The Day the Dotcom Bust Began
The lesson we still refuse to learn about the ill-fated AOL-TimeWarner Merger

By Douglas Rushkoff. Published in Medium on 8 March 2023

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The Internet changed for me on the morning of January 10, 2000, when an editor from the New York Times called to ask if I could bang out an OpEd by that afternoon. I was thrilled. The culture of the net, which I had been writing about since the late 1980’s, was finally mainstream enough for the Gray Lady to solicit a think piece from a fringe, cyberpunk writer like me.

But the editor wanted my commentary on something slightly different: Time Warner, a venerable “old media” company, had just announced it would be acquired by America Online — an internet access company that had only been in existence for a decade. Did this mean the Internet had truly arrived? Could I please explain what this merger really meant, in plain English?

I didn’t want to give up the opportunity, but this wasn’t really my beat. I was a media and culture writer. I knew about movies, television, computer games, online communities, and the subcultures they spawn. I was interested in virtual reality, electronic dance parties, chaos math, digital storytelling, media viruses and fractals.

This was a business story. What did I know about stock-only deals, board representation, and market caps? I figured I’d wing it. The Times’ editor saw this deal as the “birth of the digital economy,” and if it was, I wanted to be present and weigh in.

So I analyzed the merger from my own perspective, that of a media theorist and financial naif. A venerable conglomerate with real assets including a film library, magazine empire, theme parks, movie studios, and thousands of miles of television cable was about to merge with the guys who mailed pink-wrapped “10 Hours Free Access” CDs to pretty much every home in America. According to the terms of the deal, the two companies would combine into one, with AOL shareholders owning 55%, and TimeWarner just 45% of the new company’s stock.

How could America Online, a company with virtually no real assets, accomplish such a feat? Yes, AOL had accumulated a few million users, but I had been hearing that the new subscriber rate was slowing, not gaining, for a few months by then. The only thing peaking about AOL at the turn of the century was its stock price.

Then, all of a sudden, the move made sense to the video game geek within me: AOL was spending its “in-world” fantasy money. Of course. AOL founder Steve Case was cashing in his chips, exchanging his speculative dot com paper for a majority stake in a real company with real assets. Moreover, if he was choosing to do it now, it meant he believed that his AOL stock had hit its peak. To me, AOL’s purchase of TimeWarner suggested that the irrational exuberance surrounding technology stocks had climaxed: the dot com boom was ending.

So I wrote all this down and sent it to the editor by the 3pm deadline. An hour later, the phone rang. “We can’t run this!” he said. “Everybody is saying the deal is a great thing, and you’re trying to argue that it’s going to fail? That it’s some kind of bait and switch?”

“Yeah, TimeWarner is getting screwed,” I replied. “But AOL may be over, too. This is beginning of the end of the dotcom boom.”

“Well, we can’t run a negative piece about a merger that everyone in the Business Section says is unequivocally great for old and new media alike.”

“Maybe you should have someone from Business write it, then.”

They did. Along with hundreds of other editorials from business experts, the New York Times OpEd page extolled the virtues of the deal. I got my own piece placed in The Guardian of London, where contrarian views about American business were more welcome. But the overwhelming consensus was that we were witnessing a tide change in business history: the young eating the mature, new media conquering old media, creative destruction, the dawn of the digital economy, or the Internet Revolution.

From my perspective — that of a media theorist — this wasn’t a revolutionary moment at all but a highly reactionary one. It’s not just that the story of the Internet itself had moved from the culture section of the newspaper to the business pages. It’s that we were beginning to care less about how this technology could augment humanity, and more about how it could bolster a flagging stock exchange. The excitement around digital culture, the sexiness of people engaging with one another through media or making new software for free instead of simply watching television all night, was serving as little more than the hype for a big deal on the old economy’s stock exchange. It was no longer about changing the world, but keeping the old system firmly in place. Digital innovations were simply new ways to maintain the status quo.

Besides, two months later, the dot com bubble did burst, the NASDAQ crashed, and the very same newspapers that had celebrated the AOL-TimeWarner merger were now decrying it as an epic failure on the part of TimeWarner’s CEO, a former director of the New York Stock Exchange no less, Gerald Levin. People blamed his poor judgment on the trauma of losing his son, and watched, stunned, as $200 billion of shareholder money seemingly evaporated. The Internet Revolution was derided as a Ponzi scheme.

