AOL says access won't derail deal

Summary:Concerns that a merger of America Online and Time Warner would limit Net access choices is belied by intense competition, executives argue.

America Online Inc. and Time Warner Inc. insist they will be able to negotiate an agreement with regulators to allow their merger to proceed, although the terms under which Time Warner's cable systems are opened to Internet competitors are likely to be a major sticking point.

Negotiations between the companies and the Federal Trade Commission, which is conducting an antitrust review of the deal, have focused on the so-called open access issue. The FTC isn't convinced that public pledges by both companies to open their cable systems go far enough and has investigated how such access could subtly be inhibited.

The one Internet competitor to so far strike an access deal with Time Warner -- Juno Online Services Inc. -- said Tuesday it would like an agreement that guarantees Juno will pay the same price for access to Time Warner cable lines as AOL (aol) ends up paying. Juno (jweb) hasn't finalized the terms of its deal, announced several weeks ago and since heralded by AOL of Dulles, Va., and Time Warner (twx), of New York, as proof of its commitment to open access.

"In the absence of genuine competition, what assurance can a purchaser like Juno have that they will make rates competitive over time?" asked Juno CEO Charles Ardai in an interview.

Stocks of both AOL and Time Warner fell in the wake of reports that the FTC had raised serious antitrust concerns. In 4 p.m. New York Stock Exchange composite trading Tuesday, Time Warner fell $2.50 to $81.50, and AOL fell 56 cents to $57.19. Both stocks are trading well off their 52-week highs.

The FTC has signaled that the AOL-Time Warner merger would violate antitrust law because it marries AOL's dominant position in Internet service with Time Warner's cable systems, which would dominate broadband Internet access in the cities they serve. As a result, it is demanding that the merging companies provide nondiscriminatory access to competitors.

But Time Warner believes the FTC can't defend that argument. That is because Time Warner sees the market as made up of many competitors, including "dial-up" access services, which is the way most people currently get Internet service as well as high-speed or "broadband" services.

And even if the market is defined only as broadband access, other competitors are entering that market, including high-speed digital subscriber line (DSL) service from telephone companies and satellite service. At the same time, because the market is still forming, the FTC would be forced to argue that potential competition would be harmed, which can be a tricky case to make in court.

Now, the struggle is over the details of how to accomplish open access and whether such crucial issues as pricing and terms would be spelled out by regulators or by commercial negotiation.

How far either side is willing to go in settlement talks -- and who blinks first -- is a calculation based in part on how strong a case the companies think antitrust enforcers can make in court. In order for the FTC to block the deal, the agency would have to seek a preliminary injunction in federal court in Washington.

A spokesman for Time Warner said the companies' conversations "with the agencies reviewing the merger are proceeding well and have been constructive. We are confident that we will successfully address all of the issues that have been raised in the review and we are on track to close in the fall." AOL said it concurred with the statement.

Some observers say the FTC may just be trying to put public pressure on the companies and that AOL and Time Warner will eventually negotiate a consent decree, which makes some commitments for open access.

But a person familiar with the situation said regulators may seek to extract another concession -- such as requiring AOL to sell its stake in Hughes Electronics Corp., a unit of General Motors Corp. -- noting this wasn't a major issue for the companies or the FTC. The Federal Communications Commission, however, is looking at the issue. Hughes Electronics owns satellite TV operator DirecTV.

In a two-page statement outlining their commitment to open access issued in February, the companies pledged not to discriminate in the "economic arrangements" on access for rival Internet competitors. But in the statement, the companies left room to negotiate different Internet service provider access deals separately, noting "the economic arrangements . . . will vary depending on a number of factors (such as the speed, marketing commitments and nature and tier of the service desired to be offered)."

One observer noted Time Warner doesn't negotiate identical deals for carriage of cable programming on its cable systems and wouldn't likely agree to identical terms for Internet access unless the entire cable industry was regulated that way.

Still, rival companies are likely pressing the FTC to require such commitments.

"It would be very simple: You could say AOL and Time Warner agree to treat all content the way they treat their own with regard to technical capabilities of the system," said Preston Padden, executive vice president of government relations for Walt Disney Co. Disney (dis) has been lobbying hard for tough conditions to be imposed on the merger to prevent the combined company discriminating in favor of AOL-Time Warner content.

Juno's Ardai said many details of its agreement with Time Warner haven't been fleshed out, although a preliminary deal is based on sharing advertising and subscription revenue that Juno generates over Time Warner's high-speed cable lines.

He said Juno is still waiting to hear where it will be able to connect to the Time Warner cable network. He said Juno would prefer to place equipment that accesses the cable network in central offices rather than have to put machines in multiple, far-flung locations. "The question is: How far downstream do we have to put in equipment?" Ardai said.

The commitment to open access by AOL and Time Warner, as outlined in the February document, lacked enforceability, some analysts point out. "The rub is whether or not they'll do it and do it consistently," said Scott Cleland, CEO of Precursor Group, an independent research company in Washington.

Some say codifying such issues will be tricky because the business of delivering Internet over cable lines is in its infancy. "It's not likely to work because no one really knows what broadband should or will look like," said former FCC Commissioner Reed Hundt.

Merrill Lynch analyst Henry Blodget said he believes that conditions on open access won't affect the merged firms' financial future. "Right now there's a lot of noise around the progress of the merger closing process and people tend to forget that all of this was expected and is totally par for the course," he said.

