoff the means to place this bold bet. For Bertelsmann held a 50% stake in AOL Europe when it was set up five years ago. When AOL announced the Time Warner deal, it was clearly impossible for Bertelsmann to continue working with a company that would soon own its biggest rival. As a result, Middelhoff sold his AOL stake fortunately for him, when the market was still high Ð and built up a considerable war chest.

The $50m he is making available to Napster is pin-money, but could easily seed the creation of a viable online rival to AOL Napster currently has almost double AOL's user base. Since Case has yet to formulate a strategy for downloadable digital music, while Middelhoff has come down on the side of the MP3 generation, the latter has stolen a march on Case, and at a stroke probably turned Bertelsmann into the number two online media company.

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