A Merger That Puts New York on Top

The real issue at stake in America Online’s decision to buy Time Warner is not the triumph of the new media over the old. Instead, it’s whether New York, the unrivaled capital of the old American national industrial economy, will dominate the new American global information economy. Whether it succeeds in doing so will depend, in large part, on how its West Coast rivals--Southern California, the Bay Area and Redmond, Wash.--respond to the challenge created by the merger of the world’s leading Internet company with the world’s leading media-entertainment company.

Although AOL will control 55% of the new company and its leader, Stephen M. Case, plans to stay in his offices in Northern Virginia, New York will be the de facto corporate headquarters of AOL Time Warner. In fact, Case has already said that Time Warner’s Gerald M. Levin, who will become CEO of the new company, will manage day-to-day operations. In explaining the broader significance of the deal, Levin emphasized his commitment to “do things through this company that have a lot to do with the social destiny of people everywhere.” What he did not say was that the merger also positions AOL Time Warner to lead efforts to reverse the erosion of New York City’s once-unquestioned position as cultural and economic center of the world’s most influential nation, which resulted from rapid economic growth in the Sunbelt and the advent of cable television, personal computers and the Internet. The regional struggle underway is not unprecedented. Over the course of U.S. history, New York has faced a series of challenges to its status as the national metropole. At independence, both Boston and Philadelphia were ahead of Manhattan economically. Though it is now difficult to imagine, early 19th-century New Orleans, the principal entrepot for trade on the Mississippi River network, was considered a serious challenger to become the commercial center of the nation. In these struggles, New York had two advantages: the location of its port and its growing capital markets.

But the key to the city’s success was its leaders’ ability to envision the future path of the national economy and develop strategies to use New York’s advantages to ensure it was in a position to dominate that economy. The two most important examples of this were the city’s decision to build the Erie Canal, which positioned New York to control the exports of the Mike Clough is a research associate at the Institute of International Studies at UC Berkeley.

U.S. hinterland to Europe; and its “triangle trade,” which allowed New York’s commercial interests to control the cotton trade between the South and England.

In the late 19th and early 20th centuries, the discovery of electricity and the invention of the telephone, motion pictures, wireless radio and television solidified New York’s economic hegemony. These innovations spawned America’s first great technology companies--most importantly, American Telephone & Telegraph and General Electric--and set the stage for Manhattan to become the headquarters of the three major TV networks. As a result, the city was able to reap enormous benefits from the postwar commercial explosion that was fueled by mass media and advertising.

One of New York’s most remarkable qualities has been its ability to capture economic gains from commercial developments that began in other regions. For example, steel (Pittsburgh), automobiles (Detroit), motion pictures (Los Angeles) and oil (Houston) all created bases for potential regional challenges to the Big Apple. But in all four cases, New York ended up co-opting or controlling its rivals. One indicator of this achievement is that all three of New York’s great philanthropic foundations--the Ford Foundation, the Rockefeller Foundation and the Carnegie Corp.--were created with money from fortunes made outside New York.

But the digital-Internet revolution poses a more serious challenge to New York’s national economic hegemony. Not only is this revolution creating new industries and sources of wealth, but it also is fundamentally changing the nature of the national (and global) economic equation in ways that reduce the weight of Manhattan’s historic advantages. Consider:

* The location advantages that allowed New York to dominate U.S. trade with the rest of the world, especially Europe, have disappeared. As national and international commerce becomes e-commerce, the most important advantage will be location in e-space, not real space, and control over e-space is exercised by companies that control access to digital communities and networks.

* The monopoly that the big three New York TV networks enjoyed has been shattered. The networks’ unrivaled access to the U.S. mass market was significantly eroded by the development of cable television, the emergence of Atlanta-based CNN as the premier global news channel (before it was bought by Time Warner in 1996) and the creation of the L.A.-based Fox network. By creating an entirely new way to reach viewers (i.e. consumers), the Internet has completed the undoing of the monopoly.

* The historic dependence of new entrepreneurs and emerging economic sectors on New York financing has been substantially reduced by the emergence of a new venture-capital market in the Silicon Valley and dramatic shifts in the relative market valuations of companies operating in the old industrial economy and those with a stake in the new digital economy. The best evidence of these shifts is the fact that AOL bought Time Warner, not vice versa.

In all three areas, AOL has what New York needs. With 22 million online subscribers, it has a strategic location in the new e-economy. Although AOL Time Warner will keep a substantial base of operations in Northern Virginia, it is inevitable that the company’s real center of gravity will shift to New York, where it can exploit the city’s financial infrastructure, strategic experience and capacity to create content.

Most analysts have focused on the significance of the AOL-Time Warner merger for rival media and Internet companies, but equally important is its significance for the aspirations of Southern California, the Bay Area and Seattle, which are vying with New York for leadership of the new global economy. The deal raises the threat that these western regions will suffer the same fate as that of New Orleans, Detroit and Hollywood in earlier eras: They will lose their opportunity to break out of second-tier status and thus be relegated to following the lead of the Big Apple. But this isn’t inevitable.

Collectively, the West Coast’s major metropolitan regions have several important comparative advantages. Their companies--especially Silicon Valley giants Cisco Systems, Intel, Oracle and Sun Microsystems, and Redmond-based Microsoft--still create and distribute the technologies driving the digital revolution. In contrast, neither AOL nor Time Warner has contributed to any major technological innovation of the information age. Hollywood still dominates the filmed entertainment industry, and the Bay Area is establishing itself as a leader in multimedia and digital arts. In addition, with the exception of AOL, the biggest Internet and e-commerce brand names--Yahoo and Amazon.com--are based in the West.

But the West’s ascendancy may be slowing.

When the Walt Disney Co. bought Capitol Cities/ABC in 1995, it marked a major reversal in the relationship between the West and the East. For the first time, a Southern California company was acquiring control over important New York assets. But Disney’s recent economic difficulties have prevented the company from fully exploiting the synergies created by its ownership of ABC and ESPN. In Redmond, the once seemingly invincible Microsoft is increasingly on the defensive because of the Justice Department’s antitrust suit and the rise of the Internet. And Silicon Valley’s corporate leaders seem uninterested in parlaying their grasp of digital technology and their stratospheric stock valuation’s into a foothold in the communications and media industry. For example, in response to speculation that Yahoo might follow AOL’s lead and buy a media company, CEO Tim Koogle announced that the Internet powerhouse had no such desire.

More generally, corporate and regional leaders in the West have yet to develop the kinds of grand strategic visions that inspired Time-Life founder Henry R. Luce--the man whom both Case and Levin, with their emphasis on the broader, global social importance of their proposed company, seem to be emulating--to imagine the 20th century as “the American century.”

Unless the great Pacific metropolitan regions--and companies such as Disney, Microsoft and Yahoo--overcome their rivalries and develop a common vision, it will only be a matter of time before New York will end, once and for all, the debate about which city will emerge as the “capital of the next American century.”