AOL-Time Warner critics focus on cable and access

AOL-Time Warner critics focus on cable and access

By Rod Perlmutter, News Editor, Media Central

(Additional material from news services)

KANSAS CITY, Mo., Jan. 10, 2000 (MediaCentral) – All the headlines about the proposed Time Warner Inc.-America Online Inc. merger mention billions of dollars, but critics say the real story is millions of cable subscribers.

Specifically, the key to the deal is Time Warner’s 13 million cable subscribers — and just who will have access to them. That’s the opinion of several industry analysts, online reporters and consumer groups, who expressed either opposition or skepticism about the deal.

On Monday, top Internet services provider America Online and Time Warner, the world’s largest media company, announced that AOL will buy Time Warner for what the Associated Press reported would be billion in stock. If approved, it would be the largest merger ever.

Shares of both companies soared on news of a deal that will create an empire that reaches from magazines and movies into cyberspace and that promises to remake the landscape of how people communicate, are entertained and informed, around the globe.

Prior to the announcement, the biggest merger on record was MCI WorldCom Inc.’s agreement to buy Sprint Corp. for billion.

It’s the cable

Sergio Non, the Inter@ctive Investor reporter for http://www.zdnet.com, was skeptical about AOL CEO Steve Case’s reported reasons for wanting to acquire Time Warner.

“No matter how much Case praises Time Warner’s content, for AOL this is all about cable distribution, not owning Sports Illustrated and the rights to Pat Metheny records. … You can get content anywhere … but not just anyone has a broadband system that passes 20 million homes.”

AOL and Time Warner promised on Monday to promote open access on what will be their cable network — Time Warner’s network — which has 13 million customers and is available to more than 20 percent of U.S. homes. That’ll likely prevent AT&T from foot-dragging or backsliding on conversion of its network to open access.

If equal access is one of the issues, then prepare for a contentious debate.

“It’s still unclear under what terms cable companies will provide access to outsiders that want to provide broadband services,” wrote Tom Steinert-Threlkeld, reporter for Inter@active Week.  “What is worrisome here is the same sort of questions that plague independent communications companies that want access to Bell company phone lines in local markets.”

Witness, for example, AT&T’s opposition to the Federal Communications Commission’s Dec. 22 decision to allow Bell Atlantic Corp. to offer long-distance service in New York. It was the first time since the 1984 break-up of AT&T that the FCC allowed a “Baby Bell” company to provide long-distance telephone service in its own region.

One of the FCC conditions for allowing a Baby Bell to offer long distance was for it to prove that it allowed other phone companies within its region equal opportunity to provide local service, and AT&T argued that Bell Atlantic hadn’t proved that yet. AT&T sued for an emergency stay against the FCC decision, which a federal appeals court blocked.

 Complex web of media giants

The Time Warner-AOL deal would produce a complex relationship among AOL, Time Warner and No. 1 cable operator and long-distance giant AT&T. Time Warner is the No. 2 cable operator.

AT&T is seeking to acquire Media One Group Inc., which owns 25 percent of a joint venture called Time Warner Entertainment, which holds the bulk of Time Warner’s assets, including more than 11 million cable television subscribers. Time Warner owns the remaining 75 percent of the venture.

If AT&T’s deal is approved and AOL and Time Warner merge, AT&T would own 25 percent of a venture that holds a substantial portion of AOL Time Warner’s cable assets.

Time Warner and Media One also jointly own a high-speed Internet access service called Road Runner. AT&T owns the largest stake in the only other major cable ISP, Excite AtHome Corp.

Some groups said it was ironic that AOL, which has been critical of AT&T over cable access, would bid for Time Warner.

“The key aspect from the AOL-Time Warner press conference was the statement by Levin, endorsed by Case, that it’s time to take the issue of access regulations out of Washington and out of the localities,” Peter Arnold, executive director of Hands Off the Internet, a group based in Washington that opposes government attempts to regulate web content. “As both men stated, individual companies are much better able to serve consumers by structuring relationships without concern about whether it might violate some misguided government regulation.”

“For a year now, AOL-backed groups have been active in pushing state and local access regulation in franchise transfers and renewals across the country,” Arnold said. “It will be interesting to see if they are as aggressive in promoting this regulation in the service territories for AOL-Time Warner.”

 Opposition but probably antitrust OK

Jamie Love, Director of the Washington-based Consumer Project on Technology, said federal regulators should oppose the merger. Love gave five reasons:

  • AOL is the single most important force today in advocating open access to the cable broad band platform.
  • If this merger is approved, AOL’s interests will be fundamentally changed.
  • AOL and Time-Warner are direct competitors as Internet content providers on broadband services.
  • One relevant market for AOL and Time-Warner as content providers is for providing navigation and interface services to Internet users, such as menus for electronic commerce.
  • If AOL can buy Time-Warner, will a Microsoft/AT&T merger be far behind?

AT&T and Time-Warner are both trying to set up broadband Internet services that can discriminate among content providers, and effectively degrade services offered by competitors.  But some lawyers said the takeover likely will not cause serious antitrust problems.

“It does not appear there are antitrust issues that would provide a significant impediment to this transaction,” said Steven Salop, a professor of antitrust law at Georgetown University Law School.

Antitrust lawyer Marc Schildkraut, of Howrey & Simon in Washington, agreed that the merger would probably pass muster after a close examination.

“They will be looking at the same kinds of things they looked at when Time Warner acquired CNN,” Schildkraut said.

That merger — announced in 1995 and approved in 1997 — raised questions about vertical integration. The Federal Trade Commission was concerned that the new company could raise the prices for programming because it would both produce programs and distribute them through the country’s second largest cable system.

In this merger, AOL would be in a position to distribute content produced by what is now Time Warner.

At this point, the Justice Department and Federal Trade Commission have yet to sort out which agency will be reviewing the transaction, Reuters reported.

It’s not clear whether the Federal Communications Commission would have to issue an opinion on the merger.

Michael Balmoris, spokesman for the FCC, said that if the deal involved any sort of transfers of licenses, such as for cable franchises, that would require FCC approval.

But forget about regulatory battles or opposition from competitors to the AOL-Time Warner deal. There’s another battle that’s about to begin, some critics wrote, and it’s a lot closer to home.

Imagine combining two corporations with the likes of Ted Turner, Steve Case, and Gerald Levin all under one roof.

Case stated during the Monday press conference that “there are a lot of cooks on stage, but … there is a big meal to serve here. …There’s plenty for a lot of fine chefs to oversee.” That made zdnet.com’s Sergio Non scoff.

“Somehow, I don’t see Wolfgang Puck, Emeril Lagasse and Paul Prudhomme collaborating on a meal anytime soon,” Non wrote.

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