News

Big Deals Get Hard Looks in D.C.

1/16/2000 7:00 PM Eastern

Washington -- The biggest merger in corporate history --
one that promises to accelerate the digital revolution -- can't go forward until it
complies with some analog-era laws.

America Online Inc. and Time Warner Inc. will need
antitrust approval from either the Federal Trade Commission or the Justice Department and
the Federal Communications Commission, which must determine that their $152 billion merger
will serve the public interest.

Hundreds of local governments will need to approve the
transfer of Time Warner cable franchises to AOL -- undoubtedly under pressure from public
interest groups and business coalitions to impose Internet open-access requirements.

The AOL-Time Warner deal also could complicate AT&T
Corp.'s pending effort to buy MediaOneGroup Inc.: If both mergers are approved, AT&T
would wind up with 50 percent of data-over-cable provider Road Runner in addition to its
control stake in Excite@Home Corp.

"It's bound to have some kind of impact on the review
of the MediaOne merger but I don't what. I can't preview that for you," an FCC source
said.

With the purchase of Time Warner, AOL becomes a leading
cable system operator. It also has a $1.5 billion investment in Hughes Electronics Corp.,
parent of DirecTV Inc., the largest direct broadcast satellite competitor to cable.

The FCC launched a rulemaking in February 1998 designed to
ban common ownership of DBS licenses and cable television systems, but the agency never
adopted final rules.

AOL and Time Warner leaders last week declared their
support for open access at a press conference and in a letter to Capitol Hill leaders. But
the companies stopped short of endorsing FCC chairman William Kennard's consumer litmus
test: choice of Internet service provider without having to pay twice for the privilege.

Failure to embrace the Kennard formulation was an
oversight, said AOL spokeswoman Kathy McKiernan.

"Until now, there had been no commitment to openness
that I am aware of. AOL-Time Warner is committed to being an open system," she said.

The FTC has a clear shot at taking control of the merger
because of FTC chairman Robert Pitofsky's interest and background in media mergers and
because the FTC reviewed Time Warner's acquisition of Turner Broadcasting System Inc. in
1997.

Yet, the Justice Department might assert jurisdiction
because of its past handling of mergers within the Internet sector, including AOL's $4.2
billion acquisition of Netscape Communications Corp. completed last March.

The FTC refused to approve Time Warner-Turner merger unless
the companies agreed to several conditions, including one that required carriage of a
24-hour news channel rival to CNN.

Does that foreshadow an FTC move to require AOL-Time Warner
to carry a competing ISP to Road Runner?

"It so speculative because you've got to make a
judgment before you go to that relief that there may be significant impairment to
competition among ISPs," said William Baer, a former FTC official who oversaw the
Time Warner-Turner merger conditions.

Time Warner chairman and CEO Gerald Levin said the AOL deal
would defuse open

access as a political issue. AOL, of course, led the effort
over the last 18 months to whip up support in Congress and at the FCC to impose open
access on cable.

But Levin's view, according to a Washington cable source,
overlooked GTE Corp.'s antitrust suit against AT&T Corp. and Comcast Corp. and popular
House legislation sponsored by Rep. Billy Tauzin (R-La.) that would allow the Baby Bells
to compete broadly in the Internet arena before fully opening their local phone networks
to competition.

"I don't think the open access issue goes away,"
the cable source said. "The [Baby Bell] issue is not only still there, it's more
intense."

Tauzin spokesman Ken Johnson said a hearing on the bill (HR
2420) is possible this spring. He said Tauzin has no plans to change the bill to require
cable open access.

"Billy will not support forced access. We prefer to
allow the marketplace to determine winners and losers," Johnson said.

On the day the merger was announced, Sen. Mike DeWine
(R-Oh.), chairman of the Senate Anti-trust Subcommittee, said he will hold hearings to
explore the competitive impacts.

DeWine, who held a hearing in October on Viacom Inc.'s
proposed $38 billion takeover of CBS Corp., said in a statement that he was concerned that
the AOL-Time Warner combination would harm the "marketplace of ideas" that
Internet technology has expanded in such a short period of time.

"Is this merger the beginning of the end of the
Internet as an effective counterweight to traditional media outlets, or is this just
another step on the road to making the Internet a more useful and usable source of
information? DeWine said.

DeWine said he was hopeful the deal address the cable
access debate "by potentially resolving it through private negotiations rather than
by government regulation."

Rep. Edward Markey (D-Mass.) said in a statement that
AOL-Time Warner deserved close regulatory review, especially to ensure that unaffiliated
ISPs can gain nondiscriminatory access to AOL's cable systems.

"Thousands of competing ISPs are asking whether AOL
now stands for 'All Others Left-out' or 'All Others Let-in,'" Markey said. "I
believe that it remains problematic to permit the owner of the broadband wire to determine
which ISPs get access, when, and under what conditions."

Consumer groups that have been pressing for open cable
access said in a statement that they will ask the FCC to adopt open access rules, saying
their position is consistent with the views espoused by Case.

"He has been absolutely right, and we sincerely hope
that he would continue to be such an advocate in AOL's acquisition of Time Warner,"
said the Consumer Federation of America, Consumers Union, and Center for Media Education.

CME president Jeff Chester, in an interview, called Case
the "Benedict Arnold of the digital age" for apparently backing off from
government-imposed open access. Chester said he will be urging local governments to
require open access on AOL as a cable franchise transfer condition.

MAP president and CEO Andrew Schwartzman said he was
actually hopeful that AOL-Time Warner would become a force in support of open access
because the company will need to distribute its high-speed Internet content beyond the 20
percent of U. S. households it will reach with its cable wires.

"I am not of the Benedict Arnold school. They have 80
percent of the homes to go. Are they going to try to negotiate their way through all of
that or would they do better with a straightforward nondiscrimination mandate that makes
their job a lot easier," Schwartzman said.

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