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.
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.