The Master Switch: The Rise and Fall of Information Empires - Tim Wu (2010)

Part V. The Internet Against Everyone

BY THE END OF THE FIRST DECADE of the twenty-first century, the second closing of the traditional information industries was complete. Most of the phone system was back in the hands of Bell, and its competitors were being steadily run down. A gang of conglomerates comfortably controlled film, cable, and broadcasting. And while this new order was by no means absolute, the industrial concentration had reached levels not seen since the 1950s.

The one great exception to this dominion of big business was the Internet, its users, and the industry that had grown on the network. Amid the consolidation, the 1990s also saw the so-called Internet revolution. Would it lead to the downfall of those consolidating superpowers? Some certainly thought so. “We are seeing the emergence of a new stage in the information economy,” prophesied Yochai Benkler. “It is displacing the industrial information economy that typified information production from about the second half of the nineteenth century and throughout the twentieth century.”

Unfortunately, the media and communications conglomerates didn’t consult Benkler as their soothsayer. With aggregate audiences in the billions and combined revenues in the trillions, they had—in fact, have—a very different vision of the future: the Internet either remade in their likeness, or at the very least rendered harmless to their core business interests.

For even though its origins are distinct, the Internet by 2010 had become a fledgling universal network for all types of data: phone calls, video and television, data, a potential replacement for every single information industry of the twentieth century. Technologically this was a product of the Internet’s design, conceived to be indifferent to the nature of the content carried, able to handle it all. But for the old media industries of the twentieth century, the shape-shifting nature of the Internet, its ability to be a phone, a TV, or something new, like Facebook, posed an existential threat. Hence the powerful desire to bring the network to heel, one way or another.

We now face squarely the question that the story told heretofore is meant to help us answer. Is the Internet really different? Every other invention of its kind has had its period of openness, only to become the basis of yet another information empire. Which is mightier: the radicalism of the Internet or the inevitability of the Cycle?

Chapter 19. A Surprising Wreck

On October 1, 1999, Steve Case and Gerald Levin sat together in a reviewing stand on Beijing’s Tiananmen Square, chatting about the future as they watched the long procession of troops and tanks roll by. Tiananmen Square, where these celebrations of the Communist revolution’s fiftieth anniversary were taking place, is surrounded by symbols of imperial power: the Forbidden City, home to generations of emperors, as well as the icons of the People’s Republic, including the giant portrait of Mao Zedong. The occasion was a historic superimposition of imperial spirits, for these two men, like those whose ghosts hung all around them, were also emperors of a kind: Gerald Levin ran Time Warner, the world’s largest media conglomerate, and Steve Case was president and CEO of America Online, then the single most successful Internet services firm in the world.1

The two men were in town for an event thrown by Fortune magazine commemorating the fiftieth anniversary of the Communist revolution, and watching the long parade, the two found they had much to talk about. In theory they were of rival clans, old media and new, but they found a connection. Each was an ambitious CEO with a taste for risk, but also a self-styled idealist. Both men of far-reaching vision and aspiration, they concurred in earnest that corporations, as Levin said, should be run in the public interest, to maximize long-term value, not short-term profit, the latter being the unfortunate obsession of too many American managers. Oh, and both felt they could see the future of the Internet.

Case and Levin had met briefly once before, in 1998, at a White House screening of the romantic comedy You’ve Got Mail, a Warner Bros. film that featured AOL product placement. Now as they spoke, a warm glow began to develop between a Montague and a Capulet who fantasized about all-embracing alliance between their seemingly irreconcilable houses. Theirs was to be a union that could move mountains—or at least break down the old barriers and create a perfect new world.2

The two moguls plotting the future of the Internet had something else in common: neither was what you might call a natural computer geek, in the manner of Bill Gates or Steve Jobs. Entrepreneurs like Apple’s Steve Wozniak got started by programming and soldering; Case was an assistant brand manager at Procter & Gamble in Kansas. He might have languished somewhere in upper middle management had he not resolved to grab the ring. Case took a job at a risky computer networking firm named the Control Video Corporation that had already failed twice. Three’s a charm, however: by some miracle, that firm eventually managed to become America Online.3

