Washington-The Federal Trade Commission's plan to impose open-access rules on America Online Inc. and Time Warner Inc. left more than just the two companies reaching for the Tums bottle: It also gave a queasy feeling to the cable industry and some at the Federal Communications Commission.
According to published reports and government and industry sources, the FTC is unwilling to approve the $123 billion AOL-Time Warner merger unless the companies agree to provide unimpeded access to competing Internet-service providers.
The FTC has also raised objections to AT & T Corp.'s 25 percent stake in Time Warner Entertainment, a limited partnership that houses 9.7 million cable subscribers.
And it objects to AOL's $1.5 billion investment in Hughes Electronics Corp., parent of satellite-video distributor
DirecTV Inc. Government and industry sources said the Hughes investment has not risen to the same level of importance as the other issues, however.
The FTC is concerned that with 12 million cable subscribers and 24 million dial-up Internet subscribers, AOL-Time Warner could harness those assets to become the dominant player in the emerging broadband Internet market if it excluded other ISPs or offered discriminatory terms that effectively achieved the same end.
Although AOL and Time Warner announced in February that they would provide an open platform, and they have already cut one deal with Juno Online Services Inc., they have told the FTC and local regulators that they don't want their commitments codified in a merger agreement or in hundreds of franchise-transfer agreements.
The merger is also facing opposition from antitrust regulators in Europe. Last Thursday, AOL and Time Warner executives met privately with European Commission officials in Brussels, Belgium, to defend the deal after EC staff concluded in a report last month that the merger would produce anti-competitive effects in five market categories.
The EC also has serious concerns about concentration in the music-publishing market as a result of Time Warner's announced joint venture with EMI Group plc. The EC is expected to make decisions regarding both deals in the middle of next month.
WANT IT IRONCLAD
Industry sources said the FTC wants an ironclad commitment from AOL-Time Warner-the scope of which is not exactly clear-before signing off on the deal.
The FTC's stance on open access marks a major shift in federal policy that has been in place since early 1998, causing concern within the cable industry and at the FCC.
Cable-industry sources said an open-access mandate on AOL-Time Warner could eventually cover the entire industry.
They added that the FTC could complicate cable's lobbying effort at the FCC, which plans to launch a proceeding next week on regulatory classification of Internet over cable. Cable foes want the FCC to classify cable Internet access as a telecommunications service, to which competing ISPs would have a right of access.
Some in the cable industry noted that an open-access regime that extended to the entire cable industry would ease AOL-Time Warner's effort to promote its "AOL Anywhere" strategy without the kind of tough bargaining that would go on if the government didn't guarantee access.
For their part, FCC officials said they would be troubled if the FTC's open-access stance led to layers of regulation with regard to prices, terms and conditions.
The FCC stayed out of the open-access debate in part because the agency saw itself getting bogged down in applying phone-company access rules to cable operators.
"Does the FTC want to become the new Common Carrier Bureau for the FCC? I don't think so. I don't think that's where they want to go," a government source said. "At the other extreme, you could see them doing something like telephone regulation."
But consumer groups that have been lobbying the FTC to impose open access on AOL-Time Warner cheered the news that the agency has decided not to sit back and monitor developments like the FCC.
"The good news here is that the FTC appears to be leading and the FCC is following," said Jeff Chester, president of the Washington, D.C.-based Center for Media Education, an open-access advocate who has met with FTC staff reviewing the deal.
In the past two years, FCC chairman William Kennard has had four opportunities to require open access, but he has declined each time, saying that the marketplace should be allowed to determine who wins a broadband race that he feels has just left the starting gate.
The FCC has issued a pair of broadband-market reports and reviewed two huge cable-system acquisitions by AT & T.
Despite pressure from industry competitors and consumer groups, the commission in those instances said no one dominates the broadband market, multiple providers were deploying high-speed Internet facilities in droves and the proper stance for government was to stand down and see if competitive pressure forces cable to open.
AT & T has committed to open access, and both AT & T and Time Warner have open-access trials in the works.
But FTC chairman Robert Pitofsky, an antitrust expert from Georgetown University, has apparently concluded that the AOL-Time Warner combination-bringing together massive distribution and content properties-can't be rubber-stamped without government intervention.
Pitofsky, a Democrat, leads a five-person commission that includes two other Democrats and two Republicans. FTC spokesman Eric London declined to comment on the agency's review of the merger.
