AOL: Merger Foes are Strategy-Challenged


Washington-An America Online Inc. executive said last week that the major companies opposing its merger with Time Warner Inc. want to hobble a competitor because they lack their own strategies to compete in the Internet economy.

George Vradenburg III, AOL's senior vice president for global and strategic policy, told an American University audience that The Walt Disney Co., SBC Communications Inc., Microsoft Corp. and AT & T Corp. have all lined up against the merger because they hope regulators will place restraints on the parties' activities on the Internet and in interactive television.

"It's scaring the heck out of The Walt Disney Co. because they know they haven't an Internet strategy," he said. "That's their Internet get conditions on this merger."

(An AT & T spokesman said the company is not opposing the merger, but is instead raising concerns with regulators. The spokesman declined to comment further.)

For 10 months, Disney has been the most outspoken critic of the $123 billion merger. Its campaign escalated when Time Warner dropped Disney's ABC Inc.-owned broadcast-TV stations in roughly 3 million cable homes during a protracted retransmission-consent dispute.

Aided by public-interest groups and AOL's business competitors, Disney has apparently made a case strong enough that both the Federal Trade Commission and the Federal Communications Commission have planned to make merger approval contingent on open-access Internet policies and instant-messaging interoperability.

At the same forum, Preston Padden, Disney's executive vice president of government relations, said there was no way regulators could approve the merger unless AOL-Time Warner agrees to a minimal set of fair-competition conditions.

Responding directly to Vradenburg's challenge, Padden claimed AOL-Time Warner's plan was to deny consumers a choice of ISPs and block them from easy access to competing content services.

As a real-world example, Padden said his company protested when AOL required Disney's AOL-delivered services to disable Web links to outside sites.

"The price of admission to AOL's walled garden is to deny you the right to navigate easily out of our site to somewhere outside the walled garden," Padden said. "These are the reasons we are in this dispute."

Vradenburg said AOL subsequently signed a deal with CBS Corp. that included none of the linking restrictions that bothered Disney negotiators.

AOL, Vradenburg added, prides itself on providing consumers friendly, easy-to-use service that includes a gateway to the information bounty of the Internet. At one point, he said, all an AOL customer needs to do to leave the AOL portal was type in the letters ESPN-a reference to the Disney-owned cable network-to reach that Web site in seconds.

Although AOL committed to content choice long ago, Vradenburg said, Disney created the portal as a method to funnel people to Disney-affiliated web pages.

"It just didn't work. Why? Because users do want choice," Vradenburg said.

Disney is also concerned about interactive television, particularly AOL TV, a dial-up service that will connect customers' TV sets to electronic mail, chat, and Web pages. Disney's fear is that once AOL TV migrates to broadband via Time Warner Cable systems, AOL-Time Warner will supply its content with a rich set of features that Disney won't be able to share.

In talks with Time Warner, Padden said, Disney sought, but did not obtain, assurances of equal treatment for its interactive services.

"If they had given us that pledge, I wouldn't be here tonight," Padden said.

Meanwhile, in an interview with CNBC last week, Disney chairman Michael Eisner said the merger should include conditions on content discrimination and broadband access.

"The consolidation of the two of them together doesn't bother me at all as long as.part of it is real nondiscrimination against other media companies and open access as there was in the narrowband world, so that every entrepreneur has a shot," Eisner said.

Eisner said he expects both the FTC and FCC to approve the deal.

"I don't know if the deal is going to get approved exactly as they would like, but I suspect the deal will get approved unless they refuse to negotiate with the government at all," Eisner said. "They are smart people. It will get approved."

Eisner said with the proper conditions, he didn't "mind the deal going through. I think they are both great companies."

Internet analyst Bill Whyman, president of the Precursor Group, said he expects FTC and FCC approval, but subject to some tight conditions.

"If the companies resist those conditions, they actually risk putting the merger at risk," said Whyman, who shared the podium with Padden and Vradenburg.

Whyman's advice to AOL-Time Warner was to accept conditions, because the government would not throw up roadblocks to stop the new company from leading in its markets.

"They are going to be one of the powerhouses of the broadband world," Whyman said.