Senators seek closed meeting on AOL Time Warner

Sens. Barbara Boxer, D-Calif., and Conrad Burns, R-Mont., sent a private letter to the FTC today requesting a meeting Friday to voice their concerns about the merger and to be briefed about the scope of the agency's investigation. The senators will also push FTC officials to take a closer look at issues involving AOL's dominance in instant messaging and the potential for a combined AOL and Time Warner to discriminate against content from rivals on its Internet services.

"The senator would like to get a briefing on what the issues are that (the FTC is) looking at," said David Sandretti, a spokesman for Boxer. Sandretti added that both Boxer and Burns have written letters expressing concerns about the merger's implications.

Sandretti was not aware that other senators would be present. However, staff members from other Senate offices are expected to attend, according to Senate sources.

"We're going to find out what they're looking at and how the whole framework looks, and raise concerns of our own," said one Senate staff member who requested anonymity.

It is uncommon for legislators to request a private briefing with regulators in advance of a decision on a merger, and some experts wonder whether regulatory independence would be breached by increased scrutiny of the deal by the Senate.

"Questioning federal regulators could undermine the integrity of the regulatory process," said one federal regulator who worked on a large merger from the corporate side.

But meeting with senators could allow the FTC to gauge political support for arguments against the merger.

"Suppose for sake of argument that the FTC did have a legal antitrust case," said Robert Lande, a professor at the University of Baltimore Law School. "If they know they'll get a friendly reception on Capitol Hill, they may be less likely to get their budget slashed. It is important to have political support."

At least a dozen senators from both sides of the aisle have written letters to the FTC and the Federal Communications Commission asking regulators to carefully examine the merger's implications. Those raising concerns include Senate leaders Jesse Helms, R-N.C., Edward Kennedy, D-Mass., and Orrin Hatch, R-Utah, as well as Boxer and Burns.

Today's meeting request is the latest bump in the road for the merger, coming as the FTC begins to take a harder stance on a combination that would bring together the world's largest media and Internet companies. The FTC, which has the authority to strike down the merger if it deems it harmful to consumers and competitors, may require divestitures and force the companies to allow open access to its high-speed cable network, according to reports.

Despite assurances that the merged company would permit competing Internet service providers on its cable networks, the FTC believes the promises are not sufficient, according to a report by Reuters.

The FTC, along with the FCC and the European Union, has the power to approve or deny the merger.

AOL declined to comment on the proposed Senate-FTC meeting.

"Our conversations with the agencies reviewing our merger are proceeding well and have been constructive," said AOL spokeswoman Kathy McKiernan. "We are confident that we will successfully address all the issues that have been raised in our review, and we're on track to close in the fall."

AOL lobbyists turn up the heat
AOL has also targeted senators, focusing on the core group who wrote negative letters to regulators about the Time Warner deal.

AOL has aggressively pursued these senators to submit follow-up letters expressing support for the merger, according to Senate staffers who requested anonymity. AOL lobbyists--and on occasion AOL CEO Steve Case--have been meeting with senators and staffers to persuade them to voice support to regulatory bodies, sources said.

"They're trying to have members of Congress write inoculating follow-up letters," said one Democratic Senate source.

Senate sources have added that AOL's tactics have been perceived negatively in certain offices. Sources have complained that AOL's lobbying efforts have been heavy-handed and potentially damaging to its cause among congressional members and their staff.

"You certainly draw more flies with honey than vinegar," said one Republican Senate source. "The more vinegar that you put out has more long-term effects with a corporation's ability to do work with Congress."

AOL spokeswoman Tricia Primrose said in an interview last week that the company's activities on the Hill are commonplace.

"We're constantly working to educate members of Congress about the tremendous benefits of this merger for consumers," Primrose said.

Primrose declined to comment on other details surrounding AOL's lobbying strategies and objectives. She also declined to comment on specifics in AOL's efforts on Capitol Hill in relation to the letters.

AOL's lobbyists have a reputation for being strong-willed and highly effective, according to people familiar with their efforts. More than any other company, AOL is looked up to by members of Congress as the authority on Internet matters. Sources added that the effectiveness of the lobbyists' efforts has also reflected their growing influence as the torchbearers of the Internet on Capitol Hill.

"AOL is a very savvy and tough political opponent," said Jeff Chester, executive director at the Center for Media Education. "They certainly know how to work the Hill, when to bring Steve out, and when to bring out the bells and whistles."

Quieting the chorus of critics
AOL and Time Warner have taken steps to quell the ongoing scrutiny of their business combination. Notably on the open-access issue, the companies have issued a "Memorandum of Understanding" promising that consumers will be able to subscribe to any ISP on Time Warner's cable lines. Furthermore, the company will not limit how many ISPs can enter into agreements for carriage on the cable network.

In addition, AOL and Time Warner executives have reassured the FCC that AOL Time Warner's cable network will offer rival ISP services. Furthermore, AOL's president of interactive services, Barry Schuler, said the company is building technology to allow its instant messaging servers to interoperate with outside servers. He said it would take about a year to build the technology and security to protect its consumers.

Time Warner last month announced that ISP Juno Online Services signed a letter of intent to become the first outside ISP to be carried on Time Warner's cable system. AOL this week also disclosed in a filing to the FCC that it plans to offer its online service on AT&T's cable network in Boulder, Colo.

Those moves have not mollified opponents of the deal, some of whom believe a combined AOL Time Warner will seek to block competitors from distributing content over its cable network.

Senators such as Hatch have drafted letters raising concerns about AOL and Time Warner's promises for open access to their cable lines. In a letter to FTC Chairman Robert Pitofsky, Hatch "urged" the FTC to examine the possibility that AOL and Time Warner would "use discriminatory pricing to effectively deny 'open access' to competitors."

According to Reuters, an FTC official has indicated that the agency is prepared to block the merger on those grounds.

In addition, regulators, consumer groups and competitors such as Disney have voiced concerns over the combined company's influence in instant messaging, its control of the nation's second-largest cable operator, and whether it will discriminate against rival companies that wish to offer content on these networks.

Consumer groups have also sounded off on requiring concessions for the merger. In April, the Consumers Union, the publisher of Consumer Reports magazine; the Center for Media Education; the Consumer Federation of America; and the Media Access Project jointly filed demands for a series of divestitures to the FCC. The groups want AOL Time Warner and AT&T to open their cable lines to rival Internet service providers. In addition, they asked for divestitures in AT&T's stake in Time Warner, Time Warner's Road Runner Internet cable holdings, and AOL's investment in Hughes Electronics' DirecTV.

A coalition of competitors--including CMGI, Microsoft, AT&T and Excite@Home--have also urged senators to demand a unified standard for instant messaging, regarded by the industry as a powerful technology, which lets people send instant text messages to each other. Competitors argue that AOL should open its systems to all technologies.

It is considered unlikely, however, that the FTC will require AOL to open its instant messaging technology as a condition to the merger's approval, according to sources close to the matter. Because instant messaging is a free service, there's no commercial market to regulate, the source indicated in a previous report.

AOL controls 90 percent of the instant messaging market with its AOL Instant Messenger and ICQ services. Several senators have raised concerns claiming that AOL has dragged its feet in opening its instant messaging network to rival technologies.

News.com's Patrick Ross and Reuters contributed to this report.