AOL-Time Warner Merger Spells End of Forced Access Campaign

By Dave Kopel

The Heartland Institute. March 13, 2000. Also published in the Syracuse Business Journal.

The biggest beneficiaries America On-Line's merger with Time Warner may be consumers and computer users who don't use AOL, read Time, or watch Warner Brothers cartoons. You see, the AOL/TW merger may spell the end of a campaign by AOL to slow down AT&T and other cable television companies which want to offer high-speed Internet access through cable television lines. If the cable television companies succeed, consumers all of the country will see the rapid deployment of "broadband" Internet access, allowing connections dozens of times faster than current connections on slow telephone lines.

Currently, about 95 percent of U.S. Internet users hook into the Internet through a dial-up telephone connection. These dial-up connections often create a "World-wide Wait," since they can move data at no more than 56 kb per second.

Until last year, higher-speed Internet connections were available mostly to businesses that paid for expensive T1 lines. But then, cable television companies such as AT&T (which bought TCI) and others began offering their customers cable modems. Through a cable modem, a computer can send and receive Internet data via the cable television line. The broadband cable lines are at least five times as fast as the fastest ordinary phone line, and emerging technologies push the speed even higher. By end of this year, most homes which have cable television will have the option of getting a broadband cable connection, thanks to a $33 billion of cable line upgrades being implemented by the cable television companies.

In most cases, the cable line will also offer telephone service, thus providing major competition to local telephone monopolies.

Cable modems clearly pose a major competitive challenge to local phone monopolies, and to companies like America On-line, which currently has about half of all the consumers who access the Internet on slow-speed narrowband telephone lines.

There were two responses to the competition from cable modems. First, almost all the competitors began to offer better products of their own. Second, some of the competitors, led by AOL, tried to crush the cable modem companies through a spurious call for "Open Access"-code words for taking property right away from the cable companies, and giving the property rights to cable's competitors.

The phone companies improved their consumer Internet products by starting to offer DSL (Digital Subscriber Line) services to consumers at reasonable prices. The DSL technology, which is a decade old, allows ordinary phone lines to be re-conditioned so that they can provide high-speed broadband. Before the cable competition came along, if DSL was available at all, it cost $90 a month or more. Now, DSL is being introduced all over the country, usually for $20 to $40 a month-right in line with the monthly fees for high-speed Internet access via cable lines.

Other companies, such as Earthlink and AOL, began massive investments in high-speed wireless Internet services-allowing rapid Internet access via connections with satellites or with earth-based radio towers.

The new competition spurred by cable modems will ensure consumers a choice of high-speed Internet access from a variety of technologies, and will finally provide competition in local phone service.

Unfortunately, AOL decided that one way to beat the cable competition was to get government into the game. As detailed in the Wall Street Journal, AOL formed a front group called the "OpenNet Coalition," which began a nationwide lobbying campaign to obstruct cable modems. A list of OpenNet Coalition major donors looked almost exactly like a list of companies which could lose their customers to cable modems. (Notably, some competitors, such as EarthLink and BellSouth, honorably declined to join the "Coalition.")

In Congress, in front of the Federal Communications Commission, and in hundreds of city councils all over the U.S., the OpenNet Coalition has lobbied (so far with little success, except in about half a dozen city councils) to take away the property rights of the cable Internet companies.

If you buy Internet access from a cable company, you retain your full ability to access any part of the Internet you want. Nothing changes about content availability. In-between your cable television line and the Internet, your connection to the Internet is handled by an Internet service provider which works in cooperation with the cable television company. (There is no extra charge from the Internet service provider; the price is included in your cable bill.)

Thus, if you get high-speed Internet from AT&T cable television, the Internet service provider will be Excite@Home (a company partly owned by AT&T). Since AT&T owns the cable television lines, it is AT&T's prerogative to decide how to connect those lines to the broader Internet.

