As antitrust matters go, the $183 billion combination of America Online Inc., the nation's largest Internet service provider, with media and entertainment conglomerate Time Warner Inc. is not expected to trip many alarms with federal regulators, analysts said yesterday. In a strict sense, the two companies are engaged in different businesses and their merger would eliminate little or no competition.
But the sheer scope of the deal--it would be the largest in history--and the reach of the combined companies could intensify debate over who controls access to the Internet as it becomes increasingly central to much of American life.
News of the deal sparked worries that corporate consolidation now imperils the free-for-all quality of the global computer network. If such expressions of concern grow loud, the Federal Communications Commission or antitrust authorities could condition approval on promises that the new AOL Time Warner would guarantee "open access" to the Internet, allowing its high-speed Internet customers to connect to the service provider of their choice, some analysts said.
In a sign that the debate has political currency, Sen. Mike DeWine (R-Ohio), chairman of the antitrust subcommittee of the Senate Commerce Committee, and Sen. Herb Kohl (D-Wis.), the panel's ranking member, released a joint statement pledging to hold congressional hearings on the deal's impact on "the so-called 'marketplace of ideas.' "
"Is this merger the beginning of the end of the Internet as an effective counterweight to traditional media outlets," the senators asked, "or is this just another step on the road to making the Internet a more useful and usable source of information?"
As AOL raised the banner on its corporate capture yesterday in New York, it pledged that it would not restrict customer choice in choosing an Internet service. "We're committed to the concept of opening this up," AOL chief executive Steve Case said in an interview.
But consumer advocates were not assuaged. "Consumers do not want to be beholden to a giant media-Internet dictatorship," said Gene Kimmelman, co-director of Consumers Union.
The latest deal also heightens questions about another major telecommunications merger, AT&T Corp.'s pending purchase of cable giant MediaOne Group Inc. In buying that company, AT&T would inherit a 25 percent stake in Time Warner's cable systems. Yesterday's news means AT&T would wind up owning a piece of the new AOL Time Warner. The cable world has long been marked by complex ownership webs, but how this complication will affect the FCC's ongoing review of the AT&T-MediaOne deal was anyone's guess.
At the heart of AOL's move to take over Time Warner is the growing belief that the next generation of the Internet will demand unprecedented speed, allowing sophisticated graphics and video to be fused with the current computerized fare. Cable wires have emerged as a leading conduit for the new high-speed Internet, competing with DSL, a technology that runs over phone wires. AOL has now ensured itself a way into the roughly 13 million households served by Time Warner's cable systems.
But what about AOL's rivals? Will they also be able to sell their services over Time Warner's cable systems? For months, AOL has led a pitched battle to force cable companies to share their wires with Internet service providers, much as local telephone companies are required to let competitors connect to their systems. The company has funded the OpenNet coalition, which portrays itself as a grass-roots group pressing for "open access" to cable.
The open-access debate was prompted by AT&T's push into cable. The long-distance company snapped up Tele-Communications Inc. and then MediaOne in a bid to ride those wires into homes, selling both high-speed Internet and telephone connections. As part of its merger with TCI, AT&T inherited a contract giving Internet provider Excite At Home the exclusive right to sell service over the TCI system.
AOL urged cities around the country to adopt rules requiring AT&T to let other Internet providers serve customers on the same terms. It sought to persuade the FCC to mandate an open-access policy nationally. The commission, led by Chairman William E. Kennard, has declined to regulate, citing worries that rules could discourage cable companies from upgrading their systems for high-speed Internet links.
Cable officials portrayed AOL's advocacy cynically. They said the company stood for open access only so long as it was on the outside: Once AOL did a deal with a cable company--it had been negotiating with AT&T before taking Time Warner--its passion for open access would wane.
Not so, AOL and Time Warner said yesterday. "AOL Time Warner will be committed to ensuring consumer choice," the companies said in a press release, adding hopes that "this merger will persuade all companies operating broadband platforms to provide consumers with real choice."
