AOL, Time Warner Clear FCC Hurdle

A year and a day after proposing a bold deal to create the biggest media company of the Internet age, America Online Inc. and Time Warner Inc. on Thursday cleared the final government hurdle to their $99-billion merger.

Although the regulatory review took longer than anticipated, the Federal Communications Commission voted unanimously in favor of the deal. “You’ve got approval,” quipped FCC Commissioner Susan Ness, referring to the chirpy “You’ve got mail” greeting on AOL’s Internet service.

By a narrower 3-2 vote, the commission also voted to impose modest conditions to AOL’s dominant instant-messaging service.

The new company, known as AOL Time Warner, wasted no time and formally closed the merger late Thursday, leaving executives with the difficult task of leading two very different corporate cultures.

“This is a historic moment for consumers everywhere, and a tremendous step toward our goal of becoming the world’s most respected and valued company,” said Steve Case, chairman of the new company.

The pairing creates the world’s largest media and entertainment conglomerate with some of the best-known brand names, including Warner Bros. studios, CNN, HBO, Sports Illustrated, Time magazine, Netscape and CompuServe.

The deal is the most ambitious attempt yet to combine the traditional entertainment industry with the world of new media. Even though the Internet bubble popped since the deal was announced, the combined company is expected to usher in a wave of new technologies. This would include interactive television, so consumers can download movies into their living rooms, play along with game shows or purchase items through their TV.

The merger also provides both companies with critical pieces missing from their existing businesses.

AOL, with 29 million Internet subscribers, was facing a threat to its telephone-based Net access from the surging demand for high-speed broadband Internet connections. Time Warner, with 12 million cable TV customers, will be able to provide AOL with access to this high-speed pipeline into American homes.

Meanwhile, Time Warner had been struggling to develop a successful Internet strategy for its wide collection of entertainment properties.

The FCC vote was the last regulatory step in a long, sometimes bitter battle to win the government’s blessing. Powerful opponents, including Microsoft Corp. and Walt Disney Co., warned government regulators that the combination of AOL, the world’s largest Internet service provider, and Time Warner, the world’s largest entertainment company, could monopolize the Internet and reduce choice for consumers.

During the last year, the value of the deal dropped about $60 billion as stock prices of both AOL and Time Warner fell, partly because of a nose dive in technology stocks and because some analysts doubted the vast company will produce the hoped-for financial gains.

Last month, the Federal Trade Commission extracted tough concessions in exchange for its approval, including a requirement that the company lease its cable lines to AOL rivals, such as EarthLink, before it can offer AOL broadband Internet service. The FCC also appointed a special monitor to ensure competition in the marketplace.

Concessions Required in Instant Messaging

Consumer groups and AOL rivals lobbied the FCC to impose similarly tough conditions on AOL’s Instant Messenger, a service that permits Internet users to know when their friends are online and exchange real-time messages. Future uses may include exchanging files, videoconferencing and listening to music.

AOL pioneered this technology and controls more than 80% of the market, with more than 140 million users worldwide on AOL Instant Messenger and its sister company, ICQ.

But rivals, including Excite@Home Inc. and Yahoo Inc., have pressured AOL to allow them to connect their own competing instant-messaging services to AOL’s, allowing their customers to send messages no matter which service they subscribe to. AOL has promised to open its messaging service eventually but insists it must first develop technology to protect the privacy and security of AOL members.

Instant-messaging companies lobbied the FCC to require that AOL make its entire instant-message system compatible with others as a condition of the merger.

In the end, the FCC ordered that AOL must open its instant-message system to at least one rival before it can offer advanced services, such as music or video across Time Warner cables. Then after 180 days, AOL must offer messaging access to two additional instant-message companies.

AOL can circumvent this requirement if it can show in the future that the marketplace has changed and it no longer poses a competitive threat.

One rival instant-message firm said the conditions don’t go far enough.

“It’s very shortsighted,” said Susan Bidel, vice president of marketing at MessageVine, a wireless instant-message company in New York. “They haven’t really dealt with the issues. I’m sure AOL will be very happy.”

Analysts said the conditions would have little financial impact on AOL Time Warner.

FCC Chairman William E. Kennard said he sought to strike a balance between protecting consumers and supporting the growth and development of new technologies.

“Because this merger is a marriage of old media and new media, content and conduit, it raised some new issues for policymakers,” Kennard said Thursday.

In addition, the FCC took steps to protect the Internet service providers that will one day compete with AOL by offering high-speed service on Time Warner cables. The FCC said AOL Time Warner may not interfere in the billing relationship with the customers of a competing service provider or dictate the content of the first screen that customers view when signing on.

Two FCC commissioners, Harold W. Furchtgott-Roth and Michael K. Powell, voted against imposing any conditions at all on the merger.

For Kennard, the AOL Time Warner approval will be the last major action of his tenure. Earlier Thursday, Kennard presided over his final FCC monthly meeting. He is expected to be replaced by Powell, the son of Secretary of State-designate Colin L. Powell, once President-elect George W. Bush takes office.

Kennard and other Democratic commissioners were eager to complete the merger review before Jan. 20, when Bush takes office.

Though winning government approval proved difficult, analysts say the real challenge for AOL Time Warner lies ahead in the integration of two companies with sharply different cultures and a staggering 85,000 employees.

“The day after the merger closes, you have to start thinking about how to put these two companies together,” said Morton Pierce, who chairs the mergers-and-acquisitions practice at law firm Dewey Ballantine in New York. “A hidden benefit of the extended regulatory process has been that executives have had a fair amount of time to think about these things.”

The new company will be led by Time Warner Chairman Gerald Levin, 61, who will be chief executive, and Case, 42, who led AOL as it avoided disaster in the early days of the Internet.

AOL President Bob Pittman, who will be co-chief operating officer of AOL Time Warner, already has been encamped in Time Warner’s New York office, where the merged company will be based. The two companies also have been cross-promoting each other’s products. For example, AOL has been selling subscriptions to Time magazine, which in turn is inserting AOL software into its issues.

Merged Company Braces for Challenges

Workers at both companies have been bracing for possible layoffs as AOL Time Warner strives to cut costs to meet its earnings and growth projections for the merged company.

Another challenge is the slowing economy. CNN, the cable network owned by Time Warner, is reportedly close to slashing hundreds of jobs.

A shakeout in the dot-com world has slashed AOL’s stock price by more than a third since the deal was announced, eroding much of the premium that was to be paid to Time Warner shareholders.

On Thursday, AOL stock closed at $47.23, up 5%, or $2.34 a share. Time Warner gained 6%, ending the day at $71.19. The FCC approval was announced after the markets closed.

Time Warner has had its own share of problems. Declining ad revenue caused the company to warn last month that earnings would be lower than expected.

Though analysts once predicted a wave of similar combinations of old-media and new-media companies, few rivals have so far followed in the footsteps of AOL Time Warner.

“This is a daunting task,” said Scott Reamer, analyst at SG Cowen Securities. “There are going to be structural, strategic and financial challenges. But the benefits will outweigh the risks.”