AOL-Time Warner 'Open Access' Deal Threatens New Economy

During much of 1999, America Online devoted its considerable lobbying prowess to trying to convince federal, state and local governments to enact laws guaranteeing the company cleverly called "open access."

Cable companies had invested tens of billions of dollars in new technology that would allow the fat pipes that came into homes carrying cable-television signals to carry, as well, fast Internet signals, capable to speeding movies and other byte-hungry applications into homes. AOL wanted to be able to use those cable connections on its own terms.

So the company lobbied governments to require that cable companies make the services of Internet Service Providers (ISPs) available on their systems at mandated terms and rates. It is no coincidence that AOL is the largest ISP by far in the country, with roughly ten times as many subscribers as number two.

While most governments - including the one in Washington, D.C., where the Federal Communications Commission took a reasonable hands-off approach - ignored the imprecations of AOL and other ISPs, some local governments, including Portland, Ore., took AOL's side. Still, it became clear that the lobbying route was not going to work, and AOL would have to turn to the market for a solution. So last January, the company announced a merger with Time Warner, Inc., a media conglomerate that owns, among others, CNN, Time magazine and a cable system with a 20 percent market share.

Now, suddenly, the shoe was on the other foot, and AOL's enthusiasm waned for having governments to tell companies what they had to do with their own private property.

But the story did not end there. The Federal Trade Commission, which had grown especially aggressive during the final years of the Clinton Administration, got into the act. The FTC chairman, Robert Pitofsky, knew that proposed mergers offered fabulous opportunities to apply a kind of blackmail to extract concessions from companies desperate to complete their deals. Those concessions, supposedly taken in the "public interest," typically amounted to limiting the firms' free-market activities - to the detriment of consumers.

AOL was especially desperate. The company had bought Time Warner with stock which, at the time of the deal, was worth a lot of money. As the months passed, that stock declined in value (in other words, it would have required a great deal more of it to buy Time Warner). It was understandable, then, that AOL was under severe pressure to consummate the merger.

What the FTC wanted, among other things, was to apply an "open access" regime to Time Warner's cable systems. In the end, after nearly a year of negotiations, that's exactly what the commission got. In a consent agreement on Dec. 14, Time Warner agreed that it would not start offering AOL's ISP service to its subscribers until it offered the services of the second-largest ISP, Earthlink. Then, within 90 days, Time Warner would have to enter into agreements with two other ISPs. These agreements, said the FTC, "must be on terms comparable to either the Earthlink ISP service agreement approved by the Commission."

The irony here is delicious. AOL, the company that invented the specious "open access" issue was hoist on its own petard. Instead of being able to use the Time Warner facilities on its own terms, entering into agreements with ISPs (or not) as market conditions and its own corporate strategies dictated, it was forced by the FTC to accept government prices and conditions.

So, for AOL, I have no sympathy. When you call in the government to solve your market problems, you are letting a Trojan Horse inside your gates. That's a lesson just now being learned by technology companies that encouraged the Justice Department to go after Microsoft.

If cable were the only method for consumers to get swift Internet connections, then the FTC might have a point. But it is not the only method. There is DSL, technology that can turn nearly every phone in America into a broadband receiver. In fact, Jupiter Communications estimates that, by 2005, some 14 million homes will have broadband access to the Internet by cable modem and 12 million by DSL. There is satellite; there is wireless (those means will be the choice of 3 million homes, says Jupiter). And certainly there will be other technologies as well - or, at any rate, there would be if regulators did not discourage investment and innovation by their interventions. What sane capitalist wants to put billions of dollars into a telecom system which, at a bureaucrat's whim, will suddenly become the property of someone else?

What worries me is that the Dec. 14 deal will set the standard for cable companies in general - for the firms that service the 80 percent of America that Time Warner does not. I am afraid that is Pitofsky's purpose here, and it would be disastrous. In large part because of increased government intervention, telecom investment is slowing sharply already. A global "open access" regime imposed on cable would bring it to a halt.

Don't underestimate the power of the open-access propaganda. A few weeks ago, before the deal was approved, I talked with a Time Warner executive who told me that, in principle, he saw nothing wrong with open access. "After all," he said, "our magazines depend on open access to newsstands." What he failed to see was that the government does not require newsstands to carry Time or Fortune, or Solider of Fortune, for that matter. The decision is with the newsstand's owner. Of course, the owner wants to carry Time because it is in the owner's best interest to reap the profits from its sale. The same with Internet-by-cable. Imagine that a newsstand were owned by Time Warner. Would it sell only Time Warner magazines? Perhaps, but that would be its own decision - and probably a poor one at that.

President-Elect George W. Bush now has it in his power to boost the New Economy by changing the way that the FTC, the Justice Department, the Federal Communications Commission, and other regulatory agencies do business - to end "open access" and other such pernicious means of state control. He needs appoint reformers, not meddlers, to key positions. Consumers benefit most when companies can allocate capital to its best uses - not when they have to curry favor with regulators who, in their hubris, think they can tell where technology is heading.