AOL-Time Warner Deal Clears Hurdle

The Federal Trade Commission on Thursday approved the $105-billion merger of America Online and Time Warner Inc., clearing the most significant remaining obstacle to the creation of the world’s largest media company.

Final approval, from the Federal Communications Commission, is likely within weeks. Once that happens, the information and entertainment behemoth would have a reach into television, movies, magazines and the Internet that would make it a ubiquitous--or inescapable--presence in the lives of almost every American.

AOL Time Warner, as the company is to be called, would assemble a critical mass of customers from AOL’s 28 million Internet subscribers, Time Warner’s 12 million cable customers and the 28 million readers of such Time Warner periodicals as Time, Fortune, People and Sports Illustrated. It would be identified with some of the most enduring names in American culture, ranging from Bugs Bunny and Madonna to HBO and CNN.

The FTC approval, on a unanimous vote by five commissioners, came with unusually stringent conditions. These are designed to prevent the company from using its vast bulk to dominate the emerging technologies of high-speed broadband Internet access and interactive television, or to stifle competition from Internet and entertainment rivals. The restrictions will remain in effect for five years.

These concerns posed an unusually complex challenge for antitrust regulators, who took months longer than originally expected. Indeed, the FTC staff was prepared until nearly the last minute to go to federal court to block the deal. AOL and Time Warner instead agreed to the regulatory restrictions Wednesday night.

“It was a close call,” FTC Chairman Robert Pitofsky said.

The merger may also increase pressures for more mergers among Internet and entertainment companies seeking comparable market power. These include Yahoo and Microsoft on the Internet side, and Walt Disney Co., News Corp., Viacom and Vivendi Universal among media companies.

“If this works for AOL and Time Warner, it might work for someone else,” said Tom Wolzien, media analyst for Sanford C. Bernstein & Co. “It will be very difficult for any company to stand alone.”

AOL Time Warner will be required to pass on to the FTC any complaints it receives from rivals alleging anti-competitive behavior. And the company will be subject to the appointment of a special monitor empowered to oversee its competitive practices and to make access deals with rivals if AOL fails to do so on its own.

The conditions, Pitofsky said Thursday, were designed to allay concerns that AOL, which is the biggest Internet provider with about 40% of the U.S. consumer market, and Time Warner, which operates the nation’s second-largest cable network, would drive smaller competitors out of business and reduce choice for consumers.

Pitofsky said the ongoing monitoring and reporting requirements were necessary because it is impossible to anticipate how the technology of broadcasting and the Internet will develop.

“The industry is changing so rapidly, it’s impossible to write an order today that can ensure that there won’t be harm to competition three or four years down the road,” he said. “The FTC pledges to be vigilant on a continuing basis.”

To prevent AOL Time Warner from becoming a gatekeeper to the Internet, among the key provisions of the FTC’s order were:

* The new company will be barred from offering its AOL broadband service in Time Warner cable’s major markets until at least one rival, EarthLink, is offering the same service. EarthLink has signed a wide-ranging agreement guaranteeing its subscribers access to Time Warner Cable’s broadband network. Within 90 days of offering AOL broadband Internet service, the company must provide access to at least two additional ISPs.

* In a nod to smaller Internet service providers, the FTC required AOL Time Warner to agree to negotiate in good faith with any ISP seeking to lease its cable lines and offer terms at least as favorable as those offered to EarthLink or AOL.

* AOL must continue developing its phone-based digital subscriber line, or DSL, service, which offers high-speed access via telephone lines. This is designed to maintain DSL as a viable competing technology to high-speed Internet access over cable.

* AOL may not interfere with competitors’ interactive TV services that utilize Time Warner cable franchises.

Perhaps the most surprising aspect of the FTC’s decision was the praise it won from the merger’s former opponents. These included Walt Disney Co., owner of the ABC television network, which was briefly kicked off the Time Warner cable system last spring in a programming dispute.

