FTC BUILDS A MODEL

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WASHINGTON -Alarmed by a potential lock on emerging broadband-data and interactive-TV businesses, the Federal Trade Commission last week forced America Online Inc. and Time Warner Inc. to agree to a host of detailed merger safeguards that could affect other cable operators.

After months of tedious negotiations, the FTC approved the merger that unites AOL, the world's leading Internet-service provider, and Time Warner, the nation's No. 2 cable operator and media conglomerate, in a deal worth $111 billion.

When the then-$183-billion deal was announced in January, it was the largest in U.S. corporate history.

Together, AOL and Time Warner hope to provide consumers with high-speed Internet access backed by brands that presently dominate the Internet and enjoy powerful positions in the publishing, video-programming and film industries.

They also appear poised to introduce interactive-TV services designed to bring Internet functionality to the television by allowing consumers to pick up electronic mail and instant messages, access Web pages, alter camera angles and buy products hawked by Hollywood stars.

But before any of that can happen, the FTC insisted that AOL-Time Warner give competitors at least an equal chance at grabbing a piece of the lucrative pie. Had AOL and Time Warner balked, the agency intended to attack the merger in federal court.

"I believe this was an illegal merger, which is remedied by this order," said Richard Parker, director of the FTC Bureau of Competition, who led the agency's negotiating team under the watchful eye of chairman Robert Pitofsky.

AOL and Time Warner said in a statement they were "very pleased" with the FTC action and are having "constructive discussions" with the Federal Communications Commission, the last regulator that needs to sign off. They expect the merger to close by early 2001.

The companies called the FTC agreement "a win for consumers" and said it "advances the commitment the companies made last winter to offer consumers a choice among multiple ISPs on AOL Time Warner cable systems." They said 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 FTC, voting 5-0, granted approval provided AOL-Time Warner is in compliance with the following conditions for a period of five years:

Before AOL can provide its service to high-speed Time Warner subscribers, the company must first offer an unaffiliated ISP in any cable division with more than 300,000 subscribers. Time Warner's agreement with EarthLink Inc. effectively meets the requirements of this condition. This condition does not interfere with Time Warner Cable's ongoing provision of its high-speed ISP, Road Runner.

After introducing high-speed AOL, the company has 90 days to ink deals requiring FTC approval with two more unaffiliated ISPs. Additional ISPs can seek carriage, with AOL-Time Warner required to bargain in good faith.

\u0007AOL-Time Warner is prohibited from interfering with the content transmitted by unaffiliated ISPs, including signals and triggers that accompany ITV services.

AOL-Time Warner is barred from signing deals with any cable company that would make AOL the exclusive provider of Internet access and ITV services on those systems.

AOL-Time Warner is required to market and distribute AOL over telephone company-owned, high-speed digital subscriber lines in Time Warner Cable markets at about the same price that AOL charges DSL subscribers in non-Time Warner Cable markets.

The FTC plans to appoint what it calls a "monitor-trustee" that will enforce the conditions, review complaints, and issue orders to rectify any compliance problems. The agency's conditions-even those that contain prior restraints on speech-are not subject to judicial review, though some actions taken by the monitor-trustee can be challenged in court.

In a surprise move, the FTC did not require AOL-Time Warner to negotiate the sale of AT & T Corp.'s 25 percent stake in Time Warner Entertainment, which includes at least 9.7 million cable subscriber, Home Box Office and the Warner Bros. film studio.

Pitofsky said the FTC was not in position to remedy every problem.

'MODEL' ACCESS REGIME

FTC leaders said the scope of the conditions was necessary based on real fears that AOL-Time Warner represented an Internet/traditional media juggernaut with the unchecked might to crush any rival, big or small.

"Our concern here was with access, that these two powerful companies would create barriers that would injure competitors of Time Warner [and] competitors of AOL," Pitofsky said at a packed press conference at FTC headquarters on Dec. 14.

In an ominous sign for cable operators, Pitofsky said he hoped the FTC conditions would serve as a model "not just in Time Warner areas, but other areas throughout the country."

Consumer groups that pressed the FTC to ignore the FCC's policy of allowing cable broadband deployment to flower unfettered by regulation cheered the merger conditions.

