No one is more aware of those nuances than AOL itself. Working with an impressive list of partners–including Bertelsmann in Europe, China.com in China, Mitsui and Nikkei in Japan and the Cisneros Group in Latin America–AOL now boasts 3.2 million international subscribers. And yet it remains a second-tier player in most countries. AOL’s ambitions have been hampered by powerful former phone monopolies (which have a built-in customer base for their own Internet services), customer demand for localized content and its own management missteps. In Britain, an upstart called Freeserve rocketed past AOL last year by pioneering free Net access. (AOL has since counterattacked.) In Brazil, where AOL launched its service last November with a blitz of celebrity advertising, hundreds of new customers unwrapped their AOL discs, only to find the latest release of samba group Raca Negra.
Europe, Latin America and Asia have all experienced their very own Internet stock frenzies in the last year. But companies and markets alike are still a couple of years behind those in America. With the market value of non-U.S. Internet companies still only a fraction of AOL’s, a European or Asian equivalent of the $172 billion AOL-Time Warner deal–with a new-media company in the driver’s seat–isn’t on the horizon. But sizable deals, shaped by local conditions, may well be hastened by the American example. Everybody from Vivendi (the French infrastructure giant that’s recasting itself as a communications company) to mobile-phone Goliaths like Vodafone are now jostling for position, and the stakes will only get higher. The investors who bid up the stock price of Pearson (the U.K. publisher of the Financial Times) by 15 percent immediately after the AOL deal was announced weren’t entirely deluded. “The world is coming together,” said Pearson CEO Marjorie Scardino, a new-media savvy executive (she’s an AOL director) thought by some to be a likely participant in the trend. Even those who produced a surge in the shares of Hong Kong TV broadcaster TVB may be rewarded. “This deal makes [everybody] think differently about the future,” says Daniel Chiang, chairman of Sina.com, the leading Chinese-language Internet portal.
One man with a lot to think about is Thomas Middelhoff, CEO of Bertelsmann, the German media giant. Middelhoff, an early Internet enthusiast, engineered the deal that made Bertelsmann AOL’s chief partner in Europe. In an arrangement that was in some ways a harbinger of AOL Time Warner, the two companies are 50-50 partners in AOL Europe. Bertelsmann, whose European properties include the French magazine group Prisme Presse and German magazine Stern, gives AOL the local-language content it needs in Germany and France. In return it gets a new distribution channel for its books and music. But now the future of AOL Europe is in question. Bertelsmann (which also owns America’s Random House) is a major competitor of Time Warner–which is why Middelhoff last week said he may resign from the AOL board. “AOL may have to find another content partner in Europe,” says Anja Stemmer, an analyst with Jupiter Communications in Munich.
Can’t AOL just substitute Time Warner products? Not if it wants to keep its customers happy. Except for CNN, Time Warner does not have much to offer Europeans. In fact, no other European media company is quite as attractive as Bertelsmann–a fact AOL seems to recognize. “We have a strong partnership with Bertelsmann, and that won’t change,” says AOL Europe CEO Andreas Schmidt. Klaus Eierhoff, a management-board member of Bertelsmann, also denies that the U.S. deal was a setback. “What do you mean?” he asks. “We started linking multimedia and content five years ago. Now AOL wants to do the next step by linking with Time Warner. This is the logical movement of markets,” and, he adds, a mostly American venture. “The lesson for all of us is that we have to act more quickly. Speed is key.”
Speed, yes. But also, increasingly, size. For Bertelsmann that may pose a problem down the road, since as a privately owned company it can’t participate in mega-mergers without the Bertelsmann Foundation (set up by the founding Mohn family) losing control. Yet most everybody will be looking anxiously for partners. AOL Time Warner, says David Lui, director at Shroder Investment Management in Hong Kong, “will force people to realize that they have to be big. You can’t be a niche player any more.”
That idea has sunk in. Over the last six months, for example, China.com has made 23 acquisitions and partnership deals with companies ranging from e-mail services to online retailers. In fact, all of Asia’s biggest Internet players–Softbank and Hikari Tsushin (Japan), China.com and Pacific Century CyberWorks (Hong Kong) and Creative Technology (Singapore) have been investing heavily–buying up smaller companies. “If 1999 was the year of the start-up, then 2000 will be the year of the shutdown,” says Hanson Cheah, executive director of AsiaTech Ventures, a Hong Kong-based venture-capital company. “We won’t see any giant mergers, but we’re starting to see the weeding out of wanna-bes.”
Europe’s predators are likely to be the phone companies, which have been busy creating Internet service providers (ISPs) and readying them for public offerings. Deutsche Telekom plans to float a stake in T-Online, its own ISP, this year. In Spain, Telefonica’s public offering of Terra Networks (its ISP) has been wildly successful. These companies will be prowling for deals. Filippo Lo Franco, an analyst with BNP Equities in Paris, says that Europeans are beginning to take a different view of media content. Long interpreted as “culture,” books, movies and TV shows are now also “entertainment.” Says Lo Franco, “That is an important evolution.”
That’s old news, of course, to Rupert Murdoch, whose News Corp. is one of the world’s biggest media companies. He, too, has Internet alliances, but that doesn’t mean he’s ready to merge with an Internet company. Speculation was rife of a possible deal with Yahoo!, AOL’s biggest competitor–so much so that News Corp.’s stock skyrocketed early last week. “Hell, no!” said Murdoch. “We don’t see anything out there at an attractive price.” Unlike Time Warner’s Levin, Murdoch apparently sees himself as a buyer; he doesn’t want to cede power to a nerdy upstart. But like other media executives, he’ll have to think more about sharing it.
