Are More Blackouts Coming?

Last Monday night, viewers in seven cities, including Los Angeles, turned on their televisions expecting to watch a special celebrity version of ABC’s “Who Wants to Be a Millionaire.” Instead, they got the first installment of a new series, “Who Wants to Be a Monopolist,” starring executives from media giants Time Warner and Walt Disney Co.

After much protest, Time Warner put Disney’s ABC signal back on its cable system while negotiations on a long-term agreement between the two companies continue. But there is a larger contest that promises to go on for a long time, and its stakes are only going to get higher. The ultimate prizes in this struggle of media titans is who will control the flow of content--news, entertainment, information and advertising--into U.S. homes and who will capture the biggest share of revenues expected to come from e-commerce. The challenge for policymakers is to find ways to ensure that the real loser in this contest doesn’t end up being the public.

Many analysts believe Time Warner’s temporary blackout of “Millionaire” demonstrates an urgent need for the federal government to exercise greater regulatory resistance to the mega-mergers reshaping the global media and entertainment industries. Most immediately, this could mean blocking the impending merger of Time Warner and America Online. But other analysts point to how quickly Time Warner retreated in the face of viewer outrage and contend that consumers can protect their own interests.

But neither federal regulation nor consumer feistiness is the answer. Instead, new media giants that don’t own “pipes,” through which digital content is transmitted to U.S. homes, offices and schools, should encourage their proliferation to ensure their own competitiveness. Disney’s offer to give away DirectTV satellite dishes to Time Warner subscribers is an example. Finally, the digital competencies of ordinary Americans should be strengthened.

In the past, technology kept the media and entertainment industries segmented. Newspapers, radio, magazines, motion pictures and television each had their own formats, creative talent, audiences, revenue sources, competitive dynamics and regulatory structures. This arrangement set limits on corporations’ ability to leverage ownership of assets in one segment to increase market power in another. For example, Time-Life’s dominance in the magazine business didn’t enable it to influence what radio and television networks put on the air.

But digitization is knocking down the barriers among media industries and markets. In the world of digitization, control over the key phases of the new media business matters most. This has created tremendous pressures on media companies to vertically integrate, that is, develop their own capacities to create, distribute, assemble and deliver content. The conflict between Time Warner and Disney is best understood as each’s effort to use its strengths in one phase of the new media business to increase its leverage (or compensate for its weaknesses) in other phases.

Time Warner is already the largest and most vertically integrated media company in the world. With Time Inc., Warner Music Group, Warner Bros. Studio and New Line Cinema and the CNN News Group, the company is a preeminent provider of content. Its lack of control over a major TV network is partly offset by its ownership of Time Warner Cable. If its merger with AOL goes through, AOL Time Warner will have a dominant position in all phases of the new media industry.

Disney is one of Time Warner’s main rivals in content production (the others are Fox and Viacom, which is merging with CBS). In addition, its ownership of ABC and ESPN make Disney a major force in the assembling and distributing content in the television industry. But Disney hasn’t invested in pipes to deliver its content. Moreover, while its Go.com Web site is the most visited by children and families, the company has not created an Internet portal to compete with AOL or Yahoo.

The immediate source of conflict that led to Time Warner’s 36-hour blackout of ABC’s signal was Disney’s effort to leverage its ownership of ABC to force Time Warner to pay a higher price for its Disney Channel, Toon Disney and the Soap Network. The more fundamental--and worrisome--issue is whether Time Warner will use its control of cable wires to give preferential treatment to its own content producers and distributors and, conversely, to impede Disney’s ability to reach viewers. Another issue is whether Time Warner will equip its cable channels with more interactive features than those of rivals. As e-commerce grows, this could make an enormous difference in the ability of media companies to generate revenues from their content.

Furthermore, there is the question of whether Time Warner and other cable companies will muscle their subscribers into using one preferred Internet service provider (ISP). Before its proposed merger with Time Warner, AOL was the nation’s leading proponent of “open access,” which would give subscribers a choice of ISPs. But since it’s about to acquire pipes of its own, AOL’s interests have changed. Now, AOL-Time Warner is more likely to side with AT&T;, which, if its pending acquisition of MediaOne is approved, will control more pipes than any other media company and has already begun to position its Internet portal, Excite@Home, to play a leading role in assembling and distributing content.

If Time Warner and AT&T; are able to monopolize the nation’s wires, they would unquestionably threaten the commercial interests of their competitors and the public interest. For this reason, many analysts, encouraged by lobbyists such as Disney’s Preston Padden, are calling on the Federal Communications Commission to block the AOL-Time Warner merger and regulate the ability of content producers and distributors to control the wires. But federal regulatory control isn’t the best answer, for two reasons.

First, technological change is proceeding so rapidly that regulatory actions that might promote competition today could end up working against it tomorrow. For example, the strongest argument for the federal government to regulate cable to ensure open access is that, in the near term, neither digital subscriber lines (DSL) nor wireless can compete with cable. But intervening now could reduce incentives to invest in DSL and wireless, thus reinforcing cable’s monopoly power in the long term.

At the same time, it’s clear that consumers cannot resist efforts to control access to digital content. Time Warner’s mistake was to block content that was already popular. The larger threat is that Time Warner and AT&T; will use their ownership of the pipes to prevent new content from ever reaching audiences, or they will subtly facilitate the ease with which the public can access certain content and services as opposed to others. To some extent, this is what both AOL and Excite@Home already do.

What are the alternatives?

* Reinforce incentives that content creators and distributors have to support the development of alternative wires like DSL and wireless, as well as educating the public about the pernicious effects of denying it access to content.

* Concentrate regulatory efforts at the local, not the national, level, because the relative advantages of cable, DSL and wireless vary substantially from area to area; primary regulatory control over cable is already strongest at the local level; and efforts to use monopoly power are likely to be more evident in a world of diverse regulatory regimes.

* Enhance the technological competency of ordinary Americans. In today’s world, it is nearly impossible to prevent technologically savvy individuals from accessing content they want. The problem is, most consumers are neither equipped nor inclined to take full advantage of their digital options. This is the main reason why AOL has been able to develop and maintain its enormous base of subscribers even though alternatives are cheaper, more elegantly designed and come with fewer annoyances.

All the major new-media companies have fervently extolled the social virtues of the new digital age and declared their commitment to end the digital divide. Toward that end, they should join with the federal government and other independent groups to educate all American schoolchildren about how to exercise their rights to information, privacy and free expression in a broadband world.

Tht’s the best way to keep “Who Wants to Be a Monopolist” off the air.