AOL‐​Time Warner: Not Big Enough for Tomorrow’s Internet

January 5, 2001 • Commentary

Need more proof that regulators can’t keep pace with the Internet economy? Look no further than the AOL‐​Time Warner merger.

Before granting permission to merge, the Federal Trade Commission extracted a promise from the combined company to open Time Warner’s cable‐​TV system, whose wires can be used to access the Internet, to competing Internet service providers (ISPs). But in “Internet time,” cable modems are too slow. It can take an hour to download “Titanic” onto a playing‐​card‐​sized screen. In effect, regulators are forcing AOL‐​Time Warner to grant competitors access to a technology not suited to the digital age.

The FTC’s lust to impose mandatory access requirements on the Internet’s cable infrastructure will, however, do more than dampen the incentives for rivals to deploy competing cable offerings. The threat of forced‐​access rules will hamper real broadband—the new, fast, post‐​cable‐​modem class of infrastructure that the Internet needs.

Unless major breakthroughs in wireless and satellite technology occur, mounting demands for bandwidth call for new fiber optic wires spanning the “last mile” to the consumer. Fiber’s carrying capacity is more than 500 megabits per second, while cable carries one to three megabits per second. To the typical consumer, fiber’s capacity seems infinite, allowing the busy homeowner to download several movies, play streaming music and video, video‐​conference with co‐​workers, monitor home climate and appliances, shop and play online games—all at the same time.

But while some 20 million fiber miles snake through the nation’s telecommunications backbones, fiber usually ends at local distribution hubs that often serve a few hundred customers. From there, the last mile is served via ordinary copper lines, often limiting Internet users to 56 kilobit per second dial‐​up‐​modem speeds.

But the mandatory open access mentality of regulators will now cause would‐​be fiber entrepreneurs to think twice before stringing that last mile.

To be sure, some companies, such as Nortel and Optical Solutions, are pursuing new fiber‐​to‐​the‐​home infrastructure. But breakthrough success will require business alliances larger than AOL‐​Time Warner, which may smell like “monopoly” or “collusion” to regulators, rather than the risky “startups” they would represent. If regulators exercise restraint, cross‐​industry alliances can make the financing and logistics of major fiber rollouts more bearable.

Yes, complaints abound about the constant tearing up of streets by telecommunications firms today. But a multi‐​billion‐​dollar infrastructure campaign to service the last mile may help make producers smarter this time around. For instance, they could bury multi‐​redundant, non‐​degradable conduits with numerous access points to allow easy future line‐​swapping without further digging.

Ultimately, the benefits of unlimited bandwidth are such that eager dads may take to the front yard themselves with a shovel and a spool of Boston Optical’s breakthrough plastic fiber, begging for someone to rip up the street.

In our highly networked economy, forced access mandates of any kind—whether to AOL‐​Time Warner’s cable systems or its Instant Messenger service, Microsoft’s operating system code, or electricity grids—wipe out incentives to create alternative business structures.

Perversely, the forced access model can increase industry concentration and reduce competition, which is the opposite of regulators’ stated intent. For example, if regulatory pressure had not impelled AOL to grant access to Earthlink—the second‐​largest ISP in the country—Earthlink might have started a competing cable deal of its own.

Of course, voluntary open access is proper, and will emerge spontaneously in the digital age out of business necessity. That makes coercive policies and the accompanying pre‐​emptive choke‐​off in bandwidth supply all the more frustrating. AOL‐​Time Warner will service only about 12 percent of households. Restrictive policies toward other ISPs would invite retaliation as the company tried to expand into other geographical areas—as well as hurt the company’s stock value.

Unfortunately, regulators have never accepted the notion that there must be competition among business models, not merely competition in the goods and services businesses aim to sell. The entire forced access campaign is an unfortunate example of unelected regulators overstepping their bounds. They are exploiting their power over industries to make regulatory “law” that should require an act of Congress. Forced access represents a regrettable new incarnation of industrial policy.

The communications networks that underlie tomorrow’s Internet should come in several flavors: Some will operate on an open access basis, some closed, but most probably somewhere in between. Without mandatory access, there will emerge many “information highways,” not just the one the government picks.