Consumers Likely on the Short End as AOL Gobbles up Time Warner in World's Biggest Merger ... So far
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Jeff Chester, media activist par excellence, was listening very carefully while Gerald Levin and Steve Case held their press conference on January 10 to announce the $184 billion marriage of Time Warner and America Online (AOL), the biggest merger in the nation's history. Chester, director of the Center for Media Education -- a media watchdog organization -- and a group of public interest advocates, have been fighting hard for open access or "consumer choice" for the Internet. This merger, Chester knew, could put their struggle in jeopardy.The AOL-Time Warner deal, creating the fourth most valuable company in the country, culminates a long string of media mergers. An increasingly smaller number of giant companies now controlling what most Americans see and hear. The uniqueness of the AOL-Time Warner deal is that for the first time, a so-called "new media" company has gobbled up a traditional media conglomerate, making it quite clear that the Internet will not be any different than the hyper-commercial world of television, radio and entertainment that has come to dominate the global media system.One of the reasons for the deal is that the architecture of the Internet is changing quickly. The phone lines of today's Internet will likely soon be replaced by a high-speed cable system. This next generation -- called broadband -- will give users access to the Internet in a faster, more powerful way, and the ability to access a complete range of data -- including text, audio, video, film, and photographs -- from any and all of electronic equipment, ranging from television to computers to personal digital assistants to telephones. In a fundamental way, broadband changes everything.In this broadband scenario, the people who own that cable system will have more control over the flow of content than they do now. Thus the AOL deal, and many more deals likely to come, hinges on the ability to control both customers' ability to access the Internet and what they see, hear and read when they're online.That's the scenario that Chester and his allies are fighting. The first goal of the "open access" movement is to force cable companies to share their pipes with other service providers (ISPs) in a way that is analogous to local phone companies having to share their lines with long distance providers. A second goal is to protect the public interest by giving non-discriminatory, unfettered access to all content providers. This means that content providers -- including those who don't own the channels of distribution -- will have the same treatment. Without this guarantee, says Chester, "non-profit content, non-commercial content and controversial content not meeting sanitized standards could be marginalized."In their open access campaign, the consumer groups (including Consumer's Union and the Consumer Federation of America) had mainly targeted AT&T, which by dint of its purchase of TCI and then Media One, had overnight become the largest cable system owner in the country. AOL, on the other hand, was the open access campaign's most visible ally. According to the Washington Post, "AOL funded the OpenNet coalition, which portrays itself as a grass-roots group pressing for open access to cable. AOL urged cities around the country to adopt rules requiring AT&T to let other providers serve customers on the same terms and sought to persuade the FCC to mandate open-access policy nationally."Now, with AOL buying Time Warner (AOL will control 55 percent of the stock, which will trade under the AOL symbol), they too overnight became a huge cable operator -- the second largest next to AT&T. Will they now abandon the principle they were making so much noise about?During the January 10 press conference, it didn't take long for Chester to find out part of the answer. After Case and Levin did some cheerleading about how good the merger would be for the country and the consumer, they turned to the press for questions. The second question asked was about open access."We're in favor of consumer choice," Levin answered, "but we are going to take the open access issue out of Washington, out of city hall and to the marketplace." Case added: "We always hoped it would come from the marketplace rather than have government get involved."These Case/Levin statements "masked a stunning reversal," according to the Washington Post. Gene Kimmelman, co-director of Consumer Union, told the Post, "As soon as AOL becomes the largest high-speed provider in the country, they have every incentive to harm competition and consumers in the very way they claimed companies were doing."After hearing Case and Levin, Chester was even more forceful. "Steve Case is the Benedict Arnold of the digital age," he said. "Now that he has bought himself a piece of broadband cable access, he is no longer advocating for public policy to ensure access to the Internet. We need enforceable federal rules to ensure non-discriminatory access to cable broadband infrastructure."Open Access Battle ContinuesThe battle for open access continues, but the odds against government-required open access have dropped dramatically, as deep-pockets ally AOL is now on the other side of the equation. To be fair, AOL is still mouthing rhetoric about being in support of open access -- in