EMI pullout may win AOL-Time Warner merger OK

In recent days, concerns among European Commission regulators about the Time Warner-EMI deal clearly were shaping up as a major stumbling block for approval of both combinations, which would have created both the world's largest record label and media company.

Today's decision to drop the smaller deal in effect is an admission that the companies had bitten off more than they could chew, having badly underestimated opposition to the mergers, which were announced just weeks apart.

"EMI was basically what scared the regulators," said Youssef Squali, an analyst at ING Barings. "And the European regulators linked it to the (AOL-Time Warner) transaction."

Regulators in Europe are now expected to approve the AOL-Time Warner merger within days, according to Squali, opening the way for full approval of the largest corporate transaction in history.

Should the European Commission give a green light to the deal, attention will then turn to the United States, where AOL and Time Warner await approval from the Federal Trade Commission and the Federal Communications Commission.

Time Warner spokesman Scott Miller declined to comment on when Europe will come to a decision. But Miller said the companies and the commission are in active discussions to finalize the deal.

"Our discussions with the EU are proceeding well and are nearing the end," Miller said. "We are confident that they will conclude successfully." Miller added that the companies expect the deal to close in the fall.

But AOL and Time Warner may have more difficulty on the home front.

Passage of the AOL-Time Warner deal has reached a critical point. The combination of both the world's largest Internet company and the media and entertainment company has raised warning flags among competitors, regulators, consumer advocates and legislators. Critics allege that merging AOL's massive subscriber base with Time Warner's cable system and its vast array of content holdings, which include CNN, Time Inc. and Warner Bros., would potentially give the combined company an unfair advantage.

Entertainment companies such as Walt Disney say AOL Time Warner could give its programming preferential treatment on its interactive TV systems. Consumer groups have lobbied for regulators to open Time Warner Cable to rival Internet service providers. And tech competitors such as CMGI, Microsoft and AT&T have demanded that regulators require AOL to open its instant messaging network as a condition of the merger.

AOL and Time Warner have responded aggressively to fears among the voices of dissent. The companies in February released a memorandum of understanding promising they will let rival ISPs onto their high-speed cable networks. Critics say the memorandum is a gesture but not a promise.

AOL and Time Warner executives have downplayed the instant messaging and interactive TV complaints as merely business disputes that have little relevance to the merger.

Nevertheless, regulators are beginning to look at all of these issues under greater magnification. A source close to the FCC recently told CNET News.com that commission staffers are considering forcing AOL to open its instant messaging network as a condition of the merger.

Meanwhile, the FTC, which also has the power to strike down the deal, has increasingly taken a hard-line stance toward the agreement. The FTC may require divestitures and force the companies to allow an open number of competitors onto its high-speed cable network, according to published reports.

Whether approval of the merger comes down to opening Time Warner's high-speed cable network or AOL's instant messaging service remains to be seen. But analysts such as ING Barings' Squali expect some quid pro quo between regulators and the companies.

"The companies have publicly said they will do whatever it takes to get it through," Squali said. "And they will make concessions."