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Commentary: Who Will Watch Aol's Watchdog?


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Commentary: Who Will Watch AOL's Watchdog?

The FTC trustee will have fingers in every pie

The Federal Trade Commission may have approved the blockbuster merger of new- and old-media giants America Online Inc. and Time Warner Inc. last month, but behind the scenes the commissioners clearly had their doubts. Historically, they have often O.K.'d such megadeals, but require that overlapping businesses be sold off. In this case, no divestiture made sense, so their only choice--short of blocking the deal outright in court--was to impose a set of requirements that comes uncomfortably close to direct regulation of the company. "There's an awful lot of policing in this document," says Commissioner Moselle Thompson. "And we don't normally do that."

Indeed, this month the FTC will take the rare step of appointing a "monitor trustee" to oversee the company for the next five years. The trustee's mission: to ensure that AOL Time Warner's cable network and interactive television services allow competition. To enforce that, the new AOL czar will have carte blanche to hire as many "consultants, accountants, attorneys, and other representatives...as are reasonably necessary"--all on AOL Time Warner's tab.TOO MUCH POWER? The unprecedented arrangement is meant to ensure that the combined company doesn't get too dominant, but it carries with it plenty of risk. The biggest: that an all-powerful bureaucrat will stymie AOL Time Warner's business.

Much of the policing will deal with the nitty-gritty of ensuring "open access" to the company's cable wires. Basically, it's meant to give competing Internet service providers the same access that AOL and Time Warner's cable operation Road Runner has. The problem? There are currently thousands of ISPs, many of which would like to be part of AOL Time Warner's high-speed Internet network. Each time the company wants to turn one down, the monitor trustee will have to determine whether it has a legitimate right to do so.

Equally tricky decisions will be rendered on AOL Time Warner's interactive television service, which provides Internet access through a TV. The main fear is that the company will find a way to provide connections to Time Warner sites that are a little bit faster and more seamless than those to rival sites. Garnering more eyeballs, alone, is likely to let AOL increase advertising rates. But to discern and combat such shenanigans, the monitor trustee will need a crash technical education to determine if the company is doing anything to "discriminate" against rival programming.

Meanwhile, the monitor trustee will have fingers in every aspect of the merged company. The trustee will be able to pore over arcane contract details to decide whether AOL Time Warner truly is negotiating with competitors in "good faith"--or when a decision not to grant access is justified for technical reasons. He'll even have to get involved in some pricing decisions. "It'll be like the song by Sting," says the FTC's Thompson: "`Every breath you take, every move you make, I'll be watching you."'

That's an awful lot of responsibility--one reason the FTC's trustbusting colleagues at the Justice Dept. considered creating a similar position in the Microsoft case, but rejected it as unwieldy. The closest comparison may well be Harold H. Greene, the federal judge who all but ran the telecommunications industry for 11 years following the breakup of AT&T Corp. in 1984. His interventionist approach--which was criticized at the time as cumbersome and bureaucratic--is now widely viewed as something to be avoided.

Still, the risks aren't all one way. Alternatively, the new czar could end up fairly impotent. Agencies such as the Federal Aviation Administration and the Federal Communications Commission have been accused of falling captive to their industries, in part because they spend all their time listening to the arguments of industry executives.

Most worrisome to some FTC watchers is that the appointment will create a precedent for monitoring emerging industries. In fact, Chairman Robert Pitofsky argues that complicated merger deals involving monitor trustees are a necessary evil of the New Economy. The reason: Thanks to proprietary technologies, such industries are more prone to monopoly and are harder to evaluate than traditional industries. That view may not carry much weight much longer, however. President-elect George W. Bush is expected to eventually appoint commissions less likely to favor such trustbusting oversight. The FTC's latest monitor trustee could well be its last.By Dan Carney; Correspondent Carney Covers Antitrust Issues from Washington.


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