AOL and Time Warner will merge in a deal underlining the power of the free access model which has forced the biggest online service provider to rethink its business strategy.
The company, to be renamed AOL Time Warner, will create the world's first fully integrated media and communications company for the Internet Century in a stock combination valued at $350 billion.
Scott Smith, director of Internet strategies Europe at the Yankee Group, said that the merger shows a "fundamental shift in the way the industry is evolving. AOL's business model of paid Internet access is being eroded by the free access providers. It has eaten a major chunk of its revenue."
The combined goliath, which has combined revenue of £30 billion, is aiming to provide a new broadband distribution platform for AOL's interactive services and drive subscriber growth through cross-marketing with Time Warner's brands.
Smith said the deal makes sense for AOL as it "augments its content anywhere strategy," breaking away from being chained to fixed line PC access and moving towards an interactive and cable TV infrastructure.
Time Warner benefits because "if it is to exploit its cable assets it needs a strong content provider," said Smith.
The impact of the deal will not be immediate in Europe because "Time Warner's cable asset does not extend here," said Smith. However, he believes the merger will "redouble Microsoft's efforts to purchase stakes in cable companies" to "cut AOL off at the pass."
Steve Case, chairman and CEO of AOL, will become chairman of the new company. Commenting on the deal, Case said: "This is a historic moment in which new media has truly come of age," he said.
He added that the merger "will fundamentally change the way people get information, communicate with others, buy products and are entertained."
Gerald Levin, Time Warner's chairman and CEO, will become AOL Time Warner's chief executive officer. He said: "This strategic combination with AOL accelerates the digital transformation of Time Warner by giving our creative and content businesses the widest possible canvas."
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