Time Warner last week pitched its broadband carriage deal with Internet provider EarthLink as the breakthrough deal needed to win federal approval for the cable giant's merger with America Online.
The real test, however, will come during the next few weeks as Federal Trade Commission officials pore over the contract. They'll be making sure the agreement provides adequate terms, such as subscription- and ad-revenue sharing, that would allow it to be used as a template for carriage deals Time Warner will have to offer as a condition of the merger.
Although skeptics of AOL and Time Warner abound, EarthLink at least has dropped its contentious stand against the merger and praised the contract. "Our deal can be a model for which the rest of the industry can hopefully get access to this infrastructure," EarthLink chief executive Gary Betty said during an interview with Web financial service On24.
EarthLink had been one of the most vocal critics of the AOL-Time Warner merger and several weeks ago made public an embarrassing Time Warner "term sheet" the cable company used as a starting point for talks with several ISPs seeking carriage. Under those terms, which drove home to FTC officials how Time Warner was using its market muscle to extract harsh carriage terms, ISPs would have been forced to turn over 75% of their subscriber revenue and 25% of ad revenue.
Last week's agreement provides much better terms, Betty said, although he would not reveal specifics of the contract. "We are happy with the deal we cut," he said. "The deal that had been on the table would have put EarthLink in a position of losing money on every customer," he told CNN last week.
Under the FCC's terms, Time Warner would be required to offer at least one unaffiliated ISP in any market as it rolls out AOL broadband services. Over time, the cable system would be required to offer at least three unaffiliated ISPs in the market.
Critics of the merger were keeping an open mind about the deal, including Disney Washington chief Preston Padden, who called the agreement "a step in the right direction."
Besides EarthLink's long-standing determination to win favorable access terms, Padden and consumer advocates are heartened by the company's strong bargaining position. Atlanta-based EarthLink is the country's second largest ISP with 4.6 million subscribers. Juno, the other company likely to strike a deal with Time Warner soon, is poorly capitalized and has less leverage.
Still, proponents of open-access conditions said they are troubled that the contract's provisions are confidential. "The FTC has to make the principles behind these terms public," said Center for Media Education executive director Jeff Chester.
The FCC, which is examining the need for industrywide cable access rules, is likely to be influenced by the final terms imposed by crosstown regulators at the FTC. Cable industry officials contend, however, that the FTC's conditions should not be imposed beyond Time Warner's merger with 23-million-subscriber AOL, the overwhelming leader in Internet service.
Still, other industry players are gearing up to carry multiple providers. Comcast is reportedly readying a multiple ISP trial in Philadelphia and AT & T is conducting one in Boulder, Colo.
Regardless of how the industrywide open-access battle turns out, EarthLink's Betty was ecstatic about his deal because "EarthLink will be on Time Warner Cable before AOL."