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AOL broadband business model about to change

The top executives at AOL Time Warner and Comcast probably did not feel like heavyweight boxers as they hammered out last week's deal for the looming AT&T Comcast cable television giant to distribute the America Online Internet service.

And yet, the agreement may represent a technological transition point in the cable TV business as important as the "Thrilla' in Manila" heavyweight title fight in the Philippines 27 years ago.

Internet technology could now create the same kind of era-defining shift in cable television that satellites did back then. And for the media industry, the big question is which sorts of companies can benefit most from this transition -- the companies that operate the cable systems, or the ones that provide the "content."

When Muhammad Ali defeated Joe Frazier on Sept. 30, 1975, in Manila, the fledgling Home Box Office network beamed the fight to cable television operators in the US. It was the first time a cable network used satellite technology to distribute live programming to affiliates around the nation. Viewers, who up to that point had considered cable mainly a means to better reception of local broadcast stations, soon realized that cable operators could provide original programming available nowhere else.

Just as important, cable operators soon realized that their success hinged on their relationship with the providers of that programming. As networks like HBO, ESPN and CNN blossomed in the late 1970s and early 1980s, they attracted millions of households to cable for the first time.

The top executives at AOL Time Warner -- which owns HBO, among other cable channels -- now hope that its America Online unit can fit into a similar mold. After years of insisting that America Online had to "own" its customers and trying unsuccessfully to persuade cable operators to lease the use of their lines as "dumb pipe" for high-speed Internet access, AOL Time Warner's executives came to a realization this summer: The only way to persuade AT&T and Comcast to distribute the cyberspace service over their cable lines was to package America Online as if it were a premium movie channel.

It is a wholesale shift in America Online's business model and presumably for its future prospects. The new approach means that viewers who use the America Online service over the cable lines of the combined AT&T Comcast will be billed by AT&T Comcast -- not by America Online -- the way the price of HBO is included in a customer's cable bill, rather than the customer receiving a separate invoice from HBO.

In other words, the high-speed AOL customer will be as much the cable company's customer as they are America Online's. Customers who sign up for the AOL service will have their cable modem installed by AT&T Comcast.

And when a customer buys something on AOL -- online transactions are expected to play a big role in AOL's future -- AT&T Comcast will receive a cut of that revenue. This arrangement is comparable to the way cable operators now generally receive two minutes of advertising time for their own use for every hour of a cable network's programming they carry.

What all this means is that, a few years out, the question of whether last week's deal was a good one for AOL Time Warner will probably depend on whether the America Online unit can create the Internet equivalent of must-have offerings like The Sopranos and Sex and the City.
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