Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (16 page)

Markey eventually won: the FCC backed down and denied the phone companies the right to apply special charges to Internet service providers (ISPs). The FCC judiciously said at the time that it was forbearing from imposing these fees (“this is not an appropriate time to assess interstate access charges on the enhanced services industry”), but the reality is that it was dragged kicking and screaming into supporting AOL, Prodigy, and Compuserve.
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The flat-rate, inexpensive lines for Internet access that the phone companies were obliged to provide led to an explosion of consumer interest in the Internet, and success for AOL and its competitors. “Imagine the history of the Internet if I hadn't done that,” Markey says now.
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One of the videotex providers testifying at Markey's 1987 field hearing was Philip Gross, the president of a fast-growing online service called QuantumLink that provided e-mail, chat services, and other resources to its subscribers. Its growth—zero to fifty thousand subscribers in just two
years—was particularly impressive given that access to its system at the time was limited to users of Commodore 64 computers, which could be bought at Toys “R” Us. Gross testified that QuantumLink's growth was at risk, thanks to the FCC: with the threatened access-fee increase, Gross believed that the cost of transport of his interactive service would jump by 450 percent.
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That the local phone companies did not get their way was good for QuantumLink, and important for our story, because the mind behind QuantumLink belonged to the young Steve Case.
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With access fees out of the way, Case went on to create the AppleLink online service for Apple and PC-Link for IBM clones; in 1991, he changed the company's name to America Online, and by 1994 his online service had a million subscribers.
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AOL was soon swimming in cash, or at least in stock valuations that might someday be worth cash. It was making enormous deals for sponsorship and advertising; its deal makers were infamous for their confidence, arrogance, and take-no-prisoners tactics.
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AOL also had the advantage of ease of use: it literally brought America online for the first time. People were hearing about the Internet and wanted to be part of this great cultural transformation, but they didn't want it to be too difficult or time-consuming to do so. With America Online, people who had grown up long before the digital revolution could easily check their e-mail, drop into a chat room, and find stories they wanted to read. And thanks to the millions of free signup disks the company mailed out, the opportunity to get online wasn't hard to find.

When I first moved to Washington, D.C., in 1992, those brightly colored disks were everywhere. They came with promotions encouraging you to sign up for a low monthly fee and proved irresistible to people who wanted to try “going online” but didn't know what online services were or how to access them. I remember looking at the Whole Earth catalog of Web sites and wondering how I could get to these things from the desk at my law firm. America Online was my answer. (It was also busy—I remember hearing the braying sound of the modem followed by static and a seemingly inevitable busy signal.)

But when people did get through, they started talking to one another. This was new for us in America; we hadn't had such easy electronic
interactivity before, and making the Internet social was just what we wanted to do. Community drove AOL's growth as much as ease of access. By mid-decade it was one of the most talked-about companies in America.

The initial public offering (IPO) of the Web-browser firm Netscape in August 1995 (which gave it a valuation of two billion dollars) and the idea of expanding Internet access beyond services like AOL suggested to many pundits that AOL's days were numbered.
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Soon people were making fun of anyone who used an AOL e-mail address—AOL was Internet for dummies and old people, the elementary, dumbed-down version of something much more exciting and current. It seemed obvious that people would soon leave AOL's walled garden for the wide-open spaces of topic-focused, global online discussions—or other kinds of interactions yet to come.
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Yet people who did not have time for wide-open spaces, or were a little afraid of them, stayed loyal to AOL. By the end of 1995 it had doubled its size in less than a year and was up to five million members. By the beginning of 1999, its stock had soared to an incredible valuation of $65 billion, and AOL had joined the Standard & Poor 500.
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Its 20 million customers made it the largest ISP in the country, serving two-thirds of all new dial-up customers, 44 percent of the total dial-up market in the United States, and more Instant Messaging users than all of its competitors combined.
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Still, AOL was a “narrowband” company: from a technical perspective, it was a dial-up Internet service provider. Users connected via modems to their phone companies’ lines and dialed in over a dedicated copper telephone line to AOL's bank of servers in order to see AOL's content (and, sometimes, the Wild West of the Internet itself). As long as the family computer was logged on to AOL, the phone line could not be used for anything else. It was busy sending and receiving data at a rate of just twenty-eight or fifty-six kilobits per second (Kbps).

This was a bonanza for the phone companies, who were secretly delighted that so many people were buying second lines so as to leave a phone line free, but it was not sustainable for Internet connections that carried anything more than e-mail text. By 1999, subscriptions to “broadband” connections to the Internet via cable were approaching one million.
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These connections meant that consumers no longer needed AOL to reach the Internet. It was not even clear whether Internet service providers would
survive. If, unlike phone companies, the cable companies were not required to be common carriers, and thus obliged to let Internet service providers use their lines, this entire category of businesses would presumably wither away.

By early 1999, the cable industry had succeeded in labeling access to competitive ISPs across their lines “forced access,” and the government seemed to be accepting the argument.
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There was little political appetite to treat broadband access to the Internet over cable lines the same way the government had treated broadband access over telephone lines. Cable companies were winning the battle against the idea of common carriage.

