AOL and Time Warner's marriage of insecurity

Fear drove the two companies into bed with each other. Now it's our turn to be afraid.

By Scott Rosenberg

Topics:Microsoft, CNN, AOL

It’s official: There’s now more than one Goliath online.

After years of viewing Microsoft as the 800-pound gorilla in the Internet business, the world woke up Monday morning to news of America Online’s purchase of Time Warner. Oh, it was formally called a “strategic merger of equals” in the press release — in deference, no doubt, to the many egos atop the Time Warner hierarchy. And it’s true that Time Warner’s Gerald Levin gets to be CEO of the new company.

But over on the AOL.com site a headline reported, “AOL To Buy Time Warner for $166B” — and that’s the truth. The new company may be named AOL Time Warner, but in this equity-crazed age, what counts is the ticker symbol. And AOL’s 55 percent share of the new company means that stockholders will type “AOL” into their browsers to see how the combined entity is faring in the market.

On the surface, what happened Monday is simple: AOL, the leading provider of dialup Internet service, needed a strategy for moving its customers forward into the much-ballyhooed world of high-speed “broadband” access, controlled by telephone companies and cable TV operators (such as Time Warner). Time Warner, the ungainly media conglomerate, needed a credible way to salvage its Internet strategy after a decade of failure in the digital realm — from the colossal flop of its “Full Service Network” interactive television experiment to the spectacular flameout of its misconceived Pathfinder Web portal.

Put the two companies together and you get something like Monday morning’s press conference announcing the deal: A torrent of references to “synergy,” “one plus one equals three,” “the media value chain,” “the convergence of media, entertainment and communications,” and “new benefits to consumers.” You also get an avalanche of hype: One analyst declared, “It is probably the most significant development in the Internet business world to date.”

There’s no question that the combined company — which weds AOL and Netscape to the full Time Warner stable of cable networks and cable service operators, publishing firms, movie studios and music companies — will boast impressive market share and power. If Microsoft still thinks it has a chance to challenge this colossus in the media business, the software company is even more arrogant than its enemies paint it.

But that doesn’t mean the future is necessarily golden for AOL Time Warner.

Here’s what the people on that press conference podium didn’t say: These companies leapt into bed not because they felt confident but because they felt insecure.

Time Warner has spent more money on the Internet with fewer results than any other media company. AOL is afraid of missing the broadband bandwagon. Both companies see their new corporate spouses as perfect mates who can remedy their own inadequacies. And everybody knows what happens in marriages like that.

Once the dust settles from the analysis of who got the better deal financially, the question AOL and Time Warner will both face is: Can a merger on this scale work on the Internet? Will AOL’s proven expertise at making the online experience easy and accessible be of any use to Time Warner as it tries to straighten out the jumble of its online properties? How will Time Warner’s cable services help AOL conquer the broadband universe if the combined companies remain committed to the “open access” that AOL has been campaigning for over the past year?

Other questions we’re already hearing: Are there more old media/new media weddings on the way? Does Yahoo buy Disney? Does Microsoft defy the feds and try to purchase AT&T?

What all these questions take for granted is a phenomenon today’s news confirms: Corporate media power really is getting scarily concentrated. Just as the crazy weather patterns of the last few years are forcing even naysayers to think about the likelihood that global warming is for real, so today’s merger ought to give even the most die-hard free-marketeer cause to stop and wonder where we’re going.

Two years ago, Jeff Berg of the Hollywood agency ICM declared, “By the year 2000 there will likely be 10 to 15 media structures that will determine what we see and hear.” So far, the year 2000 seems to be bearing him out. The Internet will remain a great incubator of new ideas, small companies and innovative media — but let any of them become too valuable and one or another of the behemoths will snap it up.

Two mysteries remain after Monday’s press conference. First, why did every exec feel compelled to mention the deal’s “positive impact on society” — Ted Turner, who threw his 10 million or so shares of Time Warner stock behind the deal, even declared it would “create the most exciting and socially conscious company the world has ever seen.”

What’s going on? Is the new AOL Time Warner going to become the Ben & Jerry’s of media? Or are all these men hoping to forestall any potential regulatory obstacles to their merger by sending these carefully worded “good citizenship” signals?

