Arnold Kling

Polar Visions

Arnold Kling, Great Questions of Economics
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If you want to see visions of the Internet that are polar opposites, read this Fortune recent article on America Online's goal and then compare Bob Frankston's essay from last October.

AOL offers this scenario for the future:

Imagine a customer who pays AOL $24 a month for the basic subscription, plus around $30 a month for broadband service... it can then persuade him to pony up another $30 for a special "family plan" that lets the whole household use AOL at the same time...another $20 a month so that he can download unlimited jazz onto the stereo's hard drive... another $15 ordering up interactive games... another $40 a month for unlimited voice and wireless calls... and pretty soon you're closing in on $159 per month.

This prospect strikes me as rather dubious. These services are available today from separate providers at lower prices.

It seems to me that the only way AOL can ever get away with this sort of pricing is if competitors are shut out from offering similar services to AOL customers. Frankston argues that this is exactly the problem with integrated companies. Referring to existing telephone and television companies, he says,

As long as we allow the incumbents to use their control over both connectivity and services/content to thwart competition in services/content, we will suffer economically...Just as the FCC required that television networks divest themselves of the production companies we need a period during which the connectivity business and the services/content business are distinct.

What Frankston is saying is that what consumers need is not television or telephony but connectivity. Once the consumer has a broadband connection to the Internet, that connection can be used for telephony, television, or other services. For now, however, the cable television industry wants its wires to carry television programs as a top priority, and the telephone industry wants its wires to carry voice phone calls as a top priority.

AOL seems to be taking a more eclectic view of connectivity--in fact there is no reason why their futuristic scenario could not include a television subscription as well. But apparently Frankston believes that for now consumers would be better off if AOL were prevented from combining the connectivity business with the content and services business.

Discussion Question. Is it really feasible to draw a distinction between "pure connectivity" and services? If so, what are the pros and cons of prohibiting companies from providing both?

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