<nettime> AOL/TW: The Same Old Media Colossus

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SUNDAY FOCUS / The Same Old New Media Colossus
BY: Doug Henwood.
EDITION: ALL EDITIONS
SECTION: Currents
DATE: 01-16-2000 B05

Anyone who's been reading the business headlines over the last 20 
years has gotten pretty used to giant mergers. Travelers + Salomon 
Bros. + Citicorp = Citigroup. Exxon + Mobil = Exxon Mobil. All in a 
day's work, it seems. But the engagement of AOL and Time Warner was 
enough to shock even the most jaded observer.

I say engagement rather than marriage because it's quite possible the 
deal will never go through. A market collapse or the Justice 
Department's antitrust division could spoil the celebrants' plans. 
But since it's a rare megamerger that doesn't go through these days, 
let's assume this one will. What's it all mean?

Much of the immediate clamor over the deal concerns the now-familiar 
specter of upward media consolidation-ever bigger companies 
commanding ever greater market shares. And this landmark 12-figure 
deal presents the additional, mind-bending prospect of a new media 
corporation-claiming the interactive brand loyalty of more than 20 
million users-swallowing up a much more established "old" media 
giant. Many prophets of what is now known as the "media concentration 
thesis" forecast rampant cross-branding and brave new conflicts of 
interest, as the once-bracing competition between networks and the 
Net gives way to the implacable power of media monopoly.

But how grim is this prospect, really? There's no doubt the world's 
biggest media conglomerates are claiming an ever-larger share of the 
world's eyeballs, eardrums and cashflow. Concentrations of power are 
scary, but some of the anxiety looks a bit out of line.

Golden Ages of the past are evoked without much proof. After all, 
when exactly was it that things were so great? Was it when William 
Randolph Hearst was perfecting yellow journalism and promoting 
foreign wars? Was Time magazine better in the days of Henry Luce than 
it is today? Most Golden Age myths dissolve on close inspection, and 
this one is no exception.

In other words, the concentration argument is (as economists like to 
say) mis-specified. The problem with our big media is less a matter 
of size than the structural conditions under which they operate: the 
imperative of maximizing profit (and audience share) under 
competitive conditions.

It's that imperative that leads to concentration, as the strong 
combine and the weak are winnowed out. And it's that imperative that 
leads editors and producers to devise the toxic mix of convention and 
sensation that concentration theorists blame on size.

The Lewinsky affair is a perfect illustration. News outlets competed 
for scoops-mainly leaks from interested parties-to lure viewers and 
readers. But had the president been removed from office, he would 
have been succeeded by Gore, a less scampish personality, but a 
politician with opinions virtually identical to Clinton's.

In that sense, it was an ideal story for the American media-much ado 
about nothing. Just as competition explains content, it also explains 
concentration.

There's a sentimental view that competition leads to diversity in 
both content and the number of voices. In fact, it leads to sameness 
in content, as everyone imitates everyone else (again, as we saw in 
the Lewinsky affair). And of course, competition leads to increasing 
concentration, as the economic pressures of competition favor players 
with the biggest claim to shelf space. Left to its own devices, the 
market will deliver homogeneity and bigness. The only antidote to 
these tendencies is government policy to restrain combination and 
subsidize the offbeat-not exactly the most fashionable view these 
days, of course.

Say this, and almost any nearby new economy booster will answer: "Oh, 
but the Internet has changed all this." This fiber optic network is 
now reflexively imbued with almost divine powers to flatten old 
communications networks and overturn established hierarchies.

Yes, the Internet does some of these things-though it's been largely 
forgotten that it owes its existence to about 30 years of subsidies 
from the federal government, specifically the Pentagon. It's hard to 
overstate the irony here: The technology that makes today's media and 
economy so millennially "new" has almost nothing to do with the free 
market that so many of its enthusiasts promote so tirelessly.

For decades, private industry was thoroughly uninterested in the 
expensive and risky business of creating a national, then a global, 
computer network. Only after Washington had eaten all the startup 
costs was the Net privatized.

In fact, you could say as much about the entire computer industry. As 
Kenneth Flamm writes in his book "Creating the Computer": "Key 
players in the military first tried to convince established business 
and investment bankers that a new and potentially profitable business 
opportunity was presenting itself. They did not succeed, and, 
consequently, the Defense Department committed itself to an 
enormously expensive development program ..."

Europe's weakness in computers is often attributed to its stodgy 
business culture and thin financial markets, but, as Flamm shows, 
European governments were too stingy in their subsidies in the 1950s 
to get an industry going. By the 1960s, the U.S. lead was unbeatable. 
But we've been too busy buying dot.com stocks to think much about 
history.

The stock mania is the other part of this story. Though the two 
companies like to present their merger as a partnership of equals, it 
looks more like AOL eating Time Warner, and paying the check with the 
inflated currency of its stock. It's tempting to call this deal the 
delirious climax of the great bull market, but this market has shown 
an unprecedented penchant for topping one delirious climax with 
another.

The Internet mania of the last few years is also unprecedented. The 
stars of earlier technology-driven bull markets-RCA in the 1920s, 
Xerox in the 1960s, Apple in the early 1980s-were all highly 
profitable. We've never seen speculative orgies over companies whose 
losses expand as their sales grow-and who have no prospect for making 
money in the visible future.

The few profitable "blue chips" of the field, such as Yahoo!, make 
microscopic amounts of money-which hasn't stopped investors from 
pushing the market capitalization of Yahoo! beyond that of 
Viacom-CBS, twice that of Disney and half that of IBM.

Indeed, the giddy nature of the Internet bubble seemed to temper the 
responses of the market in the wake of the AOL-Time announcement. The 
first few days saw a sell-off in AOL's shares, as Wall Street studied 
the consequences of applying real-world valuation logic to the 
fantasy logic of cybervaluations.

But that logic is steadily overtaking the real world.In the summer of 
1998, I interviewed the manager of a mutual fund that invested 
entirely in Internet stocks. He told me that in his world, it was a 
positive virtue for a firm not to have earnings, because you couldn't 
apply traditional valuation models to these stocks. I thought that 
his reasoning was pretty loopy-but he was clearly right. AOL has 
earnings, but until this week they've been valued according to the 
surreal methods applied to cyberstocks. No wonder Yahoo! has been 
vigorously denying any acquisition plans; if it were valued at the 
scale of, say, Disney, its stock would be trading at 9 3/8 rather 
than 341.

In strict economic terms, it's hard to find any merit in the merger 
of AOL and Time Warner. Neither produces much terribly compelling 
media content, and their union is unlikely to change that.

But maybe this new-old media colossus will produce an unintended 
benefit: It could force people to return to Earth. The intellectual 
byproduct of the bull market has been some wild mythmaking about 
weightlessness and liberation from the constraints of the material 
world. To listen to some enthusiasts, you'd think the triumph of the 
Internet will bring an the end of poverty and oppression. It won't.

I'm tempted to hope that running AOL through traditional valuation 
models might prick the financial bubble, and with it, the 
intellectual bubble. But maybe I'm being too irrationally exuberant.

ILLUSTRATION/PHOTO: Gary Viskupic by Newsday - Ballon surround by a 
triangle floating in the air.

KEYWORDS: OPINION.MEDIA.ECONOMY.BUSINESS.INTERNET.

Copyright 2000, Newsday Inc.

Doug Henwood. Doug Henwood is the editor of the Left Business 
Observer and the author of "Wall Street" and the forthcoming book "A 
New Economy?"
SUNDAY FOCUS / The Same Old New Media Colossus, 01-16-2000, pp B05.

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