Review of AOL-Time Warner Deal Extended

Federal regulators are extending their review of the America Online-Time Warner deal because of complaints that a merged company would end up with dominant control of the promising field of interactive television.

Interactive television is a potentially multibillion-dollar market of electronic commerce and video fees that Hollywood and Madison Avenue hope to harness by melding television and the Internet.

But critics fear that AOL-Time Warner on its cable TV network would create a “walled garden” of its own interactive commerce, programming and advertising to prevent competition in interactive TV.

This prospect of unfettered control over such a powerful technology has alarmed Walt Disney Co., NBC Television, some software companies and several consumer groups.

“This [would be] the first merger of TV and the Internet,” said Blair Levin, former chief of staff of the Federal Communications Commission, which is reviewing the AOL-Time Warner deal. “It gives AOL all kinds of incentives to continue the wall around the [interactive TV] marketplace. We want to make sure that marketplace is opened up.”

Levin is a lobbyist for ICast Corp., a Woburn, Mass., firm that makes instant-messaging software, which is expected to be a key interactive TV application.

“We need a nondiscrimination rule so that AOL and Time Warner don’t end up controlling [interactive TV],” said Jeff Chester, director of the Center for Media Education advocacy group in Washington.

AOL and Time Warner contend their deal is not anti-competitive because the two companies are in different businesses. Officials of the companies have expressed confidence their deal will be approved soon. But the FCC and the Federal Trade Commission have been slow to formulate any policy on interactive television.

The Federal Trade Commission, which is conducting an antitrust review of the deal, is expected to continue at least into November, according to people close to the case.

Regulators previously had indicated they would finish their work by mid-October.

Although interactive TV has less than 1% of the market, analysts see dynamic growth for the technology. Some envision viewers playing armchair director and choosing from multiple endings for their favorite TV show or allowing viewers to click on ads and instantly view product information or stock quotes.

Interactive television will be in 24 million homes in the United States by 2004, with revenue totaling $20 billion a year, according to Forrester Research.

Eyeing this lucrative market, AOL and Time Warner have told federal regulators that although they are willing to make concessions on other aspects of their merger--including opening up Instant Messaging and high-speed Internet access--interactive TV is nonnegotiable.

The two companies contend that because interactive TV is a nascent technology, it is premature for the FCC to impose conditions on interactive TV as part of their merger. The companies particularly oppose any requirement that their interactive TV network provide an electronic link so viewers can interact directly with rival services.

“Any such requirement would, in effect, [violate] . . . governmentally mandated free Internet access service,” AOL Senior Vice President George Vradenburg III and Time Warner Senior Vice President Timothy Boggs wrote in a letter released by the FCC last month.

But AOL and Time Warner are already at loggerheads on this issue with cable TV mogul John Malone and media titan Rupert Murdoch. Murdoch’s News Corp. recently expanded its stake in a key interactive TV service--the electronic program TV guides supplied by Gemstar-TV Guide International Inc. of Pasadena.

In March, Gemstar filed a complaint with the FCC, charging that Time Warner was blocking Gemstar’s Guide Plus+, which uses non-visible parts of TV signals to transmit an electronic programming guide that helps viewers sort through the dozens of stations available over cable TV and satellite TV systems.

The service is seen as a centerpiece of the emerging world of interactive television, Murdoch has said.

In June, Time Warner relented and told Gemstar that “in a gesture of goodwill” it would no longer block the electronic programming guide that competes with similar offerings from Time Warner. But Time Warner has remained adamant that it is not legally required to carry Gemstar’s service unless the company pays Time Warner.

Critics are attempting to persuade federal regulators that the Gemstar dispute is indicative of the anti-competitive practices that might arise if AOL and Time Warner are not forced to open up its interactive cable TV system to outsiders.

“We believe that the law is perfectly clear--the ‘must carry’ and retransmission rules do not allow you to strip program information out of the TV signal,” said Stephen A. Weiswasser, executive vice president and general counsel of Gemstar.

“Time Warner and AOL have been trying to pull a bait and switch,” said Chester, of the Center for Media Education. “This is not about high-speed Internet access. This is a battle over the future of television.”

But such warnings seem too draconian for some analysts who doubt that interactive television will ever catch on.

“The idea that we are going to become a nation of interactive TV viewers is incredibly optimistic,” said Robert Thompson, professor of film and television at Syracuse University and founding director of the Center for the Study of Popular Television.

“I can’t imagine that, after working all day at a keyboard at the office, people will want to come home and get on another keyboard and help TV stories along” or shop and send e-mail through a TV screen. “TV is supposed to be entertainment, not work,” Thompson said.