The matter was hastily resolved, but it galvanized Disney and other critics of the proposed merger, who said the move demonstrated how ruthlessly AOL Time Warner might wield its market clout in the future.

“We think the [FTC’s] order is a huge win for competition and consumers,” said Preston R. Padden, Disney’s executive vice president for government relations. Because Disney contemplates eventually being able to transmit, or “stream,” its movies directly to viewers via the Internet, it feared being forced to deal with only one all-powerful Internet source, AOL. “Now we’ll have many alternative pathways to reach consumers,” he said. “We’re now happy to congratulate AOL and Time Warner.”

Consumer advocacy groups that had been among the most determined critics of the merger similarly climbed on board.

“This definitely sets the stage for the emergence of a competitive broadband marketplace,” said Jeff Chester, executive director of the Washington-based Center for Media Education. “It’s just the beginning of the battle over the heart and soul of the Internet, but it opens a vital pipeline to competition.”

A strong dissent, however, came from the cable television industry, which does not relish being forced by government regulation to open its cable networks to independent Internet service providers on the same favorable terms AOL Time Warner was forced to grant EarthLink.

Because AOL dominates the Internet service market, its “unique circumstances do not apply to any other cable system operator,” Robert Sachs, president of the National Cable Television Assn., said in a written statement. “The antitrust safeguards imposed by the FTC . . . are not a precedent.”

FTC approval turned out to be far more difficult than AOL and Time Warner expected Jan. 10, when they announced plans for what was then a $163.4-billion merger between the Internet’s most successful brand name and the world’s largest entertainment company. (The value of the deal has fallen to $105 billion because AOL’s stock has fallen 31%. On Thursday, AOL shares rose $1.55 to $50 in New York Stock Exchange trading. Time Warner shares rose $1.90, closing at $74.50 on the NYSE.)

The deal aimed to solve critical problems facing both parties. AOL, most of whose customers reached the Internet via slow telephone connections, had been excluded from the high-speed access market by cable companies that owned the necessary lines. Time Warner had been unable to develop a commercial presence on the Web for its entertainment properties.

With one stroke the merger changed the media landscape. AOL, far from being only an Internet company, turned into the most potent player in the field with access to a monumental store of movies, video and entertainment brand names. Time Warner, once an Internet laughingstock, won instant access to the largest single customer community in cyberspace, with all its advertising potential intact.

But it also raised the hackles of rivals in all the markets touched by the two partners. Competing ISPs feared that AOL would shut them out of the broadband access market, and media companies feared that the merged companies would favor Time Warner material over their own in transmitting entertainment content to a vast audience.

Another concern was the emerging technology of interactive television, which could allow audiences to watch movies and video on demand, surf the Web and use e-mail, and make point-and-click purchases over high-tech cable-TV boxes. As a company whose dominance straddled the cable, TV and Internet markets, AOL Time Warner was in a position to act as a “gatekeeper” of such services for millions of Americans.

The final remaining regulatory hurdle is approval by the FCC, which is considering whether to order AOL to open its two instant-messaging networks to subscribers of competing Internet services.

Beyond that, the companies face the daunting task of making their unprecedented combination work.

“Is there execution risk? This is the biggest thing anyone’s ever built,” Wolzien said.

The merger brings together two companies with histories and cultures as dissimilar as chalk and cheese.

One question is how the two companies’ top executives will work together: Time Warner Chairman Gerald Levin, 61, a technology expert who led his company into the cable industry, will be the new company’s chief executive. And AOL Chairman and founder Steve Case, 42, who steered his company through the shoals of near-failure several times on its way to supremacy over the consumer online market, will be its chairman.

Among the best examples of the uncertainties that come with melding disparate giants is the merger that created Time Warner itself--the combination in 1989 of publishing giant Time Inc. and entertainment kingpin Warner Communications. Time Warner’s executives struggled for years as the combined companies piled up losses and saddled shareholders with a stock price that barely budged for eight years.