The other mystery is how the companies managed to keep this massive, complex deal so completely a secret, with nary a leak in sight. These are both media companies, right? What kind of journalists work for them, anyway? Or could the tight lid on this story be a harbinger of the kind of controlled presentation of the news we can expect to see more and more of as the media falls into ever fewer corporate hands?

Watching Gerald Levin answer questions from his own employees at the AOL Time Warner press conference, broadcast over his own networks (or on the AOL Web site, where I saw it), you just might get a glimpse of the future. More and more, it seems, this is the “new media.”

: Salon co-founder Scott Rosenberg is director of MediaBugs.org. He is the author of "Say Everything" and Dreaming in Code and blogs at Wordyard.com. More Scott Rosenberg

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Bill Gates' deal with the government of Tunisia, and other instances of officials and corporations behaving badly

By Justin Elliott

Bill Gates and former Tunisian President Zine el Abidine Ben Ali.

Topics:Microsoft, WikiLeaks, War Room

(UPDATED BELOW)

Politicians and corporations behaving badly: that’s one theme that emerges from the latest secret State Department cables released by WikiLeaks.

The new revelations don’t measure up to the seriousness of the alleged massacre of civilians by U.S. troops in Iraq that I delved into over the weekend. But they are still very much worth noting.

A cable from 2008 titled “Mayawati: Portrait of a Lady” reports that the chief minister of India’s Uttar Pradesh state (the country’s most populous) once dispatched an empty private jet to Mumbai to procure her favorite brand of sandals:

Mayawati’s full majority victory in May 2007 UP State Assembly elections left her beholden to no one and has allowed her to act on her eccentricities, whims and insecurities. When she needed new sandals, her private jet flew empty to Mumbai to retrieve her preferred brand. According to Lucknow journalists, she employs nine cooks (two to cook, the others to watch over them) and two food tasters.

At a press conference today, Mayawati called the report “wrong, baseless, and disgusting.” She also asked that Julian Assange be put “into a mental asylum.”

Read the original cable here.

Jumping over to the Middle East and North Africa, two more revelations of interest: First, it appears that U.S. diplomats were skeptical of a deal between Microsoft and the now-deposed dictator of Tunisia, Zine al-Abidine Ben Ali.

In a September 2006 cable flagged by ZDNet, an official at the embassy in Tunis expressed reservations about a deal that provided “for Microsoft investment in training, research, and development, but also commits the GOT [Government of Tunisia] to using licensed Microsoft software.” The basic concern was that the software giant would be helping Ben Ali’s regime oppress Tunisians more effectively.

Wrote the author of the cable:

Microsoft’s reticence to fully disclose the details of the agreement further highlights the GOT emphasis on secrecy over transparency. In theory, increasing GOT law enforcement capability through IT training is positive, but given heavy-handed GOT interference in the internet, Post questions whether this will expand GOT capacity to monitor its own citizens. Ultimately, for Microsoft the benefits outweigh the costs.

The company did not comment to ZDNet. I’ve asked Microsoft for comment and will update this post if I hear back.

Finally, a cable from Iraq flagged by AFP provides a snapshot of the ever-increasing reliance on private military contractors by the United States. The basic concern was that Iraq, which had already banned Blackwater from the country after the notorious 2007 Nisour Square shooting, would also ban all former Blackwater employees. And the U.S. still relied on the same corps of former Blackwater employees who had joined other firms like Triple Canopy and DynCorps.

From a January 4, 2010 cable:

[A government spokesman] also indicated that the GOI [Government of Iraq] might expel former Blackwater employees out of Iraq, potentially complicating security services for the Embassy. …

[T]here are many former Blackwater employees at other private security companies in Iraq, most notably Triple Canopy and DynCorps providing security services to us.

Another cable written a week later reported that, “The Embassy understands that Triple Canopy currently employs several hundred former Blackwater employees.”

UPDATE: A Microsoft spokesperson sends along this statement:

Microsoft partners with countries around the world to help spur local IT innovation and job creation, help broaden access to IT, and to enable governments to adopt IT in the delivery of services to citizens. This has been the focus of our work in Tunisia.

: Justin Elliott is a Salon reporter. Reach him by email at jelliott@salon.com and follow him on Twitter @ElliottJustin More Justin Elliott

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Purchase will mark largest acquisition in the software maker's 36-year history

By Associated Press

Topics:Microsoft

Microsoft Corp. said Tuesday that it has agreed to buy the popular Internet telephone service Skype SA for $8.5 billion in the biggest deal in the software maker’s 36-year history.

