Small Ops Raise Problems with Merger


Washington-As events since May 1 made conspicuously clear, America Online Inc.'s merger with Time Warner Inc. has its problems with The Walt Disney Co., with the media giants slugging it out on the front page of every newspaper.

But the AOL-Time Warner combination is equally troubling for small cable-system operators, who fear that they would lack the market clout of a Disney when negotiating deals with AOL Time Warner Inc.

In the Disney example, the company headed by chairman and CEO Michael Eisner is throwing its weight around to get Time Warner to buy its programming services and to treat its Internet content on equal terms.

In their concerns about AOL Time Warner, small cable operators said the situation is just the reverse: What will the cost and the global terms be to obtain the rights to provide their subscribers with well-known Time Warner cable channels, such as Cable News Network, TBS Superstation and Home Box Office?

In a recent filing with the Federal Communications Commission, the American Cable Association-the organization that represents the country's small cable operators-forecast a gloomy scenario and said it wants the FCC to step in with merger conditions.

The ACA, headed by Matt Polka, predicted that AOL Time Warner will refuse to sell CNN, TBS, and HBO unless small operators agree to a package deal that includes AOL services.

If that turns out to be the case, the association said, AOL Time Warner would threaten the viability of small operators because access to "essential programming" would be tied to services that small operators may not want to purchase.

"This would sap capacity, raise cost, disrupt existing partnerships with [Internet-service providers] and stall infrastructure investment in smaller markets," the ACA said in May 11 comments at the FCC.

In an interview, Polka said the ACA's concerns with AOL Time Warner were "completely at the other end of the spectrum that Disney is worried about."

The association represents about 300 cable operators with 3 million subscribers, or some 5 percent of U.S. cable subscribers. AOL and Time Warner would bring together a cable company with 12 million subscribers and an ISP with 23 million.

AOL Time Warner told the FCC that the new company's strategy would be to deploy its brands as widely as possible. But it dismissed the ACA's prognostications of anti-competitive harm as far-fetched for a number of reasons.

In May 11 comments, AOL Time Warner said it would it be shooting itself in the foot by leveraging cable networks and ISP services, because small operators could turn to other programmers if they didn't like the terms it offered.

"The type of practices the ACA imagines.could not be sustained in the marketplace because there are too many diverse, competing programming networks to step into the void if AOL Time Warner in any way limited access to its programming," AOL Time Warner said.

Legally, AOL Time Warner said, the ACA's members are entitled to purchase its cable networks under the FCC's program-access rules.

The ACA, however, disagreed that the program-access rules afford the kind of protections AOL Time Warner suggested. The association said it did not have the financial resources to file complaints with the FCC, and it was unlikely that the rules would protect small operators that complain about being required to buy services they don't want.

"Consequently, the program-access rules provide no protection for smaller cable businesses against forced carriage of AOL services as a condition of program access," the ACA said. The FCC should withhold consent unless AOL Time Warner agrees to market cable networks and AOL services separately, the industry group added.

In a related request, the ACA asked the FCC to force AOL to divest its $1.5 billion stake in DirecTV Inc., the No. 1 direct-broadcast satellite provider, which has about 8 million subscribers.

AOL's DirecTV investment would give AOL Time Warner "a powerful incentive" to use "hardball, anti-competitive tactics" against small cable operators, the association claimed.

"The unavoidable issue is this: A customer lost by small cable is a customer gained by DirecTV," the ACA added.

In the fourth quarter, DirecTV plans to launch "AOL TV," a version of the online service adapted for television that is expected to compete with cable-modem and digital-subscriber-line services.

Jimmy Schaeffler, a DBS analyst with The Carmel Group, said AOL's stake in DirecTV parent General Motors Corp. was a significant statement that satellite bandwidth can bring the Internet to the home via satellite.

"If they were forced to divest at this point.that would take the entire satellite industry back and it would take the American consumer back a long way," Schaeffler said. "I think the consumer would be much worse off if its $1.5 billion investment was derailed or slowed down."

AOL Time Warner told the FCC that AOL had a limited and indirect interest in DirecTV because the investment was made in GM. Although the stake is convertible to the tracking stock of DirecTV's immediate parent, Hughes Electronic Corp., AOL Time Warner said the voting interest would be below 5 percent and too small a position to dictate DirecTV's programming decisions.

Rather than harming competition, AOL Time Warner said, AOL's investment in GM would help to accelerate "the development of satellite as a viable broadband platform" available to all Americans, thus helping to close the digital divide by bringing advanced services to high-cost areas.

"The [FCC] should reject.unsupported calls for divestiture of AOL's pro-competitive investment in GM," AOL Time Warner said.