Moreover, the marriage of old and new media did not infuse TimeWarner with the disruptive values of Internet culture. The resulting company didn’t become more adventurous or innovative. Quite to the contrary, it became much more traditionally corporate in spirit, obsessed with the bottom line. They fired CNN’s Ted Turner — the 1980s cable television renegade was simply too radical and spontaneous for this supposedly 21st Century “new media” company. Magazine editors, who had previously focused on finding outlier writers and stories were told to develop shorter, more web and ad-friendly copy. The promised “synergies” between print and digital media amounted to diluting what was left of revered properties such as Time and Sports Illustrated with cheap online “extensions”. They recycled copy in the hope of selling a few banner ads, but ended up mostly giving away online space as a perk to those who advertised in the print publications.

Worse, the new combined company had to justify a tremendous valuation, or market capitalization, to its shareholders. The market cap of a company is its total worth — in stock. It’s the price of a single share multiplied by the number shares out there. Normally, it has some relationship to the amount of money a company makes. But with new and seemingly infinite business sector like the early Internet, it can be based on wildly speculative guesses about future growth. To those who didn’t know a lot about the way the Internet works, AOL seemed to have a lock on “dial-up,” which was the way most people connected to the Web. So — in a practice that’s still used in business plans today — they multiplied the number of people in the world by the cost of monthly access, and figured that was AOL’s true value.

But now that AOL’s Internet subscriber rate had plateaued, the old media side of the new AOL-TimeWarner was going to have to make up the difference. Somehow. That would be tricky for a traditional publishing company in an era of digital disruption. So instead of finding new revenue sources (known as growing the top line), the company implemented a tried and true method of pleasing shareholders: cutting expenses. TimeWarner offered its staffs “packages” to resign, slashed research budgets, and even carted out the water coolers. The company sold off productive assets such as Six Flags theme parks and even their cable company, Roadrunner. In order to survive, TimeWarner eventually had to spin off AOL entirely, leaving TimeWarner back where it was — except without its assets, personnel, cash, or stock value.

So, at least in this case, creative destruction resulted in something more like destructive destruction. The new industry didn’t replace the old one with something better; it just destroyed everything in the path of its exit strategy. It turns out Steve Case’s team had been looking for months for a way to spend his high-priced shares while there was still time. Instead of investing in digital innovation, he hired investment bank Salomon Smith Barney to find an acquisition target. This was not any sort of new media strategy. It was plain old, buy-low-sell-high horse trading, amplified by the massive bubble of digital finance. As Ted Turner now explains it in characteristic hyperbole, “the Time Warner-AOL merger should pass into history like the Vietnam War and the Iraq and Afghanistan wars. It’s one of the biggest disasters that have occurred to our country.” And at the time they thought I was being pessimistic.

In retrospect, the problems underlying the merger look obvious — even to traditional economists and business strategists. Yet even today the vast majority of professional observers seem incapable of recognizing how these same dynamics are still at play in the business landscape. This is because the experts tend to accept the business landscape as a pre-existing condition of nature. It is not. The rules of our economy were invented by human beings, at particular moments in history, with particular goals and agendas. It’s like a computer program, with accumulated lines of code written by developers throughout history with specific functions in mind. By refusing to acknowledge this, we end up incapable of getting beneath the surface. We end up transacting, and living, at the mercy of a system — of a medium, really.

To a media theorist, anyway, the real power underlying our emerging digital environment has less to do with digital technologies or computer algorithms than it does with the hands-on approach such an environment engenders. Members of a digital society are implicitly invited to program and reprogram the various operating systems that shape our world. Everything is up for grabs. All it takes is a willingness to see seemingly given circumstances as up for discussion.

By the same token, in a digital age, the refusal to have those discussions — to consider who or what we’re programming for — can be perilous. Instead of reevaluating the economic status quo, we simply amp it up with powerful, blazingly fast, and ultimately unpredictable technologies. Instead of recognizing, adapting or transcending the underlying game, we use software to game the system — like pro athletes using steroids to boost performance. Then we wonder why there’s so much collateral damage to the humans our economy was supposedly built to serve.

We have yet to learn the lesson of the dotcom boom and bust. We are bound to repeat it until we do.