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The AOL Time Merger


industrial sponsors focused heavily on its educational, informational and

cultural potential to which they were allegedly devoted, and in 1922 then

Secretary of Commerce Herbert Hoover stated that there was no way we could allow

such a great medium to be overwhelmed by "advertising chatter." But

advertising chatter won, and the history of broadcasting ever since has

witnessed advertising’s increased hegemony and the displacement of the public

sphere with entertainment and advertising itself.

Similarly,

when the Internet took hold in the 1980s and into the 1990s, it was going to

provide an "information superhighway" that would enlighten us all,

bring us together, and advance democracy. Norman Solomon has shown, however,

that whereas in 1995 the major papers referred to the "information

superhighway" in 4,562 stories and "e-commerce" or

"electronic commerce" only 950 times, that ratio quickly shifted so

that in 1999, the superhighway was down to 842 mentions, e-commerce was

mentioned in 20,641 articles.

This

reflects the rapid takeover of the Internet by commercial interests and the

market’s belief that the Internet has enormous prospects in selling goods,

advertising, and inter-business transactions. There are almost daily notices of

new entrants or public offerings of recently organized firms with Internet

sites, software, and business connections that allow them to sell something

(toilet seats, flowers, pets, mortgage loan service, autos, groceries). And the

portals and servers that successfully build large customer bases increasingly

make money by deals with site businesses that direct customers toward those

sites. (AOL gets some 30 percent of its revenue from sources other than charges

to its customer base.)

Because

the market is super-bullish on Internet business, the market valuations of

Internet firms have been grotesqely inflated and many fortunes have been made

there in the 1990s. The high valuations of the premier firms have also allowed

them to buy out other firms by exchanges of stock, as the 15-year old AOL has

been able to buy out the giant Time-Warner with a stock valued at 55 times AOL

earnings (Time-Warner’s price-earnings ratio was 14). One theory of this merger

is that AOL’s management recognizes that its market value is unsustainable and

is shrewdly buying solider (more rationally-valued) assets at the top of its own

peculiar market. It is possible that the Internet market bubble will burst and

that the Big One will unravel by price declines that will cause the stockholders

to vote the merger down. But there would be heavy costs in exiting from the

merger and this scenario is unlikely to materialize. The AOL bid has put

pressure on other firms to do the same, so that Internet and related stocks may

get another round of inflation based on these expectations and followup mergers.

All this is wonderful from the standpoint of a small set of owners of the

affected stocks and investment bankers and lawyers who will cash in on another

merger wave.

The

merger clearly has other motives than AOL’s cashing out of an inflated market

valuation, and sharing some of that loot with Time-Warner’s officials and

stockholders. AOL’s managers have been worried about their lack of access to

high-speed broadband cable distribution and the threat of companies like ATT who

aim to bundle Internet service with phone and TV business and who can offer free

Internet service as a loss leader. Time-Warner gives them a major cable system.

It also gives them massive "content" that they can offer and push.

Time-Warner, on its side, gets a stockholder bonanza (barring further major

declines in AOL’s price before actual sale), plus a major increment to their

customer base and Internet access.

None

of the benefits accruing to the merger participants benefit society at large.

Both companies were completely viable and could have done what they get from the

merged partner by internal investment, smaller acquisitions, contractual

arrangements, or some combination of these, even if more slowly and

incompletely. The "synergies" they get from combination don’t

constitute social efficiencies, they are merely privileged tie-ins that make it

possible to get business without competing for it or to more effectively target

the customers advertisers want. (One global media ad buyer remarks, "The

combined company will have a fantastic data base. They will have a phenomenal

way of slicing and dicing their consumer data base to deliver the specific

target audiences that I want.") Virtually all the proposed gains are

"pecuniary" and private, not "real" and social economies.

And

the social costs of the merger are substantial. The phony synergies reflect

increased market power, just as they did in the case of the Disney-ABC and

Time-Warner-Turner mergers, where intra- system films could be given a special

push in the controlled TV stations and magazines that would increase sales and

revenues. Now, AOL will be able to give special position to Time-Warner content,

at the expense of content that might be better but doesn’t have the market power

of a "synergistic" merger behind it.

Competition

will be weakened not only by the preferential treatment given own-content within

this vertically integrated giant, which will make it tougher for outsiders to

reach and/or sell to target audiences, it will decline because of the rush to

consolidate into comparable giants by AOL’s and Time-Warner’s rivals.

Time-Warner’s Levin asserted that "This should provide encouragement for

other combinations that wouldn’t have been thought possible," as if the

followup mergers would be a very good thing. But this will further concentrate

and oligopolize the media, bringing the New Media into this web of privilege and

power. This merger highlights the fact that the new technology of the Internet

is not providing new competitors to the Old Media, but instead offers a new

means of distribution that is rapidly integrating with the content-rich and

content-dominant Old Media to yield even more powerful oligopolists. No doubt

competition will still exist on the fringes, and we can all still send messages

to one another and start our own sites, but competition will be substantially

reduced.

The

"content" that the merger will help push is also the

commercial–dominantly entertainment–material that a pop culture behemoth like

Time-Warner has increasingly featured. It is notable that "Entertaindom"

is the first of several miniportals Time Warner is starting, and it will be

featured on AOL’s entertainment channel. Any neutrality in AOL’s channeling of

customers toward content will end and the hegemony of the commercial over the

rapidly billboarded "information highway" will be consolidated by this

merger. The 75 year history of broadcasting in the United States established the

virtual "law" of media evolution: that commercialization steadily

erodes the public sphere, substitutes entertainment for public sphere materials

like in-depth news and documentaries relevant to a democratic politics, and even

transforms the residul news into entertainment. There is solid evidence that the

Big One will advance that process by integrating the New Media into the

commercialized Old.

The

merger will also have the immense disadvantage that, apart from its negative

effect on competition, it will further centralize economic power, directly and

by the defensive mergers that will follow. This will further skew political

power toward the corporate community and affluent as the new giants will have

both financial and market leverage to affect the political process. The media

have acknowledged this wee bit of a problem, but give it little weight. The New

York Times editorialized that "The remedy to this political threat is not

to scuttle mergers, but rather to fix campaign contribution laws" (Jan.

11). What makes this answer absurd is that the further centralization of power

makes it more difficult to pass and enforce limits on campaign financing, and

electoral funding arguably will be uncontrollable by law in any case as huge

power differentials will necessarily feed in to the political process.

This

centralized economic power has already taken a huge toll not only in electoral

politics but in its derivatives: the courts and the regulatory agencies. It has

also affected ideology with the help of a steadily centralizing and

commercializing media. This is why antitrust and FCC regulation have weakened,

why bigness and the centralization of economic power have ceased to have any

influence on policy actions, and why the Big One is likely to pass muster

despite its huge social negatives. The feedback mechanisms at work, which have

protected the merger process, continue to damage economic and political

democracy. This process will halt only when we see a grass roots movement like

that we witnessed at Seattle but multiplied by many thousands.

 

 

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