By Thomas W. Hazlett
Jan. 9, 2020 7:01 pm ET
It was the biggest corporate merger in history, and it stunned the markets. On Jan. 10, 2000, America Online, the world’s largest internet service provider, bid $183 billion for Time Warner, the world’s largest content provider. Steve Case, AOL’s CEO, talked of “the global company for the internet age.” Investor Roger McNamee called the event “transformational.” It was widely anticipated to be the start of something significant.
But the merger tanked. Time Warner cast off AOL in 2009. Verizon acquired AOL in 2015 for $4.4 billion, less than 1% of its 2000 value, adjusted for the S&P 500 index. AT&T bought Time Warner in 2018 for 20% of the adjusted price AOL paid in 2000. The merger’s failure is often attributed to executive mismanagement and clashing corporate cultures. But the episode holds lessons for politicians and antitrust regulators, who too often view market rivalry too narrowly.
America Online was enjoying big success: The company brought easy internet access to some 22 million subscribers. AOL rode the crest of the tech bubble, complete with a fabulous valuation. But competitive challenges lurked. AOL’s dial-up service chugged along traditional phone lines, even as cable and phone companies were building faster broadband networks. In 2000, AOL’s subscriber base dwarfed the U.S. high-speed market by a 3-to-1 ratio. By 2006, broadband users dominated AOL’s base 5 to 1.
Regulators feared AOL’s acquisition of Time Warner would stifle innovation. University of Michigan economist Jeffrey MacKie-Mason, who wrote the Federal Trade Commission’s report, said that the combination “will horizontally and vertically increase AOL’s power in the market for internet online services,” which would have anticompetitive effects and harm consumers.
The thinking was that a combined service and content provider would favor its own content and make life miserable for would-be internet upstarts. That would hamper the development of the entire system. As then-FTC Chairman Robert Pitofsky put it: “Our concern here was with access, that these two powerful companies would create barriers that would injure competitors” of AOL and Time Warner.
The merger went forward only after a settlement with the FTC that included several conditions: AOL would open its Time Warner cable systems to competing internet service providers such as EarthLink. AOL would not discriminate against content from rival firms—say, restricting downloads from CNBC to protect AOL’s Motley Fool. AOL would make AOL instant messenger, the company’s hugely popular texting app with 140 million users, compatible with similar tools on other platforms.
But the market turned out to be far more robust than imagined. The remedies put forth by antitrust regulators were ineffective and even irrelevant. Few could have predicted the creative destruction that would follow.
The worry about market power among internet service providers turned out to be illusory. AOL flopped, along with EarthLink, AT&T’s Excite@Home and Time Warner’s Road Runner. What mattered was networks: cable modems, digital subscriber lines, fiber, eventually broadband mobile and now 5G. Lags in spectrum allocation have hindered progress, but not the strategies feared in AOL-Time Warner.
Concerns about vertical foreclosure proved overblown, as Time Warner’s premier media properties—Time, Life, People, CNN and HBO—faced fierce new competition. In 2009, Time Warner voluntarily spun off Time Warner Cable. Meanwhile a crush of apps and services came from firms such as Google, Facebook, Netflix, Amazon, Apple and Spotify. None of these entrants owned “last mile” networks, but they succeeded anyway.
And after the FTC opened up Instant Messenger, the app was promptly buried by better services. Texting, Skype, FaceTime, WhatsApp, Facebook Messenger, Twitter and Instagram displaced AOL’s chatting program. None of these new entrants connected with Instant Messenger, or one another, and it didn’t seem to matter.
There are lessons here for the left-right condominium on antitrust. Elizabeth Warren says tech companies have “bulldozed competition” and “tilted the playing field against everyone else.” She demands the government break up tech companies. Steve Bannon has said that companies such as Google and Facebook “are so essential to daily life that they should be regulated as public utilities.”
These arguments will likely one day seem as quaint as the alarm over AOL’s acquisition of Time Warner. And it isn’t an isolated example. In 2005 the Bush administration prevented Blockbuster from acquiring Hollywood Video on antitrust grounds: The merger would threaten to monopolize video rentals. Blockbuster filed for bankruptcy in 2010 and today has a single store, in Bend, Ore. It sounds like the plot for a movie, if Netflix is interested in making it.
Mr. Hazlett, an economics professor at Clemson University, is the author of “The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone.”