Once a corporate lawyer, Levin during these years was working as a cable executive. He made his name in the business as an executive at HBO, the first premium cable network, persuading cable operators to install the satellite dishes that Ted Turner would later make use of. But unlike Turner, eternally entrepreneurial and advantaged at birth, Levin had worked his way up within the system, a slow and steady rise within Time Inc. as it became Time Warner. There he became a protégé of Steven Ross, who, before dying, anointed him as successor.4

Not long after that Beijing parade, Case telephoned Levin with a proposal. And within three months of that rendezvous on the reviewing stand, on January 10, 2000, they were holding a press conference to announce their own revolution: a $350 billion merger between the world’s biggest media company and biggest Internet firm. AOL would be the engine that brought Time Warner’s old media holdings—a treasury of what was becoming known as “content”—into the new world. It was an effusive spectacle. Levin said “We’ve become a company of high-fives and hugs.” Ted Turner, the largest individual shareholder, likened it to “the first time I made love some forty-two years ago.”5

It looked as if the future had indeed arrived. To many it seemed that the Internet would eventually belong to vertically integrated giants on the model of AOL Time Warner. Here’s Steve Lohr writing in The New York Times in 2000: “The America Online–Time Warner merger [will] create a powerhouse for the next phase of Internet business: selling information and entertainment services to consumers who may tap into them using digital cell phones, handheld devices and television set-top boxes in addition to personal computers.”6 In time, it was envisioned, three or four consolidated firms—say, AOL Time Warner, Microsoft-Disney, and perhaps Comcast-NBC—would slowly divide up the juiciest Internet properties, such as Yahoo! and eBay, just as they’d already divided up the rest of the electronic media and entertainment world. In other words, Steven Ross’s media conglomerate model now seemed poised to conquer the new frontier that was the online universe.

Let’s stop for a moment to consider the world as it would look today had this expectation been fulfilled. The realm of information industries would be divided, essentially, in two: conglomerates on the one side and phone companies on the other, the rest serving as the business world’s equivalent of condiments. If it had all worked out, the new century would have begun with the world of information far more consolidated than at any time in American history.

But it didn’t work out.

Coming around the bend at full speed, AOL Time Warner ran right into a wall they didn’t even see. Soon the very name became synonymous with “debacle.” The share price plummeted, and within a short time, Case was forced out and Levin retired. Time Warner would carry on, though seriously enfeebled, while the AOL part of the operation would survive only as a zombie of its former self before being cut loose.

Ugly though the crash was, to this day, some still believe that AOL Time Warner was a good idea poorly executed. Steve Case makes this claim, as does Larry Kramer, a media analyst, writing in 2009, “One of the world’s foremost content companies was merging with one of the largest distributors of online content. Content meets customers. Sounded perfect.… The idea that you could put world-class content in front of a huge audience wasn’t a bad one.”7 Most take the opposite view—and they are far more numerous and vehement—but these critics have created a different sort of misunderstanding about the fiasco. For it wasn’t, as generally reported, just a tale of epic personality clashes and bullheadedness, however much fabulous schadenfreude and great copy that story line made for. Far more than anyone realized at the time, the human errors plaguing the firm were less to blame than the very structure of the Internet in destroying whatever advantages the merger was meant to deliver. The principle of net neutrality, instilled by the Internet’s founders, is ultimately what wrecked AOL Time Warner. And that now iconic wreck, if nothing else, would attest powerfully to the claim that the Internet was at last the great exception, the slayer of the Cycle we have been visiting and revisiting.

THE TWO SIDES

By the late 1990s, Time Warner had grown into an even larger giant than it had been under Steven Ross. It was now an empire encompassing almost every conceivable type of media. Yet as the turn of the century drew near, Ross’s successor, Levin, became convinced he had a serious problem: the Internet, or interactive sector, represented a hole in the imperial panoply of Time Warner’s media holdings; and were it not filled, it might one day be the giant’s undoing.

