By Steven Pearlstein
Washington Post Staff Writer
Tuesday, February 8, 2011; 10:14 PM
News flash: AOL, desperate for a new strategy as its base of dial-up Internet service customers erodes and determined to built a "platform" that marries "community" with "content," overpays to purchase a well-known media company.
Haven't we seen this flick before? If memory services, the merger of AOL and Time Warner turned out to be more horror movie than action-hero adventure. Corporate memories, however, tend to be short, and no sooner was the ink dry on AOL's $315 million purchase of the Huffington Post than the Wall Street dream machine kicked into high gear, floating rumors and sky-high valuations for Gawker and Politico.
The hype notwithstanding, this time they may be right. Enough has happened since AOL announced its ill-fated merger with Time Warner that the original strategy based on business "synergies" and technological "convergence" may be more valid today than it was a decade ago. If so, we could be at the start of radical consolidation in the media industry.
I'm not just talking about mergers between Web portals and popular Web sites. Think newspapers and TV networks, magazines and cable networks, wire services and social networks, movie studios and telephone networks. The process will take at least another decade and will involve lots of trial and error and squandered fortunes. By the time it's over, the landscape is likely to be dominated by a handful of global "brands" selling news, entertainment and community engagement, using video, audio and text, delivered through whatever devices customers desire.
Several factors drive this consolidation, including the AOL-HuffPost deal.
The most obvious is that there are tremendous economies of scale in the media business. News, information and entertainment are classic examples of products that involve lots of one-time, upfront costs required to serve the first customer, but little cost to serve additional customers. In such industries, firms that jump out in the lead with the highest sales volume gain a huge cost advantage that they can use to lower prices and gain an even greater market share. In time, only a few giants survive.
Consuming news and entertainment, it turns out, is also something of a community activity. People mostly read and view by themselves, but they like to talk with other people about what they have read or viewed. For that to happen, however, it's best if many of us get our news and entertainment from the same sources. That also pushes the market in the direction of consolidation.
There was a time when many people believed that everything on the Internet should be free, or at worst financed by advertising revenue. That was always something of a West Coast fantasy, or a throwback to the days when newspapers and TV networks could command hefty ad rates. But while Internet advertising sales grow every year, it's becoming clear they will rarely be sufficient to pay the full cost of producing the kind of quality news and entertainment that can attract large numbers of readers and viewers.
To an extent, consumers are already getting used to paying for content. It's no coincidence that today the better TV shows tend to be found not on free, over-the air broadcast networks but on paid cable channels. And the New York Times, following the lead of the Wall Street Journal and the Financial Times, will soon put some of its best content behind a pay wall. Given the dramatic decline in newspaper revenue and news quality, it's only a matter of time before other papers follow suit.
Quality is the operative word here. While any number of news Web sites got their start posting reams of content from "citizen journalists," college interns, pajama-clad bloggers and low-cost freelancers commissioned online, much of what they produced could not replace the reporting and writing of knowledgeable, experienced reporters and editors. Inevitably there will be fewer such journalists, but those who survive the shakeout will command ever higher salaries - salaries that only a handful of large news organizations will be able to afford.
Another bit of conventional wisdom about the Internet was that individuals would no longer have to rely on the "mainstream media" to decide what they read or viewed - that they could pick and choose their own content from a variety of specialty sites that suited their individual needs and tastes. But it turns out that many people actually value the convenience of getting a lot of their news and information from a single, trusted source. As a result, many portals, Web sites and news organizations are rushing to expand the scope of their core offerings.
Rupert Murdoch understood all this early on and has now assembled newspapers, TV networks and Web sites into a formidable media colossus. Google is also getting heavily into the content business, while Bloomberg recently picked up BusinessWeek. The recent marriages of Newsweek and the Daily Beast, Comcast and NBC-Universal, and the Economist and Congressional Quarterly all speak to the logic of consolidation.
As for HuffPost and AOL, nobody knows how things will work out - in terms of content, both have been better at producing quantity than quality. Unlike the AOL-Time Warner merger, however, this one comes when efficiencies are more obvious, the technology more developed and the potential benefits to consumers more apparent.