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2HRS2GO: AOL Time Warner merger can survive antitrust look

    Regulatory worries about AOL Time Warner shouldn't worry investors.

    Government regulators recently suggested the merger of America Online (NYSE: AOL) and Time Warner will create unhealthy dominance in digital music and broadband access. I don't see it.

    The Federal Trade Commission believes AOL can monopolize the market for Internet service over Time Warner cable lines.

    AOL Time Warner promises to open its cable network to other ISPs. A pilot test has been announced with several companies, including Juno Online (Nasdaq: JWEB).

    Nonetheless, the Federal Trade Commission worries about underhanded ways of hurting competition, chiefly by limiting competitors' abilities to harness the full power of cable broadband, while enhancing delivery of AOL Time Warner's own content.

    It's only an issue if you assume cable lines are the only venue for high speed Internet access. They're not.

    All the regional Bell operating companies are rolling out DSL service, either through their own ISPs or through resellers.

    At least one company, Hughes Electronics (NYSE: GMH), sells satellite Internet service, and others have announced plans to follow. News reports indicate AOL may be forced to sell its GMH stake to complete the Time Warner purchase. It's no great loss; those holdings mean little if anything to AOL's operating income.

    Neither does competition. ZDNet readers love to trash AOL, but the reality is that AOL has always faced a fiercely competitive environment, and it has always come out on top, because it markets a package that many people want.

    In any case, AOL should be able to overcome regulatory opposition. If the FTC or FCC imposes conditions to enforce competition, AOL can live with them. If the government decides to out-and-out sue to stop the merger, AOL wouldn't have a hard time demonstrating that it faces legitimate rivals.

    If the U.S. worries appear overblown, Europe's concerns seem to come out of nowhere. European overseers worry AOL Time Warner will dominate digital music.

    The European Union's antitrust hackles were already raised by the prospect of Time Warner buying EMI, but that's a separate issue; I'm still trying to figure out how AOL could change Europe's music scene.

    Unlike its U.S. parent, AOL's European business could hardly be called dominant. Yes, America Online has a sizable European business, but it isn't nearly as influential in Europe as in the United States.

    So it's hard to see how combining Time Warner with AOL would create an iron force in digital music distribution. What music publisher would be crazy enough to limit its online distribution pipeline to only one ISP?

    That's the fallacy behind this whole regulator escapade, when you think about it. Even AOL, for all of its irritating ad windows and clunky e-mail and proprietary chats and layers and layers and layers of vapid crap placed between the end user and the Internet, does not limit its customers' choice on the Internet, because it's bad business.

    People would not use AOL if they knew the company would block a website or choke off a download. If AOL was in a totalitarian mood, its customers wouldn't be able to get Yahoo! (Nasdaq: YHOO), which is, after all, nothing more than a Internet-only version of AOL. Without the annoying pop-up windows.

    I'm obviously not a fan of AOL's service. And I don't see much to like in the AOL Time Warner merger, purely from a business point of view, because it instantly transforms AOL into a mostly-mature business, as opposed to the rapidly growing Internet operation it has been until now.

    But that doesn't mean the merger will be stopped by the government, because it doesn't hurt consumers.

    The consumers in Time Warner's cable territory will have choices. For the rest of us -- and that means roughly 80 percent of the U.S. cable network -- why should we worry at all about AOL limiting ISP freedom?

    And I doubt AOL will refuse to sell me digital music downloads merely because my cable provider is AT&T (NYSE: ATT) and my broadband ISP is Pacific Bell.

    After all, that would be a bad business model, and if Steve Case & Co. are good at anything, it's making money. 22GO>