FTC approves AOL-Time Warner deal

The 5-0 decision represented the most significant regulatory hurdle yet to AOL (aol) and Time Warner (twx) in their prolonged attempt at approval for their business combination, one of the largest in corporate history.

Government regulators had been lobbied heavily by rivals such as Walt Disney, which contended that the merger would create an unfair media monopoly. The deal still faces review from the Federal Communications Commission.

"In the broad sense, our concern was that the merger of these two powerful companies would deny to competitors access to this amazing new broadband technology," Robert Pitofsky, chairman of the FTC, said in a statement. "This order is intended to ensure that this new medium, characterized by openness, diversity, and freedom, will not be closed down as a result of this merger."

The agreement was expressed as a consent order between the FTC and the companies. Under the terms of the deal, AOL Time Warner, as the combined company would be:

forced to offer one rival broadband ISP access to its cable system before AOL can begin such a service, followed by at least two additional services with 90 days;
prevented from disrupting the flow of content being served to consumers through rival ISPs and/or rival interactive TV services on its network; and
required to offer AOL's digital subscriber line (DSL) services equally to subscribers in areas where Time Warner does and does not offer cable broadband service.

Analysts said AOL made significant trade-offs to get the merger approved.

"The deal says the FTC and AOL negotiated in good faith and made a number of substantive concessions," said Jordan Rohan, an analyst at Wit SoundView.

The deal combines the world's largest ISP with the world's largest media company.

AOL has about 29 million subscribers and also runs instant messaging services and Netscape NetCenter.

Time Warner's cable network reaches 20 percent of cable homes in the United States, trailing only AT&T in its reach. It owns film and music studios, cable, and TV broadcasting properties HBO and CNN, and publishes Time and People magazines.

The companies had expected to close the merger in the fall, but the FTC delayed its vote until AOL and Time Warner gave more firm assurances that they would open their cable network to rival Internet service providers.

In November, the companies inked a deal with ISP EarthLink Network Inc. (elnk), largely viewed as a concession to the FTC for approval.

Last night, AOL formally offered the FTC additional terms on access and other issues in a bid to win approval, according to reports.

Now it's up to the FCC to vote on the merger. The roles of the two commissions are different, and their reviews are focusing on separate aspects of the merger.

The FTC put open access front and center in its review. The FCC will evaluate AOL's dominance in instant messaging, among other issues, sources said.

The FTC generally reviews issues that involve a direct commercial effect on competition under antitrust law. The FCC also examines competition in a merger review, but under the broader mandate of whether the merger serves the public interest.

The communications agency traditionally votes after the trade commission's or the Justice Department's review of a corporate merger, although that is not because of any statutory obligation.

The FCC could vote at any time, but likely will not vote immediately, according to people close to that commission.

Scrutiny from FTC staffers was boosted by the chorus of protests to the deal from dissenters, who ranged from competitors such as Disney to small-market ISPs to consumer groups.

Critics found one common thread in their arguments: A combined AOL and Time Warner was making empty promises to open cable or instant messaging networks, and the combined company would discriminate against competitors piggybacking on its system, they said.

The FTC's approval puts AOL one step closer to living its broadband dreams.

The online giant has set its sights on getting its service to as many people through as many pipelines as possible, be it with wireless, satellite, cable, or DSL.

High-speed cable access in particular is expected to boom in households across the country.

AOL has already begun upgrading its service to support faster connections. Owning Time Warner's cable network gives AOL a foothold to offer more multimedia-intensive services. Its AOL Plus service lets broadband customers watch videos or listen to audio streams.

AOL members will likely see incremental rather than drastic changes in the online service after the companies complete their merger, analysts said.

(aol) Already, AOL has begun promoting an array of Time Warner-owned publications through methods such as using pop-up ads to sell subscriptions to Time or using content from People and Entertainment Weekly in its entertainment area.

AOL and Time Warner have said that promoting each others' products will help all of their businesses grow, thereby improving the combined company's cash flow. But the company will need to tread carefully so its promotional ambitions fall in step with its subscribers' tastes.

"I think the number of pop-ups that have actually been used to promote Time Warner's properties and (publications) have started to turn some subscribers off," said Ken Kiarash, an analyst at Buckingham Research Group. "You may actually see some backlash and some active complaints from their subscriber base."

Owning a cable network gives the companies a foothold in creating high-speed interactive TV products and in tapping an audience that would be interested in upgrading Internet services.

"The changes will be very incremental and very gradual," said Wit SoundView's Rohan. "The end result is a higher quality product with stronger appeal."

But concerns still persist among critics about whether the combined company would use its cable ownership to shut out competitors.

Cable networks essentially serve the overwhelming majority of the cable customers in their geographic area.

Entertainment rivals such as Disney have criticized the merger, fearing AOL Time Warner would favor its own content -- be it HBO, CNN, or TNT -- over competitors' offerings.

Patrick Ross contributed to this report.