AOL-Time Warner Lesson: Dont Ask for Regulations

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"We believe that any approval of this transaction should be conditioned upon the combined firms provision of open access to its cable platform in order to empower consumer choice among competing Internet-service providers."

-America Online Inc., Aug. 23, 1999, in FCC comments on AT&T Corp.'s merger with MediaOne Group Inc.

WASHINGTON-By now, it should be called the Anstrom Doctrine, named for Weather Channel CEO and former National Cable Television Association president Decker Anstrom. He's often quoted along these lines: If you invite the government in to regulate a business, you'll inevitably regret it.

Heedless of that advice, less than five months before America Online Inc. agreed to buy Time Warner Inc., the world's leading Internet-service provider begged federal regulators to impose open-access conditions on AT&T Corp. In fact, AOL kept pressing the point even as CEO Steve Case and Time Warner Inc. CEO Gerald Levin nailed down their deal.

Once AOL and Time Warner announced their merger a year ago, AOL abruptly switched sides and solemnly abjured any support for government involvement in regulating competing ISP's access to cable systems.

Nevertheless, the Federal Trade Commission and the Federal Communications Commission decided to pay closer attention to AOL's words that preceded the Time Warner deal. That decision resulted in a requirement that AOL Time Warner Inc. comply with broad open-access conditions, mandates to supply Internet access to phone-company competitors and prohibitions on seeking first-screen and direct-billing rights for vendor ISPs.

Federal regulators also compelled AOL Time Warner to withhold the launch of advanced instant-messaging services on its cable systems until competitors with similar services could reach AOL Time Warner customers without interference.

And last week, the FCC launched a notice of inquiry, aimed at the cable industry at large, that would determine whether MSOs will have the power to use their networks to injure competing interactive-television suppliers.

ITV issues had been far off the FCC's radar screen-that is, until The Walt Disney Co. used the issue as a lobbying bludgeon against the AOL Time Warner merger.

Now, the big question is whether the conditions federal regulators imposed on AOL Time Warner will wind up ensnaring the entire cable industry.

One industry source last week ruled that out, mainly because many cable operators have agreed to carry competing ISPs. That move, the source said, should appease regulators.

"We think that proponents of regulation will try to extend the conditions from the FTC consent decree as amplified by the FCC to other cable operators, but we don't assume that they will become law or regulations," the source said.

Paul Glenchur, a cable analyst with Schwab Washington Research Group, said that although the AOL Time Warner merger set a precedent, the FCC refused to impose open access on AT&T when the MSO decided to merge with MediaOne Group Inc. and Tele-Communications Inc.

"I really have doubts that the commission is going to go down that path," Glenchur said. "It's still the issue of whether the benefits outweigh the cost of having regulators step in and begin that rulemaking process with all the subsequent litigation that would be involved in doing that."

When the FCC approved the deal on Jan. 11, chairman William Kennard characterized the merger conditions as "very narrowly tailored, minimally intrusive" steps to protect consumers and, derivatively, AOL Time Warner competitors.

"We focused specifically on harms that would be presented by these two companies coming together," Kennard told reporters.

There's no question the FTC and the FCC could have added even more layers of regulation. Both agencies were asked to force the companies to divest their cable networks; to force AOL to modify online setup protocols for its new Version 6.0; and to guarantee access to local and regional ISPs. Some even pressed for AOL to divest its $1.5 billion stake in DirecTV Inc. But none of that happened.

"On open access, which is my essential issue, we got about as much out of merger review as we could," said Mark Cooper, research director for the Consumer Federation of America. "We wanted an obligation to sign with the little guys. We got the inclination to sign with the little guys. We wanted number 2 and number 3 to be a little guy. We didn't get that."

'AN OBVIOUS LOOPHOLE'

As one cable industry source noted, the FTC's five-year open access mandate requires AOL Time Warner to provide access to at least one competing ISP before the company may launch a high-speed version of AOL on Time Warner Cable systems in large markets.

But that condition did nothing to prevent AOL Time Warner from offering Time Warner's high-speed Road Runner service exclusively on Time Warner Cable systems.

"It is an obvious loophole," a cable industry source said. "It's not something that people who negotiated that were unaware of. I think what [regulators] assumed, and probably correctly so, is that AOL wants to get the AOL brand in front of as many people as possible as soon as possible."

