Why were these two giants eager to wed, even in a transaction so ultimately dilutative that shareholders were bound to rebel? Why were magazines and cable systems and a Hollywood studio and Wile E. Coyote deemed such a fine fit? Why were advertisers and marketers -- let alone other media and entertainment companies -- in such a frenzy to react to the marriage?
The answer then was "synergy," a word used to justify earlier binges in the communications world, notably the Saatchi brothers', and later acquisitions, from WPP Group's buyout of Ogilvy to Viacom's purchase of Paramount.
"Synergy" implied both efficiencies and new revenues could be realized by taking the entire communications value chain -- content creation to distribution across multiple platforms -- and making it vertical under a single owner. If I might be excused an and-then-I-wrote moment, the idea (I wrote then) was that "by vaulting the boundaries separating print, film, television and records, these new giants could make one plus one equal three."
Yet the reality of synergy, as I pointed out here last September, never really lived up to the promise; most of the megamerged media companies from that era, Time Warner notable among them, significantly underperformed the S&P 500 during the 1990s.
In the wake of last week's blockbuster America Online/Time Warner merger news, a skeptic should be forgiven for again asking, "Why?" The answer is another Latinate noun, "convergence." This time the justification is for real.
Convergence is far from universally accepted, even among the cognescenti. "Whenever we VCs hear the word convergence, we reach for our guns," Jim Breyer of the Silicon Valley venture capital firm Accel Partners told me last year. That's because most infotainment companies trafficking in the terminology were projecting a union of the TV set and the PC, a dubious prospect at best.
But if you define convergence as the rendering of all datatypes into a consistent digital form, such that they can be delivered agnostically anywhere at any time, then you can see the phenomenon is occurring, almost as a force of nature.
That's where convergence differs from synergy: the latter required corporate executives to act in ways contrary to their self-interest to achieve the desired result; the former is happening, like it or not. As I noted last week, balding, paunchy me is now using my computer as a 300-station niche radio set. Countless, hipper others are playing transnational games, watching customized news videos, taking virtual tours of and buying new homes, having distance sex, etc. It will take only the tiniest kickstart to get the rest of the nation -- and the world -- to follow the lead of the early adopters.
AT&T Corp.'s Michael Armstrong was the first to take a big-bucks gamble on that recognition, investing $110 billion over the last 18 months to buy the cable systems he envisions will provide the first easily accessible fat pipe into the home.
His move almost forced the AOL/Time Warner deal. AOL needed cable coax if it was to be anything other than a dial-up ISP, an especially fraught position now that the "Free ISP" movement is picking up steam; Time Warner needed AOL's customer base, interactive content, and move-on-a-dime management skills.
Each brings formidable direct-marketing expertise to a media system that is, increasingly, all about going direct. (You thought you'd seen enough AOL disks in the mail? Wait 'til you see what Time's magazines, book clubs and record clubs can bring you.
And, hey! -- speaking of record clubs, didn't Time Warner recently do a deal with Sony to acquire CDNow? What happens when they start offering direct music downloads on AOL's home page?)
Since the AOL-Time Warner salvo wasn't the first in this new war, it's a safe bet it won't be the last -- especially as the battle to sell broadband services, such as AOL Time Warner's Roadrunner and AT&T's [email protected], heats up. All the other players in the convergence game are now at risk and in play, whether they specialize in infrastructure, delivery or content.
Other ISPs with large customer bases, like Earthlink, will be looking for cable partners. So will the giant Internet portals (I can hear Yahoo!'s Tim Koogle, denials aside, on the phone with Paul Allen right now). The telephone companies that have been so dilatory in developing high-speed services priced within the reach of real consumers will have to get their acts together quickly; it's not too farfetched to imagine a Bell Atlantic looking for content partners among the Disneys or GEs.
How it shakes out, no one knows. But this I can say with confidence. There will be 500 channels. And, at last, there will be something on.
Mr. Rothenberg can be reached at [email protected]