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

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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 extracteda promise from the combined company to open Time Warner's cable-TV system,whose wires can be used to access the Internet, to competing Internetservice 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 competitorsaccess to a technology not suited to the digital age.

The FTC's lust to impose mandatory access requirements on the Internet'scable infrastructure will, however, do more than dampen the incentives forrivals to deploy competing cable offerings. The threat of forced-accessrules will hamper real broadband—the new, fast, post-cable-modem class ofinfrastructure 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 500megabits per second, while cable carries one to three megabits per second.To the typical consumer, fiber’s capacity seems infinite, allowing the busyhomeowner to download several movies, play streaming music and video,video-conference with co-workers, monitor home climate and appliances, shopand play online games—all at the same time.

But while some 20 million fiber miles snake through the nation'stelecommunications backbones, fiber usually ends at local distribution hubsthat often serve a few hundred customers. From there, the last mile isserved via ordinary copper lines, often limiting Internet users to 56kilobit per second dial-up-modem speeds.

But the mandatory open access mentality of regulators will now causewould-be fiber entrepreneurs to think twice before stringing that last mile.

To be sure, some companies, such as Nortel and Optical Solutions, arepursuing new fiber-to-the-home infrastructure. But breakthrough success willrequire 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-industryalliances can make the financing and logistics of major fiber rollouts morebearable.

Yes, complaints abound about the constant tearing up of streets bytelecommunications firms today. But a multi-billion-dollar infrastructurecampaign to service the last mile may help make producers smarter this timearound. For instance, they could bury multi-redundant, non-degradableconduits with numerous access points to allow easy future line-swappingwithout further digging.

Ultimately, the benefits of unlimited bandwidth are such that eager dads maytake to the front yard themselves with a shovel and a spool of BostonOptical's breakthrough plastic fiber, begging for someone to rip up thestreet.

In our highly networked economy, forced access mandates of any kind—whetherto AOL-Time Warner's cable systems or its Instant Messenger service,Microsoft's operating system code, or electricity grids—wipe out incentivesto create alternative business structures.

Perversely, the forced access model can increase industry concentration andreduce competition, which is the opposite of regulators' stated intent. Forexample, if regulatory pressure had not impelled AOL to grant access toEarthlink—the second-largest ISP in the country—Earthlink might have starteda competing cable deal of its own.

Of course, voluntary open access is proper, and will emerge spontaneously inthe digital age out of business necessity. That makes coercive policies andthe accompanying pre-emptive choke-off in bandwidth supply all the morefrustrating. AOL-Time Warner will service only about 12 percent ofhouseholds. Restrictive policies toward other ISPs would invite retaliationas the company tried to expand into other geographical areas—as well as hurtthe company's stock value.

Unfortunately, regulators have never accepted the notion that there must becompetition among business models, not merely competition in the goods andservices businesses aim to sell. The entire forced access campaign is anunfortunate example of unelected regulators overstepping their bounds. Theyare exploiting their power over industries to make regulatory "law" thatshould require an act of Congress. Forced access represents a regrettablenew incarnation of industrial policy.

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