Mar
01
2000

The Titanic Sails On

Why the Internet won't sink the media giants

The January announcement of the proposed merger of AOL and Time Warner--the largest deal in history--crystallizes one trend, and may trigger another, more ominous one.

It can be seen as yet another of the colossal media deals that has dotted the past decade, such that only a handful of conglomerates now own almost all the film studios, TV networks, music studios, cable TV channels and much, much, more. But more than that, the deal represents what may be the first great move toward convergence, where the handful of giants who dominate computer software, the Internet and media begin to formally merge with each other.

This all makes sense, because as everything switches to digital language, the technical distinctions between these categories recede and are ultimately nonexistent. The end result of this process--five, 10 or 15 years down the line--may be an integrated global communication market dominated by no more than a dozen (often closely linked) firms of unfathomable size and economic and political power. By any known standard of a free press in a democratic society, these developments should provoke intense concern, if not outrage.

In the wake of the AOL/Time Warner announcement, their executives and defenders pooh-poohed the idea that, in the Age of the Internet, we have any grounds for concern that our media and communication systems are in too few hands. The Internet, we are told, has blasted open the communication system and increased exponentially the ability of consumers to choose from the widest imaginable array of choices. If everything is in the process of becoming digital, if anyone can produce a website at minimal cost, and if it can be accessed worldwide via the World Wide Web, it is only a matter of time (e.g., expansion of bandwidth, improvement of software) before the media giants find themselves swamped by countless high-quality competitors. Their monopolies will be crushed.

The Electronic Frontier Foundation’s John Perry Barlow, in a memorable comment from 1995, dismissed concerns about media mergers and concentration. The big media firms, Barlow noted, are "merely rearranging deck chairs on the Titanic" (New York Times, 9/24/95). The "iceberg," he submitted, would be the Internet with its 500 million channels.

Clearly, the Internet is changing the nature of our media landscape radically. As Barry Diller, builder of the Fox TV network and a legendary corporate media seer, put it (Electronic Media, 12/15/97), "We're at the very early stages of the most radical transformation of everything we hear, see, know."

But will these changes pave the way for a qualitatively different and better media culture and society? Or will the corporate, commercial system merely don a new set of clothing? The evidence so far strongly suggests that, left to the market, the Internet is going in a very different direction from that suggested by the Internet utopians. The Internet as a technology, in short, will not free us from a world where Wall Street and Madison Avenue have control over our journalism and culture.

Big Media go online

The main argument made by defenders of the AOL-Time Warner deal, and by defenders of the media status quo, is that the Internet is going to launch innumerable new commercially viable competitors, such that any concerns about concentrated corporate control are unfounded. If anything, the AOL-Time Warner deal should have hammered the last nail in the coffin of that argument. It is now clear that the Internet will probably not spawn any new commercially viable media entities; the media giants will rule the roost. Indeed, the Internet is encouraging even greater media concentration, not to mention convergence.

This might seem a bizarre assertion, since the big media firms have seemed to approach the Internet in such a bewildered and clumsy manner. Time Warner's Pathfinder website, for example, began in 1994 with visions of conquering the Internet, only to produce a "black hole" for the firm's balance sheet (Advertising Age, 6/8/98). Likewise, the New Century Network, a website consisting of 140 newspapers run by nine of the largest newspaper chains, was such a fiasco that it was shut down in 1998.

Far from being visionary, the initial motivation for media firms to dominate the Internet is as much fear as it is the prospects of mega-profits. "For traditional media companies," the New York Times correctly noted (1/11/98), "the digital age poses genuine danger." "The entertainment companies are terrified of being blindsided by the Internet," a business consultant said (Economist, 11/21/98), "as the broadcasting networks were blindsided by cable in the 1980s."

In fact, it remains unclear exactly how the Internet will become a commercially viable media content enterprise. It is clear that there is a huge market for Internet Service Providers (e.g., AOL) and for electronic commerce (e.g., Amazon.com), but profits for online ventures that operate more like traditional media outlets are less assured. As Time Warner CEO Gerald Levin put it (New York Times, 1/11/98), it is "not clear where you make money on it." But even if the Internet takes a long time to develop as a commercial medium, it is already taking up some of the time that people used to devote to traditional media. An AC Nielsen study conducted late in 1998 determined that Internet homes watched 15 percent less television overall than unwired homes.