-- John R. Wilke contributed to this article.

America Online Inc. and Time Warner Inc. insist they will be able to negotiate an agreement with regulators to allow their merger to proceed, although the terms under which Time Warner's cable systems are opened to Internet competitors are likely to be a major sticking point.

Negotiations between the companies and the Federal Trade Commission, which is conducting an antitrust review of the deal, have focused on the so-called open access issue. The FTC isn't convinced that public pledges by both companies to open their cable systems go far enough and has investigated how such access could subtly be inhibited.

The one Internet competitor to so far strike an access deal with Time Warner -- Juno Online Services Inc. -- said Tuesday it would like an agreement that guarantees Juno will pay the same price for access to Time Warner cable lines as AOL (aol) ends up paying. Juno (jweb) hasn't finalized the terms of its deal, announced several weeks ago and since heralded by AOL of Dulles, Va., and Time Warner (twx), of New York, as proof of its commitment to open access.

"In the absence of genuine competition, what assurance can a purchaser like Juno have that they will make rates competitive over time?" asked Juno CEO Charles Ardai in an interview.

Stocks of both AOL and Time Warner fell in the wake of reports that the FTC had raised serious antitrust concerns. In 4 p.m. New York Stock Exchange composite trading Tuesday, Time Warner fell $2.50 to $81.50, and AOL fell 56 cents to $57.19. Both stocks are trading well off their 52-week highs.

The FTC has signaled that the AOL-Time Warner merger would violate antitrust law because it marries AOL's dominant position in Internet service with Time Warner's cable systems, which would dominate broadband Internet access in the cities they serve. As a result, it is demanding that the merging companies provide nondiscriminatory access to competitors.

But Time Warner believes the FTC can't defend that argument. That is because Time Warner sees the market as made up of many competitors, including "dial-up" access services, which is the way most people currently get Internet service as well as high-speed or "broadband" services.

And even if the market is defined only as broadband access, other competitors are entering that market, including high-speed digital subscriber line (DSL) service from telephone companies and satellite service. At the same time, because the market is still forming, the FTC would be forced to argue that potential competition would be harmed, which can be a tricky case to make in court.

Now, the struggle is over the details of how to accomplish open access and whether such crucial issues as pricing and terms would be spelled out by regulators or by commercial negotiation.

How far either side is willing to go in settlement talks -- and who blinks first -- is a calculation based in part on how strong a case the companies think antitrust enforcers can make in court. In order for the FTC to block the deal, the agency would have to seek a preliminary injunction in federal court in Washington.

A spokesman for Time Warner said the companies' conversations "with the agencies reviewing the merger are proceeding well and have been constructive. We are confident that we will successfully address all of the issues that have been raised in the review and we are on track to close in the fall." AOL said it concurred with the statement.

Some observers say the FTC may just be trying to put public pressure on the companies and that AOL and Time Warner will eventually negotiate a consent decree, which makes some commitments for open access.

But a person familiar with the situation said regulators may seek to extract another concession -- such as requiring AOL to sell its stake in Hughes Electronics Corp., a unit of General Motors Corp. -- noting this wasn't a major issue for the companies or the FTC. The Federal Communications Commission, however, is looking at the issue. Hughes Electronics owns satellite TV operator DirecTV.

In a two-page statement outlining their commitment to open access issued in February, the companies pledged not to discriminate in the "economic arrangements" on access for rival Internet competitors. But in the statement, the companies left room to negotiate different Internet service provider access deals separately, noting "the economic arrangements . . . will vary depending on a number of factors (such as the speed, marketing commitments and nature and tier of the service desired to be offered)."

One observer noted Time Warner doesn't negotiate identical deals for carriage of cable programming on its cable systems and wouldn't likely agree to identical terms for Internet access unless the entire cable industry was regulated that way.

Still, rival companies are likely pressing the FTC to require such commitments.

"It would be very simple: You could say AOL and Time Warner agree to treat all content the way they treat their own with regard to technical capabilities of the system," said Preston Padden, executive vice president of government relations for Walt Disney Co. Disney (dis) has been lobbying hard for tough conditions to be imposed on the merger to prevent the combined company discriminating in favor of AOL-Time Warner content.

Juno's Ardai said many details of its agreement with Time Warner haven't been fleshed out, although a preliminary deal is based on sharing advertising and subscription revenue that Juno generates over Time Warner's high-speed cable lines.

He said Juno is still waiting to hear where it will be able to connect to the Time Warner cable network. He said Juno would prefer to place equipment that accesses the cable network in central offices rather than have to put machines in multiple, far-flung locations. "The question is: How far downstream do we have to put in equipment?" Ardai said.

The commitment to open access by AOL and Time Warner, as outlined in the February document, lacked enforceability, some analysts point out. "The rub is whether or not they'll do it and do it consistently," said Scott Cleland, CEO of Precursor Group, an independent research company in Washington.

Some say codifying such issues will be tricky because the business of delivering Internet over cable lines is in its infancy. "It's not likely to work because no one really knows what broadband should or will look like," said former FCC Commissioner Reed Hundt.

Merrill Lynch analyst Henry Blodget said he believes that conditions on open access won't affect the merged firms' financial future. "Right now there's a lot of noise around the progress of the merger closing process and people tend to forget that all of this was expected and is totally par for the course," he said.

-- John R. Wilke contributed to this article.

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