But that statement masked a stunning reversal: AOL also renounced government-imposed rules as the means of ensuring open access. "We always hoped it would come through the marketplace, rather than having to have government get involved," Case said at a news conference. "We are going to take the open-access issue out of Washington, out of city hall, to the marketplace," added Time Warner chief executive Gerald Levin.
Given that AOL is largely responsible for putting the issue into the government arena in the first place, some seized on those statements. "As soon as AOL becomes the largest high-speed Internet provider in the country, they have every incentive to harm competition and consumers in the very same way they claimed cable companies were doing," Kimmelman said. "If you can't beat 'em, join 'em."
Scott Cleland, an analyst with Legg Mason Precursor Group, said AOL still needs access to other cable systems. "Time Warner only reaches 20 percent of the cable households and 12 percent of American households," he said. "AOL still wants to reach the other 88 percent."
Some analysts saw the deal as bad news for DSL providers, who use telephone lines to deliver high-speed Internet service. But others took AOL's credo--"AOL Anywhere"--at face value. Though cable is clearly a major part of its plans, so are links to customers via DSL and wireless phones, they assumed. "AOL is all about capturing eyeballs," said Jason Oxman, senior legal counsel at Covad Communications, a leading DSL provider. "It doesn't care what network it uses to get there."
Some analysts said the deal ensures that the FCC will continue to eschew open-access rules and allow the market to give consumers Internet choice. Last month, AT&T signed a letter of concurrence with MindSpring Enterprises Inc., the nation's second-largest Internet service provider, outlining the principles of open access that will apply after Excite At Home's exclusive contract expires in 2002. Now, AOL says, the new combination will be added to the open-access column.
"Whatever negligible risk there was that government would intervene, that risk is diminishing to zero," a former FCC senior official said.
The FCC declined to comment yesterday. But, in recent statements, Kennard has given no signals he is thinking otherwise.
"We should give the marketplace a chance to work," he said in a speech last month. "We have [fewer] than 2 million broadband subscribers in America, and the most important thing that we in government can do is to create an environment to get these pipes built."
The antitrust review would be handled either by the Justice Department or the Federal Trade Commission. Though forecasts were for a smooth ride to approval, no one offered guarantees.
William Baer, a former head of the FTC's Bureau of Competition, said he saw no major obstacles to the deal, but added that questions about the combined company's control of so many parts of the media market "can't be dismissed out of hand."
European authorities could also play a role. Time Warner has a global presence, and AOL has expanded extensively into Europe. Some of AOL's alliances, such as a strong bond with Germany's Bertelsmann AG, involve direct competitors to Time Warner and could create thorny issues for EU regulators to work out.
Staff writer Ariana Eunjung Cha contributed to this report.
Control Video launches the Q-Link online service, predecessor to AOL.
Control Video launches nationwide online service America Online.
Control Video changes its name to America Online.
AOL goes public.
Steve Case becomes chief executive.
Has 1 million subscribers by the end of the year.
Teams with German media firm Bertelsmann to offer online services in Europe.
Begins charging a flat rate, vastly increasing the amount of time spent online. Has 7.8 million subscribers by year-end.
MTV founder Bob Pittman joins AOL as president and tries to focus on network problems.
Facing possible lawsuits, AOL agrees to pay refunds to customers who had trouble getting online.
Acquires CompuServe's online services division.
Also buys interactive TV company Net Channel.
Buys Netscape Communi-cations for $10 billion.
Acquires MovieFone, the largest movie listing and ticketing service.
Strikes a major marketing deal with Gateway computers.
Has 20 million AOL subscribers by year-end. Compuserve has an additional 2.2 million.
SOURCE: AOL, Hoover's
CAPTION: Sen. Herb Kohl plans to hold hearings on the AOL-Time Warner deal's impact on "the so-called 'marketplace of ideas.' "