Buying Skype would give Microsoft a potentially valuable communications tool as it tries to become a bigger force on the Internet and in the increasingly important smartphone market.

Microsoft said it will marry Skype’s functions to its Xbox game console, Outlook email program and Windows smartphones. The company said it will continue to support Skype on other software platforms.

The sellers include eBay Inc. and private equity firms Silver Lake and Andreessen Horowitz.

About 170 million people log in to Skype’s services every month, though not all of them make calls. Skype users made 207 billion minutes of voice and video calls last year.

Most people use Skype’s free calling services, which has made it difficult for the service to make money since entrepreneurs Niklas Zennstrom and Janus Friis started the company in 2003. An average of about 8.8 million customers per month, or just over 1 percent of the user base, pay to use Skype services.

Skype lost $7 million on revenue of $860 million last year, according to papers that the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO was later put on hold. Skype’s long-term debt, net of cash, was $543,883 at the end of 2010.

The Skype takeover tops Microsoft’s biggest previous acquisition — a $6 billion purchase of the online ad service aQuantive in 2007.

Microsoft said Skype will become a new business division headed by Skype CEO Tony Bates, who will report directly to Ballmer.

Although it makes billions from its computer software, Microsoft has been accustomed to losing money on the Internet in a mostly futile attempt to catch up to Google Inc. in the lucrative online search market. Microsoft got so desperate that it made a $47.5 billion bid to buy Yahoo Inc. three years ago, but withdrew the offer after Yahoo balked. Yahoo is now worth about half of what Microsoft offered.

Microsoft would be Skype’s second large-company owner. EBay bought Skype for $2.6 billion in 2005, but its attempt to unite the phone service with its online shopping bazaar never worked out. It wound up selling a 70 percent stake in Skype to a group of investors led by private equity firms Silver Lake and Andreessen Horowitz for $2 billion 18 months ago.

Besides eBay, Silver Lake and Andreessen Horowitz, Skype’s other major shareholders are Joltid and Canada Pension Plan Investment Board.

: More

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The last time life was this good for Apple, the PowerBook was new and Windows 3.1 had yet to launch

By Andrew Leonard

The Mac Classic II

Topics:Apple, How the World Works, iPad, Microsoft, Steve Jobs

The news that for the first time in 20 years, Apple’s quarterly net profit — $5.99 billion — has exceeded Microsoft’s — $5.23 billion — is remarkable for a couple of reasons. First, there’s the fact that the massive success of the iPad has pounded the market for consumer laptops and notebooks running Windows.

From Bloomberg:

Consumer PC shipments dropped 8 percent in the quarter, Microsoft Chief Financial Officer Peter Klein said. Netbooks — the cheap laptops that became popular during the recession — plunged 40 percent, partially because of defections to tablet computers, he said.

: Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21. More Andrew Leonard

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World's largest mobile maker will use Window's software as the main platform for its smartphones

By Matti Huuhtanen, Associated Press

Smartphones like the Nokia 5800 will now be programed with Microsoft Window's Phone software in a partnership aimed at taking consumers away from iPhones and Androids.

Topics:Smart Phones, Apple, Internet Culture, Microsoft

Technology titans Nokia and Microsoft are combining forces to make smart phones that might challenge rivals like Apple and Google and revive their own fortunes in a market they have struggled to keep up with.

Nokia Corp., the world’s largest maker of mobile phones, said Friday it plans to use Microsoft Corp.’s Windows Phone software as the main platform for its smart phones in an effort to pull market share away from Apple’s iPhone and Android, Google’s software for phones and tablets.

The move marks a major strategy shift for Nokia, which has previously equipped devices with its own software. Analysts said the deal was a bigger win for Microsoft than Nokia, whose CEO Stephen Elop in a leaked memo this week compared his company to a burning oil platform with “more than one explosion … fueling a blazing fire around us.”

Nokia said the partnership would “deliver an ecosystem with unrivaled global reach and scale.” However, it warned that the new strategy would also bring “significant uncertainties,” and said it expects profit margins to be hit by strong competition from rivals.

