Will the AOL-Time Merger Flop?

When Steve Case and Gerald Levin, CEO's of AOL and Time Warner (TW), respectively, announced their intention to merge their two companies last January, they predicted smooth sailing from regulators, so sure were they that the merger was in the "public interest." The AOL-TW combination, they told the Federal Communications Commission, would enhance the public interest by offering "next generation branded content." As proof of how their merger served the public interest they submitted to the FCC (which, along with the Federal Trade Commission must approve the merger in the U.S.) three reports from Wall Street investment houses, each praising the merger for the "sticky applications" that would drive e- and t- (TV) commerce revenues.

But now, after a concerted effort from public-interest and consumer groups, and from competitors both here and in Europe, AOL-TW will be forced to make major concessions. These groups have mobilized because they know that the merger would profoundly alter the shape of the Internet.

If the merger goes through, AOL-TW would be able to use its high-speed cable pipes to favor its own content, including its Web sites and e-commerce applications, over others. The open, nonhierarchical architecture of the dial-up Internet, which has allowed for a flowering of discourse and commerce, would be reshaped by AOL-TW (and also other cable giants) whose business model is based on controlling all bits to make the most bucks.

Advocates have asked the Federal Trade Commission to insist that AOL-TW, as a condition of the merger, agree to a policy of nondiscriminatory open access for competing ISPs. Critics of the merger also want the FTC to guarantee that AOL-TW will treat content providers, including all Web sites, equitably. They want these policies extended to next-generation devices, including television set-top boxes and interactive TVs, which will soon play a major role in delivering high-speed digital content. These groups also have asked the FTC to sever the ties between AOL-TW and AT&T (the nation's largest cable provider), whose combined holdings would give them a lock on more than half of all cable TV households in the country.

Public-interest advocates believe they will be successful in imposing conditions to the merger for several reasons. One big help in this regard comes from AOL itself. Up until the day last January when it announced its merger, the company was the chief corporate advocate for an open-access policy for high-speed cable networks. AOL recognized that despite its presence as the nation's largest ISP, with approximately 40 percent of the market, its ability to survive would depend on whether it could use cable TV's pipes, perfect for delivering super-fast video and data (also known as broadband service).

Up until now, AOL's ability to become the country's number one ISP and a huge digital powerhouse has rested on open access to the telephone network, which by law is a "common carrier." But the next phase of Internet delivery requires companies like AOL to use cable wires, which are defined by federal law as proprietary networks controlled by their owner. Before the merger announcement, AOL spent millions of dollars in a coast-to-coast lobbying blitz, trying to convince policymakers to require open access for cable. Recognizing how important cable access was to AOL's future, the company realized that the only sure entry into cable's monopoly community was to buy its way in with the acquisition of Time Warner.

Accordingly, in what is now seen by many as a huge flip-flop, AOL reversed itself, telling regulators to ignore its previous calls for an open-access policy. "We're going to take the open access issue out of Washington and out of City Hall and put it in the marketplace, " said TW's Levin, when first announcing the merger.