Merger a landmark of Cyber Age

Take the nation's leading media company and merge it with the cyberworld's top powerhouse, and what do you get? A single line into your home that can bring an interactive bonanza of entertainment, shopping, news - even your phone service.

This came closer to reality yesterday when America Online announced a merger with Time Warner Inc. worth an astounding $350 billion - the equivalent of the gross domestic product of Pakistan. It's the latest and biggest media merger in the new age of high-speed convergence, where companies gobble up one another in a frantic bid to gain a competitive advantage in the still-evolving Information Age.

Stock analysts hail it as a brilliant business stroke that will provide both companies with new customers and business lines in a forum that still has plenty of growth potential. But consumer advocates contend it will bring about a further commercialization of the Internet, a medium once hailed as the future's greatest democratic round table.

The companies themselves are calling this the right way to start the "Internet Century."

"This is an historic moment in which the new media has truly come of age," says Steve Case, chairman and CEO of AOL.

The World Wide Web's growing importance in daily life can be seen in some of Monday's headlines before the merger was announced. Front pages included stories of how the Internet is spurring the illegal importation of medicine to the US, how a large number of credit-card numbers were stolen and broadcast on a Web site, and how General Motors and Ford are planning to use cyberspace to reach customers.

It's estimated that more than 40 percent of American homes are online. That's almost 20 percent more than just a year ago, and the growth is expected to continue. But many media watchers worry that as the Internet becomes more popular, it's becoming controlled by fewer and bigger companies.

Indeed, some antitrust experts believe this latest merger does raise serious concerns. "The question is, are they going to be too powerful?" says Henry Goldschmid, a professor of law at Columbia University in New York.

When is big too big?

Consumer advocates think the answer is "yes." A coalition including the Consumer Federation of America and the Center on Media Education are calling on the Justice Department to carefully scrutinize the merger.

They're also urging the Federal Communication Commission to immediately convene a hearing to ensure that the huge media companies that control access to the Internet won't also limit it to their commercial interests.

"This is the equivalent of control of the railroads in the early 20th century, but it's far more important because it's about the control of the central nervous system of our democracy," says Jeff Chester of the Center on Media Education in Washington.

The merger, which will create a new company called AOL Time Warner Inc., also illustrates the new dynamics of finance. Neither company has a strong history of earnings. Over the past 10 years, Time Warner has posted losses as it has grown through acquisitions. AOL's stock is selling at 150 times earnings, a reflection of its lack of profit. But both companies are using their stock as a form of currency to finance the merger.

"Both companies are trading on prospects," says Steven Jones, a securities analyst with Value Line Inc, a brokerage house. "Their value is in their skills, personnel, technology, size, and dominance in the Internet sector."

Those prospects include the enormous potential of Time Warner's millions of cable customers, who watch programs produced by its own Warner Brothers studios and news shows on CNN, which it also owns.

In the future, analysts expect the companies to take advantage of the cable system that is in place to sell telephone services and higher speed Internet connections. "They are one of the earliest businesses to meet this trend," says Mr. Jones.

Up to this point, experts say, convergence has been a buzzword. "Today it achieves real status," says a different Steve Jones, a professor of communications at the University of Illinois in Chicago. "In the long run, it's through acquisitions such as this that we'll get to see what convergence really means."

Gary Chapman of the 21st Century Project at the University of Texas in Austin believes the AOL/Time Warner merger was a "preemptive step in anticipation of AT&T, which has been buying up cable companies, making a similar deal with a content provider."

Those mergers are likely to put other media companies under pressure to also find partners, which further concerns consumer advocates.

The next wave

They warn the Internet's essentially democratic nature is already being choked by commercial interests. Once a chaotic jumble of scholarly, quirky, unusual, and sometimes irreverent sources of information, the Internet and the World Wide Web are increasingly the domain of Wall Street's powerhouses.

This merger "makes absolutely clear that the Internet is no longer the great democratic wilderness that it once was," says Mark Crispin Miller of the Project on Media Ownership at New York University. But he adds: "There are still plenty of little players out there on the margins and there always will be."

*Staff writer Stacy A. Teicher contributed to this report.

(c) Copyright 2000. The Christian Science Publishing Society