DSL Prime: AOL's Death Revisited

Bad government policies assassinated what was once the world's largest ISP.

by Dave Burstein of DSL Prime and Future of TV [July 13, 2006]

"You have to choose your battles"
—FCC Chairman Bill Kennard in 2000, discussing choices critical to AOL

I headlined the March 1, 2004 issue of DSL Prime "As AOL Dies," adding "I hope I prove wrong." Now, AOL is abandoning the ISP business in the United States.

I wrote then, "AOL probably died on February 1, 2004 when they stopped offering DSL or cable service. Not long ago in control of one third of the Internet, it will take a miraculous recovery to allow more than a small fraction of the company to survive. In two years or five, only a shell is likely to remain."

Thousands are about to be fired, and the rest have to hope an advertising based business will support them. AOL was assassinated by bad policy, as I discuss at the end of this issue.

VDSL isn't ready to conquer all, folks protested, claiming "ADSL is so last century," is unfair. VDSL2 deliberately included all the features of ADSL2+, so why not use it everywhere, some think. ADSL supporters, selling tens of millions of chips, wrote back that VDSL2 has no interesting advantages beyond a mile or so, takes more power, space, and cooling, and costs more. As the market shifts to $10 per month DSL (India's added a million lines), even a small difference in price matters. The ADSL/VDSL crossover will take time, even if the seven promised VDSL chips drive down prices.

Australia's Comm Minister Helen Coonan is ready to call Telstra's bluff. She's encouraging nine carriers to join together and build what Sol Trujillo won't. SingTel/Optus is ready with a billion and Telecom New Zealand also has funding. Macquarie Bank, part of the deal, led a $7 billion bid for PCCW and almost bought Eircom. If the incumbents don't offer 21st Century service, governments need to find a solution. Or maybe it doesn't matter if Australia, Germany, Canada, and three-quarters of the United States have second rate internet service.

Editorial: AOL's Death Revisited
AOL was assassinated by bad policy. Regulation does matter
Policy is boring, and old policy even more so. I'm returning to why AOL died because we now have to deal with the aftermath. Time Warner will salvage what they can. Google surprised everyone I know, and AOL has at least a chance to make a go of the ad business. Meanwhile, the remaining dialup customers are extremely profitable, costing $4 to $8 per month to service and bringing in cash for a transition.

I wrote in 2004 that Mike Powell's inactions make him the executioner of AOL. His predecessor, Bill Kennard, discussed with me the problem of ISP death back in 2000. If the telcos were allowed to continue pricing with no margin allowed for ISPs, and cable wasn't effectively opened, prospects were dismal.

"You have to choose your battles," Kennard explained as we went over the details of telco wholesale pricing. He chose not to directly challenge wholesale tariffs on the then new DSL service. Instead, he required Verizon and SBC to offer DSL through a separate subsidiaries that had to pay the wholesale rates. Massive losses in the subsidiary would expose the cross-subsidy and force them to change the pricing structure. Beyond that, as part of the Ameritech merger, SBC was required to actively compete in 30 metros across the country as a CLEC under risk of billions in fines for non-compliance. Verizon, to take over GTE, agreed to invest hundreds of millions in out-of-district services. The two giants would be CLECs in most of the country, giving political power that would force reasonable wholesale terms.

Kennard is possibly the smartest man I've met in telecom, and certainly the most decent. Yet by late 2000, his planning was undermined as Rhythms, NorthPoint, and Covad fell towards bankruptcy. AT&T, then still a cable power, decided to give up market share and go for profit instead. This took the pressure off Verizon and SBC, who renounced their national plans.

Early in 2001, SBC actually raised broadband prices. When Powell did nothing, the cablecos and Verizon soon followed with price increases as well. That price increase is the primary reason the U.S. fell from world leader in broadband to parity with Estonia. When Powell took over, competition could only be preserved by strong action. This conflicted with Powell (and Bush's) belief in the limited role of government.

In 2006, Kevin Martin faces the same conflict. He does not believe in strong government action. His goal, a great fast internet, affordable to all Americans, will not be achieved unless he takes strong action. The AT&T/BellSouth merger decision is the best opportunity he will have to get results. Next issue, I'll write about what he could achieve if he has the courage.

Copyright 2006 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

"The power of the printing press belongs solely to those who own the presses"
—A.J. Leibling

The Internet is the cheapest printing press ever invented.

Related articles:
	[March 1, 2004]	DSL Prime: As AOL Dies
	[Feb. 19, 2004]	AOL, Feeble Giant