In AOL merger, the watchdog is watched

Assuming AOL and Time Warner receive the blessing of the Federal Communications Commission, which is expected, questions persist about how freely the combined companies will be allowed to operate. The Federal Trade Commission cleared the way for the merger last week but ordered the appointment of a "monitor trustee" to enforce various stipulations outlined in its consent order.

AOL Time Warner, as the company will be called, would unite the leading Internet service provider with one of the largest cable operators in the United States. The proposed $109 billion merger has drawn criticism from rivals such as Walt Disney that had lobbied government regulators to set restrictions, contending that the merger would create an unfair media monopoly.

But the FTC's order has won praise from AOL competitors, many of whom said requirements imposed on the deal were sufficient to guarantee a fair playing field, particularly in gaining access to the combined company's coveted high-speed Internet cable network.

How those terms will be enforced, however, will fall to an as-yet-unannounced trustee, leaving substantial uncertainly about how vigorously the order will be followed.

"This is part of a conscious FTC effort...to put more teeth into remedies and to make divestiture commitments more credible or to make more performance commitments by the companies more credible," said Bill Kovacic, a George Washington University School of Law professor and antitrust expert.

Looking at the history of mergers, the trustee is unlikely to have powers equal to those of the most famous corporate watchdog, Judge Harold Greene. The federal judge oversaw the consent decree that broke AT&T into the Baby Bells. From 1984 until the 1996 Telecommunications Act, Greene acted as the gatekeeper for any deal considered by the individual companies.

In the AOL-Time Warner merger, the trustee will mainly work to prevent future antitrust concerns, rather than to disassemble present concerns.

The challenge for the trustee will be to sort through the many Internet service providers that are expected to clamor for carriage on AOL Time Warner's cable system. This, according to some critics, will be more difficult than the FTC anticipates.

"The monitor is going to get a bucket of cold water thrown in its face very quickly as it's forced to referee disputes among ISPs over access to the Time Warner cable platform," said Peter Arnold, director of the coalition Hands Off the Internet. "It is horrendously unfair to AOL because AOL not only has to negotiate from a business perspective, which is tough enough, but they're also going to have to keep looking over their shoulders wondering if their actions will pass muster with a government official."

Approval with conditions
Under last week's FTC consent order, AOL Time Warner will be accountable to three conditions: The company must offer a rival ISP on its cable network before it can offer an AOL service, then add two additional ISPs within 90 days. It cannot disrupt the flow of content provided by other ISPs or interactive TV services piggybacking on its network. And it must offer AOL's digital subscriber line (DSL) services equally to all of its customers in areas served by Time Warner Cable.

The AOL-Time Warner merger still faces a vote from the FCC before it can officially close.

The trustee will have powers to negotiate deals between smaller players and AOL Time Warner. The trustee could report any potential problems to the FTC, which could decide to take AOL Time Warner to federal court if it violates the consent order. More than anything, the trustee will keep close watch to ensure AOL Time Warner doesn't jump through any loopholes to get around the restrictions.

"The point of a monitor trustee is to make sure the order is being complied with," said Michael Antalics, a deputy director for the FTC's bureau of competition, who was closely involved in the negotiations with AOL and Time Warner. "It's more of a safeguard than anything else."

The FTC will appoint the trustee within the next few weeks; it is seeking candidates from an array of backgrounds, including academia, business or consulting, according to Antalics. He insisted that the trustee would not act as a day-to-day regulator that can set policy or bar AOL Time Warner from doing other types of deals.

Time Warner and AOL executives declined to comment on the trustee.

Watchdog or negotiation trump card?
The effect of the monitor trustee will not be felt until AOL Time Warner begins striking deals with other ISPs for carriage on its cable network. For smaller ISPs this is a big win; many have criticized Time Warner Cable's deal terms for carriage as economically disadvantageous to their businesses.

"The ideal situation is that nobody will ever have to go to trustee," said W. Scott McCollough, an attorney for the Texas ISP Association, which represents 600 ISPs. But the FTC has "given this person sufficient power to do what's necessary."

Critics, however, disagree, claiming the position stifles the competition and entrepreneurship required to make high-speed Internet access a reality. Any regulation of the Internet will slow the progress for increasing high-speed access into homes and will prevent market forces from behaving naturally, they say.

"What it does is this so-called pro-competitive action actually reduces competition," said Wayne Crews, director of technology studies at the CATO Institute. "These ISPs would otherwise be forced to cut their own network deals, and now they won't need to."

Walt Disney may have scored the biggest coup with the FTC's ruling. The entertainment giant was concerned that its prized programming would not get the equal treatment when funneled through AOL Time Warner's interactive TV services. The company lobbied aggressively for the FTC to attach concessions to the merger to allow a third party to monitor the company's practices. As an alternative remedy, Disney lobbyists also suggested separating the cable business from the content business.

"This is the less regulatory, less interventionist way to go," said Preston Padden, head of government affairs at Disney. "If the parties have been very clear they have no intention in acting in a discriminatory way, I'm sure it won't be a problem for them."

Industry analysts agree that the consent order was a key win for Disney. But some warn that the long-term effects of the order could come back and bite Disney as it tries to increase its stake online. Rumors have begun to swirl over the possibility of Disney investing in Web portal giant Yahoo, fueling speculation that the Mouse needs another Web partner to help its troubled Go.com.

"Disney broke the law of the jungle. The 10 words you never want to hear is, 'I'm from the government, and I'm here to help you,'" Christopher Dixon, an analyst at UBS Warburg, said in an interview. "By taking an anti-industry side, all they did was buy time to redevelop their Go platform to make it more competitive and managed to severely irritate every potential partner they're going to need going forward."