A Sad, Infuriating Tale

After being battered in the marketplace, AOL turns to the courts.

This article originally appeared in TechCentralStation.

Some business stories make you angry—like the collapse of Enron. Other business stories make you sad—like the bankruptcy of K-Mart. Still others make you both—like the suit filed yesterday by AOL Time Warner against Microsoft Corp.

AOL was once a proud, entrepreneurial, profitable company. Today, it is a bloated, money-losing behemoth, the largest media conglomerate the world has ever seen. AOL's merger with Time Warner, completed a year ago, has not worked out. AOL stock, which was trading at more than $90 per share before the merger, closed Tuesday at $28.40. It's down by more than half since June. And no wonder: The company has lost an incredible $3 billion in the past 12 months, despite cost-cutting and management changes.

Now, instead of competing in the marketplace—where it's been battered lately—AOL has decided to compete in the courts. The suit serves several purposes: It distracts investors from AOL's business woes, and it adds confusion in an attempt to scuttle a settlement already reached among the U.S. Department of Justice, nine state attorneys general and AOL's arch-rival, Microsoft, to end an antitrust action begun in 1997.

Also, by filing a lawsuit, even one of dubious merit, AOL purchases a low-cost lottery ticket. After all, the company, in league with other Microsoft competitors, got the federal government to file the initial suit, so U.S. taxpayers have borne nearly all the costs of prosecuting the software company. Other unscrupulous companies, please note the technique: Don't bother filing a suit yourself. Get the government to do it. Then piggyback later on its expensive work.

AOL's suit seeks damages for the alleged harm done by Microsoft's business practices to the Netscape browser. AOL wants Microsoft to stop such practices and to pay damages.

It's a strange suit—to put it mildly. After all, it was in 1999 that AOL agreed to purchase Netscape for $10 billion. In other words, the year after the government sued Microsoft for thwarting Netscape, AOL bought the company for a ton of money. Now, more than three years later, AOL decides to sue Microsoft.

If AOL were all that worried about Microsoft's alleged anti-competitive practices in the first place, then why did it buy Netscape? No one forced AOL to shell out $10 billion. And AOL's Steve Case, who is hardly a naïve guy, knew full well that Joel Klein and his colleagues at the Justice Department were claiming that Microsoft was crushing Netscape unfairly.

Clearly, AOL's management believed that it could compete with Microsoft anyway—especially with a massive federal lawsuit preoccupying Microsoft's own management. But just as clearly, AOL was wrong. Netscape turned out to be a poor investment (its market share has plummeted to about 10 percent, compared with nearly 90 percent for Microsoft's Internet Explorer, which, by the way, AOL chose as its online service's own browser).

So AOL has turned to an arena in which it increasingly finds more comfort than the rough-and-tumble marketplace: the courts and the political system.

"Over the next five years," Case told the National Press Club in 1998, "I believe the future of this medium will be determined more by policy choices than by technology choices." Sadly, he may be right. AOL has played a big role in promoting policy (and politics) over technology. Remember that the firm campaigned in 1999 in Congress, state legislatures and city councils to persuade politicians to require cable companies to give "open access" to content providers like AOL at government-mandated terms and prices.

But then, in 2000, AOL made its deal with Time Warner, which had 12.7 million cable subscribers. Suddenly, the shoe was on the other foot, and AOL was trying to prevent the kind of forced access it championed.

The company clearly has still not learned its lesson: Keep the courts and the politicians out of technology. In the end, technologists lose, and consumers lose.

Speaking of consumers, I can't understand how they're hurt by a business strategy that offers browsers for free. Would consumers—who, after all, are the people who are supposed to be protected by antitrust laws—be happier if they had to pay $100 or $200 for a browser? Free software is hardly a new Internet idea; AOL continually offers "upgrades" to its own service for free. Is it unfairly competing?

It's no coincidence that AOL's dramatic lawsuit comes just as a federal judge is deciding whether to bless a hard-won settlement, reached by nearly all the parties in the massive anti-trust suit against Microsoft. Nine attorneys general, among them America's top publicity-seekers, remain holdouts. They have asked, among other things, that Microsoft be forced to give away the Explorer source code.

But AOL Time Warner itself will have to tread in a gingerly fashion to avoid anti-trust crusaders. Its sheer size alone makes it a tempting target. As an Internet Service Provider, AOL at last count had 29 million subscribers; by contrast, Microsoft, at number-two, had just 5 million. AOL also owns Turner Broadcasting, the leading revenue producer in cable, with such networks as CNN, Turner Classic Movies, TBS and the cartoon channel; 60 magazines, including Time, People and Sports Illustrated; Warner Bros. Pictures and television; Warner Music Group; plus the cable properties.

Yet the company, which just announced a new CEO, hasn't been able to put all the pieces together. Revenue, according to the Value Line Investment Survey, is "lackluster" and "subscription revenues are softening." The research service concludes, "Investors should be cautious? Issues of performance and integration still need to be resolved. In addition, there is a risk that the company may have to either raise debt or dilute its stock." Debt, by the way, already stands at $20 billion—a lot of money, even for a company with $38 billion in sales.

Instead of straightening out its business problems, AOL has decided to spend its time and effort filing lawsuits against tough competitors—a petty, distracting pursuit that won't help AOL or, for that matter, the U.S. economy, which depends on firms like Microsoft for the innovation necessary to bring about a technology revival.