I was surprised to find Virginia Postrel saying that she’d always been skeptical of the AOL Time Warner merger. Or, rather, I wasn’t particularly surprised that she’d been skeptical, but surprised by the reasoning behidn her skepticism:

[N]o one who applied economically informed strategic thinking to that merger would find any reason for it. What could these companies do as a single entity that they couldn’t do through business contracts between separate companies?

She quotes a recent article from the Wharton website that backs up her thinking.

Now, I’m no big-city businessman or New York Times economics columnist [tugs at suspenders, sucks teeth], and I wouldn’t presume to second-guess the astute judgement of Ms. Postrel or the fine folks at Wharton, but I have to assume that they’ve been smoking something a bit more powerful than Old Golds.

To say today that the AOL Time Warner merger was a misstep does not require a lot of prognosticative ability. But to say that it was a bad idea because the companies could have achieved their goals through contractual relationships requires some sort of particularly cloudy thinking.

When AOL bought Time Warner, AOL was trying to ensure that the AOL service would continue to be a viable business proposition. The service had been in steady decline (not according to subscriber numbers, maybe, but definitely in utility) since they had moved to a flat-rate billing scheme in 1998. Flat-rate billing meant that content providers would no longer get a check from AOL each month, representing their cut of the revenue generated by time users spent looking at their content. That, in turn, meant that almost no compelling content remained exclusive to the AOL service.

The value of Time Warner, in AOL’s eyes, was that it had an enormous library of media from which to draw. With Time Warner, AOL could be both the content provider and the conduit, retaining (and even gaining) users, and making money.

Unfortunately, it didn’t work out that way; AOL Time Warner’s core competency is no longer media production and distribution, it’s intramural squabbling and turf-battling.

Very few people in a modern company have, as their job description, ‘Make money’. The CEO usually does, and perhaps one or two others at the very top of the corporate pyramid. Under them, there are hundreds of vice-presidents whose job description is something like ‘Make money by doing some quite specific thing’. The promise of the AOL Time Warner merger never was fulfilled because these vice presidents, when faced with the choice of doing what was best for the new merged company overall or doing what was best in the short term for the department they happened to be running at the time, chose the short-term gain. And the upper management of the company, for whatever reason, would not or could not effectively overrule them.

I’ll repeat that: the AOL Time Warner merger failed overall because the company was unwilling to cannibalize certain of its existing businesses in order to make more money from the same product through different channels.

And Ms. Postrel, whose main message is that a lot of people tend to cling to the familiar even when this really isn’t in their interest — suggests that this situation would have been better, not worse, had this been attempted though ordinary contractual means. That the Time Warner VPs would have gladly had their businesses diminished as part of a joint-venture with another company, when they wouldn’t do it for another unit of their own.