AOL's management saw the end approaching. Cable was the future, and the dial-up ISP model had no place there. The telephone companies had been forced to allow AOL to get rich using their lines, but the cable companies had dodged that bullet. AOL's long-term strategy, meanwhile, seemed limited to doing more deals. In 1999, it launched an “AOL Anywhere” campaign (foreshadowing Comcast's “TV Everywhere” push), allying itself with digital-video-recording companies, handheld device manufacturers, satellite companies, and PC manufacturers—all to ensure that AOL could be easily accessed from any platform.
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But the company was treading water. Case realized that AOL needed to lock in its broadband future by reaching an agreement with a key cable distributor that had control over all-star content. This would keep the walled garden of AOL at the center of users’ media experience in the new broadband world, allowing it to pull in enough advertising dollars to sustain itself. At the beginning of October 1999, Case settled on Time Warner as the target.
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At the time Case started looking its way, Time Warner was a cable distributor serving 15 percent of the country—about 13 million people.
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It also owned top-flight entertainment brands: CNN, Bugs Bunny,
People
magazine, HBO, and Atlantic Records, among others. When the news of AOL's plan to merge with Time Warner broke at the end of 1999, the great promise of the Internet era seemed to be encapsulated in a single transaction. To the surprise of many, AOL's market capitalization was much higher than Time Warner's, and AOL planned to buy Time Warner for $180 billion in stock and debt, creating a company worth $350 billion, of which AOL would
own 55 percent.
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Old media would come under the dominion of the Internet model; everything was going online. The companies’ leaders were hailed as visionaries and symbols of a new era. The venture capitalists and investment bankers were exulting over the grandness of the undertaking and gathering enormous fees.

Meanwhile, Time Warner could see that cable lines might be the future. As Kara Swisher reports in
There Must Be a Pony in Here Someplace,
an internal memo from Time Warner made this point back in 1994: “In the next few years, high-speed Internet connection via cable may become commercially available. It will transform the online experience, and could make dial-up services such as CompuServe and AOL, which pretend to be content services but are mainly connectivity services, vulnerable.”
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But if the cable companies’ executives had any say, those cable lines would never be common-carriage pipes that allowed other providers to sell Internet access. Time Warner wanted to control the entire user experience.

The deal made sense; AOL would pull together the formidable content assets of Time Warner and bring them to people finding community online, while Time Warner's faster distribution assets would allow subscribers to enjoy graphical files—video, photographs—that would have been frustratingly difficult to see by way of dial-up connections. David Bennahum, a contributor to
Wired
magazine, made the “everything is about to change forever” point when the 1999 transaction was announced: “This [deal] has ramifications for television networks, for cable networks, for radio networks. This is the beginning of a profound transformation, and so what Time Warner gets out of this is, first, advantage, moving [to] enter the Internet. What AOL gets out of this is the incredible access of that content. And now what they both have to do, one of the many challenges they face, is to say, well, how do we then begin to create this next generation of media and content? How do we leverage all these connections in terms of marketing, in terms of relating to your audience?”
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Both Case and Gerald Levin, Time Warner's visionary CEO, promised high revenues, with a cash flow of $11 billion a year once the companies were combined.
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As Swisher, a technology columnist for the
Wall Street Journal,
said at the time, “No matter how you slice it, it's a moment of Internet becoming sort of an adult. It's a lot of money. It's all these fabulous personalities.”
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Many saw a downside, too. NBC filed with the FCC seeking a “meaningful, enforceable commitment by AOL Time Warner to provide nondiscriminatory access” to Time Warner's lines by other programmers.
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The announcement of the AOL–Time Warner deal prompted apocalyptic pronouncements from pundits concerned about media consolidation, and U.S. regulatory agencies erected elaborate schemes designed to avoid the evils of vertical integration.

Ten years later, the AOL–Time Warner merger was, according to Allan Sloan of
Fortune,
the “biggest takeover turkey ever that didn't end in bankruptcy.”
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Critics claimed that the regulatory conditions imposed by the agencies looked silly in hindsight. The two companies had not achieved the synergies their leaders had hoped for. When Time Warner launched a new broadband service, it did not even associate it with the AOL brand, calling it Road Runner instead. The two cultures had not managed to mesh; Time Warner divisions had no interest in working with the AOL cowboys. As one content executive told me, “It never occurred to us that they [AOL Time Warner] might so badly manage the integration of the companies.”
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What happened?

To the regulators and the public-interest advocates of the day, the AOL–Time Warner merger looked like an event that would change the media landscape forever—but not for the better. The Consumers Union, in a lengthy letter to the FCC, expressed deep concern about how the merger would concentrate markets in television and online content as well as the distribution of this content through broadband and narrowband connections.
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The nationally syndicated columnist Norman Solomon was convinced that the AOL–Time Warner merger was the beginning of the end of the freewheeling Web:

Not to be outdone, the
New York Times
published an op-ed proclaiming that the AOL–Time Warner merger could mark the end of America's independent press.
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And the broadcasters were furious. NBC warned of dire consequences, arguing in July 2000, “Given the size and scope of the proposed merged company, AOL/Time Warner will have both the ability and the incentive to discriminate against unaffiliated content providers such as NBC.” The network urged the FCC to “establish firm principles of nondiscrimination in the treatment of unaffiliated content providers in the broadband services marketplace.”
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Disney went farther, proposing that the agencies divide the merged entity into separate content and distribution companies.
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In short, the AOL–Time Warner merger approval became a public forum for competing visions of how content would be distributed in the Internet era—the continuing battle over the future of common carriage.