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TAKING ON GOLIATH

Old- and new-media execs join public-interest groups to limit powers of a merged AOL Time Warner 6/18/2000 08:00:00 PM Eastern

William Reddersen last week led a team of executives from Atlanta-based Bell South to talk with FCC Chairman William Kennard and the agency's other commissioners in Washington.

What topped the telco's agenda? Perhaps its plan to meld wireless operations with SBC Communications? Nope.

Reddersen was the first in a parade of big-company leaders that in the next few weeks will try to persuade the FCC and the Federal Trade Commission to impose strict conditions on the pending merger of America Online and Time Warner Inc. The conditions would limit the would-be cable-Internet juggernaut's power to favor its own content and services on its broadband cable pipes to the home.

Expected to follow suit are a surprising collection of old- and new-media players. They include TV station groups, The Walt Disney Co., SBC, Microsoft and such upstart Internet services as iCast and Tribal Voice. This conglomeration of cross-industry voices is adding a rare corporate resonance to the familiar outcry of public advocacy groups working full-time to slow media and telecom consolidation.

Corporate distrust of the AOL Time Warner deal is fueled by more than the sheer size and scope of the deal, although it would create a company of unprecedented reach into nearly every sector of the TV, Internet, music and publishing worlds. AOL Time Warner will be by far the country's largest media company, holding the second-largest cable-system operator with 12.7 million subscribers; more than a dozen of the top cable channels including HBO, CNN and Cinemax; more than one-half of U.S. dial-up Internet subscribers; 30% of high-speed cable Internet subscribers; one-fifth of U.S. movie production; one-sixth of the recorded music market; more than 30 magazines; and 10% of annual book publishing.

But beyond its overpowering breadth, AOL Time Warner's critics are worried the company plans to put a choke hold on interactive TV and Internet services. Both companies, they complain, have long-standing strategies of using control over distribution to keep unaffiliated service and content providers away from their subscribers.

If regulators approve the merger without putting a stop to those practices, the critics say, the unbridled innovation and wide-open access to new programming and services needed to fuel the convergence of digital media will be strangled at birth.

"We're at a crucial moment when good behavior must be made standard practice," says Margaret Heffernan, chief executive of iCast, a video- and audio-streaming Web site focusing on movies and music and battling AOL over access to instant-messaging customers. "If AOL is acting as a bully and stifling us now, there's no reason to believe they are going to be better behaved when it gets so much bigger."

Running at the head of this unorganized pack of critics is Preston Padden, head of Disney's Washington office, who has campaigned to rein in AOL Time Warner's power almost nonstop since the companies announced their $181 billion merger in January. Padden's evangelical appeals to federal regulators, Congress, municipal governments, The New York Times editorial board, and anyone else who will listen appear to be gaining traction in Washington.

Padden's success comes despite the sneaking suspicions that Disney, as the country's second-largest media group, might be motivated more by its desire to get leverage in private Internet/TV carriage negotiations with AOL Time Warner than by concern for the public's welfare.

Conceding his company's self-interest, Padden points out that Disney failed to work out antidiscrimination terms when it settled its high-profile contract fight with Time Warner over carriage of ABC-owned TV stations and Disney cable channels in May. But he predicts that Disney's troubles will be worse for others. "What happens to companies smaller than Disney?" he asks.

Disney, BellSouth, TV broadcasters and other AOL Time Warner critics each have different concerns about the merger. For his part, Padden worries that Disney and other content providers that lack cable or other broadband distribution will be squeezed onto the slow lane in the high-speed digital world if AOL Time Warner isn't prohibited from discriminatory practices that make it harder for subscribers to get new types of services from third-parties.

So, he says, approval of the merger should include conditions that would prohibit the company from:

  • Interfering with the "return path" communication link needed for viewers to utilized interactive TV.

  • "Force feeding" programming by promoting only affiliated shows or networks on electronic program guides.

  • "Local caching" of affiliated content on AOL Time Warner servers around the country, so the programming will be more quickly accessed by subscribers than unaffiliated content.

  • Streaming third-party video content at slower bit rates than AOL Time Warner programming.

Going further, Padden says the conditions should be applied to any broadband distributor that owns programming. "Control over digital distribution creates new opportunities for platform owners to discriminate in ways that weren't possible before," he says.

