A Sober Realities Release: The AOL-Time Warner Merger: ‘Billboarding the Information Superhighway’

Each great technological advance in communication begins with claims of the dominance of public service aims and probable effects, which is then followed and concluded by a commercial takeover. When broadcasting began in the 1920s its 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.

Each great technological advance in communication begins with claims of the dominance of public service aims and probable effects, which is then followed and concluded by a commercial takeover. When broadcasting began in the 1920s its 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”. 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 the likes of that which we witnessed at Seattle, but multiplied by many thousands.

– A Brief Bio –

Edward S. Herman has taught for years in the Annenberg School of Communication at Penn. His specialties of study is corporate control and power, financial regulation and issues relating to conflict of interest. He is the author of 20 books and numerous articles on the corporate system, the media and foreign policy issues.

Among his books are: The Washington Connection and Third World Fascism (with Noam Chomsky, South End Press, 1980); Corporate Control, Corporate Power (Cambridge Univ Press, 1981); The Real Terror Network (South End Press, 1982); Demonstration Elections (with Frank Brodhead, SEP, 1984); Manufacturing Consent (with Noam Chomsky, Pantheon, 1988); The Terrorism Industry (with Gerry O’Sullivan, Pantheon, 1990); Beyond Hypocrisy (SEP, 1992); Triumph of the Market (SEP, 1995); and The Global Media (with Robert McChesney, Cassell, 1997). His essays on the media will be published by Peter Lang in 1999 under the title The Myth of the Liberal Media.

Author: Edward S. Herman

News Service: PeaceCenter

URL: http://www.peacecenter.com/articles/herman_aolmerger_011600.html