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AOL Time Warner makes open access pledge

America Online Inc. (NYSE: AOL) and Time Warner (NYSE: TWX) pledged Tuesday to open their cable lines to other Internet service providers in a move that could help gain regulatory approval for their planned merger.

The companies unveiled their open access plan (see full statement) just ahead of testimony before the Senate Judiciary Committee hearing on the two companies' January mega merger.

AOL Time Warner's plan: Smooth move?

AOL and Time Warner unveiled a memorandum of understanding designed to create a framework where other ISPs can use Time Warner's cable pipes. The companies said the memorandum is likely to lead to a binding agreement.

AOL and Time Warner said the memorandum is the first step and more details would be available in the near future.

The details

The companies pledged the following:

  • Consumer choice: "AOL Time Warner is committed to offer consumers a choice among ISPs," the companies said. Customers won't be required to purchase an ISP affiliated with AOL Time Warner.

  • Diversity of ISPs: AOL Time Warner said they won't limit the number of ISPs available. AOL said it would partner with national, regional and local ISPs.

  • Customer relationships: The companies said they would allow both the cable operator and ISP to have a direct relationship with the customer. ISPs can sell broadband service directly and bill and collect from customers.

  • Video streaming: AOL Time Warner will allow ISPs to provide video streaming.

Roadrunner deal

The objectives outlined by AOL Time Warner are subject to current Time Warner obligations -- notably Time Warner's contract with Roadrunner, the broadband service.

Under the Time Warner-Roadrunner partnership, Roadrunner is the exclusive ISP on Time Warner cable until the end of 2001.

Time Warner, however, opened the door for reworking the Road Runner deal. Time Warner said it is "committed to providing a choice of ISPs as quickly as possible, and will work with its partners to try to achieve that goal even before its current obligations expire."

Time Warner's approach runs counter to AT&T Corp.'s (NYSE: T) open access talk. AT&T has unveiled plans to open up its cable pipes to other ISPs, but not before its exclusive pact with Excite@Home (Nasdaq: ATHM) expires in mid-2002.

Winning Wall Street over

Although the open access announcement was made to win over regulators, AOL and Time Warner have also been telling their story to Wall Street.

Since the two companies unveiled their merger, analysts have been mum on the deal. The biggest issue was whether Time Warner's old media assets would slow down growth for AOL. Another issue was how to value the new company because it's the first old media-new media merger of its kind.

Shares of both companies have been weak lately, but have rebounded in recent days as analysts pick up coverage again.

Credit Lyonnais Securities and Robertson Stephens on Monday issued bullish comments on the merger.

Robertson Stephens said AOL's share price has bottomed and it believes a recent "dead money'' attitude will be displaced with an optimistic "how high is up'' mentality. The firm said it had a $115 price target on AOL and the stock has been rated a strong buy. Credit Lyonnais set a one-year $102 price target on Time Warner and said it rates AOL shares a buy at $57 and lower, with $68 a fair valuation based on 2001 earnings estimates.

Merrill Lynch Internet analyst Henry Blodget started the AOL-Time Warner lovefest last week with a bullish report on the company. Merrill Lynch media analyst Jessica Reif Cohen and Blodget said the combined company would benefit from the impact of the Internet on media industries.

"We regard the stock as a core holding if for no other reason than this,'' they said in a report. Credit Suisse First Boston also upgraded its rating on AOL to a "strong buy" from a "buy "and Time Warner to a "buy" from a "hold."