The media behemoth cometh, with optimism

On Mon, Jan. 24, media giant Time Warner and Internet powerhouse America Online (AOL) announced a $350 billion merger—the largest merger in American corporate history. Time Warner was motivated by its plummeting stock price and fear of being locked out of the Internet market, while America Online was eager to spend its huge stock wealth to acquire more content for its Internet portal. The Herald sat down with Economics Professor John Rust to discuss the merger, Internet frenzy, and pessimists' predictions of a stock market crash.

"I like the merger from a consumer's point of view because I'm distrustful of information monopolies," Rust said. "The merger between AT&T and TCI meant that previously there was only one broadband provider; now, hopefully, there will be two huge companies racing to provide better service. There's always the danger, however, that there will just be regional monopolies."

CHRIS HONDROS/NEWSMAKERS Steve Case, CEO of AOL, and Gerald Levin, CEO of Time Warner, pulled off the largest merger in U.S. history.

Rust said PCI, for example, had been promising to provide the Shoreline community in Connecticut with Internet service via cable modems for three years—but had never fulfilled that promise. "There's competition, but it's not moving fast enough," Rust said. "I'm perplexed about why it's taking so long." The new AOL-Warner giant will, Rust hopes, speed up the growth of consumer options and services.

According to Rust, the merger was also good for each of the companies involved. "AOL is a powerful company," he said. "But what they're offering, by itself, doesn't look that valuable. They have access to modem pools around the country. But Internet access is not that hard to provide."

Rust uses the Internet service provider NetZero, which offers free access to the Internet in exchange for personal information and advertising. "As people get more computer-savvy, they will realize that they don't have to pay $30 a month for modem service. They can get it for free. The answer, for AOL, is content." Time Warner's media, music, and movies could all provide AOL with exclusive content that they could offer in their Internet portal, which would help justify AOL's high price and keep their customers loyal.

Time Warner, on the other hand, needed an "in" to the Internet economy. The company—which at the time of the merger was worth $162 billion, about $50 billion less than AOL—was watching its stock price drop, limiting its ability to enter the web world. "Time Warner has the content, but they need the delivery," Rust said. "It's a smart move on both sides."

Is this merger just the first in a wave of giant media-tech conglomerations? According to Rust, the prospects are somewhat mixed. "You're seeing big companies banding together," he explained. "But as fast as that happens, new people are coming in—such as my Internet service provider, NetZero—so it's hard to keep a monopoly for very long."

The stock market's response to the merger has been full of uncertainty. AOL lost about 20 percent of its value after the merger announcement before recovering to $63. Time Warner leaped 58 percent on the news, then settled at $82, up 26 percent for the week. Rust said AOL's high stock price—dismissed by some as the product of a "dot com" frenzy—was not completely out of line. "AOL has low cost of operation—modems are cheap—and high revenue. The margins are very high, which can justify their stock price, as long as they can stay in the ballgame with competition entering." Rust was also cautiously optimistic about current stock price levels. "Lots of people, including Alan Greenspan, recognize we're in a transformation of the economy. Despite concerns about `irrational exuberance,' growth is solid and is based on increased productivity."

In this rapidly changing environment, many of the classical tools of economics are inadequate, and the fast pace of change remains the only certainty. "We can't predict how the rules will change," Rust said. "Some companies are basically dinosaurs. And the dinosaurs will become extinct. But others will be able to transform themselves."

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