FTC’s Unusual Task in AOL-Time Warner
The scheduled vote today on the pending AOL-Time Warner merger caps one of the most challenging and potentially far-reaching antitrust reviews faced by the Federal Trade Commission in years.
Though antitrust reviews at the FTC are rarely simple, the marriage of Virginia-based America Online Inc., the No. 1 Internet service provider, and New York-based Time Warner Inc., a cable and entertainment giant, raised a host of difficult questions.
Chief among them is whether to regulate cutting-edge technologies and how best to foster competition in markets that have not yet been developed.
In addition, because AOL and Time Warner compete in different industries, the deal doesn’t create the traditional antitrust concerns about overlap, but has led competitors to worry that the merged company might dominate the Internet.
“It’s been an unusual review, in part because it involved new technologies, but also because it was so high-profile,” said Mary Azcuenaga, a former FTC commissioner who now works as an antitrust attorney at Heller Ehrman White & McAuliffe. “There is always more pressure with these marque mergers.”
After reviewing the deal for months, listening to scores of experts and poring through reams of paper, the five FTC commissioners are prepared to meet in Washington today to decide the fate of the first mega-merger of the Internet economy. It is expected that the commissioners will either impose heavy conditions on the deal, or reject it.
Commissioners are mindful that the decision will be scrutinized and second-guessed for years, Azcuenaga said, and could set the standard for future technology deals.
There are signs that the commission has struggled with the AOL deal. The agency set, and then broke, several deadlines for concluding its review. A scheduled vote last month was postponed after commissioners took the unusual step of pushing aside a staff proposal and demanded additional concessions from the companies.
This week, the commissioners’ indecisiveness was apparent in the last-minute flurry of activity and conflicting reports of how some planned to vote. Opponents of the deal continued to plead their case as late as Wednesday, a rare sign that some commissioners have not made up their mind.
“The interesting problem faced by the FTC in this deal is that you have two companies who are absolutely dominant, but in different spaces,” said Blair Levin, a technology lobbyist and former chief of staff at the Federal Communications Commission. “The question is whether the companies will be able to leverage their combination of dominance into new markets, such as broadband Internet access, instant messaging or interactive TV.”
By contrast, most other mergers that come before the FTC involve two rival companies in the same business, such as the marriage of two oil companies. In such a case, the agency can reject the merger if it finds that the combined company’s market share is too large, or if it would be in a position to control prices and drive out competition as the commission did in blocking the proposed office-supplies merger between Office Depot and Staples.
“The AOL-Time Warner transaction presents very different questions,” said Howard Morse, an antitrust attorney and former assistant director of the FTC’s bureau of competition.
Commissioners must consider whether the companies will be able to combine their products and services--such as coupling AOL’s Internet service with Time Warner’s cable wires--to monopolize certain industries or technologies.
To make matters more complicated, many of the key technologies that AOL-Time Warner might dominate, such as interactive TV and high-speed broadband Internet access, are not yet fully developed or widely available.
“These are emerging markets,” Levin said. “The dilemma for the FTC is that, on the one hand, you don’t want to regulate too early. But on the other hand, given the dominance the company would have, there are very serious concerns about what it might mean for innovation.”
Former FCC Chairman Reed Hundt, now a principal at McKinsey & Co., said the FTC should take a hands-off approach.
“They’re trying to micro-manage an industry that doesn’t even exist yet,” Hundt said. “[The antitrust review] is not an appropriate platform to try to develop a broadband policy.”
In the AOL-Time Warner review, the agency has had to skate a fine line between those who want it to use the merger as an opportunity to set broader Internet policies and those who say the commission should stick to narrow antitrust issues. Congress, in particular, takes a dim view when agencies attempt to use their regulatory or enforcement powers to set public policy.
Pressure on the FTC to act broadly is even greater because other federal agencies, particularly the FCC, have declined to act on several hot-button technology issues, such as whether cable companies should be forced to lease their high-speed wires to unaffiliated companies.
Finding an appropriate remedy to the competitive concerns raised by the AOL-Time Warner deal also has been a challenge.
Unlike a merger between two oil companies, antitrust concerns cannot be addressed by simply ordering the divestiture of some refineries and gas stations in overlapping markets.
Instead, the FTC is weighing whether to set restrictions on the future behavior of AOL-Time Warner, such as requiring the companies to lease their cable wires to other Internet service providers or promise that they won’t discriminate against AOL rivals who want to offer interactive TV on Time Warner lines.
Such agreements also are vulnerable to the whims of future commissioners, who can affect how vigorously the original terms are enforced. “If they set a paradigm with this deal, it could be extremely short-lived,” Hundt said.
