|Partners face high price of doing business with online giant |
By Jim Hu and Mike Yamamoto
Staff Writers, CNET News.com
March 1, 2000, 4:00 a.m. PT
Mark Elderkin thought an eight-year relationship with America Online would get him better terms when renegotiating his contract. He was wrong.
The president of Online Partners recently got into a bitter contract dispute with the Internet giant involving OnQ, a gay and lesbian online community his company is acquiring. America Online insisted that OnQ--which has resided on AOL since 1992--refuse all advertising from Internet service providers deemed competitors, Elderkin said.
"It seems funny to me that they want to take so much control over our business and restrict what we do," he said. So he decided to sever his "132"="" border="0" align="left" hspace="5" vspace="5" alt="Regardless if AOL's putting pressure or not, there's a fear of losing business. Many don't want to risk that relationship.">
company's ties with AOL and go it alone.
Such is the price of doing business with the world's largest online service. At least two companies that have ended long-standing distribution deals with AOL allege that the online monolith routinely bullies smaller businesses into accepting contractual limits involving other ISPs, according to interviews and correspondence forwarded to CNET News.com. Others have left the service because it found AOL's terms too stringent or expensive.
Legal experts say AOL's demands do not appear to violate any laws, but some believe that the company is risking a backlash among its smaller partners. Just last month, AOL was hit with a class-action lawsuit alleging that
its new software surreptitiously disables connections to other ISPs.
Moreover, the accusations are emerging at a critical juncture for AOL, whose proposed merger with Time Warner is being examined by federal regulators. Although it has eluded the kind of antitrust scrutiny brought upon the likes of Microsoft and Intel, AOL will likely face increasing pressure over its market domination if content-related mergers continue to concentrate media power into a handful of large corporations.
"We've already seen the Internet go through dramatic transformation because of the role of advertising and marketing. Media consolidation will only accelerate that process," said Jeff Chester, executive director of the nonprofit Center for Media Education. "Those Web sites that don't have resources to market themselves like big media companies will fade into the digital twilight."
The lesson, if there is one, could be learned from the so-called old media. "Whenever (content) becomes very important to a commercial merchandiser, I
think we have to be a little fearful," said Ben Bagdikian, professor emeritus at the University of California at Berkeley and author of "The Media Monopoly." "That influence will be used to discourage individual noncommercial use."
AOL denies that it has done anything improper, let alone illegal, in its negotiations with partners, though it declined to discuss any particular contract. Spokesman Andrew Weinstein noted only that AOL was "unable to find a mutually acceptable resolution to the outstanding issues" regarding OnQ.
Others say smaller businesses have little choice but to meet AOL's demands or face relative obscurity by losing such high-profile exposure. As companies such as AOL have emerged as the standard-bearers of the Internet, clout has become an undeniable factor in determining who gets which pieces of their valuable real estate--and at what price.
AOL has encountered antitrust concerns before, in the online gaming market. Kesmai, a subsidiary of Rupert Murdoch's News Corp., sued AOL in 1997 charging "flagrant violation of federal antitrust laws" but later settled the case for undisclosed terms. Another gaming company, MetaCreations, blasted AOL that same year for abruptly canceling its contract after demanding "excessive fees, when none were previously charged."
Content partners essentially rent space in topic areas on AOL's subscription-based service, often in multiyear, multimillion-dollar deals.
In return, they get exposure to an AOL membership that leads all ISPs, with 21 million subscribers. CNET, publisher of News.com, is a paying tenant on AOL's Computing channel.
"AOL's a pretty strong force out there," said Danny Robinson, whose company powers BlueLight.com, the free ISP offered by Kmart and Yahoo. "Regardless if AOL's putting pressure or not, there's a fear of losing business. Many
don't want to risk that relationship."
Robinson, chief executive of Spinway.com, said he has not witnessed any strong-arming by the online giant. But he and others say content companies are wary of striking deals with Net access services that AOL views as competition.
Latest demands called "escalation"
Elderkin said AOL has always restricted content partners with conditions in their contracts. But he said the demands asked of OnQ were an "escalation" of AOL's existing restrictions.
In one email exchange, an AOL account manager asked OnQ to remove a link to Gay.com, another site owned by Online Partners. Gay.com was offering a free-ISP promotion by 1stUp.com that was deemed "competitive" to AOL.
"I have no problem with continued linking to Gay.com to supplement content offerings, but the FREE ISP references and Pop-up must be struck on the site since it is competitive with AOL," the account manager wrote. "We don't allow other partners to do this and cannot allow OnQ."
In addition, Elderkin said AOL instructed OnQ to stop offering free ISP deals of its own. Online Partners is acquiring QView, the parent company of OnQ.
AOL spokesman Weinstein said OnQ has ended its partnership but would not confirm the contents of the emails or comment further on the negotiations.
According to a second email correspondence, a QView representative argued that PlanetOut, which has an investment from AOL, regularly runs a "Free Internet Access" ad banner.
The account manager responded: "As for PlanetOut promoting a free ISP from their AOL mirrored site aol.planetout.com, I will follow up with them directly. They are fully aware they can't do that?"
Megan Smith, chief executive of PlanetOut, confirmed that the gay and lesbian site carried advertising from free ISP WorldSpy. But she said the co-branded AOL-PlanetOut site would not sell ad space to a rival ISP because it is prohibited by contract.
"It's standard AOL policy to ask all their partners to not directly solicit on AOL's service in its partner area for people to go to other ISPs," Smith said.
Rather than agree to the restrictions, Elderkin said Online Partners decided to part ways with AOL and build its own presence on the public Web.