AOL, Time Warner complete merger with FCC blessing

The companies complete their historic merger late Thursday shortly after the Federal Communications Commission approves the deal with conditions that affect instant messaging and Net cable access.

Evan Hansen Staff Writer, CNET News.com
Department Editor Evan Hansen runs the Media section at CNET News.com. Before joining CNET he reported on business, technology and the law at American Lawyer Media.
Evan Hansen
8 min read
WASHINGTON--America Online and Time Warner completed their historic merger late Thursday, shortly after the Federal Communications Commission approved the deal with conditions that affect instant messaging and Net cable access.

Click here to Play

AOL, Time Warner receive FCC blessing
William Kennard, FCC chairman

"AOL and Time Warner, you've got approval," FCC Commissioner Susan Ness said at a press conference announcing the decision.

Shortly after receiving the green light, AOL Time Warner issued a statement saying that merger of the companies had been completed. Indeed, the Web address www.timewarner.com had already been redirected to www.aoltimewarner.com late Thursday, although www.aol.com had not been changed.

Steve Case, chairman of the combined company, said "AOL Time Warner will lead the convergence of the media, entertainment, communications and Internet industries and provide wide-ranging, innovative benefits for consumers.

"Our brands, services and technologies already touch hundreds of millions of people and by closely integrating our assets, we will embed the AOL Time Warner experience more deeply into their everyday lives."

FCC Chairman William Kennard said the approval came with three key restrictions beyond those already required by the Federal Trade Commission.

The new conditions are "designed to protect the open, competitive nature of the Internet," Kennard said. The conditions apply to three specific areas: Internet access over high-speed cable lines, instant messaging via cable lines, and ownership issues between AT&T and Time Warner.

Kennard said the FCC will require AT&T to divest its ownership stake in Time Warner Entertainment, a joint venture that operates the Warner Bros. film studio, the WB television network, HBO, and other cable programming and cable network assets.

Walt Disney, which contended that the merger would create an unfair media monopoly and lobbied government regulators to set restrictions, cheered the imposition of conditions.

"Consumers and competition will be well-served by the additional open-access conditions and by the important new FCC proceeding on interactive TV," said Preston Padden, executive vice president of government relations for Walt Disney.

But not all AOL competitors embraced the decision.

The Instant Messaging Unified Coalition, whose members include Microsoft, AOL Time
Warner package is expected to release a formal statement Friday saying the conditions on IM do not go far enough, according to a source close to one of the coalition member companies.

"The IM Unified Coalition is still reviewing provisions (of the FCC decision)," said the source, who asked not to be identified. "It doesn't appear that the instant messaging provisions go far enough. They will allow the status quo from AOL to continue, and consumers will not have free-flowing and open communications over instant messaging. The IM Unified Coalition will now face the prospect of a world in which AOL will likely never embrace interoperability to the benefit of consumers."

Under the conditions, AOL Time Warner must guarantee interoperability in its IM services before offering "advanced IM-based high-speed services," such as videoconferencing.

This provision does not affect AOL's current AOL Instant Messenger and ICQ services, rather it only affects future applications that would take advantage of high-speed Net access.

As for access to Time Warner cable networks by competing ISPs, the FFC conditions add to restrictions imposed by the FTC last month. Specifically, the new conditions:

 Prevent AOL Time Warner from interfering in customer choice of Internet service providers;
 Require AOL Time Warner to allow ISPs to control the first screen that consumers call up when they access the Net via a competing service;
 And require AOL Time Warner to give unaffiliated ISPs the same quality of service guaranteed to affiliated ISPs.

The FCC vote to approve the merger was unanimous, although two of the five commissioners--Harold W. Furchtgott-Roth and Michael K. Powell--did not want to impose any conditions.

FCC conditions on AOL Time Warner 
Internet services:
The Federal Communications Commission added six new conditions to augment a consent decree previously worked out with the Federal Trade Commission governing Net cable access. The FCC said the following conditions are necessary to ensure AOL Time Warner treats small Internet service providers unaffiliated with the company fairly:

• ISP choice: Prevents AOL Time Warner from interfering in customer choice over ISPs and requires the company to make available a list of competing, unaffiliated services on request. 
• First screen: Requires AOL Time Warner to allow competing ISPs to control the first screen that consumers call up when they access the Net. 
• Billing: Requires AOL Time Warner to grant ISPs direct billing relationships with their customers. 
• Performance quality: Requires AOL Time Warner to give unaffiliated ISPs the same quality of service guaranteed to affiliated ISPs. 
• Disclosure: Prevents AOL Time Warner from blocking any ISP from disclosing its terms of contract to the FCC through confidentiality agreements. 
• Enforcement: Sets rules for resolving disputes between ISPs and AOL Time Warner.

Instant messaging:
The commission requires AOL Time Warner to guarantee interoperability in its IM services before offering "advanced IM-based high-speed services," such as videoconferencing. The condition does not affect AOL's current AOL Instant Messenger and ICQ services but will affect expected future applications that take advantage of broadband Internet access.