Nokia’s share price plunged 9 percent to euro7.43 ($10.11) in afternoon trading in Helsinki.

Elop, a Canadian national, joined Nokia from a senior executive position at Microsoft last year. The first non-Finn to lead Nokia, he is under intense pressure to reverse the company’s market share losses to North American and Asian competitors.

“Nokia is at a critical juncture, where significant change is necessary and inevitable in our journey forward,” Elop said. He added the company was aiming at “regaining our smart phone leadership, reinforcing our mobile device platform and realizing our investments in the future.”

Speaking later to analysts in London, he declined to say when Nokia would introduce a new device running on Windows Phone. But he said Nokia won’t bury its own Symbian operating system or the new Meego platform that it is currently developing.

The Symbian technology is being used in 200 million phones with 150 million more expected on the market, Elop said.

Android surpassed Symbian to become the world’s No. 1 smart phone software in the fourth quarter of last year, according to the Canalys research firm.

Microsoft CEO Steven Ballmer said the partnership would give the team “more innovation, greater global reach and scale.”

“We need to, and we will, collaborate closely on development … so we can really align and drive the future revolution of the mobile phone,” he said.

The key challenge will be to come up with devices of a quality level and hip factor that helps position Windows Phone as an attractive alternative to iPhone or Android.

Windows Phone 7, which was launched last year, still has a lot of catching up to do in terms of both the number of users and the number of “apps” available for the phones.

Nokia said its expertise in developing new software with Microsoft will be “on top of the platform in areas such as imaging, where Nokia is a market leader.” Its map services will be a core part of the new device as will Microsoft’s Bing search engine, Nokia said.

Neil Mawston of London-based Strategy Analytics said Microsoft was the big winner in the partnership, by teaming up with the biggest mobile hardware vendor in the world.

“In terms of expanding their distribution reach, this is a huge win for Microsoft,” he said.

For Nokia the deal leaves uncertainty about what will happen to its current Symbian operating platform. Mawston said he expects it to be phased out within two years and “completely, or at least mostly, replaced by Windows Phone.”

Although Nokia still is the mobile industry’s biggest handset maker, its market share has plummeted from a high of 41 percent in 2008 to 31 percent in the last quarter of 2010.

It has also lost its innovative edge in the fiercely competitive top-end sector and is virtually invisible — with a 3 percent share — in the world’s largest smart phone market, North America.

Apples’ iPhone has set the standard for today’s smart phones and Research In Motion Ltd.’s BlackBerrys have become the favorite of the corporate set. More recently, Google Inc.’s Android software has emerged as the choice for phone makers that want to challenge the iPhone.

“Today, developers, operators and consumers want compelling mobile products, which include not only the device, but the software, services, applications and customer support that make a great experience,” Elop said.

He warned of further layoffs and restructuring, saying Nokia must “improve the speed and nimbleness and agility of the organization … by taking significant steps in how we operate.” He gave no details.

The company said it will announce a new leadership team and organizational structure “with a clear focus on speed, results and accountability.”

Nokia, which claims 1.3 billion daily users of its devices, said it hopes the “broad, strategic partnership” with Microsoft will lead to capturing the next billion users to join the Internet in developing growth markets.

Jyrki Ali-Yrkko, from the Research Institute of the Finnish Economy, described Nokia’s cooperation with Microsoft as “surprising.”

“The strengths will be in Microsoft’s strong position in various corporate solutions and server solutions, but its weakness is that Microsoft perhaps doesn’t have a broad, user-oriented group of developers like those around Android or Apple,” Ali-Yrkko said.

——

Online:

Nokia: http://www.nokia.com

: More Matti Huuhtanen

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He was considered a possible heir apparent; his departure is bad news for the software giant

By Dan Gillmor

Ray Ozzie

Topics:Microsoft

Ray Ozzie gave me hope for Microsoft. When he joined the software behemoth after it bought his collaboration-software company, Groove Networks, he brought qualities to the executive suite that Microsoft sorely needed. The most notable was an appreciation that the software world was moving toward models of cooperation with others as much as plotting their ruination. He was considered a potential, even likely, successor to Steve Ballmer, the only other CEO Microsoft has had besides Bill Gates.

So much for that idea. Ozzie’s departure, announced today in a weirdly low-key manner, shows that Microsoft is still struggling to define itself for the Internet era.