Can AOL Learn From Its Merger Mistakes?

Analysts reflect on the star-crossed Time Warner merger, and predict a thorny road ahead for Aol.

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Wednesday marks the official break-up of what many analysts consider one of the worst partnerships in business history--AOL's $160 billion purchase of Time Warner in 2001. After bleeding revenue and market share for nearly a decade, AOL will begin trading as a solo entity on the stock exchange on Thursday at an estimated value of $2.5 billion.

Although Time Warner's future is far from certain, bloggers have been preoccupied with what lies ahead for the new "Aol."--now one of the oldest Internet companies. With broad agreement that AOL's failure stemmed from faulty predictions about the direction of Web growth, bloggers aren't convinced that the company's new course of action is airtight. Still, they say, it's too soon to count AOL out for good.

Looking Back: What Went Wrong?

  • Vertical Limit The BBC's Rory Cellan-Jones analyses just how and why one of the most-hyped mergers of the modern-era went so awry. His conclusion- the duo made what turned out to be an extraordinarily bad bet on vertical integration as the ticket to Internet success:
The idea of bringing together the people who supplied the internet with the owners of compelling content - the pipes and the poetry as the phrase went - seemed compelling in January 2000.

But the companies that grew and prospered over the decade turned out to have a single-minded focus on the web as a means of communication, knowledge gathering and socializing.
  • Hotmail Hit Hard At the Washington Post, Michael S. Rosenwald says that AOL's fall began actually began with the launch of Hotmail in 1996, well before the merger was even conceived. Unlike AOL, Hotmail allowed users to access their inbox from any service-provider. "Entrepreneurs like [Hotmail founder Jack] Smith took what AOL had popularized and moved it out of AOL's expensive walled garden, for which users had to install software and dial to from home for access, offering it through Web browsers for the very attractive price of free."

Looking Forward: Can It Prosper?

  • Last Legs True/Slant's Diane Mermigas favorably compares AOL to a cat, but ends by saying that the company has likely expended all of its "nine lives" at this point: "Five years from now, AOL will likely be buried within a global conglomerate and a bittersweet footnote in media history." Mike Schuster of Minyanville is less harsh, but still dwells on the numerous, self-created obstacles AOL must overcome if it hopes to succeed at all as a separate entity, including the stigma surrounding its new automated content-generation system:
The company plans to launch a number of new sites next year that will be mostly populated by content from freelancers, who will be paid by flat rates per post or click rates. Although cheaper to produce, user-generated content comes at the expense of a seasoned staff and produces mixed reactions.

AOL faces a long uphill battle. Stuck with a brand image that generates such negative memories like dropped connections, rude customer service calls, and landfill-lined CD-ROMs, it's anyone's guess if CompuServe decides to branch off from the company as well and try its own 2010 reemergence.
  • Risky Business Writing for AOL-owned blog Daily Finance, Sam Gustin is understandably hopeful about the new direction of his company, but even he concedes that the CEO Tim Armstrong's new strategy focusing on content-production is something of a hail-mary: "Armstrong has made a countertintuitive bet, pushing AOL's chips firmly in the direction of content. Just as traditional news companies are laying off thousands of reporters and editors, AOL is scooping lots of them up for its network of nearly 100 Web sites...If Armstrong can turn AOL around, he'll have completed a Herculean task -- a victory possibly sweeter than the millions he made at Google. Of course, the consequences of failure could be dire for AOL shareholders and employees. If ever there was a test of that old Internet bromide, 'Content is king,' this is it."
  • AOL Is a Cockroach Weighing in at NPR Morning Edition, All Things Digital's Kara Swisher compares AOL to the notoriously tenacious insect, which many believe could be one of the few species to survive a nuclear war: "Everyone's always counting AOL out and they still manage. They used to be called the cockroach of the Internet and they kind of still are in a lot of ways. You know, they never die. They always fall down. And it was their image that they constantly reinvented itself. And so we'll see. I mean they have survived multiple changes in their business." Going further, she thinks that AOL's chances for survival have increased lately thanks to recent reorganization efforts at the company: such as the installation of successful ex-Googler Tim Armstrong as CEO and the decision to cut costs via massive employee buyouts/layoffs.
This article is from the archive of our partner The Wire.