An interview with the architects of the Legend-AOL deal

AOL International president Michael Lynton (seated, left) and Legend CEO Yang Yuanqing sign their joint venture agreement in Beijing Monday.

CNN's Beijing correspondent Lisa Weaver talks to Legend chairman Liu Chuan Zhi and AOL Time Warner chief executive officer Gerald Levin on prospects for their $200 million joint venture to develop interactive services for the China market.

LISA WEAVER: How optimistic are you about expanding your Internet services business at a time when Internet isn't doing so well in China?

LIU CHUAN ZHI: The Internet industry has great potential. Last year, there were a lot of positive reports about the Internet. I think they were correct, except in the timing. Investors want something to happen immediately, but in fact it may take three or five years. The Internet companies treat a long-term project as a short-term one. In another words, they consider an IPO as their goal. This kind of behavior causes today's Internet bubble phenomenon. We are mentally prepared. We know the current situation of the Internet is good, but the future is better. When broadband facilities and on-line payment are ready, the China's Internet will become more and more mature. By that time, people can live in the Internet world. They can pay online. Right now, we need to work on it step by step.

LISA WEAVER: When do you expect to see profit from this deal?

GERALD LEVIN: We've announced a total capitalization of $200 million and the first tranche is $25 million for each company. We have, obviously, a schedule for investment, we also have a schedule for return, and a lot of the structure obviously is designed in advance of China's accession to the WTO. So at this point it's hard to be specific about what the format of the investment and the returns will be once that takes place, but it will change.

LIU CHUAN ZHI: We don't think we can make profits soon. In China's current situation, Internet development faces many restrictions and people are not ready to pay for the Internet. By improving our service gradually, we hope we can use AOL's model to make money. It will take some time. I hope both AOL and Legend will carry out the plan without any interference from outside.

LISA WEAVER: China will enter the WTO gradually, with different industries complying fully with WTO standards at different times. At what point in China's entry do you think AOL would reach the final structure?

GERALD LEVIN: Well, I think it will be a rolling process most likely. But again, the initial accession will be a significant change in what companies can do in relationship to business in China, regardless of the specific equity amounts. In this case we're waiting. So in the meantime, the joint venture's been structured to provide a form of technical service to really enable the concept of Internet access in China to begin to be formulated.

LISA WEAVER: Legend Holdings will control the content in this deal. Is AOL/Time Warner prepared to live with the Chinese government's censorship of news and information?

GERALD LEVIN: Well, as part of AOL Time Warner, we have very different functions taking place. In the case of CNN and Time, we have very strong traditional journalism, a practice with the kind of journalistic independence that's one of our core values. On the other hand, AOL as a service is an Internet service, and particularly in countries around the world, it operates to provide communications, lifestyle information, things like e-mail and instant messaging. So it's a very different function that's performed, and in all cases it operates within the purview of the country in which it is doing business. That's different from Time and CNN.

LISA WEAVER: There's been some analysis that now is not the best time to enter China's Internet business. This deal involves a lot of money. Is AOL's approach to forgo profit in the short term and stay in for the long haul?

GERALD LEVIN: Well, we're capable of multi-tasking and we think long term in the kind of five or ten-year time frame. But we also watch everything quarter to quarter, and in this case I would say that both perspectives prevail.

There's little doubt in my mind that China will become the largest Internet market in the world, and that at some point the Chinese language will be the dominant language of the Internet. But even in the short term, there is a tremendous appetite in China, and we see it already, and Legend sees it already, to participate in the benefits of making the computer a network device. So assuming the successful introduction of a financial formula that works for consumers, I think we're talking about something that's a wise undertaking for AOL/Time Warner and AOL in the short, mid and long term.

LISA WEAVER: Given that the deal might be re-done for after China's WTO entry, why the hurry? Why not just wait?

GERALD LEVIN: Because WTO is about to happen, and there's so much that can be done already to provide not only the beginnings of the technical support of the infrastructure that's necessary, but based on what Legend is already experiencing in the Chinese market and what AOL already understands as it does business around the world, we can have a very good idea as to the kind of formula that is both important from a financial return perspective but also what will work for the consumer. So it's not too early, and we have a tradition of pioneering and being first anyhow.

LISA WEAVER: Will AOL increase its share in the joint venture after China joins the WTO?

LIU CHUAN ZHI: After China joins WTO, if China's policy changes, we might enlarge our business. Our cooperation today is limited to technology due to Chinese laws and regulations. If Chinese laws and regulations change after China joins WTO, we might change the way we cooperate. If the change affects the proportion of shares, we might change that as well. I believe our company will not lack money after the $200 million investment. Both sides put in their advantage: Technology from AOL and the Chinese market from Legend. That's how we come up with the 51 percent and 49 percent portion. If there's any changes, we have to see how the situation develops.

AOL is a wholly owned subsidiary of AOL Time Warner, the parent company of CNN.