FTC approves AOL-Time Warner merger

The Federal Trade Commission voted unanimously Thursday to clear the $109 billion merger of America Online and Time Warner, paving the way for final government approval of one of the largest deals in corporate history.

Although the merger will face one more federal agency, the FTC's review has been widely viewed as the most difficult regulatory obstacle before the proposed combination. Government regulators had been lobbied heavily by rivals such as Walt Disney, which contended that the merger would create an unfair media monopoly.

"In the broad sense, our concern was that the merger of these two powerful companies would deny to competitors access to this amazing new broadband technology," Robert Pitofsky, chairman of the FTC, said in a statement after the agency's 5-0 vote. "This order is intended to ensure that this new medium, characterized by openness, diversity and freedom, will not be closed down as a result of this merger."

The agreement was expressed as a consent order between the FTC and the companies. Under the terms of the deal, AOL Time Warner, as the combined company will be called, would be

• forced to offer one rival broadband Internet service provider access to its cable system before AOL can begin such a service, followed by at least two additional services within 90 days;

• prevented from disrupting the flow of content being served to consumers through rival ISPs and/or rival interactive TV services on its network;

• and required to offer AOL's digital subscriber line (DSL) services equally to subscribers in areas where Time Warner does and does not offer cable broadband service.

Analysts said AOL made significant trade-offs to get the merger approved.

"The deal says the FTC and AOL negotiated in good faith and made a number of substantive concessions," said Jordan Rohan, an analyst at Wit SoundView. Wall Street reacted positively to today's news, as the stock prices of both companies rose 2 percent to 3 percent by late trading.

The deal combines the world's largest ISP with the world's largest media company. AOL has about 26 million subscribers and also runs instant messaging services and Netscape Netcenter. Time Warner's cable network reaches 20 percent of cable homes in the United States, trailing only AT&T in its reach. It owns film and music studios and cable and TV broadcasting properties HBO and CNN, and it publishes Time and People magazines.

The companies had expected to close the merger in the fall, but the FTC delayed its vote until AOL and Time Warner gave more firm assurances that they would open their cable network to rival ISPs. Last month, the companies inked a deal with ISP EarthLink, largely seen as a concession to the FTC for approval.

Wednesday night, AOL formally offered the FTC additional terms on access and other issues in a bid to win approval, according to reports.

Those who fought the merger appeared satisfied with government conditions attached to the approval of the deal.

"We think it is a big victory for competition and consumers, and with these safeguards in place we can congratulate the two companies with the merger, and we look forward to doing business with them," said Preston Padden, head of government affairs at Disney, which spearheaded much of the opposition.

The deal must still be reviewed by the Federal Communications Commission, which could impose further changes, but it is expected to follow today's FTC decision and approve the merger. FCC commissioners have recently said they hope to vote before year's end but did not establish a firm date.

The roles of the two agencies are different, and their reviews are focusing on separate aspects of the merger. The FTC put open access front and center in its review. The FCC will evaluate AOL's dominance in instant messaging, among other issues, sources said.

The FTC usually reviews issues that involve a direct commercial effect on competition under antitrust law. The FCC also examines competition in a merger review, but under the broader mandate of whether the merger serves the public interest.

The communications agency traditionally votes after the trade commission

The consent decree Under the proposed order, the Federal Trade Commission's antitrust concerns would be resolved by: • requiring AOL Time Warner to make available to subscribers at least one nonaffiliated cable broadband ISP service on Time Warner's cable system before AOL itself begins offering service, followed by two other nonaffiliated ISPs within 90 days and a requirement to negotiate in good faith with others after that; • prohibiting AOL Time Warner from interfering with content passed along the bandwidth contracted for by nonaffiliated ISPs or discriminating on the basis of affiliation in the transmission of content that AOL Time Warner has contracted to deliver to subscribers over its cable system, including the transmission of interactive triggers or other content in conjunction with ITV services; • and requiring AOL Time Warner to market and offer AOL's DSL services to subscribers in Time Warner cable areas where affiliated cable broadband service is available in the same manner and at the same retail pricing as the company does in those areas where affiliated cable broadband ISP service is not available. The proposed consent order would be effective for a term of five years. Source: Federal Trade Commission

or the Justice Department reviews a corporate merger, though not because of any statutory obligation. The DOJ was not involved in examining the potential antitrust issues surrounding this case, leaving that authority in the FTC's hands.

Scrutiny from FTC staffers was boosted by the chorus of protests to the deal from dissenters--from competitors such as Disney to small-market ISPs to consumer groups. Critics found one common thread in their arguments: A combined AOL and Time Warner was making empty promises to open cable or instant messaging networks, and the combined company would discriminate against competitors piggybacking on its system, they said.

The FTC's approval puts AOL one step closer to living its broadband dreams. The online giant has set its sights on getting its service to as many people through as many pipelines as possible, be it wireless, satellite, cable or DSL. High-speed cable access in particular is expected to boom in households across the country.

AOL has already begun upgrading its service to support faster connections. Owning Time Warner's cable network gives AOL a foothold to offer more multimedia-intensive services. Its AOL Plus service lets broadband customers watch videos or listen to audio streams.

AOL members are likely to see incremental rather than drastic changes in the online service after the companies complete their merger, analysts say. Already, AOL has begun promoting an array of Time Warner-owned publications through methods such as using pop-up ads to sell subscriptions to Time or using content from People and Entertainment Weekly in its entertainment area.

AOL and Time Warner have said that promoting each other's products will help all of their businesses grow, thereby improving the combined company's cash flow. But the company will need to tread carefully so its promotional ambitions fall in step with its subscribers' tastes.

"I think the number of pop-ups that have actually been used to promote Time Warner's properties and (publications) have started to turn some subscribers off," said Ken Kiarash, an analyst at Buckingham Research Group. "You may actually see some backlash and some active complaints from their subscriber base."

Owning a cable network gives the companies a foothold in creating high-speed interactive TV products and in tapping an audience that would be interested in upgrading Internet services.

"The changes will be very incremental and very gradual," said Wit SoundView's Rohan. "The end result is a higher-quality product with stronger appeal."

But concerns still persist among critics about whether the combined company would use its cable ownership to shut out competitors. Cable networks essentially serve the overwhelming majority of the cable customers in their geographic area. Entertainment rivals such as Disney have criticized the merger, fearing AOL Time Warner would favor its own content--be it HBO, CNN or TNT--over competitors' offerings.

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