AOL Lobbies FCC on Merger Proviso
AOL Time Warner Inc.’s turnaround plans have bumped up against regulatory conditions forced on the media company when its giant merger was approved in 2001, sparking a recent request to ease one key limit.
Though the conditions -- which were intended to prevent the merged company from dominating the Internet -- are not likely to become major stumbling blocks to AOL Time Warner’s recovery, they are additional complications that could slow the company’s advance into the all-important broadband Internet market, analysts say.
Worried about its ability to roll out new broadband features and compete against rivals such as Microsoft Corp. and Yahoo Inc., New York-based AOL Time Warner has begun quietly lobbying the Federal Communications Commission to lift one important merger condition that restricts its ability to offer cutting-edge products, such as videoconferencing, on its popular instant-messaging system.
Unlike other providers, America Online was required in the merger to make its instant-message system operable with those of outsiders before it could offer advanced services.
At the same time, another merger condition that requires Time Warner Cable to offer rival Internet service providers access to its cable wires could leave the firm at a competitive disadvantage, some analysts say, particularly now that America Online has ended efforts to cut similar deals with other cable operators.
“If they become tied down by the conditions put on them with the merger, it’s going to hurt them from a competitive standpoint,” said Mark Kersey, senior broadband analyst at research firm Current Analysis.
Kersey said the recent decline in America Online’s instant-messaging market share may be linked to the company’s inability to offer advanced instant-messaging services, such as videoconferencing, which already are available on rival services offered by Microsoft and Yahoo.
According to figures from Web researcher Media Metrix, AOL’s market share of instant messaging has dropped from nearly 100% in 1999 to about 59%, while Microsoft and Yahoo have grown to 22% and 19%, respectively.
In a recent FCC filing, AOL complained that its competitors have been given a head start in offering advanced services. With more than 50 million users, instant messaging is one of AOL’s most important services.
But in 2001, the FCC said AOL could not offer video streaming unless it first made its system operable with other instant-messaging systems. At first, AOL promised to open up its system, but the company says costly technical and security hurdles remain. Regardless, the company says the condition should be removed.
“At this point, the only purpose of the condition is to stymie innovation,” said AOL Time Warner spokeswoman Kathy McKiernan.
She said AOL Time Warner has not yet developed a video version of its instant messaging, but would like to offer it to subscribers in the future.
“Video streaming is beginning to catch on,” she said. “But it’s not something that has moved into the mass market yet.”
Jeff Chester, head of the Center for Digital Democracy and a key opponent of the AOL-Time Warner merger, called the firm’s FCC request “outrageous.” He said AOL is still the dominant instant-messaging force and should be required to live up to its past promise to make its system operable with rivals.
“They’re just trying to boost their bottom line,” Chester said. “Do they think it’s the role of the FCC to help their stock price?”
In its filing, AOL Time Warner argues that it is no longer the dominant instant-message service.
The company’s request could receive a sympathetic ear from FCC Chairman Michael K. Powell, who voted against the instant-messaging provision when he was a commissioner in 2001. At the time, he said the FCC was overstepping its authority.
AOL Time Warner has fewer options when it comes to a separate condition imposed by the Federal Trade Commission, which required Time Warner Cable to open its systems to rival Internet service providers and offer them similar terms to those offered to AOL Time Warner-owned ISPs such as America Online.
At the time, it was expected that AOL Time Warner would use its clout to push the cable industry into opening all high-speed wires to competition, thereby creating an even playing field. But the rest of the industry balked and Time Warner Cable remains the only major cable company that operates under a competitive open-access model.
“They are subject to a different set of rules than everyone else,” said Bill Whyman, president of Precursor Group, a research firm. Whyman said many observers believed that the merger condition “would be the wedge that would leverage open access across the industry, but now there’s next to no interest in open access.”
AOL, the nation’s No. 1 Internet service provider, recently announced it would give up on its efforts to cut similar deals with other cable companies and instead would focus on selling a cheaper version of its service as an add-on to the cable provider’s access plan.
The merger condition increases costs for Time Warner Cable by forcing it to maintain back-office systems capable of supporting different ISPs, said Michael Harris, president of Kinetic Strategies, a Phoenix research firm.
But Harris also noted that Time Warner Cable appears to be benefiting from the government-mandated competition, which has increased consumer awareness about the broadband product and boosted subscription rates.
“Time Warner has one of the highest cable modem adoption rates in the industry, and some of that is attributable to the fact that other ISPs are bringing in the business,” Harris said.
Time Warner Cable added 1 million new high-speed Internet customers last year, bringing to the total to 2.6 million, distributed among Road Runner, America Online, EarthLink Inc. and other ISPs, said Time Warner Cable spokesman Keith Cocozza.
He said AOL Time Warner has no plans to seek relief from the open-access condition.
“This business model has worked for us,” Cocozza said.