Recognizing that regulators will be reluctant to take on responsibility for monitoring what is essentially a new industry, Padden suggests it's time to revive something akin to the financial syndication rules that once restricted the broadcast networks from owning their own shows. In the digital world, it would be cleaner to bar pipeline operators from controlling content, he says.

SBC Senior Counsel Pat Pascarella agrees. "There is a real question about how much concentration is too much when it comes to both content and distribution," he says. "If you're going to own one, it's dangerous to let you own the other." At a minimum, SBC says, Time Warner should be forced to dump its 45% stake in Road Runner to reduce its post-merger incentive to discriminate.

BellSouth last week was pushing FCC commissioners to take an even broader approach. Company executives wouldn't be interviewed about their concerns, but, in public filings with the FCC, they have urged regulators to prevent the roughly half dozen "mega-carriers" (others include AT & T-MediaOne and Bell Atlantic-GTE) from having interlocking business relationships. For instance, BellSouth wants to bar any contract that would give AT & T long-distance customers a rate break on AOL's Internet service in return for giving Time Warner cable telephony customers a deal on long-distance service.

Public advocacy groups such as the Media Access Project say the merger should prod the FCC to impose open-access rules that would force AOL Time Warner to carry all ISPs on the same financial terms. AOL Time Warner also should be forced to sell its investment in satellite TV competitor DirecTV, held through a $1.5 billion stake in General Motors.

The National Association of Broadcasters, prompted by Disney's campaigning, called on the FCC to condition the deal on Time Warner carriage of all free over-the-air signals of local stations-both digital and analog. The NAB also wants AOL Time Warner to be barred from blocking electronic program guides and other supplemental services that broadcasters offer for free.

AOL and Time Warner say government antidiscrimination conditions won't be needed and point to their Feb. 29 agreement to carry unaffiliated ISPs on their broadband pipe as proof (see story, page 18). But public advocates complain that the agreement offers little in the way of concrete promises, such as how many ISPs will be given access and whether all will have equally efficient connections.

Industry critics also scoff at AOL and Time Warner promises because of their long history of tense relations with rival content companies. For instance, Time Warner currently is blocking competing electronic program guides that broadcasters are offering in three states where its cable systems offer their own EPGs. Also, SBC discovered in May that the local Time Warner/Road Runner service was conducting a corporate espionage operation that cost SBC thousands in start-up costs for digital subscriber lines. Of course, Time Warner also gave itself a public relations black eye in April by yanking ABC TV stations from its cable systems during a retransmission consent dispute with the network.

As for AOL, its critics say its poor sportsmanship is exemplified by its decision to block outside instant messaging and the release early this year of AOL 5.0, which frequently disabled non-AOL browsers.

AOL and Time Warner officials say they expect little in the way of government conditions; after all, the companies have little operational overlap, and the merger will not violate any government ownership limits. But critics of the deal say past FTC and FCC decisions provide plenty of precedent to hinder the type of vertical concentration between content suppliers and distributors that this deal creates.

"From the early going, both agencies have been eyeing this very, very seriously," said Andrew Schwartzman, president of Media Access Project. "They think this is a very big deal."

Time Warner, better than any company, is well aware of the FTC's concern over ties between cable distributors and programmers. After all, it was the FTC that ordered John Malone's Liberty Media to convert his 9% stake into a passive investment as part of approving Time Warner's 1996 takeover of Turner Broadcasting. The FTC also forced Time Warner to end contracts that gave Tele-Communications Inc. favorable terms for Turner programming.

Furthermore, the Department of Justice's order last month forcing AT & T to sell its 35% stake in Road Runner as a condition of the MediaOne merger signaled the government's willingness to prevent concentration in the budding broadband market and gives the FTC enough ammunition to fight content/distribution ties in that area just as it did in the Turner deal. As a first step in its review of the AOL deal, the FTC last week asked about the online provider's effort to block users of rival instant-messaging software.

The FCC is moving ahead as well. Two weeks ago, the Cable Services Bureau asked AOL to explain why it dropped out of an Internet industry effort to develop common instant-messaging standards and to document its DirecTV holdings. The five FCC commissioners also will hold a public hearing on the deal at the end of June.

Critics of the merger also take heart knowing that the commission appeared willing to rely solely on its "public interest" in imposing conditions on the AT & T-MediaOne merger, even if a federal court had struck down the government's cable-ownership cap. (Ultimately the cap was upheld.) Said an FCC source: "This will be a good example for showing how the commission can require these things under its public-interest authority."

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