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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.’“

The same thing had already happened with AOL. In 1994, AOL was paying content providers to create material; by the time they were close to the 10-million-subscriber mark, the content providers had to pay to get on AOL‘s opening screen. Steve Case now is signifying like a cable mogul -- a point he made himself back in 1995, according to cable-industry trade paper Multichannel News: ” . . . [O]n July 14, 1995, [at a meeting] sponsored by the Interactive Services Association, Case went so far as to give the cable model of bundling content and distribution into affordable packages for consumers partial credit for AOL’s ascension . . . “

So here we are in 2000, and Beth Kennedy, returning to her argument of six years ago, says, ”In order for AOL to continue to get subscriber revenue, when free access to the Internet is ubiquitous through companies like NetZero, AOL must have content. People are used to paying subscriptions for basic cable, premium channels, tickets to movies and plays, new-technology versions of their favorite music. Broadband makes engaging, visual content an imperative to stay in the game.“

AOL‘s original service, for the Commodore 64, featured tiered access. And though naysayers will point to the fact that AOL gave up on that model, that’s just the point: AOL, over the years, has shown a willingness to dump or pick up on any new trend in order to remain in the mix.

Something else to consider: After AOL switched to flat-rate pricing, too many subscribers hung around for too long and AOL‘s servers became overloaded. Something similar is predicted when broadband becomes the dominant Internet hookup model -- cable modem users must split the available space on the broadband. You put 20 million people onto the existing system, and you may as well have a 14.4 modem. So how do you cut the overload? How about tiered pricing?

So here’s the nightmare scenario, if you happen to own another ISP, or have grown to like free Internet content: Time Warner‘s online offerings are split into ”lite“ and premium versions. The lite stuff, say headline news from Time and CNN, continues to be offered over the Web for free. AOL sells additional programming on a pay-per-view basis over the Web. A premium AOL subscription package is also offered with ”exclusive“ downloads and special sneak peeks at Warner movies and music before a they are released offline. You may argue that AOL’s tried that before and failed, as have many other content providers. The difference now is not how many Internet subscribers but how much content will be owned by AOL? Can you say, ”My ball, my rules!“ boys and girls?

So ”open access“ sounds good in theory, but if you follow the cable-centric model, in practice it becomes a joke -- if, for the same price as any other ISP, you can get the exact same broadband access, and everything in Time, Sports Illustrated (streaming video of swimsuit models!!), Fortune, Entertainment Weekly and, for a few dollars more, exclusive windows on Warner movies, first chance at Warner music, etc., etc. Well, hell, would you go with some Internet-only ISP? But wait, there‘s more! Why would any advertiser want to support NetZero freeloaders if the most desirable demographic were already shelling out money for content-rich AOLTime Warner?

It gets better (but only if you’re Steve Case). If the only way you can get broadband Time Warner content is through AOL, and your local cable operator won‘t open up its lines, we all may find ourselves pounding the podium at our local city councils, screaming, ”I want my interactive HBO!“

But wouldn’t an AOLTime Warner Internet monolith eventually run up against regulatory objections? Kramer suggests that Steve Case could keep the daisy chain going by introducing CompuServe, the older online service provider that AOL bought and maintained as an arms-length company with its own brand identity. ”The FCC, through its concentration of ownership rules, limits the number of subscribers -- that‘s individuals, not households -- any one cable operator can own,“ Kramer says. ”Fine. So Steve Case is nearly up to his limit on this one deal. However, [he] could still cut [another] deal using CompuServe as the root: He can say all this exclusive Time Warner content, now available only through AOLRoadrunner, can also be available through CompuServe -- through its affiliation with a different cable operator. Leaving all the remaining cable companies to say, ’Pick me! I want to live!‘ Federal law prohibits the consolidation of more than 30 percent of the cable industry into the hands of one cable operator, so if you’re a Steve Case -- you‘ve got 25 percent on Time Warner, and then you do a deal with AT&T -- and it’s not an ownership deal, you‘ve now got more than 50 percent of the market looking at your content without violating the consolidation rules.“

Don’t look to the FCC or the FTC to save us from the octopus. Over the last 30 years, antitrust thinking has swung from the ‘50s notion that the big film studios should be prevented from owning theaters (separation of content and distribution) to the belief that vertical integration is good for consumers, explains William Baer, former FTC official and lawyer with Arnold & Porter in Washington, D.C. (Vertical integration means owning a lemon grove, a sugar company and a paper-cup factory as opposed to a monopoly: making and selling all the damn lemonade.)

