Proposed AOL-Time Warner Deal Still Must Clear Hurdles in U.S.

Though European antitrust regulators formally approved the merger of America Online and Time Warner on Wednesday, regulators, competitors and consumer groups on this side of the Atlantic have a message for the merger partners: It’s too soon to break out the champagne.

Several issues that were not considered by the European Commission remain obstacles to the deal’s approval by the Federal Communications Commission and the Federal Trade Commission. Both agencies have said they will need several weeks more, at least, before issuing their rulings. The merger partners have said they expect to earn government approval and to close their deal sometime this fall.

On Wednesday, as it happens, the FCC announced that it will defer its ruling until the FTC completes its antitrust investigation, an action known as “stopping the clock.” The FCC said it will promptly publish a timeline for taking its own action once the FTC rules.

Although opponents of the merger do not expect the agencies to block the deal outright, many are hoping approval will come with some explicit and enforceable provisions that would prevent the companies from discriminating against AOL’s rivals in the Internet service business and Time Warner’s rivals in the entertainment field.

That is an issue because the merged company would be the second-largest cable operator in the U.S. and one of the largest providers of high-speed, or broadband, Internet access to the home. Other companies fear it would use this combined clout to dominate the emerging market for interactive television, which can provide users with Web access, programming on demand and e-commerce services via television set-top boxes.

“Our concerns are focused on the marriage of AOL’s Internet dominance with Time Warner’s cable programming,” said Preston Padden, chief lobbyist in Washington for Walt Disney. “We’re looking for a binding assurance that this platform will work the same for customers whether the customer is interacting with channels and content Time Warner owns or channels and content owned by someone else.”

The EC gave its formal approval Wednesday to the merger after the partners canceled a merger between Time Warner and the music company EMI Group and agreed that AOL would sever its ties with Germany’s giant Bertelsmann Entertainment Group. Both steps were taken to assuage concerns that the merger would lead to an unhealthy concentration of power in music publishing and distribution in Europe. Because Time Warner did not own a cable system in Europe, the EC did not address the access issues so important in the U.S.

Chief among these is the question of “open access,” or allowing competing Internet service providers to use Time Warner cable connections to deliver high-speed Web access to their subscribers via cable modems.

Although Time Warner and AOL both have expressed formal support for granting AOL’s competitors access to Time Warner’s high-speed network, critics say the terms of that access make the promise a sham.

“We’ve seen proposals for pricing and revenue sharing that are highly discriminatory,” said David Baker, vice president for law and public policy at EarthLink, the nation’s second-largest Internet service provider.

Among other things, ISPs that have negotiated with Time Warner say the cable operator is insisting on retaining 75% of subscription fees paid by customers using independent ISPs to access its high-speed lines and a minimum of $30 a month for every Time Warner cable subscriber receiving Internet service using a rival ISP on the Time Warner cable network.

“These terms present no reasonable basis for independent ISPs to compete on a commercially viable basis,” said Steve Heins, marketing director for a small ISP in Oshkosh, Wis., in a letter this week to the chairmen of the FTC and FCC.

Time Warner spokesman Ed Adler declined to comment on the terms. “American Online and Time Warner have made their commitment to open access exceeding clear,” Adler said. “The current negotiations with ISPs are proprietary and it’s inappropriate to comment further on our ongoing discussions.” He added, however, that the terms are “in flux.”

Another sticky issue is whether the merged companies’ commitment to open access via the cable modem extends to the set-top box. Although interactive TV is thus far a faint technological promise, many believe it will be the standard for TV watching--and Web surfing--in the future. But the companies stated in August that their commitment to open access would not include interactive TV service.

“That creates a loophole that negates the whole concept of open access,” said EarthLink’s Baker. “The cable modem is becoming obsolete almost as quickly as it’s becoming distributed.”

FCC officials have hinted they will not accept the distinction by asking AOL and Time Warner for statements on how they would apply open-access principles to the set-top box.

A third area of potential conflict is instant messaging--a way for Web users to instantly communicate with friends or others who are simultaneously online. A growing number of applications also allow the users to send Web pages, music clips and other material to each other, all of which enhances the Web-wide usefulness of instant messaging.

AOL, which has the largest number of instant-messaging subscribers via its AOL Instant Messaging and ICQ applications, has consistently refused to allow messages to be transmitted between its own subscribers and non-AOL members.

The company has stated, however, that it will remove the blocks--allow “interoperability”--as soon as consistent technical standards exist for cross-network transmission.

But competing instant-messaging companies say AOL has been dragging its feet on the issue. They are asking the FCC to impose a specific deadline on AOL to lift the blocks.

“We all agree that interoperability is a consumer need, an absolute good, and sooner [is] better than later,” said Margaret Heffernan, chief executive of Woburn, Mass.-based Icast.

“The only question is, can we trust AOL to deliver on their promise, and history says we can’t,” Heffernan said.

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Times staff writer Jube Shiver Jr. contributed to this report.