For folks at Walt Disney Co., TomorrowLand suddenly isn't looking so appealing. They see a future in which a combined America Online-Time Warner Inc. is able to use its control over cable systems to influence what consumers watch on interactive television or where they go on the broadband Internet of the future. Want to take in Monday Night Football on Disney's ABC network? Fine, but if you watch on a Time Warner cable system you'll likely also receive an interactive icon beckoning you to check player stats or profiles on Time Warner's CNN/SI site. Want to play an Internet game? You may find access is much quicker to sites that are owned by AOL-Time Warner or a company it has a partnership with. Want a choice of multiple Internet service providers (ISPs) that will ensure you get where you want to go on the Web? Good luck!
The Federal Trade Commission has some of the same worries. Before signing off on the deal, its negotiators are fighting to ensure that customers of a combined AOL-Time Warner will have open access to its rivals' services. Regulators want to ensure, for example, that customers will be able to choose from a multitude of ISPs. They are also haggling over the control of set-top boxes and a host of other issues ranging from AOL's Instant Messaging service to the fate of a 25% stake that cable giant AT&T owns in Time Warner Entertainment. The FTC's overarching goal: to make sure that the broadband Internet and interactive television remain open to competition--and free of stifling monopolies.
But this toughness, while commendable, is missing a crucial point: What about the rest of the cable-viewing public? Seventy-eight percent of U.S. cable users don't get service from Time Warner. Like it, every other cable company in the country has the same power to bully its customers.
That's why it would make more sense for Washington--be it the FTC or the Federal Communications Commission--to develop an industrywide policy for open access. Sure, the FCC is set to hold public hearings later this year. But it has been reluctant to grapple with the issue. That's too bad, because trying to ensure openness simply by imposing conditions on big mergers such as the AOL-Time Warner deal isn't enough. "I'm a big fan of open access," says Representative Rick Boucher (D-Va.). "But this isn't the way to do it."
In antitrust lingo, vertical integration is what's got Disney and other AOL-Time Warner rivals all worked up. That's when a company strings together a chain of businesses that stretches from the creation of a product to its final destination--the consumer. Such integration is common in the energy industry, where companies own everything from oil leases to gas stations, and it's not always a threat to competition. But it can be if a company has a dominant position at some link of the chain, which it can use to limit competition at other points of the chain.
SET-TOP CHOKEHOLD. With the AOL-Time Warner deal, trustbusters fear the lock Time Warner has on 13 million homes--22% of the U.S.--will allow it to limit users' choice of ISPs. That would mean more people would be funneled through AOL or Time Warner's Road Runner ISP. And they, too, could be configured to favor Time Warner content.
In interactive TV, the company would have another chokehold: set-top boxes. Right now, these are little more than channel changers, but in interactive TV they will become computers--programmed entirely byguess who? Control over the boxes could ensure that viewers always see AOL or Time Warner icons. Or they could be used to block the interactive capabilities of rival programmers.
The same is true of other cable outfits, however. As long as they have a monopoly in their service area, they, too, could charge exorbitant fees for ISPs. And they, too, could play games with set-top boxes. Most cable firms have developed their own ISPs and some have started acquiring content. Comcast Corp., for instance, has 7 million customers around the country--and valuable content through its ownership stake in the QVC home-shopping network, the Golf Channel, and major sports franchises.
VEXING ISSUES. That's why an industrywide solution is clearly the answer, even if defining it is no easy matter. The openness debate raises vexing policy issues: If open access is mandated, how much should cable companies be compensated for sharing their private property? If they can't get an adequate return on investment, will they have the incentive to invest in new infrastructure? These are hard dilemmas--but the issue of openness isn't going away. To the contrary, it's getting more important every day as it rapidly arises in new contexts: In Europe, for instance, battles are brewing over how much power cell-phone companies have to control what their customers see on the wireless Web.
Already, some basic openness guidelines for the cable industry are clear. Companies should offer customers access to a sufficient number of competing ISPs to ensure that there's robust price and content competition. These ISPs should be given terms that allow them to compete on an equal basis with the cable company's ISPs. And given the importance of TV as a mass-communication medium, it should be flat-out illegal to program set-top boxes to favor certain content.
None of this is going to be easy. But it would create consistency of policy and a level playing field for competitors. And that's not all. Viewers outside the Time Warner area might feel like the Feds are looking out for them as well.