AOL Time Warner? Not Big Enough for Tomorrow’s Internet

The America Online-Time Warner alliance is important not just for its size nor for the synergy it may create. It demonstrates in the real world an important theoretical principle underlying free markets: No “monopoly”–not even presumably impervious Microsoft–is ever beyond the reach of astute competitors with a new idea.

One can only chuckle at the irony of AOL’s Steve Case remarking that “over the next few years, the future of the Internet will be determined more by policy choices than technology choices” –and then proceeding to announce the largest corporate merger in history. Nonetheless, by the looks of things the AOL-Time Warner merger could herald even bigger things to come.

Mr. Case has been a leading voice calling for a government crackdown on Microsoft, yet it is now abundantly clear that he never needed Microsoft’s arms pinned behind its back. Commanding 22 million online access subscribers and looming seven times larger than the pending Earthlink-Mindspring alliance, AOL has been a counterbalancing titan in its own right in the Internet space since 1994. Indeed, in the parlance of the day, AOL quite ably “monopolizes” not just Internet access, but also Web “portal” traffic: AOL and its Netscape Netcenter subsidiary together far outstrip even Yahoo! in terms of eyeballs they attract.

In another attempt to have government secure its fortunes, AOL–fearing functional obsolescence as a squeaky $21.95-per-month dial-up service in a world embracing broadband–sought “open access” to AT&T’s sprawling cable systems. Now, though, the merger with Time Warner has secured access to the 13 million customers of Time Warner’s cable systems, catapulting AOL to the giddy heights of the nation’s second largest cable provider, reaching about 20 percent of the US population. Case doesn’t sing the open access song as sweetly anymore.

But given the what-goes-around-comes-around nature of lobbying, rest assured that somewhere in the bowels of Washington, DC, the antitrust case against America Online is already being fashioned. Increasingly brazen demands for “open access” to either AOL’s immense subscriber base or its newly acquired cable systems are likely.

For example, upon the merger announcement, Consumers Union and other such groups proclaimed they would “immediately ask the Federal Communications Commission to initiate a rule-making proceeding to require open access to the Internet.”

Forced access actually harms consumer interests. Its proponents claim mandatory access would “not regulate the highway, but getting on the highway.” That mentality is old hat among interventionists, who regard the property of others as theirs to allocate as they see fit. There is in fact no fixed information superhighway–there are many highways.

Consider that thousands of miles of optical fiber are installed per day. Despite the hype, neither AOL Time Warner’s cable nor the phone companies’ Digital Subscriber Line comes close to the yawning bandwidth optical fiber can deliver. It isn’t enough to download movies in a few minutes as AOL will be able to offer. Instead, tomorrow’s rowdy household must be able to download several movies instantaneously, as well as listen to streaming music, videoconference with friends, and play online games, all at the same time. In response to the demand for “near-infinite” bandwidth, companies like Qwest Communications are not only financing fiber networks thousands of miles long, but burying redundant, empty plastic conduits for rapid installation of next-generation optical fiber. Level 3 is burying nine empty conduits!

Our economy is perched at a critical stage in business history, a turning point at which all our network infrastructure industries are exloding and must continue to explode with redundancy and overlap to serve customers faster, cheaper, and more reliably. Thus, barring a rapid satellite revolution, a multi-billion dollar infrastructure campaign to rewire the “last mile” to household consumers may materialize. (Other developments, such as the electricity restructuring movement and new applications for technologies such as sideways flexible drilling, can help make the fearsome financing more attainable.)

The ability to execute such cripplingly risky market strategies depends crucially on owners and operators who directly profit or lose from decisions. In a high-technology economy increasingly dependent upon multi-hundred-billion-dollar alliances, forced access of any kind–whether to AOL Time Warner’s cable systems or online subscriber databases, Microsoft’s operating system code, or electricity grids– crushes incentives to innovate. Innovation stops if the dollars in the distance remain too dependent upon what regulators do. When regulators do, entrepreneurs don’t.

Given that even today most Americans still lack Internet access at home and virtually none enjoy true fiber broadband, perhaps the optimal firm scale is even larger than AOL Time Warner. While government planners and misguided activists mistakenly think open access should drive tomorrow’s communications networks, the market needs, and will provide, a mix: Some networks will be open access, some proprietary, but most will be something in between. So, perhaps we’ll see the first half-trillion-dollar merger in the not-too-distant future. But also expect a better and more ubiquitous Internet.

Wayne Crews is director of competition and regulation policy at CEI.