The company may guarantee this by implementing an interoperability standard established by a recognized group such as the Internet Engineering Task Force, or by entering into interoperability contracts with competitors. AOL Time Warner can also seek to have the condition lifted if market conditions dramatically change.

Interactive TV:
The commission will undertake no immediate action but will open an inquiry to examine the need for regulations.

AOL Time Warner must notify the FCC if it increases its stakes in the parent companies of DirecTV, General Motors or Hughes Electronics.

Relationship with AT&T:
AT&T must divest a 25 percent stake in Time Warner Entertainment. AT&T cannot offer any AOL Time Warner ISP exclusive access to AT&T cable systems for high-speed Internet services, nor can it enter any agreement that limits AT&T's ability to offer such services to ISPs unaffiliated with AOL Time Warner.

In a statement, Commissioner Gloria Tristiani said, "AOL's dominant instant messaging platform should be interoperable. Instant messaging is far more than a narrowband text messaging service; it?s an essential platform for the development of future high-speed Internet-based services that rely on real-time delivery and interaction.

"Though I advocated for even more forceful conditions aimed at achieving interoperability, the strengthened conditions ultimately adopted go a long way to protect consumers."

The commissioners have scheduled a press conference for 7 a.m. PST Friday to answer questions about the decision and the restrictions; no questions were allowed at Thursday's conference.

When the merger was announced last year, it was valued at $165 billion based on the value of AOL's stock. The shares have fallen steadily in the past few months, making the deal worth about $106 billion on Thursday. Combined, AOL Time Warner is a media and Internet giant with a market capitalization of about $205 billion.

Announced a year ago, the merger ran into unexpected delays as government regulators probed every aspect of the deal in which the world's largest online service will take control of the world's largest media company and the nation's No. 2 cable company.

Critics of the acquisition, including business rivals and consumer groups, complained that the combination could restrict consumer access to content online and stifle competition in emerging services such as high-speed Internet access, interactive television and instant messaging.

In the end, AOL agreed to the concessions for the chance to create a company that could reshape the way consumers access the Internet, get their news, listen to music, read books, watch movies, and communicate with each other in general.

European regulators signed off on the deal with few restrictions last year, although both companies took voluntary steps at that time to ward off a veto. Notably, Time Warner's Warner Music Group called off a proposed merger with record label EMI Recorded Music after the European Commission expressed concerns over the deal. AOL, meanwhile, broke off its European joint ventures with German media powerhouse Bertelsmann.

The Federal Trade Commission approved the deal in December under a consent decree requiring the combined company to allow rivals to offer high-speed Internet access over Time Warner's cable systems. The arrangement will likely hasten the arrival of broadband service for consumers by encouraging other cable operators to follow suit.

Although there had been speculation that the FCC would not impose any restrictions, its decision bolsters the FTC's earlier decision on Net cable access and addresses concerns over instant messaging.

Instant messaging was among the most controversial elements of the FCC's review.

AOL owns the two largest IM services: AOL Instant Messenger and ICQ. Rivals such as Microsoft, Yahoo, AT&T and Excite@Home have lobbied aggressively with federal regulators and congressional members to force AOL to open its IM network to competitors as a condition to approving the merger. In mid-December, Microsoft chairman Bill Gates personally phoned three commissioners to urge the opening of instant messaging as a condition to the merger.

Critics say AOL's slowness in embracing interoperability has caused setbacks to other companies trying to grow their businesses. AOL has said it supports the development of an interoperable system for all IM networks but has cited privacy and security concerns as the reasons it's taking its time. Competitors have labeled that argument a "smoke screen."

Nevertheless, instant messaging remains a highly contentious issue. The technology, which allows people to exchange real-time text messages, is offered for free by many Internet giants. Many have viewed instant messaging as one beachhead in the fight for the computer desktop--and a potential challenge to Microsoft's control of the operating system.

Given persistence, IM services are becoming beefed up with more features such as real-time stock quotes and links to free e-mail services. And services such as Aimster have started combining file swapping with instant messaging.

The FTC won concessions involving Time Warner's cable operations that hold broad repercussions for the high-speed Internet market.

In a deal widely praised by consumer advocates and competitors, AOL and Time Warner

entered into a consent order with the FTC subjecting the merged company to three conditions:

The company must offer one rival Internet service provider access to its cable network before AOL can launch its own service, and it must ink deals with at least two additional ISPs within 90 days; AOL Time Warner cannot disrupt the flow of content to consumers of rival ISPs or interactive TV services on its cable network; and AOL must offer its digital subscriber line (DSL) services to all of its subscribers.

The FTC will appoint a monitor trustee who will ensure elements of the order are not violated. The trustee will have the authority to present potential violations to the FTC, which can decide whether to take AOL Time Warner to federal court. The trustee can also act as a deal maker for AOL Time Warner to sign up ISP competitors.

News.com's Patrick Ross reported from Washington, and Evan Hansen reported from San Francisco. Jim Hu contributed to this report from New York.