part, no doubt, because they want access to AT&T cable subscribers. But what is more likely is a deal between AOL and AT&T and other broadband players, including multibillionaire Paul Allen, who recently invest $1.7 billion in cable provider RCN, considerably increasing his broadband holdings. Since AT&T is very interested in providing telephone services over Time Warner's cable system, arrangements among these big companies are likely, but where that leaves the consumer and the civic and non-profit sector is anyone's guess.For the present, the biggest hope for progress on consumer protection lies at the municipal level. If their deal is completed, AOL-Time Warner will have to get cable agreements in hundreds of cities transferred, and in some cases renewed. Here is where cities are putting up a fight, with Portland, Oregon at the lead. Last spring, Portland required that AT&T provide open access to all ISP's for its broadband service. AT&T challenged that decision in court, leading to drawn-out legal wranglings. A ruling on the case is expected soon.According to Chester, public-interest models are emerging in a number of other cities that are trying to gain concessions from the cable franchises. For example, some cities seek to retain 10 percent of the bandwidth for non-profit organizations. Other hope to allocate 3 percent of cable fees to fund public-access channels or to get one-time grants to convert public access stations -- libraries, community centers -- to digital.The Newest Behemoth -- Even More Media ConcentrationThe sheer size of the AOL-Time Warner transaction, the global reach of the new entity and the personal wealth accruing to key players in the deal all made it hard to digest. The new company now boasts a stock-market value roughly equivalent to the gross domestic product of Mexico. Steve Case, the new chairman and former Pizza Hut topping designer, whose complete media experience was working on his high school newspaper, is now a multimedia mogul worth in the range of $600 million (though AOL stock has dipped considerably since the sale was announced). The deal put an extra $100 million in Gerald Levin's pocket as well. But the big winner in all of this was Ted Turner. With his 10 million shares of Time Warner, the deal made him $3 billion richer, worth close to $10 billion overall. Turner crowed that the deal "would create the most exciting and socially-conscious company the world has ever seen." Interesting what billions will do to one's outlook.With Time's print subscribers, AOL members and paid HBO subscribers, the new company will have a combined subscriber base of more than 100 million, easily the largest in the world, according to Jim Ledbetter of The Industry Standard. Not to mention CNN's ability to reach billions worldwide."The merger will blow the roof off our advertising and commerce potential," predicted AOL COO Bob Pittman. The new company would have combined revenue of $40 billion in the first year and $10 billion in pretax income. Though AOL had only one-fifth the revenue of Time Warner in 1999, it had four times as much profit and a much higher stock value.Conflict of InterestThe bionic scope of the new company raises fundamental questions of journalistic ethics. How will Time Warner journalists cover AOL and the entire industry?"[Journalists] are now competing in pretty much every aspect of the Internet business you can think of," Ledbetter told Howard Kurtz of the Washington Post. "Virtually every company they could possibly report on is either a partner or a competitor. The wonders of the information age are in the hands of very few companies."San Jose Mercury columnist Dan Gilmore adds: "AOL has been ethically challenged throughout its existence. I hate to see Time Warner, which has had its own ethical troubles but generally shows high journalistic standards, fall into such hands. The cyber-marketing machine now under construction should also give you the creeps. AOL is notorious for its absolute disdain for customers' privacy. The combined resources of AOL and Time Warner will be a bonanza for merchandisers and marketers."Any Way to Stop the Mergers?Fighting these mega-mergers and protecting consumer interests has proven to be a difficult task. The power of the cable companies and the Hollywood interests are overwhelming in the corridors of the capital, as they spend huge sums of money in lobbying and campaign contributions. Anti-trust actions offer little hope, since the two companies, in a strict sense, are two different kinds of businesses and their merger doesn't obviously eliminate competition.Yet it's increasingly hard for anyone -- even the free-market types -- to deny the inexorable momentum toward bigger and scarier media concentration. How will independent voices thrive on this Internet of huge conglomerates?"Some analysts see the Internet as quickly ending up looking like television in the 1960s," wrote David Streitfeld in the Washington Post. "Viewers had a choice between the three major networks and that was it. It's quite a switch from the original model of the Net as empowering everyone to be their own little network."There seems little doubt that more big deals are in the offing. Yahoo buying Disney? Microsoft making a run on AT&T and Excite or going with Viacom? It's not too hard to imagine three companies dominating the media of the future -- AOL, Yahoo and Microsoft, the way the three