Online for a crash?
By Alex Callinicos
LAST WEEK was a bad one for anyone bored to tears by the endless hype about the internet. All the boosters of e-commerce (the use of the internet to buy and sell goods and services) had a collective orgasm at news of the merger of the Time Warner media empire with the world's biggest internet service provider, America Online (AOL).
The Guardian's headline was typical: "$350 Billion Media Merger Heralds Net Revolution." It quoted the claim by the deal's authors that they were creating "the world's first integrated media and communications company for the Internet Century". This is like those televisions ads which conjure up the image of a world in which all six billion of us are happy, prosperous, Americanised consumers living much of our lives through the internet. It is closely connected with the euphoria surrounding the economic boom in the United States.
Last week US Treasury secretary Larry Summers urged Europe to develop a US style "new economy" based on deregulation and "flexible" labour that can avoid inflation or slump. In fact, most serious commentators agree the reality is quite different. The US economy has been sustained by a stock market boom. Middle class households whose shares have soared feel richer and so are spending more, which is good for economic growth. Such stock market bubbles have often occurred throughout the history of capitalism. Financial markets can temporarily rise much faster than the actual production of goods and services.
But when these bubbles finally burst the effects on the real economy can be catastrophic. The classic case is the Wall Street Crash of October 1929, which ushered in the Great Depression of the 1930s. Japan has yet to recover from the collapse of the "bubble economy" in 1990. Indeed over the past year or so most share prices on the Wall Street stock exchange have started to fall.
The euphoria has kept going because of an extraordinary surge in the share prices of high-tech companies, particularly those associated with computing and the internet. This has pushed their share prices way out of line with the underlying profitability of these companies. Last week US high-tech stocks were valued at 200 times their earnings.
The internet bubble has not just personally enriched the bosses of the high-tech companies. It has increased their financial power compared to older corporations. These are often much bigger in terms of the physical assets they own or the workers they employ, but their share prices have not risen as fast. The AOL-Time Warner merger illustrates what this can mean. AOL is the senior partner, taking 55 percent of the new company. Time Warner has effectively been taken over, even though it contributed 85 percent of the revenues and 80 percent of the cash flow.
It is only AOL's high share prices that made this surrender by a bigger to a smaller company possible. But, in buying up Time Warner shares with its own shares, AOL had to agree to value Time Warner shares as worth 69 percent more than their level. Why? Because everyone is afraid that the high-tech bubble will burst, sending the share prices of internet companies like AOL tumbling. AOL is effectively offering Time Warner shareholders compensation against the risk of this happening.
As the Financial Times commented, "In this so-called 'merger of equals' every AOL dollar of pre-market capitalisation is worth less than three-quarters of each Time Warner dollar. Internet money...is not the same as 'real economy' money." The underlying fragility of confidence in the "net revolution" was shown the day after the deal was announced. Wall Street wiped $30 billion (�18.2 billion) off the combined share value of AOL and Time Warner as part of a more general fall in internet and media prices. The AOL-Time Warner merger isn't anything to do with the "Internet Century" really. It is just another symptom of the bubble of speculation that is keeping global financial markets afloat, and indeed the world economy. There is an economic rationale to the deal. Mass access to personal computers and to the internet does offer a new way of communicating the images and other information produced by a company like Time Warner. But technological change doesn't guarantee economic expansion. The 1929 crash occurred at a time when innovations like the telephone, radio and automobile were beginning to enter mass use. It is impossible to predict with any accuracy when the Wall Street bubble will finally burst. But when it does, all the boosters are going to look pretty silly.