Time Warner’s first Internet forays proved disastrous and unintentionally hilarious: the original “Clown Co.” Robert Wright, the journalist and bestselling author, once told me a story that captures their approach to the Internet in the 1990s. In 1995, he and the editor Michael Kinsley were looking for someone to back what was to become the first online magazine, Slate.com. Time Warner was an obvious possibility, and the two managed to get a meeting with Norm Pearlstein, Time magazine’s editor in chief, and Walter Isaacson, recently appointed to establish Time Warner’s presence online. Wright remembers:

As we discussed the idea, it soon became clear there was something they didn’t quite get. He [Pearlstein] kept asking about long distance charges. They seemed to think of the Internet as something like a fax machine, and that we were going to be sending our customers the physical magazine.

In 1995, abstractions like the World Wide Web, now familiar to the world as the Internet’s content platform, had yet to penetrate Time Warner’s upper-level consciousness.

What Time Warner was doing instead was investing in a cable alternative to the Internet—one not so different from Ralph Lee Smith’s 1970 vision of what cable might become, with a pilot in Orlando, Florida. It was called the Full Service Network, an interactive form of television, allowing, for example, easy online shopping via the remote control and expanded on-demand options. But as an effort to reimagine both the computer and the Internet at once, the service never got out of Disneyland.

Meanwhile, Time Warner’s first site on the World Wide Web, Pathfinder.com, was advertised as the one that would “conquer the digital world.” It conquered only whatever doubts remained about how out of touch the conglomerate was. The idea, vaguely, was to create a “portal” whose drawing power would be access to Time Warner’s content. It doesn’t take a genius in hindsight to see the limitations of a portal lacking a search engine and featuring the content of only one firm. (Ironically, it billed itself as “Home of the Web’s most complete news, information and entertainment site.”) Needless to say, it was never to be a serious rival to Yahoo!, or later Google.8

If it had failed twice already, in a sense the merger with AOL represented a doubling down of Levin’s will to take the Web. With this already full-grown success, Time Warner would at last have an “Internet strategy,” whatever that meant. To be clearer, for Time Warner, the ultimate strategic goal of merger with AOL, the Internet’s leading on-ramp, was to drive consumers toward TW’s products. The Internet presented Levin with a great uncertainty: unlike the other channels of information, which TW owned, it was a vast new domain where eyes were free to wander toward any producer’s content. By acquiring AOL’s millions of users, TW could, in theory, expose them incessantly to TW offerings. With every click of the mouse, every AOL user would be, subtly or not so subtly, steered toward allied brands.

TW imagined taking its usual practice of steering watchers to its own content to a whole new level—to the medium destined to be the mother of them all, the Internet. It was logical in the abstract, and not without grand precedent, having been the basic model invented by Disney in the 1960s, when the Disney brothers began to realize that their films could drive customers to its merchandise and theme parks, which would in turn drive them back again to its films—a strategy Disney labeled “total merchandising.” Gerald Levin referred to this as his theory of “touchpoints,” and in business conglomerate jargon the idea went by names like “cross pollination.”9

Levin had thought up a way to ensure Time Warner’s long-term survival via a shrewd marriage. But unbeknownst to him, the bridegroom was already suffering from a progressive terminal illness. AOL had managed for the most part to keep the secret in the family, but Case and his colleagues were desperately aware that there was no logical place for AOL in the age of broadband, an age that was fast approaching. This point is technical; AOL’s illness requires a bit of explanation.

They key fact about AOL is that it came of age before the mass Internet. In the early 1990s, you dialed up not to surf unfettered but to reach AOL itself, and to talk to other AOL users. This fact can be hard to grasp for those born and bred on the Internet: AOL was, in those early days, the platform, and, in the lingo, operated as a “walled garden” for its users. It dictated what content was available to users. For example, before The Motley Fool, the investor’s guide, was a website, it was an AOL page.