In the past two years, all major media have made the Internet "mission critical," as Disney CEO Michael Eisner put it, and have launched significant web activities. The media firms use their websites, at the very least, to stimulate interest in their traditional fare--a relatively inexpensive way to expand sales. Some media firms duplicate their traditional publications or even broadcast their radio and television signals over the net (with commercials included, of course). The newspaper industry has rebounded from the New Century Network debacle and has a number of sites to capture classified advertising dollars as they go online.

But most media giants are going beyond this on the Web. Viacom has extensive websites for its CBS Sports, MTV and Nickelodeon cable TV channels, the point of which is to produce "online synergies." These synergies can be produced by providing an interactive component and additional editorial dimensions to what is found in the traditional fare, but the main way websites produce synergies is by offering electronic commerce options for products related to the site. Several other commercial websites have incorporated Internet shopping directly into their editorial fare. As one media executive notes (Advertising Age, 2/9/98), Web publishers "have to think like merchandisers." Electronic commerce is now seen as a significant revenue stream for media websites.

In conjunction with this upsurge in media giant Internet activity, the possibility of new Internet content providers emerging to slay the traditional media appears farfetched. In 1998 there was a massive shakeout in the online media industry, as smaller players could not remain afloat. Forrester Research estimated that the cost of an "average-content" website increased threefold to $3.1 million by 1998, and would double again by 2000 (Financial Times, 3/12/98). "While the big names are establishing themselves on the Internet," the Economist wrote (3/21/98), "the content sites that have grown organically out of the new medium are suffering." Even a firm with the resources of Microsoft flopped in its attempt to become an online content provider, abolishing much of its operation in 1998. "It's a fair comment to say that entertainment on the Internet did not pan out as expected," said a Microsoft executive (Variety, 5/4/98).

By 1998, the current pattern was established: more than three-quarters of the 31 most visited news and entertainment websites were affiliated with large media firms, and most of the rest were connected to outfits like AOL and Microsoft (Broadcasting and Cable, 6/22/98).

Why the iceberg didn’t hit

We can see now that those who forecast that the media giants would smash into the Internet "iceberg" exaggerated the power of technology and failed to grasp the manner in which markets actually work. There are six reasons why the media giants have blown any prospective competitors out of the Internet waters.

1. The giant media firms are willing to take losses on the Internet that would be absurd for any other investor to assume. For a Disney or Time Warner or Viacom to lose $200-$300 million annually on the Internet is a drop in the bucket, if it means their core activities worth tens of billions of dollars are protected down the road. As one media executive put it (Advertising Age, 6/8/98), Internet "losses appear to be the key to the future." The media giants have to try to cover all their online bases until they can see how the Internet develops as a commercial medium. For any other investor, who is not protecting media assets worth $50-100 billion, assuming such annual losses would be absurd and irrational. The same money could be spent pursuing some other aspect of the Internet (or economy writ large) and generate much larger returns with less risk.

2. The media giants have digital programming from their other ventures that they can plug into the Web at little extra cost. This, in itself, is a huge advantage over firms that have to create original content from scratch.

3. To generate an audience, the media giants can and do promote their websites incessantly on their traditional media holdings, to bring their audiences to their online outlets. By 1998, it was argued that the only way an Internet content provider could generate users was by buying advertising in the media giants' traditional media. Otherwise, an Internet website would get lost among the millions of other web locations. As the editor-in-chief of MSNBC on the Internet put it (Electronic Media, 1/19/98), linking the website to the existing media activity "is the crux of what we are talking about; it will help set us apart in a crowded market." Indeed, much of the TV advertising boom of the past year is attributed to Internet firms spending wildly to draw attention to their web activities. The media giants can do at nominal expense what any other Internet firm would have to pay hundreds of millions of dollars to accomplish.

