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Just trust us. That's what America Online and Time Warner have been telling regulators for months about their proposed merger. Antitrust officials have worried that AOL and Time Warner could squash competing Internet service providers by refusing to carry them on Time Warner's high-speed cable systems.
It'll never happen, the two companies vowed. And to prove it, they signed a "memorandum of understanding" in February widely applauded as an open-access template. Then they announced an open-access agreement with Juno Online Services in July, and they have promised more deals with other ISPs in the weeks to come.
But now, smaller competing ISPs are accusing Time Warner of speaking out of both sides of its mouth. And their gripes could embolden regulators to make mandatory open access a condition of the merger.
Business Week Online has learned that David Baker, vice-president for law at Atlanta-based ISP Earthlink, met with Federal Trade Commission Chairman Robert Pitofsky on Sept. 28 to complain about the terms extended by Time Warner to would-be ISP partners. Instead of allowing competing ISPs to maintain control over their customers -- as the memorandum of understanding promised -- Time Warner wants to set the price the ISP charges its customers. It's also demanding a cut of Earthlink's cable-access subscription revenues and wants a big co-branding presence on the ISPs' start page, Baker told the FTC. "It makes it difficult, if not impossible, for us to offer our service on their system," he says.
HAND IT OVER. The ISPs have been reluctant to speak up until now, because the terms of their negotiation are under nondisclosure agreements with Time Warner. But as regulators step up inquiries into the AOL-Time Warner deal, the smaller players are cautiously coming forward. According to a confidential Aug. 29 Time Warner document obtained by Business Week Online, the cable company wants to retain 75% of Earthlink's subscription revenues and a minimum monthly payment of $30 for each Time Warner subscriber that switches to the competing ISP.
Time Warner also wants space on the top half of the ISP's home page to highlight links to Time Warner content and services. Then, the cable company is asking for 25% of revenues that the ISP gets from cable-access advertising, e-commerce, and other services. In addition, the ISP must pay Time Warner a $50,000 advance.
Smaller ISPs are aghast at the difference between Time Warner's public pronouncements on open access -- and the terms the company is offering in actual contractual negotiations. "They knew it was a contract none of us would sign," says Stephen A. Heins, marketing director of Oshkosh (Wis.)-based NorthNet Internet Service, which also has been in negotiations with Time Warner.
LET'S TALK. "This has really been a PR exercise. They just brought out another straw dog, saying everybody should pet this." Heins says the terms make it uneconomical for any small ISP to agree to a deal. "It takes hundreds of thousands of dollars to hook up to their nodes, and that's a big enough barrier as it is" without having to pay a $50,000 advance, he says.
Time Warner says the contractual terms under discussion are not final propositions, and the company is willing to reach deals that satisfy all parties. "Both AOL and Time Warner are deeply committed to open access," says Time Warner spokesman Scott Miller. "No company has done more to advance that cause. Time Warner Cable is committed to working creatively with Earthlink and others in the ISP community to provide consumers the choices they want in cable Internet service and to arriving at business relations in which everyone feels they're a winner."
But consumer advocates contend that the ISP complaints show that companies can't be trusted to offer open access without a government mandate. Up until now, the Federal Communications Commission, which began a study on the issue on Sept. 27, has favored open access for ISPs but prefers that market pressures accomplish this goal. "The notion that economic incentives are going to convince cable companies to open their networks is dead," says Mark Cooper, research director at the Consumer Federation of America. Adds Jeff Chester, executive director of the Center for Media Education: "This is the smoking gun."
"DIRTY LAUNDRY." Meanwhile, AOL and Time Warner are hanging tough in their negotiations with regulators. But, say consumer advocates, their strategy carries a risk. "By playing hardball, AOL Time Warner opens the door to a detailed airing of their dirty laundry," says Gene Kimmelman, co-director of Consumers Union. AOL and Time Warner maintain that their deal is on track to close this fall. The FCC and FTC declined to comment.
But one thing is for sure: The more AOL and Time Warner play a game of brinksmanship with both competitors and regulators, they more they risk government conditions being imposed on their deal.
By Cathy Yang in Washington Edited by Douglas Harbrecht
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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