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WASHINGTON -The Federal Communications Commission last week approved America Online Inc.'s merger with Time Warner Cable, a $100-billion-plus union between the world's largest Internet-service provider and the second-largest U.S. media conglomerate, which boasts a vast film, music, publishing and cable-network portfolio.

In a 5-0 vote with two partial dissents, the FCC approved the deal. However, it will require the newly minted AOL Time Warner Inc. to comply with several conditions allegedly designed to promote competition and protect consumers. The companies closed the deal shortly thereafter.

FCC chairman William Kennard said the panoply of conditions were needed now to prevent intervention later, when it would be tougher to fashion regulatory cures.

"It's all about preserving the open culture of the Internet," Kennard said at a Jan. 12 press conference at FCC headquarters.

According to Kennard and FCC press releases, the agency will require AOL Time Warner to:

  • Allow competing ISPs on Time Warner cable systems to have an unimpeded "first-screen" relationship with their subscribers; to have a direct billing relationship with customers; to derive equal benefits from such technical features as the caching of Web pages; and to be afforded fair carriage contracts.
  • Open its "advanced" instant-messaging network to one competitor immediately and to two others within 180 days from the launch of the service. Advanced IM refers to video streaming and other forms of next-generation messaging services.
  • Avoid any agreement with AT&T Corp. that would make AOL Time Warner the exclusive ISP on AT&T Broadband's high-speed cable-modem platform.

Also in the merger order, the FCC reaffirmed its decision last month that requires AT&T Corp. to sell its 25-percent stake in Time Warner Entertainment.

The agency refrained from imposing merger conditions related to interactive television. Instead, the FCC will soon conduct a general rulemaking on the issue. Copies of the proposed rulemaking were not available late last week.

Reacting to the ITV decision, National Cable Television Association president Robert Sachs called the FCC proposal "totally unwarranted by the facts" and said the agency would conclude that it had no role policing a market that barely exists.

In separate statements, Republican FCC members Michael Powell and Harold Furchtgott-Roth said the merger conditions were in some cases too broad and in others unnecessary.

Although Furchtgott-Roth said he would have approved the deal with no conditions, Powell said he was satisfied with the open-access mandates imposed by the Federal Trade Commission. He would not have taken the step of attaching extra behavioral conditions on first-screen access and direct-billing arrangements, he said.

"I see no reason for these conditions here, notwithstanding my colleagues' suggestion that these are essentially only icing on the pro-competitive cake baked by the FTC," said Powell, who is considered the front-runner for FCC chairman in the new administration of President-elect Bush.

Powell, however, said he supported the FCC's examination of ITV technology and potential market harms.

Furchtgott-Roth said it was unlikely a Republican-controlled FCC would attempt to dissolve some of the merger conditions. In an interview, he said he was troubled by the agency's action, especially in light of its repeated claim that the broadband market was too immature to warrant government intervention.

In his statement, Powell suggested he had no appetite for automatically grafting the AOL-Time Warner merger conditions on the cable industry at large, or on relying on the merger conditions to determine the outcome of the FCC's ongoing study of the regulatory classification of Internet access as provided by cable operators.

The FTC approved the deal in December, but not before insisting that AOL Time Warner provide nondiscriminatory access to competing ISPs on its Time Warner Cable systems. The trade agency's merger order expires in five years, while the FCC's conditions are permanent except for the condition on advanced IM, which also sunsets in five years.

The FCC also imposed its own version of an open-access mandate on AOL Time Warner. After five years, the FCC requires AOL Time Warner to negotiate with unaffiliated ISPs. But the company is under no obligation to enter into contracts, said Deborah Lathen, chief of the FCC Cable Services Bureau.

AOL has about 24 million U.S. subscribers worldwide, while Time Warner has 12.6 million U.S. cable subscribers.

AOL Time Warner hopes dial-up America Online subscribers will migrate to high-speed cable lines and pay for an array of new broadband services. It also plans to offer products and services through advanced interactive television set-top boxes.

The FCC vote was the merger's last regulatory hurdle in Washington. AOL and Time Warner had hoped to close in December to avoid the expense of filing thousands of tax documents around the country.

The merger was the largest such deal in U.S. corporate history when announced last Jan. 10. But a downturn on Wall Street stripped billions of dollars in market capitalization from both companies, reducing the transaction's overall dollar impact.

The FCC came under considerable pressure from Microsoft Corp. and Excite@Home Corp. to force AOL to open its instant-messaging service to traffic that originates on competing IM platforms.

AOL, the dominant IM provider with 180 million global users, blocks incoming messages, citing network-security and subscriber-privacy concerns.

The FCC's merger conditions do not apply to AOL's current IM feature, which is largely limited to text-based, real-time exchanges. AOL Time Warner may not launch advanced IM services, such as video streaming and movie clips, on Time Warner Cable systems before it has an interoperability agreement with at least one competitor.

Kennard said AOL Time Warner and its competitors all advocated support for interoperability. The only question was when that should occur.

"There is no debate about that particular point," he said, adding that AOL's dominance over IM would be as improper as one company having control over every phone number in the country.

AT&T, Excite@Home and other companies that lobbied on the instant-messaging front said last Friday they'd keep on pressing for immediate interoperability.

"Today's order is a step," the group, called IMUnified, said in a statement. "It still will not provide any near-term benefits for today's IM users."

On the ITV front, Kennard said the agency was concerned that AOL Time Warner could use ITV technology to harm competitors. But he said merger conditions would have been ill advised while the actual market for such services is still in gestation.

"We decided it was too early to impose conditions in the context of this merger," Kennard said.

The Walt Disney Co., which lobbied hard on the ITV issue, said it was pleased that the FCC would open a rulemaking.

"We are gratified that at least four commissioners support a new proceeding to look at the issue of discrimination on interactive television," said Preston Padden, Disney's executive vice president of government relations.

In the weeks leading up to the FCC action, small ISPs pressed the agency hard to ensure they could gain access to Time Warner cable systems. Small ISPs, such as NorthNet in Oshkosh, Wis., argued the FTC's merger order was insufficient to protect their interests.

The FCC declined to require AOL Time Warner to ensure access to at least one local and one regional ISP, as NorthNet had advocated. But under both the FTC and FCC's merger orders, AOL Time Warner has an obligation to try to accommodate as many ISPs as possible consistent with network capacity limits.

Separately, AT&T had urged the FCC, as a merger-approval condition, to require AOL Time Warner to negotiate the sale of AT&T's 25 percent stake in TWE, which includes at least 9.7 million cable subscribers, Home Box Office and the Warner Bros. film and TV studio.

Last month, the FCC ordered AT&T to divest the TWE stake by May 19 as part of the agency's approval of AT&T purchase of Group Inc. in June.

But the FCC did not impose a condition requiring AOL Time Warner to negotiate in good faith with AT&T on the TWE sale. In response to a question, Kennard did not clearly indicate why the FCC refused to force AOL Time Warner to bargain a fair deal with AT&T.