Gentling the Internet Giant

The Federal Trade Commission is close to reaching a deal with America Online and Time Warner on how to blunt the combined market power of the two companies once they merge. The government’s aim is to make sure the merger does not stifle competition in video and high-speed Internet services and that all content providers--media and entertainment--have equal access to the Internet. The best way to meet those goals is to require the new behemoth to open its cable lines to as many Internet service providers as it can technically accommodate, on reasonable commercial terms. The FTC decision will serve as a blueprint for the entire cable industry.

Declining prices of both companies’ shares have shaved one-fifth off the size of the merger since it was announced in January, but the potential market power of the combined company has not diminished. With 24 million subscribers--more than those of 20 of its nearest competitors combined--AOL is by far the largest Internet company in the world. Time Warner is America’s biggest entertainment company, controlling major studios and half of the most popular cable channels, including HBO and CNN. It can deliver all this and more to about one-fifth of U.S. cable households over its own lines. Consumers got a taste of Time Warner’s awesome power last May when it briefly knocked competitor ABC from its cable system in a tiff over fees.

The FTC staff rightfully considers access by AOL’s competitors to Time Warner cable lines a key condition to approving the merger. Time Warner cable subscribers should have a choice of Internet service providers, not just AOL or the Time Warner-controlled Road Runner high-speed service.

For years, cable companies have operated as monopolies in a vast majority of their markets. Sharing their lines will require a change of culture that will not occur without government pressure. Cable lines today remain the principal pipes by which high-speed Internet is being delivered. The cable companies’ share of the total market--about 75%--is declining as phone companies expand their services over digital subscriber lines (DSL), but for many suburban and rural households, cable will continue to be the only pipe for the new digital services.

A recent study by Goldman, Sachs & Co. concluded that the merged company would benefit from open access, up to its capacity limits, because it would make money from other Internet service providers and because AOL would have access to other cable systems. How “open” the cable lines should be will largely depend on the capacity of the system and should not be determined by the FTC in terms of definite numbers. Prices of cable access for competitors should be set in negotiations, based on cost and reasonable profit. Once the FTC requires Time Warner to open its cable lines to competitors, the Federal Communications Commission, which also has a say in the merger, will have to make open access a rule for the entire cable industry.