Skip to main content

AOL/TW gets mega-scrutiny

Anyone attending the FCC's packed-house grilling of the principals in the proposed AOL Time Warner merger last week could be forgiven for assuming that agency Chairman William Kennard and his colleagues are weighing opening the companies' broadband network to rival Internet providers as the price for approving the merger.

After all, the highly charged debate over forcing AOL Time Warner and other cable companies to open their networks to other companies was topic No. 1 during the 16-witness, five-hour session July 27.

But even as Kennard acknowledged the public's captivation with the issue by giving a good-natured cheer to the tiny band of demonstrators protesting his current hands-off policy, the commissioners made it clear the agency won't rule soon on the divisive issue, which would saddle the Internet with an unprecedented level of government oversight.

"I can't imagine that we will have enough of a record to set rules that would effectively apply to the entire cable industry," Commissioner Michael Powell said during a break in the hearing.

"One of the frustrations I have with this debate is there is no baseline definition of open access," Kennard said when the proceeding resumed. "Is it more than open connection? Does it also get into issues like speed and pricing" of rival providers' data transmissions? He also reiterated a pledge to launch a separate inquiry this fall into the need for industrywide open-access rules.

Despite the FCC's reluctance to abandon its hands-off policy toward open access, agency officials and critics of the deal say serious consideration is being given to narrowly tailored conditions aimed at quelling fears that the $183 billion merger would give the new company a stranglehold over the cable and Internet businesses.

Those conditions could include:

  • Forcing AOL to sell its $1.5 billion stake in DirecTV to prevent Time Warner from interfering with a multichannel competitor.

  • Barring AOL Time Warner from having interlocking relationships with other mega-carriers, such as AT & T.
  • Binding AOL Time Warner to promises not to require cable companies to carry AOL services as a condition of access to Time Warner programming.
  • Forbidding AOL Time Warner to transmit its content at higher speeds than other rival offerings.

"The expectation is that major cable companies will exchange benefits with each other while others are excluded," said Commissioner Susan Ness.

Though AOL Chairman Steve Case and Time Warner chief Gerald Levin insisted these conditions are unwarranted, their critics argued that both companies have a history of hard-nosed tactics and regulators have reason to be skeptical of the "trust us" appeal.

Besides the tight coalition of consumer groups opposing the deal, critics include giant corporations such as Walt Disney, NBC, Bell South and SBC as well as the National Association of Broadcasters. Last week, USA chairman Barry Diller seemed to join the chorus by calling the concentration of distribution facilities that would be created by the merger "scarifying," although he has not formally opposed the deal. (Staying out of the fray is Viacom, which is reluctant to enter so soon after acquiring CBS, and News Corp, where officials say they don't predict discriminatory treatment by AOL Time Warner.)

"Both AOL and Time Warner have demonstrated their propensity to abuse their bottlenecks and market strength to limit and skew consumer choice and to inhibit competition," said Walt Disney government relations chief Preston Padden.

Padden repeatedly charged that AOL is trying to expand its "walled garden" to keep its customers from using rival services, most recently by preventing users of its instant messaging program from receiving missives created with rival software.

He then ascribed a litany of transgressions to Time Warner, including Disney's retransmission consent dispute over carriage of seven ABC stations in May, the cable operator's reluctance to carry competing local news channels and its decision to strip electronic program guide signals from the transmission of local broadcasters.

Time Warner and AOL officials were indignant.

"I actually think our company has been a model," Case said, noting that AOL's instant messaging is free to anybody who wants to download it.

But Commissioner Powell said he is skeptical that promises of good behavior would be enough to ensure that AOL Time Warner won't discriminate against rival content. "I think it's very, very important for the companies in proving their case to show why there is an economic reason to pursue open models and to not leverage content," he said.

Levin countered that AOL Time Warner would be the big loser if it pursued the tactics his critics are predicting. "If you're not providing the content and convenience the consumer wants, the consumer will go elsewhere."

Few are seriously predicting that the FCC or Federal Trade Commission will block the merger. That's because the companies don't have overlapping businesses that would lead to the horizontal type of concentration that most troubles regulators.

Yes, their merger would create massive vertical leverage by marrying huge positions in cable and Internet distribution with Time Warner's stable of movies, music and TV programming, but it's not as if there would be no significant rivals.

As for the more narrowly tailored conditions, even their ultimate fate is unclear. For starters, commissioners voiced deep misgivings about trying to settle what could be viewed as simple business disputes. Kennard, for example, worried aloud that Disney might drop its opposition to the deal if Time Warner cuts the company an exclusive deal on interactive services.

"We don't like to have our processes here used as leverage in a business dispute," he stressed.

Although AOL's instant messaging dispute received tough questioning, too, the commission seems unclear whether it has any authority to step in. Instead, AOL's rivals may be left to plead their case for interoperable software standards to the FTC, which has more power to establish trade practices. "When you have a stand-alone product there are often proprietary tools ... I'm not sure that's a problem with the merger," Powell said.

But by scrutinizing open access and instant messaging in public, the FCC may be prodding the companies to change their ways without regulations.

Levin said he aims to offer multiple Internet providers over his company's cable broadband network by the end of the year. The main stumbling block is an exclusive contract with Road Runner (of which Time Warner is part owner) that lasts until December 2001. Levin said he hopes to use the Justice Department's order to AT & T to divest its Road Runner stake as an excuse to restructure his own deal. "I'm quite confident that we can make [multiple ISPs] happen faster than anyone else in the industry," he said.

As for instant messaging, AOL Interactive President Barry Schuler said the company will make its interoperable software available but it may take a year or more.

The scrutiny of regulators deserves much of the credit for both companies' willingness to compromise, said technology analyst Esther Dyson. "The government should let the merger go forward but raise concerns and say, 'This what we're going to be watching for,'" she said. "AOL is doing the right thing, but it is hardly voluntary."

The bully pulpit, rather than rules, may be the government's most potent weapon in the Internet age, added Yale economist Barry Nalebuff. "Getting people to talk is a good substitute for regulation."