In the 1990s, as the Internet began growing in popularity on college campuses, a few enterprising companies began offering home Internet service. Their popularity would eventually force AOL to change its business model, in a way that would give its millions of users direct access to the Internet, rather than merely to AOL’s walled garden. It was a decision made reluctantly, for Case and his colleagues knew that Internet access would cost them control over their customers. Nevertheless, with the new Internet Service Providers (ISPs) nipping at their heels, the company changed from being primarily an online service company to primarily an Internet Service Provider.

At first, during the 1990s, the strategy worked brilliantly. Everyone wanted to see what the Internet was all about, and AOL was the easiest way to get there, because they put a CD in everyone’s mailbox (free samples being one of the things Case learned about in his former career as marketing manager at P&G). In this sense AOL was a major part of the mass Internet revolution.

The problem for AOL as the 1990s became the 2000s was that a new way of reaching the Internet was on the horizon: broadband. The cable and phone companies had figured out how to get higher speeds out of the same old cable and phone lines, and they were offering customers a fast and direct Internet connection. Unfortunately for Case & Co., broadband service, by design, made AOL unnecessary. AOL’s business model was premised on “dial-up”—on calling AOL to reach the Internet. On the phone company’s new Digital Service Lines (DSL) and on cable broadband, the phone and cable companies offered customers the Internet directly, cutting out Internet Service Providers like AOL.

To understand what happened to AOL, imagine that the firm had been in the business of delivering pizzas by bicycle, until one day the pizza company bought its own fleet of cars. That is what the telephone and cable companies did to AOL. The diagrams below make clear the redundancy and inferiority of AOL’s core business in the new technological order. If AOL was to have any chance of surviving, it would have to acquire its own fleet of cars, and fast.

What AOL was

It is a strange thing to contemplate: in 2000, AOL was seen as the “new media” company, meant to reinvigorate the “old media” fossil Levin feared Time Warner would become. In fact, however, AOL was the dinosaur limping into the new age. Getting its own cable wires was a matter of life and death, and merging with Time Warner was a way to get those. More cynically, you might say that Steve Case, who understood AOL’s problems, picked his moment to cash in on his company’s literal and figurative stock at the moment when it could go no higher. Within a year of the merger, as the dot-com boom went bust, AOL would be worth considerably less than its lifetime high of $240 billion.10

In 2000, AOL and Time Warner were hardly alone in thinking that massive media integration would be the key to the future of the Internet. Microsoft, from the mid-1990s onward, was convinced of the imperative to own both distribution and content. From its vast cash reserves, the software giant invested heavily to take a 50 percent stake in a new cable channel, a joint venture with the peacock network, called MSNBC, conceived as a rival to CNN. It also began putting money into computer games via the Xbox, and it created an online service, MSN, to mimic the lustrous but doomed model of AOL, as well as developing new, signature content. Wright and Kinsey, for instance, would ultimately find their backer for Slate magazine not in a traditional media company but in Microsoft, who invested more than $20 million in the venture. Meanwhile Comcast, the cable provider founded in 1963, began an effort to merge with Disney to create a whole new Internet—media behemoth. The race was on.

Informed and well-capitalized opinion had it that history was repeating itself. Had the idea of these giants to stand on one another’s shoulders panned out, the combined media-Internet world would have been dominated by the handful of conglomerates then already beginning to buy up the most important websites. The early 2000s might have turned into a war of accumulation among three vertically integrated great powers: Microsoft-GE (NBC’s parent), AOL Time Warner, and Comcast-Disney. Eventually everything on the Internet would have been owned by one of them.

That would have made for a tidier information economy, centered mainly on two mega-industries: the media conglomerates and the telephone companies. But something went wrong. Microsoft stopped buying media. Disney rejected Comcast’s merger offers. And AOL Time Warner became the textbook example of what not to do—as Ken Auletta calls it, “the Merger from Hell.”11

WHAT HAPPENED?

