Global Policy Forum

Internet Feeding Frenzy

By Dan Schiller *

Hype about the wonders of the "new economy" is flooding Europe from the United States. This is supposed to break down social barriers and change the status quo. Yet inequality is greater than ever. It is the rich that are mainly profiting from expansion and the most powerful economic groups that dominate. The AOL-Time Warner merger is confirmation of this trend, aiming to turn the web into a giant virtual supermarket in an endless pursuit of customers. The deal threatens to erode the internet and, with it, the multiplicity and independence of information sources.

It is hard to overstate the impact of the merger between the online giant, America Online (AOL), and the media leviathan, Time Warner. The transformation of the information media into sales machines targeting consumers will become a bit clearer.

The story behind this deal is a tangled knot of speculative finance, new media development, and business experimentation on a societal scale. It is a story of how AOL figured out a means of commercialising online services and thereby ascended to profitable dominance; how, in that process, AOL's stock price rose to stratospheric heights, in turn fuelling the company's ability to grow still larger; and how, with its $165bn acquisition of Time Warner, the company is now in a position to turn the once-independent internet medium into a cornerstone of the mainstream media system.

Let's go back ten years. In the year before Time Inc and Warner Communications (each already a top media concern) merged in 1989, the former was a $4.2bn diversified publisher, the latter a $3.4bn media conglomerate. For its part, AOL's corporate ancestor, a company called Quantum Computer Services, displayed only a strategic orientation toward the nascent online services market and a spotty record of missteps and false starts; Quantum's net worth was trifling (1).

Then came the web. As the internet transformed from a tightly bounded system sustained by the United States military-industrial complex into an explosively expanding general-purpose medium, AOL recognised a breakthrough opportunity. Through carpet-bomb marketing campaigns; a growing range of proprietary services, including chat rooms, virtual communities, email, and extensive proprietary content often gained through partnerships; and a strategic cross-promotion deal that gave it a place on the Microsoft Windows start-up screen, AOL successfully pitched itself to millions of novices as the easiest means of going online.

The proprietary nature of the AOL model requires special emphasis, for its system was and is not based on the open internet. True, its network provides a gateway to the web, but this access, available only via AOL's proprietary dial-up system, is "almost incidental and usually carefully choreographed." Indeed, because AOL's 20 million subscribers spend 84% of their growing time online using AOL's inhouse content and services and just 16% on the internet, AOL, for its user base, effectively is the net.

Unlike most consumer internet companies, AOL's proprietary online service not only brought in substantial revenues but also regularly showed a profit - mainly as a result of monthly charges to users, but increasingly also from fees paid by other companies hungry to advertise and sell to AOL's swelling band of subscribers. The fantastic run-up in US internet stocks during the 1990s not surprisingly turbocharged AOL into the leading web company: its volatile share price has risen a spectacular 800 times since 1992 and, on the eve of the merger, the company enjoyed a capitalisation of $143bn- as against $111bn for Time Warner. In other words the market value of the new entity was 60% of the gross domestic product of Spain.

Incomprehensible sums are now needed to purchase the top online companies like AOL, Yahoo or Amazon.com and eBay. Lacking access to the stock market funny money that functions as cyberspace's dominant currency for mergers and acquisitions, even the largest conventional media conglomerates could hardly hope to seize control of cyberspace's most-visited independent sites and have been relegated to second-tier status on the web.

AOL's takeover of Time Warner decisively turns the tables regarding deals between offline and online companies. For the first time an internet-related company is attempting to demonstrate that its stock is usable not only in cyberspace, but also in the offline world. It remains unclear whether AOL's shareholders will accept this move. In fact AOL is accepting a lesser share of the combined company than would be warranted by its valuation alone (suggesting that it may be overvalued). The merger is, however, structured to be highly favourable for AOL: Time Warner will provide four-fifths of the combined company's projected revenues, AOL will have 55% of its stock.

Cross-media diversification

To understand the substantive import of this watershed event, we must turn to the AOL-Time Warner deal's structural logic. What lies behind this attempt to integrate the web more fully into the arsenal of existing media content and distribution channels, and what may it portend for a relatively open and independent internet?

It has been plain for some time that the internet portends an immediate competitive threat to every existing consumer medium, from newspaper, book, and magazine publishing, to film and recording, to radio and television. As a media conglomerate, Time Warner thus has been paradoxically rendered vulnerable, liable to simultaneous depredations on many fronts. In an earlier memo to the executive who would help lead his company's negotiations with AOL, Time Warner CEO Gerald Levin responded to this strategic danger by calling for the "digital makeover of all Time Warner" (2).

AOL's strategy was different from that of Time Warner. Another communications industry behemoth - AT&T - recently put up $110bn to make twin purchases (the second not yet complete) of two of the largest US cable television companies. AT&T declared that it would upgrade its new cable system units, and use them to furnish consumers with a comprehensive range of services. The intent here was clear, at least in theory: to claim the largest possible slice of the estimated $100-$150 middle-class households spend each month on cable TV, local and long-distance telephone service, and internet access (3). A companion deal with AOL's top rival, Microsoft, was forged to supply AT&T with the set-top box software that will be used to run this complex of services.

AOL could not fail to view AT&T's emerging cable strategy as alarming. This was because AT&T planned to offer highspeed, or "broadband," internet service through exclusive contracts with its own partially-owned subsidiary; would-be rival providers - including AOL - could be reached only if subscribers to AT&T's new broadband cable service agreed to pay a surcharge. AOL therefore faced the danger of being locked out of full participation in the next generation of consumer internet services. Buying Time Warner neatly solved the problem, by assuring AOL of access to the second largest US cable company, with its 13 million households and its strategic centrality to the broadband future of the entire cable industry. It likewise solved Time Warner's digital media difficulties by affording a dramatic expansion of the combined company's scope of action.

