Three Case Scenarios for Critical Thinking

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These questions are asking for a critical analysis - your critical analysis - so be sure to add you own voice to the following response.

I. AOL and Time Warner: Fragile Promises

a. Why did the media refer to the merger as the deal of the century?

Mainly, it was referred to as "the deal of the century" because it was the first global Internet and communications company of the Internet century, as well as the largest Internet service provider. The agreed deal, the world's largest ever takeover worth $160bn in shares, brought waves of analyst euphoria and predictable hype. Steve Case, chief executive officer of AOL and the deal initiator, described the deal as defining. It created, he said, "The first global Internet and communications company of the Internet century." Perhaps it's the deal of the millennium. (vnunet.com).

"Welcome to convergence. It is enormous. Yesterday the world's largest Internet service provider, AOL (revenue, $4.7 billion; market value, $163 billion), bought film studios to cable TV media giant Time Warner (revenue, $26.8 billion but market value only $97 billion)." (vnunet.com).

b. Why was Time Warner eager to merge with AOL?

Two essential reasons have been put forth, mainly pointing to the reason being that of Time Warner's CEO's passion for technology and/or Time Warners fear of a hostile takeover by AOL - Time Warner was eager to merger with AOL mainly because of its former AOL Time Warner CEO Gerald Levin's passion for the Internet, based on his "messianic belief in technology, in transformational events, in the next big deal." However, Liberty Media's John Malone and others have another theory that deserves at least some attention. Levin might have been afraid that AOL would use its inflated stock for a hostile takeover of Time Warner.

Consider: In 1999, AOL was battling cable companies to open their lines for Internet providers to offer high-speed connections. AOL knew that growth for dial-up connections was coming to an end. Yet, cable operators gave Case & Co. the cold shoulder. AT&T and Time Warner ? the two biggest ? privately agreed not to talk to AOL without telling the other first. That deal fell apart in September 1999, when AT&T, eager for federal approval of its MediaOne purchase, admitted it was considering an AOL deal. That had to put Levin in an awkward spot, and it made an AOL merger keeping him on top attractive (http://www.usatoday.com/money/media/columnist/lieberman/2003-07-13-aol-book_x.htm).
What challenges did AOL and Time Warner face as a merged company?

Need more proof that regulators can't keep pace with the Internet economy? Look no further than the AOL-Time Warner merger. Before granting permission to merge, the Federal Trade Commission extracted a promise from the combined company to open Time Warner's cable-TV system, whose wires can be used to access the Internet, to competing Internet service providers (ISPs). But in "Internet time," cable modems are too slow. It can take an hour to download "Titanic" onto a playing-card-sized screen. In effect, regulators are forcing AOL-Time Warner to grant competitors access to a technology not suited to the digital age. This is an ongoing issue.

The FTC's lust to impose mandatory access requirements on the Internet's cable infrastructure will, however, do more than dampen the incentives for rivals to deploy competing cable offerings. The threat of forced-access rules will hamper real broadband?the new, fast, post-cable-modem class of infrastructure that the Internet needs. Unless major breakthroughs in wireless and satellite technology occur, mounting demands for bandwidth call for new fiber optic wires spanning the "last mile" to the consumer. Fiber's carrying capacity is more than 500 megabits per second, while cable carries one to three megabits per second. To the typical consumer, fiber's capacity seems infinite, allowing the busy homeowner to download several movies, play streaming music and video, video-conference with co-workers, monitor home climate and appliances, shop and play online games?all at the same time.

But while some 20 million-fiber miles snake through the nation's telecommunications backbones, fiber usually ends at local distribution hubs that often serve a few hundred customers. From there, the last mile is served via ordinary copper lines, often limiting Internet users to 56 kilobit per second dial-up-modem speeds. But the mandatory open access mentality of regulators will now cause would-be fiber entrepreneurs to think twice before stringing that last mile. To be sure, some companies, such as Nortel and Optical Solutions, are pursuing new fiber-to-the-home infrastructure. But breakthrough success will require business alliances larger than AOL-Time Warner, which may smell like "monopoly" or "collusion" to regulators, rather than the risky "startups" they would represent. If regulators exercise restraint, cross-industry alliances can make the financing and logistics of major fiber rollouts more bearable. Yes, complaints abound about the constant tearing up of streets by telecommunications firms today. But a multi-billion-dollar infrastructure campaign to service the last mile may help make producers smarter this time around. For instance, they could bury multi-redundant, non-degradable conduits with numerous access points to allow easy future line-swapping without further digging. Ultimately, the benefits of unlimited bandwidth are such that eager dads may take to the front yard themselves with a shovel and a spool of Boston Optical's breakthrough plastic fiber, begging for someone to rip up the street.

In our highly networked economy, forced access mandates of any kind?whether to AOL-Time Warner's cable systems or its Instant Messenger service, Microsoft's operating system code, or electricity grids?wipe out incentives to create alternative business structures. Perversely, the forced access model can increase industry concentration and reduce competition, which is the opposite of regulators' stated intent. For example, if regulatory pressure had not impelled AOL to grant access to Earthlink?the second-largest ISP in the country?Earthlink might have started a competing cable deal of its own. Of course, voluntary open access is proper, and will emerge spontaneously in ...