4. As the possessors of the hottest "brands," the media firms have the leverage to get premier locations from browser software makers, ISPs, search engines and portals. The new Microsoft Internet Explorer 4.0 offers 250 highlighted channels, and the "plum positions" belong to Disney and Time Warner. Similar arrangements are taking place with Netscape and Pointcast. Indeed, the portals are eager to promote "Hollywoodesque programming" in the competition for users.

5. With their deep pockets, the media giants are aggressive investors in start-up Internet media companies. Some estimates have as much as one-half the venture capital for Internet content start-up companies coming from established media firms (Global Media, Herman and McChesney). The Tribune Company, for example, owns stakes in 15 Internet companies, including the portals AOL, Excite and iVillage, which targets women.

Some media giants, like Bertelsmann and Sony, have seemingly bypassed new acquisitions of traditional media to put nearly all their resources into expanding their Internet presence. GE's NBC arguably has taken this strategy the furthest. To cover all the bases, GE has invested over $2 billion in more than 20 Internet companies, in addition to NBC's own Web activities. "It wants to be wherever this thing takes off," an industry analyst said (Electronic Media, 8/10/98). In sum, if some new company shows commercial promise, the media giants will be poised to capitalize upon, not be buried by, it.

6. To the extent that advertising develops on the Web, the media giants are positioned to seize most of these revenues. Online advertising amounted to $900 million in 1997, and some expect it to reach $5 billion by 2000 (Electronic Media, 3/23/98; 4/6/98). The media giants have long and close relationships with the advertising industry, and can and do get major advertisers to sponsor their online ventures as a package deal when the advertisers buy spots on the media giants' traditional media.

More hamburger

This corporate media domination of the Internet has distinct implications for the nature of Web media content. "The expansion in channel capacity seems to promise a sumptuous groaning board," TV critic Les Brown wrote (Television Business International, 4/98), "but in reality it's just going to be a lot more of the same hamburger."

The most striking feature of corporate Internet fare is that it increases, rather than reduces, the hypercommercialism of our media culture. This may seem ironic, since one might think that on the Internet consumers have so many choices they will avoid excessive commercialism. But the fact is that the media giants are desperate to bring advertisers aboard their sites to generate revenue. Traditional TV-style advertising, where people basically are forced to sit through an ad, won't work. To get advertisers' dollars, websites increasingly have to permit a commercial intermingling with editorial content that has traditionally been frowned upon on the media. The rise of electronic commerce increases the commercialization of media sites that much more.

The most popular areas for Web content are similar to those of the traditional commercial media, and, for the reasons just listed, they are dominated by the usual corporate suspects.

Music: Viacom's MTV is squaring off with GE's NBC, AT&T's TCI and Rolling Stone to, as one of them put it, "own the mind share for music." Each of the companies’ websites is "slavishly reporting recording industry news and gossip," all to become the, or one of the, "default destinations for people interested in music on the Web." (Wall Street Journal, 4/15/98) The stakes are high: Forrester Research estimates that online music sales, concert ticket sales, and music-related merchandise sales could reach $2.8 billion by 2002.

Sports: The greatest war for market share is with regard to sports websites, where Disney's ESPN, News Corp.'s Fox, GE and Microsoft's MSNBC, Time Warner's CNNSI and Viacom/CBS's SportsLine are in pitched battle. Sports is seen as the key to media growth on the web; advertisers, for one, understand the market and want to reach it. Plus sport websites are beginning to generate the huge audiences that advertisers like.

To compete for the Internet sports market, it is mandatory to have a major television network that can constantly promote the website. One Forrester Research survey found that 50 percent of respondents visited a sport website as a direct result of its being mentioned during a sport broadcast. Indeed, 33 percent said they visited a web sport site while watching a sports event on TV (Advertising Age, 5/11/98).

News: The most visited websites for news and information are those associated with the corporate TV news operations and the largest newspaper chains (Wall Street Journal, 11/16/98). At present, the trend for online journalism is to accentuate the worst synergistic and profit-hungry attributes of commercial journalism, with its emphasis on trivia, celebrities, and consumer news. Columnist Norman Solomon (6/11/98) characterized the news offerings on AOL, drawn from all the commercial media giants, as less a "marketplace of ideas" than "a shopping mall of notions."