Several cable lawyers, including some close to the AOL-Time Warner merger, agreed with the assessment that the FTC has essentially taken the FCC's broadband-market analyses and tossed them in the trash.
They said it was remarkable that the FTC would give the back of its hand to conclusions reached by the expert agency that had conducted careful reviews.
"The [FTC] has taken this view very early in time, when the FCC has refused to take a snapshot of two precincts and call the election," a Washington cable attorney said. "They are not consistent views. They are different universes."
The FCC's broadband-policy calls forced the FTC's hand, Chester said.
"It's very unfortunate that Bill Kennard has driven the largest media merger in history because of his failure to act on open access," he said. "If he had acted on open access, AOL would not have had to buy Time Warner, and we would not have further concentrated media ownership."
Some FCC sources insisted last week that in fact, there was very little daylight between them and the FTC, and they were coordinating their reviews and communicating their concerns in an open manner. For example, FTC and FCC staff members have met jointly with AOL and Time Warner representatives at least once, according to FCC records.
Sources from both agencies said last week that they expect to finish their reviews in mid-October.
Because the merger does not clash with any FCC rules, the agency is analyzing the deal under its mandate to protect the public interest. The FTC is looking at the deal under antitrust laws designed to protect competition from monopolization.
Although the FTC's position complicates their merger at the federal level, both AOL and Time Warner issued statements last week predicting that they would attain regulatory approval and close the deal in the fall.
"I cannot foresee any problems in this thing closing," said Aaron Fleischman, a Washington attorney representing Time Warner.
"We are confident that we will successfully address all of the issues that have been raised in our review," AOL spokeswoman Kathy McKiernan said.
If the FTC decides to block the deal, it has to seek a preliminary injunction in federal district court. If the judge denies the FTC's motion, AOL and Time Warner can merge, but the agency has the right to bring the deal before an FTC administrative law judge, which could take many months, if not years, to play out.
As a result, AOL and Time Warner need to reach a compromise with the FTC to prevent their deal from sinking.
Industry sources said they were confident that the companies could strike a deal. "The pressure will be great to reach a settlement," said Kevin Arquit, a lawyer with Clifford Chance Rogers & Wells, who headed the FTC's Bureau of Competition during the Bush administration.
The issue now becomes one of how broad an open-access mandate the FTC will impose. Will it be a straightforward codification of AOL-Time Warner's list of promises, or will it drive deeper and spell out conditions regarding points of access, billing arrangements, first-screen guarantees, two-way transmission speeds and the like?
Andrew Jay Schwartzman, president and CEO of the Media Access Project, a public-interest law firm that is urging the FTC to impose open access, said requiring AOL-Time Warner to treat competitors fairly was not the complex regulatory undertaking that some suggested.
"One of the big issues for regulators is, 'Can this be done in a self-executing, self-enforcing way?'" he said. "We are not talking about rate regulation. What we're talking about here is whatever the best price one person gets, somebody else can get. That's easy to work out. You could do that through arbitration."
Doubters also said the FTC's notion that AOL-Time Warner would be the only broadband player is a real stretch. The FCC released a report late last month that showed cable with 51 percent of the high-speed-access market at the end of 1999.
In July, cable analyst Richard Bilotti, managing director at Morgan Stanley Dean Witter & Co., predicted that SBC Communications Inc.-a Baby Bell phone company with 400,000 digital-subscriber-line customers-would add as many new DSL subscribers in the fourth quarter as AT & T, Time Warner, Cox Communications Inc. and Comcast Corp. combined would add cable-modem customers.
With the market in that kind of transition, cable sources said they were truly puzzled at how the FTC could theorize that AOL-Time Warner would be the lone provider in Time Warner Cable markets.
So far, only three FTC concerns have bubbled to the surface. There could be more to come with the host of problems raised by The Walt Disney Co. and others relating to instant messaging, return-path access, interactive TV, caching, content discrimination and screen bias.
In June 1999, AOL made a $1.5 billion investment in Hughes to help support its planned "AOL-Plus via DirecPC" broadband Internet service, as well as the "AOLTV over DirecTV" enhanced-television product, which is set to launch in time for the pre-holiday selling season late this year.
"We cannot speculate on any government action," DirecTV president Odie Donald said last week when asked whether he expected AOL to have to divest its stake in Hughes.
Monica Hogan contributed to this report.