- The Washington Times - Wednesday, January 3, 2001

The Federal Trade Commission (FTC) finally blessed the merger of America Online and Time Warner, after extracting "concessions" on behalf of lobbyists from Earthlink, Disney and other politically influential competitors. More costly delay now comes from the Federal Communications Commission (FCC), which has also been trying to weigh the deal down with issues irrelevant to the merits of the merger. This is just another case study of the way antitrust activism has become an instrument of special interests who use political clout to obtain favors from federal agencies at their competitors' expense.

In early December, The Washington Post revealed that "FTC staffers have asked interested parties whether it is important to attach a condition to the merger that would require Time Warner to offer its content to AOL rivals on a nondiscriminatory basis." Asking "interested parties" became standard procedure among antitrust officials in the Clinton years. At the Department of Justice (DOJ), they are not even shy about it. Last March, while the DOJ was working on a touchy settlement of the Microsoft case, the New York Times reported that government lawyers phoned top executives of two of Microsoft's competitors to read them the proposal and solicit their approval. Interested parties run the show.

Since AOL and Time Warner were in entirely different lines of business, their merger required extraordinarily imaginative antitrust anxieties to rationalize dispensing favors to interested parties. The merger does not give AOL any larger share of the Internet access business, nor Time Warner a larger share of entertainment or cable TV. To justify placating all the lobbyist-demanded "conditions" required some truly fanciful arguments.

BusinessWeek columnist Robert Kuttner claimed that, "With the proposed merger of America Online and Time Warner Inc., Internet-access traffic will be heavily channeled through just two companies, the merged AOL entity and AT&T.;" Utter nonsense. The overwhelming bulk of Internet access is "heavily channeled" through local phone lines, mostly using a conventional modem but also 1.5 million with a high-speed Direct Service Line (DSL).

There are only 2.4 million subscribers using all brands of digital cable for Internet access, accounting for less than 5 percent of all Internet access. Time Warner provides digital cable to a mere 613,000, and many use it for TV not the Internet. Even if Time Warner's share of the cable Internet hookups matched its 20 percent share of table TV, that would amount to only half a million households or 12 percent of the combined cable-DSL broadband market. Wireless Internet by satellite is another rapidly emerging alternative to either cable or DSL, and new fiberoptic suppliers will further broaden the broadband market in the future. AT&T;'s share of cable and satellite links (legally limited to 30 percent) is much larger than that of Time Warner, but AT&T;'s massive dividend cuts reveal it is very far from monopolizing anything of value.

In short, cable, satellite, wireless, fiberoptic and DSL combined account for only a tiny fraction of total Internet traffic, and Time-Warner accounts for only tiny fraction of that tiny fraction.

FTC officials resorted to mentioning Time Warner's past feud with Disney as a rationale for fiddling with the merger, but that too is beside the point. Time Warner briefly stopped carrying Disney channels like ABC and ESPN, because Disney insisted on a big price increase. Comcast and Disney just resolved a similar dispute. But price warfare between Disney and the cable companies predated the merger and has nothing to do with it. If the FTC or FCC noses in, and tilts this bargaining toward content providers, that would just encourage outfits like Disney to overcharge the customers of cable companies.

Meanwhile, it is difficult to even imagine any comparable problems with Internet content from Disney or anyone else. Mr. Kuttner theorized that a merger of AOL and Time Warner would result in "preferential access to particular [web] sites." Yet if it made any commercial sense to restrict access to their web sites, why don't they do it now? You do not have to subscribe to AOL to log onto AOL.com, Netcenter.com, ICQ.com, travelocity.com, and the rest. The same is true of Time Warner sites, such as cnn.com, which are also free and open to anyone. Owners of websites try to maximize visitors, not limit them. The merger does nothing to change that.

The FTC's fanciful argument, as explained by the New York Times, was that "AOL could make Time Warner content available only on its own service as a way of gaining an unfair advantage over other ISPs." By the same twisted logic, Time Warner could make CNN, HBO and TNT available only on its own cable TV lines, by not permitting Comcast and others to air these programs. But even FTC officials must understand that restricting distribution of such programs, whether on TV or on the Internet, means restricting sales and profits. Besides, one might just as well argue that by making Elton John's songs available only on a Warner Brothers CDs, Time Warner also gains an "unfair advantage" over other recording companies. If you own something, it is not unfair to sell it however you please.

The FCC is reportedly holding up the merger because of concerns that AOL stop blocking Instant Messaging to and from other Internet services. That concern seems legitimate, for much the same reason that blocking e-mails between services would not be allowed. But this issue would exist with or without the merger. Instant messaging was no excuse for holding the merger hostage.

There is a certain irony in all the regulatory obstruction of the AOL merger, since AOL has famously lobbied the regulators whenever it suited their interests. Soon after the end of the Microsoft antitrust trial, the government's star witnesses, Netscape and AOL, merged. Just as the Justice Department literally invited AOL, Sun Microsystems and other Microsoft rivals to abuse the courts for their purposes, the FTC and FCC have been doing the same by tailoring the AOL-Time Warner merger to suit Disney, Earthlink and AT&T.; And just as AOL had once lobbied to compel AT&T; to grant AOL preferential access to its cable-TV lines, Earthlink just did the same with Time Warner's cable (which was already leased to Juno). It would have been foolhardy for the merged AOL-Time Warner to refuse cash from companies like Earthlink anyway, but the terms of such deals should never have been a matter of antitrust meddling. Still, what goes around comes around. Or, as Ronald Reagan used to say, "If you get in bed with the government, you can expect more than a good night's sleep."

This latest revival of the quaint "big is bad" approach to mergers has been a serious setback to economic understanding and economic accomplishment. Some of the country's most valuable and efficient companies got that way through mergers, such as Cisco Systems' acquisition of 51 companies over the past seven years.

The refreshing wave of deregulation in the Carter and Reagan years somehow ignored antitrust, leaving the DOJ, FTC and FCC as the main remaining playing fields for those eager to abuse the power of government to hobble their business rivals. Antitrust has lately become a loose canon, periodically aimed at high-profile companies depending on the pressures of lobbyists and the Quixotic whims of ambitious antitrust czars.

One of the Bush administration's most pressing economic chores must be to rein in the lawyerocracy notably, antitrust attorneys who have been running amok during the Clinton years. When it comes to restoring the confidence of investors and businessmen, few of the new president's appointments will be as critical as choosing an assistant attorney general for antitrust who understands economics and respects a predictable rule of law.

Alan Reynolds is Director of Economic Research with the Hudson Institute, and senior editor of the Institute's magazine, American Outlook.


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