A Lesson for Today’s Tech Trustbusters

The AOL-Time Warner merger was going to dominate the internet. Today both companies barely exist

By Thomas W. Hazlett. He is an economics professor at Clemson University and the author of “The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone.” Excerpts:

"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."

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."

"In 2005 the Bush administration prevented Blockbuster from acquiring Hollywood Video on antitrust grounds: The merger would threaten to monopolize video rentals."