| BUSINESSWEEK ONLINE : JULY 17, 2000 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
A Real Test for Trustbusters The scale of the AOL Time Warner deal is mind-boggling As Internet powerhouse America Online Inc. (AOL) prepares to tie the knot with media giant Time Warner Inc. (TWX), regulators are champing at the bit to set ground rules for the first true marriage of Old Economy and New Economy. The $183 billion deal is ''the first merger of TV with the Internet,'' says Blair Levin, former Federal Communications Commission chief of staff who now represents tiny AOL rival iCast Corp. in Woburn, Mass. ''It presents the regulators with unprecedented issues involving convergence.'' Neither a cable company nor an Internet company, the new AOL Time Warner is a hybrid, and regulators must figure out whether old or new rules should apply--or no rules at all. This deal is expected to be approved--with certain conditions--that could shape the Net for decades to come. Officials at the Federal Trade Commission, the FCC, and the European Union in Brussels declined to comment. Insiders, however, offer insights into what the trustbusters are targeting. Most merger watchers expect the FTC to lead the way. FTC Chairman Robert Pitofsky has long championed extra scrutiny of megamergers that threaten to narrow the diversity of voices in the media. Business Week has learned that the FTC is about to issue civil investigative demands to industry players so it can gather more information on numerous fronts. Concerns include the possibility that AOL, the largest online company, and Time Warner, the No. 2 cable operator and the owner of top media brands such as CNN and HBO, could use their existing positions to dominate other markets such as instant messaging and digital TV, critics say. ''Cable is hijacking the Internet,'' says Jeff Chester, executive director of the Center for Media Education, a consumer watchdog group. ''We can't let the diversity and competitiveness of the Internet be diminished as the cable industry becomes the dominant provider of high-speed Internet access.'' The FTC also is examining the tie between Time Warner and AT&T (T), the No. 1 cable operator, which owns 9% of Time Warner. ''Put it all together, and there has never been anybody with that kind of concentration in market power,'' says Preston Padden, executive vice-president at rival Walt Disney Co. (DIS). For their part, AOL and Time Warner say they have little to fear from regulators. None of the conditions under discussion, they say, seems to be a deal-breaker. ''We look forward to closing [the deal] in the fall,'' says AOL Senior Vice-President George Vradenburg III. The tricky part for regulators is that this deal wouldn't violate traditional antitrust rules. AOL and Time Warner don't generally compete with one another right now, so the merger wouldn't reduce competition in an existing market. But as the analog delivery of media goes digital, markets collide and merge. ''My anxiety,'' says Stanford University law professor Lawrence Lessig, ''is that what they do is based on old models.'' Regulators have the authority to create conditions that address mere hypothetical problems. In 1996, regulators feared that the combination of Time Warner's cable systems with Turner Broadcasting System's cable channels might give the new company the incentive to deny competing programmers access to the public. Borrowing from provisions in the 1992 Cable TV Act, the agency barred such anticompetitive conduct. The question is whether the trustbusters understand the Internet well enough to craft effective rules. The two-way digital technology of the Internet creates new opportunities for companies to game the system. For instance, AOL Time Warner could store its own content, such as CNN news, on servers close to consumers' homes, ensuring that their Web pages appear on computer screens faster and more smoothly than those of rivals such as ABCnews.com. A user would instantly get the latest video clip from Wolf Blitzer but wait an extra few annoying seconds to get Peter Jennings' report. The new company, which provides Internet access, could make sure consumers' e-mail responses or e-commerce orders originating from its Web sites travel on a faster path than those originating from competitors' sites. AOL says it would never do that. AOL's behavior in the instant messaging market already makes rivals nervous. With 90 million users, AOL's real-time e-mail communications system dominates this emerging business. Companies from Microsoft Corp. (MSFT) to startup Odigo Inc. have tried time and again without AOL's permission to link to AOL's customers. AOL has blocked them, citing violations of its users' security and privacy rights. AOL says it has royalty-free licensing agreements with 20 trusted partners to use its instant-messaging system, and it is cooperating with efforts to fashion an open standard for the technology. Rivals are skeptical and are urging regulators to jawbone AOL into speeding the process along. If not, predicts instant messaging company Tribal Voice CEO Ross Bagully, ''this problem will end up two or three years down the road at the Justice Dept.'' TIES THAT BIND. AOL Time Warner's close relationship with AT&T also gives rivals and regulators pause. AT&T, the biggest cable company in the U.S., owns 9% of Time Warner and 25.5% of Time Warner Entertainment, the entity that contains most of Time Warner's cable systems. The cross-ownership ties give the companies an incentive to strike exclusive deals that put rivals at a disadvantage, say competitors such as phone giant SBC Communications Inc. Rivals fear AT&T could get exclusive access to provide telephone service over AOL Time Warner cable systems in exchange for running AOL Time Warner's interactive TV service exclusively over AT&T's cable systems. AOL says neither AT&T nor AOL Time Warner has an incentive to enter exclusive deals because both need to link up with other companies to reach the widest markets possible. The deal is likely to be approved with conditions. SBC wants regulators to ban AT&T and AOL Time Warner from acting in concert. According to industry sources, the FTC is considering requiring AOL Time Warner's cable systems to carry all Internet service providers on a nondiscriminatory basis--in much the same way that traditional cable operators today must carry unaffiliated programmers on fair terms. To stave off regulatory concerns, the companies in February issued a memorandum of understanding with this promise of so-called open access. As regulators weigh the potential anticompetitive effects of the AOL Time Warner merger, they will be setting the ground rules for nothing less than how the media world will look in the brave era of the Internet. For a look at the new corporate politics at AOL Time Warner, go to the June 29 Daily Briefing story "AOL-Time Warner: A Conquest, Not a Marriage." By Catherine Yang in Washington _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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