A deal has been expected for some time, with AOL chief executive Steve Case hinting that the companies would close a broadband arrangement by midyear. Analysts said they expect the online giant to offer more details about those plans at its quarterly earnings announcement this month.
"Management has hinted that they will announce something with regards to a cable modem delivery deal for AOL service in near future, possibly as soon as the next earnings call," said Frederick Moran, an analyst at Jefferies & Co. "But there are no guarantees to a definite time frame."
Names for the service are already being tossed around, according to one source close to the companies. These include "AOL Broadband," "AOL Time Online" and "Time Warner Online Powered by AOL," the source said.
AOL and Time Warner representatives declined to comment on the cable service.
Analysts said the deal may indicate how the two companies plan to use their pending merger to create an interactive media powerhouse and how the combined company intends to work with competitors--issues that have drawn scrutiny from regulators charged with approving or denying the proposed $124 billion combination.
The deal is also expected to affect future arrangements between Internet service providers seeking to piggyback on the combined company's closely held, high-speed cable lines. In addition, it could have implications for carriage deals between AOL Time Warner and other cable operators, namely AT&T.
Cable ISPs offer Internet connections that are always on and are significantly faster than common dial-up modems. Given the high penetration of cable TV in American households, offering interactive services could be a revenue generator for cable operators.
But most operators have kept their networks closed to outside providers. Instead, many are tied to exclusive agreements with cable ISP Excite@Home or Time Warner's Road Runner. With the pending AOL-Time Warner merger, the doors are slowly opening.
AOL once lobbied the government to force cable operators to open their high-speed networks. It has stepped back from government action since it decided to acquire Time Warner, the second-largest cable operator behind AT&T.
AOL and Time Warner in February issued a memorandum of understanding stating their intention to open their cable lines to outside ISPs. The document outlined plans to allow consumers to subscribe to any non-AOL-affiliated ISP supported on Time Warner's cable lines. The memorandum also said AOL Time Warner would not place limits on how many ISPs could enter into agreements to offer broadband cable access on its network.
However, some congressional leaders have remained skeptical of the document's assurances. Sen. Orrin Hatch, R-Utah, the Senate Judiciary Committee chairman, criticized the memorandum as a "promotional document" during a committee hearing in February.
Consumer groups have also taken action against the merger. In April, a coalition of consumer advocacy groups filed a petition with the Federal Communications Commission calling for major restrictions on the pending merger. The coalition focused on key divestitures involving AT&T's stake in Time Warner, Time Warner's Road Runner Internet cable holdings, and AOL's investment in DirecTV.
The increased scrutiny by regulators and consumer groups will likely lead AOL and Time Warner to proceed cautiously in crafting a cable ISP deal.
"At a minimum, they may have to indicate how they have to price this (for other ISPs) because they never said what the terms and conditions should be," said Ulric Weil, an analyst at Friedman Billings Ramsey.
The unveiling of an AOL cable service raises the question to Road Runner's future. The high-speed ISP, which has been struggling to add new subscribers, trails Excite@Home.
Since the merger announcement, analysts have speculated that AOL will swallow Road Runner's subscribers and dissolve the brand. Adding to the complexity, Road Runner is partly owned by MediaOne, which recently was acquired by AT&T. Although the companies remain mum on the cable unit's future, analysts said they would not be surprised if AOL's upcoming earnings call sheds light on the issue.
"Expect Road Runner to be renamed as AOL," said Ted Henderson, an analyst at Janco Partners.