TW, AOL just want to be free

Merger restrictions unjustified and motivated by rivals' business interests, companies claim
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America Online and Time Warner executives are keeping a brave face, even as a host of corporate rivals implore regulators to saddle the companies' merger with conditions that would hinder its ability to favor its own TV programming and Internet content on its own high-speed cable systems.

Officials for both companies contend it would be unfair for the government to single out their company with unprecedented dictates that would interfere with subscriber and business relationships.

"The whole broadband marketplace is such a nascent area. It would be premature to impose conditions and certainly to impose conditions on just one player," says Art Harding, an attorney with Fleischman and Walsh representing Time Warner in Washington.

Also being questioned is whether the FCC or the FTC even has the authority to impose any conditions, given that the two companies do not violate any government ownership restrictions or raise any obvious antitrust concerns.

"What's interesting about this merger is that it combines two companies that don't have any overlapping lines of business," says George Vradenberg, AOL's executive vice president for global and strategic policy. "It's driven by the desire to innovate and create new things. It's not a merger driven by increasing our market share."

But regulators are taking a close look. Last week, the FTC asked AOL to explain its role, or lack of one, in an industry effort to develop open standards for instant-messaging software. AOL's Internet rivals have complained for months about the company's decision to block non-customers from messaging their subscribers.

AOL officials counter that they plan to open their instant e-mail system to outside messages and in a show of good faith last week issued an 18-page proposal outlining how it could make its service work with rival systems.

Three weeks ago, the FCC asked AOL to describe its investment and management role in DirecTV, a satellite TV rival to Time Warner. The FCC, separate from the merger review, also is reviewing complaints from Gemstar International and TV broadcasters that some Time Warner cable systems are denying carriage of local stations' electronic program guides.

Walt Disney Co. and BellSouth are seeking conditions that could eventually be applied to every broadband distributor, such as restrictions on caching affiliated content or prevention of interference with rivals' two-way communications.

But Time Warner lobbyist Tim Boggs says corporate critics of the AOL-Time Warner deal are simply using the government's merger-review process as an excuse to paint the merging companies as bad actors in what are, in reality, legitimate business disputes.

"Disney was seeking an advantage in programming negotiations. Gemstar is trying to pursue its business agenda. The instant-messaging people are trying to pursue their agenda. None of their filings say anything about consumers," he notes.

As for fears that the merger will put too much distribution into too few hands, Time Warner officials also scoff. AOL's investment in DirecTV through a $1.5 billion investment in General Motors is not attributable and non-voting, they say. In addition, the partnership will only speed the rollout of broadband services because AOL and DirecTV will launch a broadband satellite service as early as this fall.

Nor does Time Warner's 45% stake in RoadRunner pose a concentration threat, they continue, especially after the Justice Department's order for MediaOne to shed its 35% investment in the cable Internet service provider.

"That really should take those issues off the table," Harding says.

And public advocacy groups' effort to win open access to the cable Internet pipe shouldn't pay off either, according to Boggs. He points out that the FCC had three previous opportunities to require cable companies to open their networks to competitors-in the review of AT & T's purchase of Tele-Communications Inc., review of AT & T's merger with MediaOne, and the first annual review of the commission's advanced services rules-and all three times it has refused to act. "We think the marketplace is working," Boggs says.

To back that up, AOL and Time Warner last February presented lawmakers with a "memorandum of understanding" promising to grant competing Internet service providers access to the AOL Time Warner pipe. At the time, senators said they wanted to see something with more legal teeth. That has not been forthcoming, but Time Warner executives say subsequent announcements that the broadband networks of other major system operators will be open proves that AOL Time Warner already has set the market standard for openness.

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