The deal can be expected to expedite the integration of Time Warner's prized Time Magazine and its music, film and television assets with AOL's dominating digital platform. "The network for the new millennium is a multimedia product offering moving ideas across platforms, online and offline," says one unaligned executive (4). This was spectacularly confirmed on 23 January when Time Warner stated its wish to take over EMI - the fifth biggest music company and the only one not yet linked to a transnational conglomerate.

Equipment for living

Time Warner and AOL certainly have great ambitions. Steve Case, CEO of AOL, has attempted to frame the merger as one that will make the internet "a mass medium [by] becoming part of the everyday habits of ordinary consumers" (5). The gap between the web today and the equipment for living imagined by Case remains wide. But AOL is intent on spanning it. The object is to use broadband cable to turn online service into a profit-making utility on tap in the home 24 hours a day, seven days a week. This will permit online services and transactions to be interwoven through the (middle class) quotidian, as not only entertainment and information, but also personal finance, shopping, home security, and even domestic appliances are made to acquire a networked dimension.

But what Case calls the "AOL Anywhere" strategy also extends beyond the household. AOL has struck a deal with Wal-Mart, the gargantuan US-based retail chain, to furnish online access via in-store electronic kiosks to 90-100 million Wal-Mart shoppers a week. More complex and ambitious are efforts, by AOL among others, to provide wireless internet content and services, from email and stocks quotes, news and weather updates to a raft of new "Third Generation" services, via mobile phones, pagers and personal digital assistants. The aim, across this breathtaking range, is to deepen and extend the commercial media's quintessential function - selling.

Advertisers have been worrying for a generation about how to respond to the audience fragmentation that is occurring as new media proliferate. Their complaints grew shrill with the explosive ascendance of the internet. This was because the net not only extended the ongoing process of audience fragmentation, but also threatened to help the high-income consumers who constitute advertisers' most-desired audiences to drift entirely out of range of their sales pitches throughout significant chunks of the day and night. What could consumer product sponsors such as Procter & Gamble or Unilever hope to do?

One favoured response has been "integrated marketing" - the strategic deployment of cross-media advertising campaigns and related market-research services. The tactic is especially beholden to some of the leading media conglomerates, whose own formation was prompted in part by the same trend toward audience fragmentation. Diversified media companies like News Corporation and CBS can track consumers across individual media frontiers and offer major advertisers access to a whole array of media platforms on which to stage the sales effort: not just broadcast television, but also cable, magazines and films.

The AOL-Time Warner merger brings cyberspace directly within the ambit of these integrated marketing initiatives. As Michael Wolf, a prominent US management consultant to media businesses suggests: "any company that advertises its products has to assemble an overall media plan that includes niche cable channels, local radio, internet portals, special-interest magazines, and more" (6). How better to assimilate cyberspace into this panoply of marketing channels than by harnessing AOL, the most developed commercial online service of all?

Los Angeles Times journalist Gary Chapman observes that AOL is already "saturated with ads, product placements and 'branded content' or 'info-tainment' provided by familiar corporate sources. AOL is essentially a virtual shopping mall with e-mail and web access thrown in. Like a mall, AOL controls who gets to display their goods, who can shop there and how, where the advertising goes and what it looks like" (7).

The merger with Time Warner accelerates all this to warp speed. Business commentators are positively slavering over the combined company's ability to "deliver the customer on a one-to-one basis" to advertisers and marketers, since web portals can collect personal information much more easily than conventional TV sets can. Given these heightened abilities to segment and target audiences, AOL's abysmal record in regard to individual privacy rights is not an auspicious sign - especially because the merged company, as a global force, will presumably want to transmit audience data across national borders.

Moreover AOL and especially Time Warner have been at the forefront of culture industry transnationalisation. AOL has partnered with numerous leading media companies throughout Europe (including Bertelsmann) and Latin America. Time Warner's transnational business activities are already legion - and growing fast. Its CNN unit, for example, is accessible around the globe, and has kept its audience in the face of mounting competition by successfully regionalising its programming. Indeed, a significant portion of the growing body of "local" cultural expression can be traced back to Time Warner and fellow transnational media companies. In some nations, as much as 70% of CD sales come from local performers.

As Fortune magazine explains, "five global companies - Sony, Warner, Universal, Bertelsmann, and EMI - dominate the local scene as effectively as they deliver the international hits. That gives them two revenue streams - exports and local artists." Time Warner president Richard Parsons says: 'Twenty years from now, that [local production/global export] model is going to proliferate across the spectrum of things we do" (8).

The Wall Street Journal concedes straightforwardly that the AOL-Time Warner combination "raises the spectre that US companies will dominate important sectors of the new global economy by sheer size even before many people in the world go online for the first time" (9).

But the domination by US-based internet/media companies will grow out of not only brute economic might, but also the commercial policies that continue to make cyberspace a unique global free-trade zone. Days after the merger was announced, the Canadian authorities suggested that restrictions requiring that 35% of music played on radio and 60% of shows aired on television be Canadian might need to be relaxed. The country's Radio-television and Telecommunications Commission now contemplates loosening its domestic content rules for television and radio broadcasters, if the latter are found to be at a competitive disadvantage against new media produced in the US and distributed to Canada over the internet. After such an abdication, can anyone truly expect the US-based media leviathans - with a merged AOL-Time Warner at their head - to resist temptation?

Media history is littered with rosy forecasts - and bleak realities. The internet's decentralised structure makes a fully-fledged takeover of the medium by any one company impossible. But the current deal suggests this may not matter much. By accelerating the prevailing trend toward cross-media gigantism, it may sound a death knell for an open and independent internet.