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Ties that bind?

The mergers of America Online-Time Warner and Seagram-Vivendi are the first in a likely wave of giant amalgamations of the top TV, movie and other content producers and the owners of the digital-ready distribution infrastructure.

The question for the U.S. and European regulators reviewing these deals is whether the time is right to lay the ground rules for the day-quite possibly, not far off-when a handful of international corporations control both the production of the most-popular media titles and the distribution links necessary to bring them to consumers.

Today, it's not just the usual band of public advocates who say some government intervention might be necessary. Some of the most familiar companies in the media and Internet business are already asking U.S. regulators to step in. Among them: Excite@Home, a host of TV station groups, The Walt Disney Co., SBC, Microsoft and upstart Internet services like iCast and Tribal Voice.

The worries are getting no small amount of attention from the FCC and the Federal Trade Commission. A hearing on the merger is scheduled for Thursday, July 27. As a sign of the intense scrutiny the FCC is giving the AOL-Time Warner deal, the five commissioners will conduct the hearing rather than the Cable Services Bureau staff. "This merger is going to require a lot of work," says Cable Bureau chief Deborah Lathen.

Both the FCC and the FTC have asked the companies to answer questions about the merged companies' ties to other major industry players and about allegations of unfair business practices.

The FCC asked officials from the merging companies, for instance, whether AOL and Time Warner will have exclusive contacts with Internet content providers. The agency also wants to know the identity of all companies in which either AOL or Time Warner holds a 5% or greater ownership interest, as well as all corporate partnerships.

In spite of the attention from the feds, AOL and Time Warner officials insist that the deal ultimately will face no conditions because the new company won't violate any ownership limits or other specific rules. But FCC officials insist that the commission's broad authority to act in the public interest provides enough muscle to order the company to restructure investments or alter business practices.

Critics of these gigantic vertical mergers are particularly worried that the new behemoths will get a chokehold on interactive TV and Internet services that will be critical in the digital age.

"A lot of broadcasters and others fear that what's really going on is an effort to gain new bottlenecks," says broadband industry consultant Blair Levin, whose clients include Excite@ Home and Internet content provider iCast.

It may seem ironic that Levin has strongly opposed open-access rules that would prevent cable companies from discriminating against outside ISPs. But he insists that the two situations are different because cable-system operators have only a small portion of their investments in programming, whereas the merged AOL-Time Warner will count content as a major part of its business.

"They have a lot of incentive to favor their own content," he says, "and, wherever they can, they are going to try and get away with that."

But the big players in the budding digital age maintain that such fears are overblown. All broadband distributors in the digital age, they say, know that consumers will demand access to any content they want, no matter who owns it, and companies that try to wall themselves off will get run out of business.

Furthermore, they have publicly committed themselves to open systems and will soon prove their words with deeds. AOL Time Warner has promised to allow a "significant" number of unaffiliated Internet providers on its broadband pipe, and, having acquired MediaOne, AT & T is ramping up a pilot program for its multiple-ISP service, too.

Many worry that content providers lacking their own cable or other broadband distribution infrastructure will be squeezed out of the high-speed digital world if regulators don't prohibit discriminatory practices that make it harder for subscribers to get new types of services from third parties.

Disney Washington chief Preston Padden argues that companies that control both content and broadband distribution should be barred from:

  • Interfering with the "return path" communication link needed for viewers to utilize interactive TV;

  • "Force-feeding" programming by promoting only affiliated shows on electronic program guides;
  • "Local caching" of affiliated content on servers around the country so that it can be accessed by subscribers more quickly than unaffiliated content;
  • Streaming third-party video content at slower bit rates than affiliated programming.

Going further, Padden says regulators should think about applying conditions to any major broadband distributor that owns its own programming. "This technology can be the servant of customer choice or the enemy of consumer choice. It's all about what rules of the road are established."

Voicing agreement with that sentiment, Ross Bagully, chief executive of instant-e-mail company Tribal Voice, says regulators would be wrong to hold off on regulation, because AOL and other big companies are trying to establish the architecture of the broadband world right now.

It will be extremely difficult to unwind their structure several years down the road. "The wait-and-see attitude is very dangerous," he says.

BellSouth officials have asked the FCC to prevent the roughly half dozen "mega-carriers" (including AT & T and Bell Atlantic-GTE) from having interlocking business relationships. For instance, BellSouth wants to bar any contract that would give AT & T long-distance customers a rate break on AOL's Internet service in return for giving Time Warner's cable telephony customers a bargain deal on long-distance service.

"Collusive or other marketing relationships that divide markets and reduce competition.will remove incentives to invest or develop a full range of capabilities, especially expensive infrastructure, and must be eliminated," BellSouth says in its filing.

Demands for additional government action are rolling in from other industry players as well. Bolstered by a June 22 court ruling that they say obliges federal regulators to order carriage of unaffiliated Internet providers over cable companies' broadband networks, public advocacy groups say vertically integrated giants like AOL-Time Warner should be forced to carry all ISPs on the same financial terms.

And, they say, AOL-Time Warner should be forced to sell its investment in multichannel competitor DirecTV, held through a $1.5 billion stake in General Motors. The National Association of Broadcasters used the passing bandwagon as an opportunity to demand that the FCC-as a condition for approving the AOL-Time Warner merger-force Time Warner cable systems to carry free over-the-air signals of local stations, both digital and analog. The NAB also wants AOL Time Warner to be barred from blocking electronic program guides and other supplemental services that broadcasters offer without charge.

AOL and Time Warner say that government antidiscrimination conditions won't be needed and cite their Feb. 29 agreement to carry unaffiliated ISPs on their broadband pipe as proof. Officials for both also contend it would be unfair for the government to single out their company with unprecedented dictates that would interfere with subscriber and business relationships.

"The whole broadband marketplace is such a nascent area. It would be premature to impose conditions and certainly to impose conditions on just one player," says Art Harding, an attorney with Fleischman and Walsh, representing Time Warner in Washington.

But public advocates complain that the agreement offers little in the way of concrete promises, such as how many ISPs will be given access and whether all will have equally efficient connections. They also say that past FTC and FCC decisions provide plenty of precedent to hinder the type of vertical concentration between content suppliers and distributors that this deal creates.