Other Internet service providers that want to use the cable lines are, of course, free to negotiate agreements with the cable companies. Mindspring, a large ISP based in Georgia, has done exactly that, reaching an agreement with AT&T to allow AT&T cable consumers to use Mindspring as their ISP, at no extra cost. (In the absence of an agreement, the consumer can still use any ISP; he just has to pay whatever extra fee the ISP charges.)

AOL itself negotiated with AT&T, but the negotiations failed because of AOL's demand that the high-speed Internet access be branded as an AOL product, and not as an AT&T product.

So under the banner of "Open Access," AOL began lobbying governments to force every cable Internet company to give every ISP access to the cable lines. A few jurisdictions--such as Portland (Oregon), St. Louis, and Pittsburgh-did as AOL asked, and thereby prompted lawsuits which may eventually end up in the Supreme Court.

Because cable television lines-even high-speed ones-can only carry so much data, requiring a cable company to connect with every ISP under the sun would quickly cause the cable line to be overwhelmed, and connection speeds would slow to a crawl. (And thus, cable would no longer be a competitive threat to slow-speed specialists like AOL's dial-up telephone connections.)

The OpenNet Coalition claims that forced access is necessary because high-speed cable Internet is a "monopoly." This is nonsense. The slow-speed providers still control 95 percent of Internet connections. Of the high-speed market, the cable companies face competition from telephone DSL, from satellite, and from terrestrial wireless. According to the industry publication Inter@ctive Week, by end of this year, more people may be using DSL than cable modems. Some cable modem "monopoly."

The forced access lobby offers dire warnings that the cable companies will restrict Internet content. That the forced access lobby has to make such a desperate charge shows how weak their argument really is. In fact, the only content restriction from the cable companies is that consumers can't watch more than ten consecutive minutes of "streaming video" (e.g., a movie preview). The restriction exists because of the limited bandwidth on the cable line; if you watch web videos all day, you'll slow down the Internet connection for the rest of your neighborhood. (Telephone DSL, by the way, doesn't suffer from this technical problem.)

But the strangest claim of all from the forced access lobbyists is that they are promoting competition. It's a strange form of "competition" to demand that the government force a company to let competitors use the company property. It is the cable companies, after all, who are spending all the money for the system upgrades, and it is the cable companies who are taking all of the financial risks from the new investment. If innovative companies are forced to give the fruits of their innovation to companies which don't innovate, the result will be much less innovation.

Back in 1997, AOL sold its own hardware infrastructure to WorldCom. Belatedly recognizing the error of failing to invest in hardware for Internet connections, AOL in 1999 made a major investment in broadband satellite services. Now, with the Time Warner merger, AOL owns the second-largest cable television system in the United States.

And now that AOL owns some cable lines of its own, the company has suddenly lost interest in government mandates for forced access to cable lines. AOL claims to be sticking to its principles, since the company promises to negotiate agreements to allow other ISPs to access the AOL/TW cable lines. But there's all the difference in the world between cable companies (now, including AOL) choosing to negotiate with other companies, and cable companies being forced by law to let other companies use the cable property.

For AOL/TW, making contracts with other ISPs is an especially good business strategy, since many experienced computer users (the kind most likely to want high-speed Internet) despise AOL for its clunky web browser and for AOL's practice of shoving so many pop-up advertisements at users.

Even after the AOL/TW merger, the forced access movement will continue, albeit without meaningful support from the movement's founder. Forced access is still popular with Washington, D.C., consumer lobbies which sincerely believe that more government regulation of the American economy would be good for American consumers.

One forced access supporter denounced AOL President Steve Case as the "Benedict Arnold" of forced access. But there is an significant difference: Benedict Arnold switched from the pro-freedom side to the pro-government side. Mr. Case's belated support for property rights (now that he owns some of the property at issue) is an important step toward a better, faster, freer Internet. Because if there is one lesson that the last seven years have shown, it is that property rights and free markets--not government regulation-are the key to a better, faster, more consumer-friendly Internet.

Dave Kopel is director of the Center on the Digital Economy at The Heartland Institute.

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