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After a year of sweating, America Online Chairman Stephen Case and his Time Warner counterpart, Gerald Levin, finally got the merger of their companies approved by the Federal Trade Commission. On Dec. 14, they satisfied regulators' demands that AOL-Time Warner open its cable broadband pipes to competing Internet-service providers.
Now, the largest media merger in history -- currently worth around $110 billion -- can go through. The champagne corks will fly, the uncertainty surrounding AOL's stock is gone, and competition in the broadband Internet market will flourish, right?
Not so fast. Assuming the Federal Communications Commission also gives the deal its blessing, the FTC agreement AOL-Time Warner signed fails to address several important questions that will affect cable companies next year and beyond. First, will other cable operators, such as Comcast and AT&T, the nation's largest, offer ISPs the same sort of terms Time Warner must offer its competitors? The conventional wisdom is that the Federal Communications Commission will require similar deals from other cable companies, possibly in a broad ruling to be handed down next year.
Another longer-term question also has yet to be addressed: Who will control the set-top box that serves as the brains behind the interactive-TV platforms just now emerging? AOL-Time Warner may also become the first major player in this new field. That will be a whole different beast for regulators to tackle.
KEY REAL ESTATE. "The way you watch TV now, the cable channels are what you get. But eventually, there will be so many channels offered, and so many applications from e-mail to online shopping, that you'll have a portal -- the most important real estate on TV or the Internet," says Gruntal & Co. Internet analyst Catherine Skelly. "Whoever controls that real estate will be in control of millions of eyeballs directed to selected content. Cable operators are going to want to keep that control."
And over the long term, observers say, AOL-Time Warner will still be able to deliver a broad variety of hardware and interactive-TV programming. "Because of their ability to put boxes into peoples' homes using Time Warner's distribution, it's going to be a huge advantage for the merged company," Skelly says. The same will be true for other cable operators.
Jeff Chester, executive director of the Center for Media Education, one of several consumer groups that opposed the merger, says the FTC's consent decree with AOL-Time Warner over open access for ISPs might serve as a model for tougher broadband regulation of all cable operators overseen by the FCC. But that isn't certain. In fact, the government has said that it won't step in right away.
"I really do think open access is the way to go in this country," said FTC Chairman Robert Pitofsky during the agency's Dec. 14 review of AOL-Time Warner. But he added: "We don't have the authority to impose that. We hope the market will produce that." If not, "it's an issue that should be addressed by Congress...and also by the FTC."
EARTHLINK DEAL. Indeed, whether other cable providers follow AOL-Time Warner's lead and allow open access to their broadband pipes may depend on how much pressure they feel to do so. Garry Betty, CEO of ISP Earthlink, says he now has a deal for access to homes via AOL-Time Warner's cable systems, but he hasn't gotten nearly as far with other cable companies. Still, he adds, "with all of the cable companies, the general sense I get is positive. None are willing to take the plunge immediately, but they now know that it's in their best interest to work with other parties."
Even if the cable companies do deals with ISPs, the advent of intelligent cable set-top boxes still could give the cable operators a tremendous advantage, says Chester. The set-top box of tomorrow will deliver more than just cable channels. It will offer consumers e-mail, instant messaging, online shopping, perhaps even digital-video recording -- tapeless VCR capabilities for your TV set.
The government may well need to use a firm hand with AOL-Time Warner and other cable providers once this technology matures: No company will have a tighter grip on this market than AOL-Time Warner. In fact, AOL already sells a rudimentary form of interactive TV featuring its Instant Messenger software layered over a TV program. AOL also has a big stake in TiVo, the leading digital-video-recording company. "They could have a virtual lock if they develop technology that offers many of these features in one box," says Gruntal's Skelly.
"INTERESTING CHALLENGES." These are issues the government no doubt recognized but couldn't resolve, during its yearlong review of the merger. The more immediate goal was opening access to AOL-Time Warner's cable pipes, something FTC Chairman Pitofsky feels has been accomplished.
"Now it's in AOL-Time Warner's interest to get other cable operators to also open up," Pitofsky said on Dec. 14. Mozelle Thompson, the FTC commissioner who was most skeptical of the merger, noted "there are a lot of interesting challenges here" with respect to how AOL Time-Warner will use its market prowess.
The lesson is clear: AOL-Time Warner, with 20 million cable homes and 26 million customers of its online service, has bent to Washington's will for now. But as broadband access and interactive TV begin to permeate the marketplace, the company will have so much power that further run-ins with regulators are just about inevitable.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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