networks did in the '50s and '60s.Some in Congress are expressing concern. Senators DeWine (R-Ohio) and Kohl (D-Wisconsin) have asked the question: Is this merger the beginning of the end of the Internet as an effective counterweight to traditional media? Nonetheless, there is little expectation that the FCC or the Justice Department will set any significant obstacles in the way of the merger.While things do look grim, media critic Mark Crispin Miller writes that there is also hope to be found in "the American people's evident and growing distaste for what the media now gives us. Equally important there is promise in the growing chagrin of journalists, who more and more see clearly that these mega-mergers are a bad thing for them and for the craft they have spent long years studying -- a craft that has been coarsened almost beyond recognition by the pressures of the bottom line."Marriage Of NecessityOn a logical level, it was hard for many to wrap their brains around what had happened when the AOL deal went down. The Wall Street Journal described the shock pungently: "More astonishing is the simple fact that a company that isn't old enough to buy beer has essentially swallowed an 'ancient regime' media conglomerate that took most of a century to construct." Yes, a teenage company with a popular brand, a bunch of subscribers and a questionable future -- with no television, no radio, no magazines -- bought a company that includes Time and People Magazines, CNN, HBO, Warner movies, huge cable holdings, and on and on and on.Ironically, despite its astronomical stock valuation, AOL made this deal with Time Warner as its time was running out. AOL's future looked dim and any number of factors could have sent its value plummeting. Writing in Fast Company just a few weeks before the deal, John Ellis explained that "the stock market confidence in AOL seems incredible when you take into account the challenges AOL faces. Any one of these challenges could significantly cut AOL's capitalization ... and a couple of them could reduce the company to also-ran status in a couple of months." Ellis cited the challenge of Microsoft Network's mission to destroy AOL after their legal problems are resolved, with massive advertising which could compare AOL's $240 a year price tag to MSN's zero dollar one.In other words, AOL's pricing structure was unsustainable. Its 20 million users are loyal because of what Ellis calls the "Web Intimidation Factor" -- overwhelmed, fearful users who, lacking time to find other options, turn to and stick with AOL. In essence, AOL's strength was its dependency on the public's passivity -- not the best foundation on which to build an empire.Finally, AOL desperately needed a version of broadband delivery, since its 20 million subscribers currently access the service over slow phone lines. This proved to be the key element in the deal. Salon's Scott Rosenberg called the deal a "marriage of insecurity," and said that Time Warner, despite all its assets, had a decade of failure in the digital realm and "needed a credible way to salvage its Internet strategy. Time Warner has spent more money on the Internet with fewer results than any other media company. Both companies see their new corporate spouses as perfect mates who can remedy their own inadequacies."Who Won -- New Media or Old?Does the AOL-Time Warner deal mean that old media is becoming new media or that new media is becoming bricks and mortar? The Posts' Mark Leibovich concluded: "Neither the old or the new is going anywhere. These animals clearly need each other."But in a fundamental way, despite all the hype about nerds winning, a version of old media won this struggle. Ellis explains: "AOL fundamentally is anti-Net. AOL doesn't want you to take advantage of the World Wide Web. It wants you in its ropes, paying $21.95 a month for its proprietary content, its easy-to-use messaging services, its chat rooms. The notion that AOL content is of greater value than all the content on the Web (almost all of which is free) is, to put it mildly, nonsense."So now, even more with AOL at the helm, the Internet embraces buying and selling. With this deal the Internet comes closer to the Hollywood hype of entertainment, of celebrity and fluff. "The more the Net becomes like TV, the stupider we are going to become," suggests Internet gadfly Howard Rhinegold. "Clearly, AOL's ambition is to be more and more like television."So the utopian vision of the new media -- the Internet as potent force for a more healthy democracy, a true marketplace of ideas, a hotbed of small business activity, a place for thousands of civic and non-profit groups to compete on even footing with big corporations -- is more dead after the deal."This deal culminates five years of frantic deal-making that have seen our media culture come to be dominated by less than 10 transnational media firms operating in largely non-competitive markets," says Bob McChesney, author of the recent book Rich Media, Poor Democracy. "It hammers the last nail in the coffin of those utopians who regarded the Internet as providing the mechanism to radically change our media culture for the better. The Internet was established by massive public subsidies and now, without a shred of public debate, the system has become the plaything of a handful of billionaire investors who use their power to commercially carpet bomb every possible moment of our lives."