AOL's Case: EarthLink a "template" for future deals

Regulators and industry rivals are looking to the EarthLink deal as a blueprint for how AOL intends to address the controversial issue of providing cable connections to competing ISPs. AOL and Time Warner have faced strong objections from rivals such as Walt Disney and CMGI's now-shuttered iCast that the combined company can't be trusted to provide access to its cable systems or instant messaging customers.

The Federal Trade Commission, which is reviewing the proposed merger, wants AOL and Time Warner to live up to their open-access promises, which the companies outlined in February after announcing their merger plans. The FTC postponed its approval vote after the EarthLink deal was announced in November, according to a FTC source.

In an industry speech Tuesday, AOL chief executive Steve Case confirmed that the EarthLink agreement will be the general blueprint for all future open-access deals.

"The general template of a deal has been cut, and you would be surprised if you looked two years from now that there would be a major deviation from that," Case said at the UBS Warburg Media Conference in New York.

However, he offered few details about the deal, saying only that it will include providing separate billing and control of the screen page to ISPs carried on the cable network.

Industry critics such as ISPs, competitors and consumer groups question the secrecy of the EarthLink terms. They want to know whether EarthLink will be placed on a level playing field with AOL's future cable service or if the companies will give preferred treatment to their own interests.

AOL and Time Warner originally said the merger would be closed in the fall. But the day the EarthLink deal was announced, the companies said they did not expect the deal to close until the end of 2000 or the beginning of 2001. Nevertheless, Case's statements Tuesday confirmed that other ISPs should expect similar terms once details of EarthLink's agreement are disclosed.

He added that future deals with ISPs likely will be evaluated on a case-by-case basis, subject to certain "tweaks."

The fine print
The arrangement with EarthLink will give Time Warner nearly 70 percent of the $40 monthly subscription fees as well as a percentage of e-commerce and advertising revenues, according to a source close to the companies. The source added that EarthLink will get equal placement with other services, such AOL, when the cable customer chooses a service provider on the computer desktop.

Previous deal terms were more favorable for Time Warner. The company would have received 75 percent of the third party's subscription revenues and 25 percent of its e-commerce and advertising revenues, according to portions of the agreement forwarded to CNET News.com. Time Warner also would have gained part of the third party's home page for the service by getting prominent placement of its properties on the site.

The bigger question is how and whether the combined company will strike deals with the thousands of ISPs in its market areas. Although Case said the broad brushstrokes of its ISP carrying policies have been worked out with the EarthLink deal, it could take some time before other ISPs are allowed on board.

The companies said in their February memorandum of understanding that they will not place any limits on how many ISPs can enter into agreements to offer broadband cable access on Time Warner's network.

The companies again extended their offer to ISPs in July when Case and Time Warner CEO Gerald Levin testified in front of the Federal Communications Commission. During the hearing, Levin told regulators that "any ISP that would like to come and negotiate with Time Warner, we are ready and open."

In light of the EarthLink agreement, other ISPs are waiting for the green light for similar deals. Operators of small ISPs in Time Warner's markets expressed mixed feelings about their status; some are confident that the cable operator will soon clarify their deal terms, while others are frustrated by Time Warner's alleged slowness and ambivalence in dealing with small ISPs.

Room for small players
Time Warner is undergoing trials in Columbus, Ohio, to support multiple ISPs on its cable system and has begun to develop a billing systems to handle the different services on its network. During the July FCC hearing, Levin said rival ISPs will not be offered over its lines until it renegotiates an exclusive contract with Road Runner, the cable ISP partially owned by Time Warner.

Time Warner may be stalling for time, small ISP operators say.

"I understand they've been pretty distracted," said Scott McCollough, an attorney that represents the Texas ISP Association, which represents 600 ISPs. "But we're standing here ready to do a deal."

Some small ISP operators have criticized the EarthLink agreement because they had no role in establishing the foundation for future deals. A pact that works for a publicly traded ISP could be financially difficult for a smaller player, they say.

"If they really want to have nondiscriminatory open access, they should really involve one of us in these closed-door meetings with AOL, Time Warner and EarthLink," said Steve Heins, director of marketing for NorthNet, an Oshkosh, Wis.-based ISP with 2,500 subscribers.

Despite concerns over specific deal terms, AOL and Time Warner may have an incentive to attract numerous ISPs to their combined service. AOL, which is the largest dial-up ISP in the world, has to pay local phone costs when people log onto its service. That's not the case with cable. Thus, the more subscription revenue a merged AOL Time Warner gets from its cable network, the more likely the possibility of better margins for its services.

"The more deals you do with your network, the more value you're creating for yourself," said Blair Levin, former chief of staff at the FCC, who is not related to Time Warner's Gerald Levin. "I would say that over time, the marketplace will evolve so that cable guys will bring as many ISPs onto their pipes. But the marketplace will always start with the big guys."