Was It Good for You Too? 

Who got screwed when Time-Warner jumped into bedwith AOL?

Wednesday, Jan 26 2000

It is 1994. AOL’s Greenhouse has just licensed a multimedia project from Beth Kennedy, a former senior executive at MCAUniversal. Kennedy and I (then a publicist for Greenhouse) are having one of those impassioned, speculative arguments we techies love to start. Kennedy says her studio background tells her that there is only one way the nascent online industry can go: to a tiered-access model just like cable. No more pay-by-the-hour (still the industry model at the time), but a flat rate for all-you-can-eat basic access, and a premium rate for access to exclusive content. ”Ha!“ I reply. ”There‘ll soon be so much content on the Web, no one will pay for exclusivity.“

Cut to 2000. AOL has just bought Time Warner. I talk to Jonathan Kramer, an independent consultant who advises more than 300 state and federal agencies about cable technologies. Kramer notes that everybody is talking about Time Warner cable modems and how they will give AOL customers ”broadband access,“ the ”always on“ fast connections that carry streaming video and audio files. But the deal is not about broadband cable access, it’s about access to Time Warner‘s content, Kramer argues. And there’s only one way the online industry can go: premium rates for exclusive content, blah, blah, blah . . . The deja vu is so strong, I can hear Kennedy‘s voice coming out of Kramer’s mouth.

The last two weeks have seen analysts, executives and journalists use everything short of the I-Ching and Magic 8-Balls to forecast what the AOLTime Warner deal will ultimately mean. Living in the entertainment capital of the world, the buzz feels like the first low vibrations of an earthquake -- should we shrug this off and go back to work, or dash to the door frame and hold on for dear life?

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The early alarms went off over the possibility that the AOLTime Warner monolith will use its strong cable position (20 percent of the market) to freeze other ISPs and content providers out of the broadband revolution. After all, that‘s what another cable giant, AT&T, had been threatening to do before backing down late last year and promising to open its lines sometime in the future -- say, 2002.

If AT&T was the black hat of the open-access story, the white hat, ironically, had been AOL’s Steve Case. AOL wanted desperately to get access to high-speed lines, and lobbying local governments and the FCC seemed as good a way as any to get them. Unless, of course, you have the stock value to go out and buy your own.

Much of the speculation about the AOLTime Warner merger over the last two weeks has centered on whether Case will make a sudden conversion to broadband hoarder. But that has just obscured the more important issue: What will Case and his new partners do with Time Warner‘s content?

Time Warner’s Gerald Levin argues there is no reason for the company not to spread its content everywhere it can, and on the surface, that would seem to make sense. But look at what Time Warner controls: magazines, record labels, including the newly acquired giant EMI Group, iconic cartoon figures, etc. We‘re not dealing with a simple content peddler, eager to lay its wares before the public, but rather with a media megalopoly with the power to shape public tastes without the people even noticing. As Andy Schwartzman of the Media Access Project puts it, Time Warner is ”the OPEC of content.“

And all of these various kinds of content generate income in different ways. While magazines live or die on advertising revenue, movies generate ticket purchases and tape rentals. And music CDs, well, they used to make money before MP3s (free, downloadable music files) started making them look like a coyote at the bottom of a canyon.

”Ask yourself, what drives the stock growth?“ says Byron Wagner, CEO of Metawire, which provides broadband Internet connectivity for the entertainment business. ”There are ceilings and caps on the revenue from Time Warner content, but the reason stock prices are so astronomical for online companies is because no one has a clue [regarding] their potential growth.“ In other words, it makes more sense to use Time Warner content to get more people to sign up for AOL access than it does to put Time Warner content out for free on the Internet, in the hope of gaining revenue through advertising and e-commerce.

Doubt it? Here’s a quick history of supply and demand in the cable industry, courtesy of Jonathan Kramer: ”At first, cable operators said we need original programming, something that will differentiate us from the over-the-air broadcast networks. And the early programmers said, ‘We will enhance the value of your service, and for that you will pay us.’ Until the number of programmers increased beyond the number of channels available, and the cable operators were finally able to say, ‘You need us more than we need you -- now it’s your turn. You‘ll pay us to carry your programs.’“

  • Who got screwed when Time-Warner jumped into bedwith AOL?

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