"This is an enormous breakthrough on the road to open access," said Gene Kimmelman, Washington office co-director for the Consumers Union.

"We struck a blow to the heart of the cable industry," said Jeff Chester, executive director of the Center for Media Education.

The FCC is conducting an open-access proceeding but is not close to adopting rules. After reviewing two AT & T Corp. mergers and conducting two broadband-market analyses, the agency has jawboned for open access but has refused to impose on the basis that the market was too immature to warrant regulation.

In one MSO response, Cox Communications Inc. spokeswoman Kimberly Brown said her company hoped the FTC's action did not "set forth a precedent in the industry for forced access or mandatory access."

Despite the obvious policy clash with the FCC, FTC officials said the telecom regulator did not oppose the merger conditions.

"I don't think we have any conflicts with the FCC. I think they are pleased with what's come out," said FTC commissioner Orson Swindle, a Republican.

An FCC spokesman said the agency plans to act on the merger by the end of the year. The agency is debating whether to force AOL to open its instant-messaging network to competitors. AOL said it is moving is that direction, but not at the expense of customer privacy and network security.

Merrill Lynch & Co. Inc. analyst Jessica Reif Cohen said the open-access concessions that AOL-Time Warner had to make to win approval don't appear to be onerous.

"I don't think this is anything they can't live with," Cohen said. "Time Warner offering other ISPs access on their plant should be added to the bottom line."

According to a report in The Wall Street Journal, Time Warner would charge EarthLink about $27 per month for wholesale Internet access and agreed to offer free installation and provide cable modems and other equipment.

Time Warner would receive a portion of advertising and electronic-commerce revenue, but only after passing a high threshold. EarthLink would have to quadruple its current advertising and e-commerce sales before being required to give Time Warner a share.

In the consent decree with the FTC, AOL and Time Warner also agreed to pass through all the "triggers" residing in the vertical blanking interval that ITV players rely upon to deliver program and advertising enhancements.

RespondTV CEO David Kaiser called that good news.

"I share some of the concern that the FTC has," Kaiser said. "On the other hand, the concessions AOL has made to get the deal done are very significant, particularly in the ITV area."

Time Warner will promote those ITV players it does deals with, but will still pass through triggers from all companies, including those it does not have contracts with, Kaiser noted. "That's a pretty hard deal to complain about," he said.

MSOs TAKE IN STRIDE

Cable operators appeared to be not overly bothered by the approval conditions, given that so many are already planning for the day when they offer access to multiple ISPs.

"We were moving forward anyway," said Insight Communications Inc. president Michael Willner. "We've all known that when the period of exclusivity is over, we were going to entertain multiple-ISP approaches to the business."

AT & T Corp. is conducting a multiple-ISP trial in Boulder, Colo., and Comcast Corp. plans a trial in Philadelphia early next year. Time Warner Cable plans an open-access trial in Columbus, Ohio. America Online, CompuServe Interactive Services Inc., Road Runner, Juno Online Services Inc. and RMI.Net Inc. are among the other announced participants.

But National Cable Television Association president Robert Sachs said AOL's huge ISP presence made this situation unique, so other cable operators should not be expected to live up to the same conditions.

"The anti trust safeguards imposed by the FTC are unique to AOL's substantial Internet position and are not a precedent for broader government regulation," Sachs said in a prepared statement.

Officials at Comcast and AT & T deferred comment to the NCTA.

American Cable Association president Matt Polka said the ruling wouldn't set a precedent in terms of open-access regulations for other operators. But the small operators that ACA represents are also cautious about the possibility that the deal could lead to open access being forced upon them, he added.

"Our members are not opposed to working with unaffiliated ISPs, but they just do not want the government telling them that they have to provide access at below-market rates," Polka said.

But UBS Warburg cable analyst Tom Eagan said the FTC conditions are likely to be specific only to merging companies. MSOs shouldn't worry about the FCC imposing similar standards upon them, he added.

"This is generally good for the cable industry," Eagan said. "I don't think the FCC is going to demand the same ISP access that was wrested out of Time Warner."

One of the merger's biggest initial opponents, The Walt Disney Co. executive vice president for government relations Preston Padden, commended the FTC on its ruling in a statement. He called it a "huge victory for consumers and for competition."

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