Steve Ross, Time Warner, and Growth for Growth’s Sake

Tim Wu’s The Master Switch tells the story of how America’s information empires—from the AT&T monopoly to today’s Internet giants—have been shaped by disruptive inventions, federal intervention, and, above all, a will to power. This week, based in part on excerpts from The Master Switch, Wu will present the stories of five men who disproportionately influenced the shape of the American information industries in the 20th and 21st centuries.

Steve Ross and Dustin Hoffman.

In a typical photo, Steve Ross wore a tuxedo with a large bow tie as he stood, silver hair shining, with a celebrity or one of his cronies. Ross, the man who built Time Warner Inc., was the first of a new archetype: the media conglomerator. He was the inspiration for media executives, like Gerald Levin, Michael Eisner, and Barry Diller, who came to rule the entertainment world in the 1980s and beyond. Yet despite this important role, Ross is today hardly a household name. (Were he alive he would be distraught to learn that a Google search ranks him behind Steve Ross, author of Happy Yoga.) Ross was a pioneer in aggressively combining dozens of unrelated media properties under a single name. His life was a symbol of the decadence and glory that came along with this new kind of information empire.

Ross’Time Warner was something new, but not because it had not been imagined before. Since the 1910s, federal policy had tolerated an informal “one-cartel-per-industry” policy. The Hollywood studios ran film, the radio trust controlled radio and later television, and AT&T held dominion over the telephone system. Efforts to expand into other industries were discouraged or blocked. The film studios, for example, had at one point planned to start their own TV network but were blocked by the FCC.

The media conglomerate model, which reached its perfected form by the 1990s, flipped the structure of the media. Instead of one-industry giants, octopi emerged that owned properties across the media: a film studio, cable networks, broadcast networks, a publishing firm, and so on. Ross added a layer of management above the media firms, creating a structure in which the properties were connected only by a common name and the fact that, in some loose sense, they sold information.    

What logic lay behind the conglomerate? The dogma was “synergy,” a vague concept of theological origin that originally referred to the combined efforts of God and man to seek salvation. Economists, for their part, have long been suspicious of synergy and have regarded conglomerates either as simply corrupt or as something of a mystery. As a 1981 paper in the Bell Journal of Economics put it: “Despite extensive research, the motives for conglomerate mergers are still largely unknown.”

Looking back, the logic behind Ross’ original conglomerate, Warner Communications, is clear. Warner was a form of mutual insurance against the risks of failure in media markets—a way to prevent a “bomb” like Waterworldfrom bringing down an entire studio. As such, it provided a new level of security in a world with more choices and without the complete vertical integration that had once been crucial to guaranteeing markets.

But it would be a mistake to see risk-management as the real motivation for the media conglomerate. Born poor in Brooklyn, N.Y., Ross yearned for status, riches, and glamour—and his conglomerate delivered on all fronts. By the 1970s, Ross lived like a Roman emperor, surrounded by yes men and indulging in every conceivable adult fantasy. Without any serious ties between the various products it produced, the allure of the media conglomerate was very simple. The story of Steve Ross is one of the seductiveness of bigness in and of itself.

In the information industries, it is common for men in the squarer, more technical sides of the business to develop the urge to buy their way into content, the sexier side. We see that with Sony and Microsoft in the 1990s, both of which headed into content with investments in movie studios, MSNBC, and, yes, Slate. The jump for Ross was even grander: He went from parking lots and funeral homes to the glamour of ‘70s Hollywood film production in the space of a decade.

Ross on the cover of New York magazine.

To the media world, Ross brought a simple and brutal logic: Own as much as you can. Ross’ biographer Connie Bruck quotes an investment banker from Bear Stearns: “Steve Ross would merge with anything, just to get bigger.” The firm we know as Time Warner, then, was the product of dozens of mergers. Ross’ first merger put together his in-laws’ funeral home with a parking-lot firm. He then added cleaning services to the mix. He followed that with his first media acquisition, D.C. Comics, and then a talent agency. Ross’ big jump came with the purchase of Warner Bros., to which he added several record labels, and, in time, properties as diverse as Mad Magazine, Garden State National Bank, Atari, and the New York Cosmos soccer team. The conglomerate, now known as Warner Communications, shed holdings as often as buying them until it reached its greatest heights with the purchase of Time Inc. in 1990.

What Ross was doing is often called “empire building.” More precisely, he was pursuing a system through which he could lavish favors and money on his favorites to build a mutually re-enforcing system of absolute fidelity. When courting actors or directors, Ross’ attention was lavish. He would buy them and their children expensive gifts and give large donations to their favorite charities. When courting Steven Spielberg, Ross spontaneously agreed to pay more than $20 million, 10 times the market price, for the rights to make a video game based on E.T. While it was a disastrous deal that eventually helped wreck the Atari company, it did turn out to be an effective strategy for wooing one of Ross’ targets.

Within the conglomerate, Ross was hugely successful in creating and maintaining loyalty. He put many of his old friends in comfortable jobs at Warner or on the board. Generally, the managers at Warner were enthralled and well-rewarded by Ross and tended to be intensely devoted to their boss. In return, he gave them freedom to work on their projects—the Warner structure was famously decentralized. Jack Welch is known for bringing a discipline to every part of General Electric. Ross’ generosity with Warner’s cash, by contrast, created both loyalty and apparent contentment from his management.

Ross’ personal style can perhaps best be seen in his operation of the New York Cosmos. In the early 1970s, Ross and a few friends pooled their own money to purchase the soccer club, at the time a small, struggling operation. After a while, the losses were too much for the partners to bear. Ross had a better idea: He had Warner Communications buy the team for $1. From that point onward, he used the corporate treasury to fund the team in glorious fashion. As Ross became increasingly obsessed with the Cosmos, he began to spend much of his time actively managing the team, to the point of arguing with the coach and other Warner executives over which players to start.

Franz Beckenbauer and the New York Cosmos cheerleaders.

The Cosmos are said to have lost more than $5 million a year, though no one knows precisely because the losses were never disclosed. (As Connie Bruck explains, for Warner, any losses under $10 million “didn’t count.”) With millions to burn, Ross made New York soccer glamorous and fabulous, hiring some of the world’s most famous players: Pele, Franz Beckenbauer, and Ross’ favorite, Giorgio Chinaglia. As one former Cosmo put it in a documentary about the team, “it was like traveling with the Rolling Stones.”

The Cosmos story gives a sense of why bigness was so alluring for Ross and other media executives. Let’s face it: Running a large corporation offers a nearly unparalleled opportunity to indulge in some of the highest pleasures available to an adult male. The very bigness of Warner Communications provided those opportunities in excess. But what made Ross a successful mogul was less the size of his empire than the system of rewards he built. His patronage system provides a competing explanation, separate from any theory of synergy, as to why conglomerates came to rule the media world.

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