AOL-Time Warner merger gets U.S. government approval

The U.S. Federal Trade Commission unanimously accepted merger terms offered by America Online Inc. and Time Warner Inc. Thursday.

In the consent order proposed by AOL and Time Warner, and approved 5-0 by the FTC, the merged company would be required to open its cable system to competing Internet service providers, would be prohibited from interfering with content passed along its cable bandwidth by non-affiliated ISPs (Internet service providers), and prevented from entering into exclusive arrangements with other cable companies with respect to Internet services or interactive TV services, according to a statement on the FTC Web site.

“In the broad sense, our concern was that the merger of these two powerful companies would deny to competitors access to this amazing new broadband technology,” said Robert Pitofsky, chairman of the FTC, in the statement. “This order is intended to ensure that this new medium, characterized by openness, diversity and freedom, will not be closed down as a result of this merger.”

AOL and Time Warner said in a joint statement that they are pleased with the FTC’s approval, and that they “expect that their commitment to consumer choice embodied in the FTC agreement will become a model for other cable systems throughout the country.”

The accord requires at least one AOL competitor to offer cable Internet service on a Time Warner-owned network before AOL can offer services on the same network. In most cases, Time Warner must open its networks to two or more competitors after AOL starts offering services if technology allows it, as many as three other ISPs must be added after that. ISP Earthlink Inc. and Time Warner Cable signed an open-access agreement in November.

The FTC consent order specifically promotes development of DSL (Digital Subscriber Line) technology and access, requiring AOL-Time Warner to market and offer AOL’s DSL services to subscribers at uniform prices, regardless of whether or not Time Warner cable Internet access is available in the same areas.

The consent order is in effect for five years. Terms of the deal between the FTC, AOL and Time Warner appear complex, according to industry observers.

“It’s good that it’s finally happening after a year, but it’s making it look extremely complex all of a sudden,” said Mark Snowden, a senior research analyst for media and entertainment at market research firm Gartner Group Inc., which is based in Stamford, Conn.

Details of the deal – who gets access, where, when, and for how much – are the key to the two companies’ bargain, and should allay the fears of competitors and interest groups opposed to the merger, he said.

“It looks like some fairly rigorous terms given to AOL and Time Warner,” Snowden said. “They’re going to have to sign a certain number of agreements, so there’s only going to be so much ‘weaseling’ at first. …I think most of the companies that were trying to block it will say they got the best terms they could, and move on.”

The Walt Disney Co. – which has opposed elements of the merger – typified the corporate response.

“The unprecedented open access and nondiscrimination conditions imposed by the FTC today represent a huge victory for consumers and for competition,” said Preston Padden, Disney’s executive vice president for government relations. “With these safeguards in place, we congratulate AOL and Time Warner on their merger and wish them well.”

Small ISPs had a more mixed reaction to the deal.

“Anything that happens to advance entertainment and services over IP (Internet Protocol) is good,” said Jay Cox, director of Internet for NTELOS Inc. in Waynesboro, Va. “On the negative side, in spite of all the concessions they have made, I’m very skeptical whether small ISPs, like us, will be able to compete. It looks like the deck has been stacked against the small (companies). It looks like they have agreed to allow large ISPs into their system.”

Cox’s position echoed those of smaller businesses and consumer groups about the merger, said Steven Harris, senior research analyst at market research International Data Corp. (IDC) in Framingham, Mass.

“I think most people in the ISP industry would be very displeased to find AOL only has to have five ISPs (accessing their network). That could be a major problem for a lot of ISPs,” he said. “From a government perspective, it may seem like enough, but I don’t think it is. From an industry perspective, it’s definitely not enough. …I think consumer groups may be quite angry as well. I don’t think most people are going to be happy about it.”

Some interest groups offered cautious statements about terms of the deal.

“In general, we are appreciative that open access is part of this,” said Kristan Van Hook, co-director of the Opennet Coalition, which represents about 990 ISPs in the U.S. “Our members will be calling on the FCC (U.S. Federal Communication Commission) to make open access nationwide.”

The FCC can still move to block the merger, although analysts said the FTC deal imposes most of the restrictions the FCC would require. The European Commission approved the deal in October.

“I think it’s a done deal now,” said Larry Perlstein, vice president and research director for Gartner. Elements of the FTC deal provide for recourse if there are problems in the future, he said. “I certainly think AOL and Time Warner won. They got everything they asked for. Opening up the cable systems doesn’t detract from the value of the deal.

“I think the big question now is how effective they’re going to be internationally,” he said. “As we see that unfold, we’ll know how valuable this merger will be.”

IDC is owned by International Data Group Inc., the parent company of the IDG News Service.

The consent order can be found at the FTC Web site, AOL, in Dulles, Va., can be reached at Time Warner can be reached in New York at