Washington-In Europe and America, America Online Inc. and Time Warner Inc. have engaged in a two-front war to save their $123 billion merger from conditions that are a radical departure from the binding promises they made on a slew of issues, particularly open access for competing Internet-service providers.
Last week, AOL chairman Steve Case and Time Warner chairman Gerald Levin came here to meet with regulators at the Federal Trade Commission and the Federal Communications Commission and bargain on open-access terms.
The executives made their rounds as both agencies appeared ready to issue decisions sometime next month. As previously reported, the FTC is prepared to block the deal unless the companies make key open-access concessions.
In Belgium, the European Commission has taken the same stand as the FTC and gave the companies until Sept. 24 to make counteroffers designed to rescue the deal.
In a surprise development,The Washington Postreported last week that staffers in the FCC's Cable Services Bureau were urging the imposition of open access on AOL-Time Warner to prevent the new entity from dominating Internet content and distribution channels. The story quoted a Sept. 8 staff draft, but acknowledged that the recommendations could be outdated.
The FCC officially downplayed the story and voiced concern about the leak, noting that the release of internal agency documents is illegal. Agency chairman William Kennard has ordered the investigation of a similar leak that occurred during the review of AT & T Corp.'s merger with MediaOne Group Inc., which the FCC approved in June.
"Any media stories about potential staff recommendations on draft reports can only be based on incomplete and speculative analysis and do not accurately reflect the decision-making at the FCC," an agency spokesman said in a statement.
Open-access mandates issued by the FCC would represent an about-face for an agency that has spent at least two years studying the issue and found that the broadband Internet-access market was at too early a stage to merit regulatory intervention.
Cable operators that aren't part of the AOL-Time Warner merger are clearly worried that open-access mandates are just around the corner.
"Here's the scenario we all fear: 'Well, Time Warner is doing it. Why not everybody else?' That's the problem," a cable-industry source said.
Deborah Lathen, chief of the Cable Services Bureau and leader of the AOL-Time Warner merger review, insisted that no decisions about open access have been made.
"This is a preliminary staff draft," said Lathen. "We have not completed our analysis of this merger. I have not personally made any recommendation to the chairman or the other commissioners."
AOL and Time Warner, in a memorandum of understanding released in February, agreed to open-access policies. But in their discussions with regulators, AOL and Time Warner officials have said their proposals should not be imposed as merger-approval conditions.
AOL and Time Warner sources said that if regulators, especially the FCC, are keen on open access, they should initiate a general rulemaking that applies to the entire industry. They also said the application of open access rules on AOL-Time Warner would be unfair, because the FCC approved the AT & T-MediaOne deal without such conditions.
Some open-access supporters maintained that in the end, the FTC and not the FCC would be the body to craft the open-access rules.
"I think [the FCC is] interested in open access, but you can't guarantee anything," said Jeff Chester, president of the Center for Media Education.
Andrew Schwartzman, president of the Media Access Project, said he expects to have a better read on FCC officials' thinking after he meets with them this week. But he expressed confidence that the FTC's commitment to open access was absolute.
The FTC is "really firm and they are really going to drive a really hard bargain," Schwartzman said. "There are indications that the FTC is really taking a hard line and that, in turn, influences the FCC."
AOL and Time Warner spokesmen declined comment on the FCC development, but expressed confidence that the firms could reach a deal with European regulators and clear the necessary hurdles.
"This is a normal part of the process with the [European Commission]. We are totally comfortable with where we are at this stage of the negotiations," the companies said in a jointly prepared statement.
EC staff members concluded last month that the merger would produce anti-competitive effects in five market categories-a clear signal that it was in trouble overseas.
One analyst called the EC's latest move part of the normal course of negotiations.
"Obviously, [EC officials are] going to do everything they can to take a look under the covers to see if there is a deal here that in any way makes sense," PaineWebber Inc. analyst Christopher Dixon said. "One of the issues here is to recognize that there is really nothing on the merits that gets in the way of the AOL-Time Warner transaction."
Cable operators have expressed concern over the FCC conditions, especially if they are stretched to include other MSOs. But most hoped that these specific rules would apply only to AOL-Time Warner.
Although the FCC is planning to launch a cable-access proceeding, it is still many months away from adopting across-the-board access rules.
"If the notion is that marketplace negotiations will be conducted with ISPs, without specifying the numbers or with who, that's the direction the marketplace is taking anyway," said one MSO representative who asked not to be named. "If it is more detailed and if we can't physically accommodate all comers, that's a more troubling precedent."
AT & T Broadband spokesman Steve Lang declined to comment specifically on the AOL-Time Warner deal, but said AT & T's open-access position "is that the marketplace is the best way to regulate this business."
AT & T already has invited 10 ISPs to participate in an open-access trial in Boulder, Colo., and has plans for a second test in Boston. The number of ISPs participating in the Boston trial has not been determined.
Cablevision Systems Corp. declined comment.
ThePoststory also said that AT & T general counsel James Cicconi is urging the FTC to withhold merger approval unless Time Warner is forced to negotiate the sale of AT & T's 25 percent stake in Time Warner Entertainment, which includes 9.7 million cable subscribers.
The story said Cicconi pitched the TWE breakup as a means to prevent collusion between AOL Time Warner and AT & T. An AT & T spokesman declined to comment on the story.
"It's all about money; who has leverage in this deal," a cable-industry source said of AT & T's FCC lobbying effort.
Quipped open-access proponent Chester: "Whoever thought Jim Cicconi would become a consumer advocate?"