The books about the AOL Time Warner saga are the work of business reporters and as such tend to focus on the personalities, clashes of corporate cultures, and terse boardroom encounters. Steve Case was wily enough to see the sand running out of AOL’s hourglass, so he sold, or bought, when he could. Gerald Levin, head of Time Warner, was brash and impatient at the failure of his firm to conquer the Internet, and as a consequence was had. Some commentators blame Time Warner’s units for being slow to adjust, as they were dragged kicking and screaming into a new media environment. (Perhaps some were still worried about incurring long distance charges!) While Case and Levin continued to get along well enough, they failed to see how the world of AOL might not meld with that of Time Warner—another leitmotif in every chronicle of a failed merger foretold.

It is true that organizational incompetence and the problems naturally attending megacombinations can’t be discounted. Time Warner, for instance, continued to run a service that competed with AOL, named Road Runner. The reason was that, as a condition of the merger, the Federal Trade Commission, the antitrust enforcement agency, and the FCC required TW to provide consumers with a choice of ISPs; yet the consequence was that AOL’s greatest competitor for cable internet customers was another division of its parent company.12 There is nevertheless ample reason to believe that even if the two cultures had meshed like Cheech and Chong under an organizational genius to rival Jack Welch, much the same failure would have eventually resulted. There were deep structural problems that neither Case nor Levin nor many others fully comprehended at the time. It was, in a sense, a failure to understand the deep structure of the Internet.

The AOL–Time Warner fusion made sense only if the giant could find some way to induce among the existing customer base of each division a discriminatory preference for the other’s products. In other words, consumers of Time Warner products had to be persuaded to become AOL users and AOL users made to pay for Time Warner content. In 2001, AOL had nearly 30 million subscribers, a huge headcount for any information commodity, described by BusinessWeek at the time as a “juicy prize.”13 The plan was that those subscribers would be directed and exposed to Time Warner’s offerings: its content, its cable TV, and its Internet services. That experience would prove so agreeable that, in theory, it would result in a feedback loop, creating even more AOL subscribers. The only problem with this idea was the Internet. Neutral by design, it did not take naturally to the imposition of such a regime.

It might have worked back in the early 1990s, when AOL refused its subscribers access to the Internet beyond its walled garden. The original AOL could have simply restricted all comers to Time Warner content, rather as McDonald’s serves only Coca-Cola products and not Pepsi’s. But by 2000 AOL was less a destination in itself—the platform that it had been—than simply the most popular way to reach the Internet. While it could boast 30 million subscribers, it could exercise no meaningful control over them. Once online, a user could go wherever he wished, the Internet being set up to connect any two parties, whoever they might be. The rise of search engines and domain names would only exacerbate the problem. Type in Yahoo.com or Google.com, and the whole world of the Internet opens up before you; it scarcely matters by what ISP you have reached that point. At most, AOL could recommend Time Warner content to anyone logging on, but it was almost immediately clear that that dividend was not worth much (not much more than a pop-up ad, actually).

It may seem astonishing that anyone of Gerald Levin’s considerable experience and business acumen could have failed to grasp this problem. Levin, moreover, did not consider himself an enemy of the Internet; he described it in 2010 as “a beautiful thing.” Yet for many people, the Internet’s structure was—indeed remains—deeply counterintuitive. This is because it defies every expectation one has developed from experience of other media industries, which are all predicated on control of the customer. Levin, an apostle par excellence of that control model, fell victim to Schumpeter’s observation that “Knowledge and habit once acquired, become as firmly rooted in ourselves as a railway embankment in the earth.” Unlike any medium Levin had known, the Internet abdicates control to the individual; that is its special allure, its power to be endlessly surprising, as well as its founding principle.

Other factors may well have clouded Levin’s judgment. There are few intoxicants like the prospect of easy money, and that’s what the billions in IPO dollars then raining down on nobodies in Silicon Valley must have looked like. Nor can be discounted the recurring theme of this book: the lure of information empire. In 2010, Levin described to me the condition of being a CEO as “a form of mental illness,” with the desire for never-ending growth as a kind of addiction. As he said, “there’s something about being able to say, ‘I’m the CEO of the world’s largest media company.’ ”

Was there any way for AOL Time Warner to work? The firm would have needed to change the nature of the Internet itself, transforming the network into one on which “foreign”—i.e., non-TW—content could be blocked or discriminated against. Alternatively, the company could have sought control over Internet’s “openers”—namely, the search engines that were giving users what they wanted. AOL Time Warner needed to subdue Google, Yahoo! and their many cousins. In short, to be viable, the firm would have needed to overturn the net neutrality principles at the core of the Internet’s design.

