Mergers & Disquisitions.

Reasons not to sweat AOL-Time Warner--and other megadeals

When America Online and Time Warner announced merger plans earlier this year, one of the most vocal reactions was also one of the most predictable: basso profundo bellowings about increasingly "corporatized media" that threaten "historic notions of a free, diverse, and independent press"; a virtual monopoly of media ownership"; and the imminent creation of a "free-enterprise equivalent of a Ministry of Culture."

These worries are, unsurprisingly, most pronounced on the left, but foes of Bigness across the political spectrum share similar concerns. Let's give such fear-mongering its due: It made it that much easier to ignore Ted Turner's groan-inducing exercise in rumble-seat nostalgia. The Time Warner vice chairman proclaimed that he approached the deal "with as much or more excitement and enthusiasm as...when I first made love some 42 years ago.

But jeremiads against "media-merger mania are fundamentally misplaced and mistaken--and for reasons that range far beyond the AOL-Time Warner deal (not to mention Time Warner's subsequent merger with EMI). Such concerns reflect a basic misunderstanding of how the economy actually functions. Forget about media monopolies or a market-based Ministry of Culture, whatever that might mean. Assuming the merger passes government regulators' smell test (and by all accounts it will) we can look forward to a $350 billion megacorporation that grovels even more abjectly for customers than AOL and Time Warner do now as separate entities.

Indeed, if AOL's own corporate history is any guide, far from offering slimmer and slimmer pickings to an increasingly captive and dissatisfied audience, "AOL Time Warner" will be pathetically desperate to deliver more and more stuff at better and better prices to restless and demanding subscribers. Today's "250 Hours Free!" on AOL and $40 "special discount" subscriptions to Time will seem positively stingy by comparison.

That's not to say the anticonglomeratization crowd has gotten it all wrong. Like the critics, I don't doubt that AOL and Time Warner are hellbent on nothing short of absolute global media domination. As a longtime AOL subscriber (since 1993) who is also currently under the thumb of a Time Warner cable franchise, I can testify from personal experience that neither company seems overly concerned with customer service out of a sense of altruism. Despite Time Warner CEO Gerald Levin's testimony at a press conference, I'm confident that the new company couldn't care less about serving "the public interest" (a term, in any case, as expansive as it is meaningless).

Critics are absolutely correct to note that, as The Nation's Victor Navasky wrote in Time (of all places), AOL and Time Warner are ultimately concerned only with turning a buck for shareholders. And who's going to seriously argue with NYU professor and prominent media critic Mark Crispin Miller when he told National Public Radio that, "It's not in the interests of those who control the purse strings to have certain kinds of news be made available"? The University of Texas' Gary Chapman (another respected media maven) was right in warning in a Los Angeles Times piece that "the moguls of AOL, Time Warner, AT&T, Microsoft, and other companies view the Internet...as a consumer service used primarily to sell products and secondarily to entertain or inform."

As I said, such insights are not wrong. Rather, they're beside the point. The motives and predilections of companies are, in the end, much less important than their actual behavior. We can safely assume that AOL and Time Warner care mostly about making money, that they'd like to control all negative reports about themselves, and that educating their customers is not a high priority; additionally, we can figure that if they could get our money for doing nothing, they would.

So what? We can also assume something else: In a relatively free market, companies get big and stay big primarily by giving people what they want--and often more than they want--at pretty good prices. They may be brutally competitive with other firms but they tend to put on kid gloves when it comes to the customer.

Examples of this abound throughout the economy, where the big kids on the block tend to act more like buddies than bullies: Think of Coca-Cola, which dominates the U.S. soft drink market with a 44 percent share (and two-thirds of fountain sales). When's the last time Coke raised its prices? Over at least the past 20 years, a 2-liter bottle of Coke--or Diet Coke, or Caffeine Free Diet Coke, or Cherry Coke, or any of its proliferating sub-brands--has rarely wandered out of the 99 cents-$l.50 range.

The same goes for McDonald's, which rules the U.S. fast-food market with a 43 percent share. McDonald's is so desperate for customers that it's held prices essentially constant over the past two decades, while boosting portion sizes (burgers, fries, and drinks are all bigger than they used to be), expanding its menu, and building elaborate play structures for kids while simultaneously throwing increasingly sophisticated toys at them. In the case of McDonald's, such tactics have not even been particularly successful: Despite maintaining its top niche position, the Golden Arches continues to leak market share to an increasing number of rivals.

Even my local Time Warner cable franchise--which, of course, has a monopoly granted and enforced by my municipal government--has seen fit lately to upgrade its service and expand its offerings. Absent actual cable competitors (thanks to pliant local legislators across the U.S., fewer than 5 percent of American households have any choice in cable systems), the franchise still needs to compete against satellite dishes, old-style antennas, and the option to stop watching pay TV. As economist John Mueller notes in his recent Capitalism, Democracy, and Ralph's Pretty Good Grocery, even monopolists have reasons to court a captive market. If they do so, explains Mueller, they're "more likely to be able to slide price boosts past a wary public--that is, such moves are less likely to inspire angered customers to use less of the product and/or to engender embittered protest to governmental agencies.

A similar dynamic toward better terms and offerings for customers undergirds AOL's growth from a small online operation started in 1985 to the world's largest Internet service provider (with about 20 million subscribers, it has about half the global market for dial-up ISPs.) How'd AOL get that big? By surrendering time and again to customer demands. The service was originally marketed as a closed system that offered no Internet access and unreliable e-mail delivery to non-AOL addresses. Subscribers were supposed to be satisfied with proprietary content and internal chat groups (and were, for a while).

Soon enough, AOL realized that if it wanted to keep subscribers--who cost anywhere from $45 to $300 to acquire in the first place--it had to deliver full Internet and World Wide Web access. Its first Web browser was a buggy piece of junk, a situation the company remedied by building Microsoft Internet Explorer into its larger program (which it also upgrades regularly) and by purchasing Netscape. When other ISPs shifted from hourly to flat-rate pricing plans, AOL followed suit and famously bungled the transition. The company's response to irate customers frustrated by busy signals was to massively increase its dial-up capacity--even before a class-action lawsuit that lined the pockets of a few entrepreneurial lawyers got underway. AOL's continued hunt for faster and better Internet access is perhaps its major interest in Time Warner, the country's second-largest cable operator.

Interestingly, even as AOL has morphed into a portal system that lets users go wherever they want--including off the AOL grid--they've maintained much of their more-useful proprietary material, which now comprises a supplement to the Internet.

If this is market domination (and it is) you can almost feel pity for AOL or Time Warner, much less for the new combined behemoth. It's far from clear that "AOL Time Warner" will succeed in the long haul, either in terms of growing its market share or rewarding shareholders. This much, though, seems pretty certain: The moment it stops doing whatever its customers want, it will join the ranks of Sears Roebuck, A&P, IBM, and other once-dominant companies that have either disappeared altogether or linger on as mere shadows of their former selves.