The challenge facing the Federal Trade Commission was complex: how to allow Time Warner Inc. and Turner Broadcasting System Inc., two giants of cable television, to merge without getting a stranglehold on the market. Adding to the problem was the ownership stake of Tele-Communications Inc., the nation's largest cable company.
And the FTC staff came up with a complex solution: Force the combined Time Warner-TCI-Turner behemoth to spin off some stock and cancel some long-term contracts.
After months of intensive work by 15 people, the FTC staff proposed that the merger be approved under terms designed to dilute the market muscle of Time Warner, providing an opportunity for other cable operators and programmers to enter the business.
"The real issue was taking a dynamic look at the market, worrying about what happens when you combine 50% of cable households with the two top programmers," one source said.
Under the staff proposal, which will go to the full FTC on Friday, TCI, which owns 21% of Turner, would be forced to sell the Time Warner shares it obtains, agency sources said Wednesday. TCI is the biggest cable operator in the country, running systems connected with 14 million homes, while Time Warner is second-biggest, with 11 million.
TCI, through its interest in Turner, would wind up with 7.5% of Time Warner shares after the merger. The prospect of 25 million cable homes, nearly half the industry, connected through a single dominant company alarmed FTC officials.
Their solution was to isolate the decision makers at Time Warner from any collaboration with TCI. The stock would be spun off to a new corporation.
And long-term contracts by TCI's cable systems to buy Turner programs at discounted prices for 20 years would be shortened to five-year deals.
"Every five years, someone has a shot to come in and offer programs at better prices," another source said.
After the merger, Time Warner would also be barred from bundling HBO and Turner offerings such as CNN and WTBS, the Atlanta Braves baseball "superstation," in a single package for sale to cable systems.
For example, the company could not insist that a buyer seeking CNN and WTBS also be required to take Time Warner's HBO movie channel. Likewise, a firm that wanted HBO could not be forced to take CNN too.
Although the FTC's five commissioners have the final say, the staff is always highly sensitive to the commissioners' concerns and generally does not advance such a major proposal without first making sure the commissioners would approve.
"The FTC staff believes this agreement goes a long way in taking care of competitive concerns [and] retaining opportunities for new entry . . . " said George Cary, deputy director of the FTC Bureau of Competition.
Barry Pupkin, an antitrust lawyer and former FTC staff member, said the staff plan "sounds reasonable" and should provide the FTC with a way of achieving its goal of preventing excess concentration in the booming cable business.
In principle, the agreement "clearly addresses one of the primary concerns the staff had: that TCI could exercise undue influence . . . " Pupkin said.
The FTC, whose mission is to prevent concentration of power in operating cable systems or selling programs to cable stations, is likely to accept the staff plan as an appropriate compromise for handling a huge merger, Pupkin predicted.
The agency might have sought further concessions from Time Warner, but the company could have gone forward with the deal anyway, challenging the FTC to take the issue to court, Pupkin noted. The FTC's official comment Wednesday was limited to an announcement that the staff has reached an agreement in principle with the companies seeking the merger.
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The FTC Solution
To allay concerns about the power that a combined Time Warner Inc. and Turner Broadcasting System Inc. would have in the cable TV market, federal regulators are calling for certain strings to be attached to the companies' merger plan.
* Tele-Communications Inc., a part owner of Turner, would be kept separate from any formal influence at Time Warner. The Time Warner shares going to TCI under the deal would be spun off to a new corporation.
* Shares in the new corporation would go to the current owners of Liberty Media, the programming subsidiary of TCI. None of the executives of TCI or Liberty would have any role in determining policy at the new corporation. This means that TCI, as a huge cable operator, would not have any influence over the cable systems run by Time Warner.
* The 20-year contracts under which TCI cable systems are committed to carry Turner programming would be canceled and replaced by new five-year deals. When the five-year pacts expire, all programmers would be free to compete for space on the TCI systems.
"Every five years someone has a shot to come in and offer programs at better prices," a key source says.
* Time Warner could not charge extra for its programming to a cable competitor wanting to build a system in one of the markets served by Time Warner.
* Time Warner and Turner programs could not be bundled in a single package for sale to cable systems. The company could not insist, for example, that a buyer seeking Turner's CNN and TBS cable channels also be required to take Time Warner's HBO movie channel.