The only entity that has so far really succeeded in such a mission is the government of mainland China, as we saw in 2010, when it drove an exasperated Google out of its sovereign territory by demanding extensive control over what Google let users find. Indeed, the feat requires such power and resources as belong uniquely to the state: access to the very choke points of a nation’s communications infrastructure, its Master Switch.14 AOL Time Warner, however vast, did not have police power—it could not imprison Google’s executives for failing to block Wikipedia or Disney content.

In any event, by 2000 the death spiral that Case had feared was already under way. AOL’s huge customer base stopped growing and then started to decline as the cable and telephone companies began to deploy broadband services in earnest. Those who quit AOL for broadband had no reason to come back, and every defection pounded another nail into AOL’s coffin. The company would make various desperate attempts at survival through self-reinvention. In 2004 it tried to differentiate its service with AOL Optimized 9.0, whose bells and whistles included personalized audible greetings for the subscriber. The next year, in a joint venture with a division of Warner, AOL founded the celebrity news site TMZ.com, attempting to identify its brand with the creation of content. The next year they stopped charging for email accounts to stanch the loss of customers to Hotmail, Yahoo! and other free providers.

But it was all for naught: on December 9, 2009, just one month shy of their tenth anniversary, the disastrous marriage of AOL and Time Warner ended in divorce.

In the aftermath of the calamity, both Levin and Case departed the company. Levin quit high-stakes business altogether, becoming director of the Moonbeam sanctuary, a spiritual wellness retreat for executives in Southern California. It seems to have had an effect, for to meet Levin nowadays is to meet a man with a steady, Buddha-like gaze and a slow voice. He told me that anyone running a media company should only do so “in service of a higher purpose.”

Case stayed in Washington, D.C., where he oversees a private equity firm called Revolution LLC; its stated mission is in part “to drive transformative change by shifting power to consumers and building significant, category-defining companies in the process.” He remains one of Time Warner’s largest stockholders.

Angry recriminations would be voiced for some time on the Time Warner board; in particular by the never shy Ted Turner, who is reported to have lost around $7 billion, most of his personal worth, to the merger. Time Warner’s people continue blame Levin for making such a bad deal, and Steve Case for being the serpent in the old media garden. For their part, AOL, as of this writing newly single and still adjusting to the post-traumatic stress, has rebranded itself “Aol.” It blames Time Warner’s inflexibility and hidebound reluctance to truly embrace the online world.

This anger, though understandable and predictable, as with any failed union, is ultimately misdirected. It rightly belongs with J.C.R. Licklider and Vint Cerf. Without specifically intending to, the founders of the Internet had foreordained by the radicalism of their conception that Levin and Case’s great image of the future would have—despite its head of gold, its belly of brass, and legs of iron—feet of clay.

The design of the Internet blesses some companies and curses others. For if net neutrality destroyed the value of AOL Time Warner, it would catapult to riches the likes of Google and Amazon, firms that, far from discouraging or circumscribing consumer choice, would aim to put everything one could want within easy reach. In this fulfillment of the Net’s dream of connecting any user with any other, comes the power behind the great business success stories of the still young Internet age. In such a world, the advantage of owning everything from soup to nuts is far from evident; it may be no advantage at all.

In 2008, at Revolution headquarters, I asked Case whether he regretted the merger. “Yes,” he said, without hesitation. What would he have done differently? Acknowledging that nonintegrated, or “pure play,” firms like Google would in the end succeed where AOL failed, Case has a different vision in hindsight: “I would have bought Google.”

In some sense the work remaining to our story is to assess the merits of that answer.