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FTC approves deal contingent on opening access to independent ISPs; consumer groups see it as model; industry sees it as unique 12/17/2000 07:00:00 PM Eastern

The merger of America Online and Time Warner won the Federal Trade Commission's blessing last week, but at the price of a sweeping set of conditions intended to prevent the merged company from monopolizing broadband Internet service and interactive TV.

The next step is FCC approval, which is expected within the next several weeks.

Nailed down only in the last few days, the FTC OK comes almost a year after the companies agreed to form a media giant with an overwhelming position in both content production and distribution. Whether the deal was approved or taken to court went down to the wire, but ultimately the firms agreed to enough restrictions to win a unanimous vote from the five commissioners.

The open-access and interactive-TV conditions imposed by the FTC are likely to be a headache for other cable companies. Although cable industry officials were quick to point out that they only apply to AOL and Time Warner, the conditions are likely to serve as a model for other cable companies as they roll out broadband Internet service.

Disturbed by that prospect, the main cable trade group said the FTC insisted on merger conditions only because of the two companies' tremendous market position and that no other cable company possesses the same potential to wield monopoly power in content and distribution. AOL serves 24 million Internet customers, nearly half of the U.S. Internet access market, and Time Warner, the second largest cable company has 12.6 million subscribers and breathtaking reach in films, music and publishing.

"No other cable company serves more than a small fraction of the Internet access market," said Robert Sachs, president of the National Cable Television Association. "The antitrust safeguards imposed by the FTC are unique to AOL's substantial Internet position and are not a precedent for broader government regulation."

But FTC Chairman Robert Pitofsky said he hopes the deal will be a template for others. "My hope is this model will apply more broadly," he said. "I really think open access is the way to go for this country."

Recognizing that regulators now have more power to force similar terms on other companies, a technology industry group criticized the FTC. "Forced access is wrong on principle and its practical impact will be to delay and discourage investment in cable broadband upgrades," the Association for Competitive Technology said.

The $183 billion merger, the largest corporate deal ever, has already been approved by European regulators and local cable regulators. The FCC is the last hurdle, and is expected to finish its review by the end of the year or in early January. The FCC is expected to do little more than force AOL to allow subscribers to receives instant messages generated by non-AOL software.

The FTC was prepared to block the merger unless the companies came to terms. "There were serious antitrust problems here that needed to be addressed," agency chairman Robert Pitosfky said during a press conference to unveil the conditions. "Competition has been preserved and indeed possibly enhanced in the very, very important area of Internet commerce."

AOL and Time Warner insisted all along that conditions were not justified, but ultimately gave in to avoid a protracted court fight that would have delayed the merger indefinitely.

Consumer groups that had lobbied for restrictions on the deal were ecstatic over the FTC's order, while the companies but on a brave face.

The agreement is a "win for consumers", the firms said in a joint statement and predicted it "will become a model for other cable systems."

A surprising coalition of consumer activists and corporate rivals of AOL and Time Warner, including Disney and Microsoft, spearheaded the push for conditions. They feared that a combined company would use its overwhelming content and distribution clout to keep customers away from unaffiliated content. "The FTC has fundamentally changed what AOL Time Warner want do and the cable industry hoped to do," said Jeffrey Chester, executive director of the Center for Media Education.

The FTC's terms cover four key areas: Open access, pricing, interactive TV, and digital subscriber lines (see chart). Absent from the deal was a once-expected order that would have forced AOL to sell its $1.5 billion investment in DirecTV. Although consumer groups argued that multichannel video competition would be hurt if AOL maintains ties with the satellite TV provider after becoming a cable provider, the FTC said there was no reason to step in. The deal does not address AOL's potential for favoring Time Warner content on AOL. The FTC argues that the mandate for independent ISP's would provide enough competitive options.

Neither did the FTC address AOL's refusal to let its customers receive instant messages from other providers, but the FCC is expected to elicit a promise from the company to drop its ban.

The FTC will appoint a monitor to assess AOL-Time Warner's compliance and to arbitrate any disputes between the merged entity and ISPs that want to get onto its system.

The provisions will be in effect for five years, substantially shorter than the 20-year timetable of most FTC merger agreements. Pitofsky said quick expiration was warranted given the rapid pace of change in digital technology.

Consumer activists said they were happy to accept the short life span in return for a large bundle of strong conditions.

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