Analysis of the AOL-Time Warner merger

In the home of the future, Junior snaps on the television. “Welcome,” chimes the AOLTV set. “You’ve got mail.” He kicks back to watch Dawson’s Creek on the WB Television Network, and its Jewel soundtrack catches his fancy. So he grabs the remote and in a few clicks, he’s logged on to Shop@AOL, and the digital music downloads to the family PC in the den. That’s where Dad is reading Sports Illustrated off a Time Warner Web tablet, swapping instant messages with Mom, who’s 1000 miles away on a business trip but has her AOL Mobile Communicator clipped to her hip.

AOL Anywhere isn’t just America Online Inc. chairman Steve Case’s promotional slogan: It’s a potential fact of life.

The merger of America Online and Time Warner creates a media heavyweight with tentacles that reach beyond 26 million AOL subscribers to include scores of magazines like Time and People; publishing houses like Little, Brown; millions of cable TV subscribers; and movie and music properties like New Line Cinema and the Atlantic recording label.

That scenario is upon us, as the Federal Communications Commission has removed the last regulatory hurdle to the merger of AOL and Time Warner. FCC Chair William Kennard called the US$94 billion partnership a “marriage of old and new media” that raises new challenges for policy-making.

Open Access (Sort Of)

The FCC imposed some last-minute concessions on the union, targeting topics that have concerned the industry, including broadband access and instant messaging.

It echoed the stance of the Federal Trade Commission, which required the merged company to open its cable networks to competition for broadband Internet access.

But the FCC did not impose a similar provision on AOL’s instant messaging service, AOL Instant Messenger. The company can still block competing services from exchanging messages with AIM and ICQ, another messaging service AOL owns. But if AOL broadens AIM to support multimedia functions such as video, the FCC says, it must permit interaction between its service and its competitors. AOL already supports voice and audio functions in AIM.

Critics had hoped the FCC would force AOL to open its messaging network to competing services. In fact, the FCC extended its deadline for deliberations in December, to take a closer look at AOL’s dominance of the instant messaging market.

The Next Monopoly?

The marriage of content generators and distributors scares those who are concerned that AOL-Time Warner will become a media and technology monster tightly controlling access to news and maintaining monopolistic power over the Internet, the nascent interactive TV, and technologies like instant messaging.

But others view the deal as a regulatory victory because the Federal Trade Commission forced the merged AOL and Time Warner to open its cable networks to competition for broadband Internet access. Representatives at the Center for Democracy and Technology consider AOL-TW’s concession to open access a move that sets the tone for others, keeping the Internet’s architecture open.

Supporters also say AOL-TW has the money and talent to create innovative ways to distribute music, movies, and news to customers.

Entertainment is at the heart of this new company, and AOLTV best reflects the synergy of the combined firms. AOLTV is vital to many facets of the company’s operations, from interactive programming and video on demand to linking AOL’s sprawling online properties to the channel surfers in living rooms across the country.

One feature of AOLTV reduces the TV picture to roughly one-fifth its original size, places it in the upper-right corner of the TV screen, and surrounds the picture with chat rooms and TV-themed Web content. Its program guide groups TV channels in categories such as Movies, News, and Sports. That worries some, who fear AOLTV will push its customers to Time Warner-owned content, whether TV shows or Web sites.

Critics say AOL-TW is pushing the wide-open Internet toward a more restricted model closer to a “walled garden” of AOL-affiliate content and services. The Center for Media Education’s director Jeff Chester contends AOL is creating an “Internet lite” that will curtail the Web’s rich offerings.

Standards for developing interactive content will likely be a contentious issue, too. Today, Microsoft WebTV subscribers can’t access AOLTV interactive content, or vice versa. The content formats remain different, despite calls for an open standard.

Complementing Their Businesses

Depending whom you ask, AOL-TW could help or hinder digital entertainment distribution. Expect Time Warner artists such as Madonna, Jewel, and the Cure to be zealously promoted on AOL access devices–including Internet appliances, handheld devices, and PCs. Also, AOL is developing a Net-based music subscription service. AOL’s 26 million members could experience some marketing experiments.

This week, Time Warner’s Time Inc. announced the launch of On magazine, an Internet lifestyle and culture publication. Representatives of On say it will target AOL members with subscription pitches and some new AOL members will offered free subscriptions.

There is also some evidence that AOL isn’t above killing off innovative technology. For example, when AOL subsidiary Nullsoft innovated a bit too much, the company came down with an iron fist. Its Gnutella program used to let people swap MP3 files over the Internet. When Time Warner executives complained, AOL closed down the project.

Feds Push Choice

The merger’s impact on broadband access and competition depends on where you live and which cable company serves you.

Thanks to the FTC, which negotiated a five-year open access pact with AOL and Time Warner, the new company must let at least three other Internet service providers use Time Warner cable modem networks in any communities where AOL launches its own broadband service.

Time Warner’s largest cable subscriptions are in New York, the Carolinas, California, Florida, and Texas.

The access pact squelched some fears that Time Warner would lock out competitors from its broadband network, so AOL could hold captive an audience of broadband customers required to use AOL. Competitor EarthLink has already signed an access deal with Time Warner that is seen as a model of deals to come.

Concerns about the deal haven’t gone away, however. Some small ISPs, consumer groups, and the American Civil Liberties Union still oppose the merger on grounds that the deal’s vast scope could restrict free speech and alter the open nature of the Internet.

Merging these sizable companies is already a momentous task. Now, we have a debate that will likely outlast the argument over who really won the 2000 presidential election. Does the AOL-TW deal herald a new Net century, as Case claims? Or does it simply represent the last vestiges of a dot-com boom?

Stay tuned to AOLTV.