The new media have risen up and swallowed the old. From now on, the landscape for entertainment and communications companies around the world will be very different. That is the message from yesterday's ground-breaking purchase of Time Warner by America Online, a combination that will match some of the best-known names in the entertainment industry with a company that has risen from obscurity on the back of the Internet.

If it works - and the union faces big challenges - the deal will also herald the second phase of the youthful online industry. The new AOL Time Warner mixes very different brands, management teams and share valuations. It is the first significant test of whether an Internet company can prosper in the "real" world of traditional business.

Some analysts were yesterday betting that sheer size alone should carry AOL Time Warner through.

It will start out with a wide array of brands and distribution systems and will try to use its new clout to sign more customers for each of its services.

Many of those customers are subscribers, making up a combined base of 100 million paying customers.

But while the combination is strong, the most striking aspect of the deal is which partner has emerged as the more powerful of the two. Mr Gerald Levin, chairman of Time Warner, has agreed to hand over control of one of the world's great media empires to a company that only three years ago was widely derided for its poor service. AOL was dismissed even by many in its own industry as an interim company that would fade in strength once people no longer needed its hand-holding approach to the Internet.

Now Mr Levin has yielded to a company with only a quarter of his company's cash flow and revenues. It amounts to one of the biggest votes of confidence yet demonstrated in the power of the new medium by the old. The union "is a statement by me that the value creation in the Internet is real. The cash flow streams are real, can be calculated and can be realised - especially by this company", said Mr Levin.

The history of the Internet as a mass market phenomenon may be measured only in months, but the process that has led Mr Levin to this point has taken years to unfold. His company has already tried and failed to find its own way into the interactive world through two failed experiments in interactive television.

Of course, Mr Levin's willingness to cede control has been made easier by the price AOL has paid - equivalent to a 69 per cent premium to Time Warner's share price before the deal was announced. Given that it is an all-stock deal, the premium is based entirely on AOL's share price and - by extension - Wall Street's confidence that AOL will continue to lead the Internet media revolution.

Other attempts to mix Internet and traditional media assets in this way have conspicuously failed. The most notable attempt was last year's proposed merger of the Internet portal company Lycos with USA Networks, controlled by Barry Diller. To succeed, Steve Case, AOL's founder and chairman, must do better in convincing the stock market that Internet valuations can survive within a traditional media conglomerate.

To judge by yesterday's initial stock market reaction, AOL stands a decent chance of pulling it off. By merging with Time Warner, AOL will now have access to cable systems and some of the best entertainment "content" around.

The scale of the revolution that could be sparked off by yesterday's news is best illustrated by the question mark it leaves over the strategies of a wide range of media and communications companies. These include Yahoo!, the biggest Internet portal, and NBC, the only US television network to remain outside a broader media group. Ted Turner, the volatile Time Warner vice-chairman, has long cherished a television network, and was said recently to have tried to persuade the company's board to buy NBC from its owner, General Electric.

When he was asked last month whether AOL would itself buy a traditional television network, Mr Case was dismissive. "Television will get re-invented over the next 10 years, and it will look more like the Internet," he said. By buying Time Warner, he has thrown down the gauntlet to traditional media companies everywhere. Either they must re-invent themselves in ways that the stock market will value as highly as AOL, or they must risk getting re-invented.