The increasingly seamless relationship on the Web between advertising and editorial fare is pronounced in its journalism too. "On the Web," the West Coast editor of Editor & Publisher wrote, advertising and journalism "often overlap in ways that make it difficult for even journalists and editors to differentiate between the two" (M.L. Stein, www.mediainfo.com, 6/12/98).

Time Warner: a case study

The Internet activities of Time Warner, before the AOL deal, are a good indication of how the media giants are approaching cyberspace. In addition to its activities as a cable company, Time Warner produces nearly 200 websites, all of which are designed to provide what it terms an "advertiser-friendly environment," and it aggressively promotes to its audiences through its existing media (Advertising Age, 1/19/98). Time Warner uses its websites to go after the youth market, to attract sports fans, and to provide entertainment content similar to that of its "old" media.

Time Warner is bringing advertisers aboard with long-term contracts, and giving them equity interest in some projects (IQ, 8/18/97). Its most developed relationship with advertisers is the ParentTime website joint venture it has with Procter and Gamble (Advertising Age, 8/18/97).

Establishing hegemony over any new media rivals on the Web, of course, does not mean that cyberspace will prove particularly lucrative; one could argue it proves the opposite. Time Warner was exultant that it had sold enough online advertising to cover nearly 50 percent of its online unit's budget for 1998 (Advertising Age, 1/19/98). For a small start-up venture, this would spell death.

However it develops, the comment of the president of Time, Inc. (Financial Times, 6/9/97) seems fairly accurate:

I believe the electronic revolution is simply one new form of communications that will find its place in the food chain of communications and will not displace or replace anything that already exists, just as television did not replace radio, just as cable did not replace network television, just as the VCR did not replace the movie theaters.

The evidence so far suggests the media giants will be able to draw the Internet into their existing empires.

Taking back cyberspace

While the Internet is in many ways revolutionizing the way we lead our lives, it is a revolution that does not appear to include changing the identity and nature of those in power. Those who think the technology can produce a viable democratic public sphere by itself where policy has failed to do so are deluding themselves.

This does not mean that there will not be a vibrant, exciting and important noncommercial citizen’s sector in cyberspace, open to all who veer far off the beaten path. For activists of all political stripes, the Web increasingly plays a central role in organizing and educational activities. But from its once lofty perch, this nonprofit and civic sector has been relegated to the distant margins of cyberspace; it is nowhere near the heart of the dominant commercial sector. And we should be careful not to extrapolate from the experience of activists what the Internet experience will look like for the bulk of the population.

In fact, as the corporate media domination of Internet "content" crystallizes, the claims of the Internet utopians are beginning to get downsized. We are probably going to hear less about how the Internet will invigorate media competition and more about how since anyone can start a website, we should all just shut up and be happy consumers. But, in the big scheme of things, having the ability to launch a website at a nominal expense is only slightly more compelling than saying we have no grounds of concern about monopoly newspapers because anyone can write up a newsletter and wave it in their front window or hand it out to their neighbors.

Viable websites for journalism and entertainment need resources and people who earn a living at producing them, precisely what the market has eliminated any chance of developing. Moreover, just having a zillion amateur websites may not be all that impressive. One expert estimates that over 80 percent of all websites fail to show up on any search engines, making them virtually impossible to find, and the situation may only get worse.

The moral of the story is clear: If we want a vibrant noncommercial and nonprofit sector on the Internet, in the near term it will require existing institutions like labor and progressive funders to subsidize such activities. In the long run, the key to democratizing the Internet as a medium will be to structurally change our media system to lower the power of Wall Street and Madison Avenue, and to increase the power of Main Street and every other street.

A media system chock full of new nonprofit, noncommercial and even small commercial entities would go a long way toward improving the Internet as a medium. This is something the American people have every right to do. The federal government created and subsidized the Internet for three decades before it was effectively privatized and opened to commercial domination--with zero public debate or press coverage--in the early 1990s. It is time to take it back.