AOL-Time Warner merger moves ahead with EU nod

The European Commission on Wednesday granted approval for the world's largest corporate merger, between Internet heavyweight America Online and media giant Time Warner, setting the stage for U.S. regulators to rule on the deal.

Meta Group says regulatory concern over the merger has focused on cable access, but AOL's real motive for the buyout may be the desire to leverage Time Warner's business content to further penetrate the small-to-midsize enterprise market. see commentary

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JB Haller Senior VP, Current Analysis Inc.   The EU approval of the AOL Time Warner merger, even with concessions, is not a surprise. (3:49)  • RealAudio • Windows Media

The ruling marks the passage of the first hurdle en route to full approval by regulators. The companies still need approval from the Federal Trade Commission and the Federal Communications Commission to close their deal.

"We are very pleased with today's approval of our merger by the European Commission, another important step forward in the approval process," the companies said in a statement.

While the European Commission, the administrative arm of the 15-nation European Union, squeezed some concessions from the companies, the bigger issues affecting the deal--such as the opening of AOL's instant messaging service and of Time Warner's cable network to outside Internet service providers (ISPs)--will be addressed by U.S. regulators.

In Wednesday's ruling, one of the conditions calls for AOL to cut all structural ties with German media giant Bertelsmann. By breaking those ties, AOL Time Warner will become less of a dominating force in the European media market, according to the commission.

That condition would prevent AOL, which has several joint ventures with Bertelsmann, from tapping into the European giant's music publishing rights, thereby eliminating the risk of dominance in the emerging market for music delivery over the Web and software-based music players, the commission said in a statement.

AOL operates AOL Europe, a 50-50 joint venture with Bertelsmann, and AOL CompuServe France, a venture with both Bertelsmann and Vivendi subsidiaries.

In its antitrust capacity, the European body in June said it was concerned about the integration of Time Warner's content with AOL's Internet service, particularly in light of the promotional alliance between AOL and Bertelsmann. At the time, the commission said it was worried that the merged company's agreement with the German media company would give it too much control over how content may be distributed.

"Against this background, nothing would have prevented AOL from dominating the emerging market for Internet music delivery online, which includes both digital downloads and streaming," the commission said.

Both companies have faced several hurdles and scrutiny from third parties on the path to approval for their marriage.

Time Warner earlier this month scrapped its proposed $20 billion acquisition of rival record label EMI Recorded Music. The move was viewed as a gesture to mollify EU concerns and to hasten the commission's approval of the AOL-Time Warner merger.

The combined company would be a media and entertainment behemoth, with stakes in the largest online service, the No. 2 U.S. cable network, popular cable programming such as CNN, the Warner Bros. entertainment studio and Time Inc.'s magazine empire. With all of these interests under one roof, regulators may require some divestments.

A vocal chorus of competitors, consumer groups and legislators has raised warnings about the proposed deal. Critics say AOL Time Warner would have an unfair advantage by owning a cable network.

Companies such as Walt Disney say the cable ownership would unfairly determine how rival content can be distributed to consumers. Technology rivals such as CMGI, Microsoft and AT&T have rallied behind the idea that AOL must open its instant messaging network as a condition to the merger's approval. Consumer groups are demanding that Time Warner open its cable network to outside ISPs.

The U.S. commissions can require AOL and Time Warner to give up elements of their businesses as conditions of approving the merger. The companies and regulators are in negotiations to determine what stays and what goes, according to sources close to the commissions.

Regulators are beginning to look at all of these issues under greater magnification. A source close to the FCC recently told CNET News.com that commission staffers are considering forcing AOL to open its instant messaging network as a condition of the merger.

The FTC, which also has the power to strike down the deal, has increasingly taken a hard-line stance toward the agreement. That commission may require divestitures and may also force the combined company to allow an open number of competitors onto its high-speed cable network, according to published reports.

Both commissions are expected to rule within the month. AOL and Time Warner continue to expect the merger to fully close by the end of the fall.