Not so fast, said David Baker, vice president of law and public policy for EarthLink Inc.. That ISP-No. 2 nationwide, with 4.6 million subscribers-reached an access deal with Time Warner Cable in November. Baker said the deal includes safeguards that guarantee EarthLink access before the launch of high-speed AOL.

"There are contractual obligations that would protect against that," Baker said.

The extension of open-access rules to cable industry at large will depend on the outlook of the staff installed by President Bush to run the FCC. Bush is expected to name Republican FCC member Michael Powell as chairman.

In commenting on the merger, Powell indicated his willingness to defer to the FTC's judgment on open access. At the same time, Powell cautioned that the FTC's conditions and other open-access conditions added by the FCC should not compel the agency to graft similar mandates on the rest of the cable industry.

"As a practical matter, I have no doubt that these conditions will distort discussion about what, if any, rules are necessary to promote the availability of multiple ISPs on cable or other broadband platforms," Powell said in a statement.

To the extent cable must face government pressure on open access, the industry might have to do so as a split entity. That's because AOL Time Warner, the only cable operator with an open-access requirement, now has the incentive to see other cable systems be as open as its systems.

The FCC is conducting a cable open-access proceeding that has generated hundreds of comments that run for thousands of pages. Time Warner Cable's comments, filed on Jan. 10 (one day before the FCC approved the merger), ran less than two pages.

"However these critical issues are addressed, we agree with other commenters that a uniform national approach in this area is the preferred course," Time Warner Cable said. Notably, Time Warner did not name the parties with whom it agreed or provide any details about the FCC's role in shaping a national policy.

Asked for clarification, an AOL Time Warner spokesman said: "We think that this is something that can be solved in the marketplace. To the extent government would enact anything, it should be industry-wide."

A cable industry source said other MSOs expect AOL Time Warner has long buried the position AOL took in the AT&T-MediaOne merger.

"I think in the first instance that AOL is not going to take the approach that AOL took a year ago, but rather they are going to seek to negotiate affiliation agreements with other cable operators, much as HBO [Home Box Office] and Turner [Broadcasting System Inc.] have affiliation agreements with other cable operators," the source said.

Most analysts don't see the FCC and FTC open access conditions applied to companies other than AOL Time Warner.

"I don't think this means that much for everybody else," said SG Cowen Securities Corp. cable analyst Gary Farber. "I don't see a tremendous amount of near-term regulatory issues for these guys."

CABLE COULD SPIN OFF

In fact, many analysts see open access as a boon for operators, as long as they are allowed to add ISPs at their own pace. Forcing cable systems to allow multiple ISPs on their high-speed networks before the technology is ready could prove to be a disaster.

One analyst who asked not to be named said that the FCC and FTC provisions could change AOL Time Warner's priorities in the next few years, especially regarding the cable operations.

"What this presupposes is that the combined company will slant the economics toward the AOL side of the house and away from the cable side of the house," the analyst said. "I think that presages a potential spinoff of the cable operations down the road."

Any spinoff would need to take place at least two years from now to avoid a huge tax bite.

Local regulators said it's far too early to judge the real-world impact of the merger on open access. None could name an ISP that sought access during the open-access debate.

"No one's even though of what structural changes will be necessary (to compel open-access compliance)," noted Bill Marticorena, an attorney who advises local governments in California.

The competitive landscape has also changed in some pro-access cities. For instance, digital subscriber line provider Pacific Bell has reached widespread deployment with multiple ISPs for content in San Diego; that city has also approved a competitive overbuilder.

In that market, anyone who remains closed will be at a competitive disadvantage, noted Marc Jaffee, city cable administrator.

Still, should an ISP approach the city seeking access to the local Time Warner Cable operation, "we will take a look at that," he said.

Industry executives believe the precedent of the AOL Time Warner merger would not mean more open access conditions would be applied to other MSOs.

"I would not make that assumption," said Ohio Cable Telecommunications Association executive vice president Ed Kozelek. "I think the industry has done a good job in educating municipalities that this is not in the consumer's best interest."

Even so, with a docket still open at the FCC, there is still the chance that open access could be mandated nationwide.

As such, municipalities that negotiate new cable franchises will cover themselves by demanding language requiring operators to abide by "all applicable laws," said St. Louis cable administrator Susan Littlefield.

Mike Farrell, Joe Estrella and Linda Haugsted contributed to this report.

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