Antitrust ideology would have to make a 90-degree swing to bring AOLTime Warner under attack, although stranger things have happened. (Microsoft thought it was bullet-proof until the Justice Department launched its current offensive.) But if you’re worried, it might not be a complete waste to contact members of the Senate Judiciary Committee, many of whom have already gone on record with concerns about the AOLTime Warner deal.

Should you be worried? Capital Strategist Joey Tamer, whose advice on content distribution has made many of her clients millionaires, remains more optimistic than most that independent content on the Internet will survive the AOLTime Warner deal. But note the parallels to what happens to independent filmmakers: ”The indies are always squeezed, and they always re-emerge, and they get squeezed again, and re-emerge again,“ says Tamer. ”If a Web site is good and they hit a niche market, they can be a Miramax -- and if they achieve a following, and profitability, they‘ll be acquired by whoever wants that niche.“ So the good news is, if you’re in the content business, the party‘s far from over. And many pundits have noted both AOL and Time Warner’s histories of online-content failures, AOL‘s difficulties in managing acquired companies, and the soap-opera-diva clashes that can be expected between their conflicting corporate cultures. Perhaps, in the end, this deal will be a plague on both their houses.

But the problems of media consolidation go beyond the details of the AOLTime Warner case. A laugh-or-cry editorial cartoon in Multichannel News summed it up: An anchorman, reading a story about the merger, states, ”The new company will simply be called ’The Media.‘“

The big dangers with media monopoly are:

Old-fashioned conflict-of-interest -- or why exactly did Time magazine tout Warner Bros.’ Eyes Wide Shut on its cover?

Shrinking outlets:

A. How long will it take before corporate bean-counters decide that one reporter can feed several AOLTW news brands?

B. More ”where else you gonna go, schmuck?“ extortionary deals with independent producers.

And finally, univision: It‘s comfy to work somewhere where you have a nice upper-class salary and stock options. But it’s tough to break out of the cocoon to empathize with, let alone risk your mortgage to report on, how the other 99 percent lives.

Will the Internet survive? Not even a question. After all, the Internet is far more than the commercialized Web everyone‘s familiar with. Will the overcapitalized, any-business-plan-you-can-get-a-venture-capitalist-to-fall-for Net survive? If it collapses, it won’t be because of this deal, but for the same reasons the CD-ROM boom went bust -- too many not-all-that-great-to-start-with ideas cannibalizing the same narrow customer base.

In fact, some veteran Netheads think the AOLTime WarnerTurner deal may be a blessing in disguise, by parking the masses at a megasite so the rest of us can bliss out on the academia and arcana of the true Internet. In other words, let them have Barnes and Noble so we can live in a Midnight Special, celebrity-bio-free zone.

But that‘s only part of the answer. The true Internet, the one that felt like it had changed your life, was about reciprocity. Everyone was both expert and novice, asking questions when they had to and sharing information when they could. It was a gift culture, and the gift was knowledge. AOLTime Warner represents not just a homogenized pop culture, in which knowing how many vampires Buffy has killed is more important than knowing the education budget, but a culture in which we are mere consumers of information. Steve Case talks about ”AOL Anywhere“ -- next-generation technologies that will bring AOL to TV screens and handheld devices. This strikes me as the information equivalent of a McDonald’s in Yosemite. Call me an elitist, call me a naive idealist, or simply nostalgic, but I‘d kind of just like to find trees and rocks and waterfalls.

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

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