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AOL, TWX defend deal
July 27, 2000: 7:55 p.m. ET

Critics of America Online-Time Warner say merger is anti-competitive
By Staff Writers Tom Johnson and Martha Slud
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WASHINGTON (CNNfn) - America Online Inc. and Time Warner faced their critics Thursday, defending their planned $120 billion merger to federal regulators in the face of accusations by competitors and consumers that the massive deal could stifle customer choice.

AOL Chairman Steve Case and Gerald Levin, Time Warner's chairman and chief executive, argued before the Federal Communications Commission in Washington that the merger will be good for consumers and serve as a catalyst to speed availability of high-speed Internet and cable access.

"Our commitments to consumer choice and competition will help lead our industries into the Internet century in a way we can all be proud of," Case told the five-member panel. "That's what the merger of AOL and Time Warner is really all about -- helping to lead a second Internet revolution that reaches as many people as possible as quickly as possible, and serves the public interest."

graphicBut the two executives faced scrutiny from FCC commissioners, who voiced concerns about the effect of the deal on the competition and the potential for "digital imperialism" by one industry behemoth.

"This merger is particularly challenging to review, not so much because of its size, but because of its novelty," said Commissioner Michael Powell. "It's difficult to grasp the impact on consumers in markets that have barely emerged."

Disney/AOL square off

The hearing also marked the first time AOL (AOL: Research, Estimates) and Time Warner (TWX: Research, Estimates), the parent company of CNN and CNNfn, faced the fiercest critics of the deal in a regulatory setting.

Entertainment conglomerate Walt Disney Co. (DIS: Research, Estimates), owner of ABC Television and the ESPN cable channel among other holdings, is leading the fight against the merger, arguing that the deal could limit its access to Internet and cable TV networks. General Electric's (GE: Research, Estimates) NBC broadcast subsidiary also opposes the pact.

Disney Executive Vice President Preston Padden told the commission that the company has stayed out of the debate over other big mergers in the past despite significant concerns about them, but that the Burbank, Calif.-based company believes the proposed AOL-Time Warner deal could shut its offerings out of the marketplace.

"Consumers have the right to choose -- or to not choose -- our content, based on how good a job we do creating it and promoting it," Padden said. "What we're trying to avoid is a world where that choice is skewed or limited by business interests of the company that owns the pipe to the consumer's home."

But Case said the newly merged company would never block content from its competitors, saying such a move would limit consumers' options online.

"It has been suggested that a combined AOL Time Warner might somehow favor our content over that of our competitors," Case said. "So, again, let me be very clear: AOL has never done anything like that, and we never would -- because it would diminish our members' online experience."

In May, Time Warner and Disney engaged in a high-profile tussle, when Time Warner blocked ABC Television's programming from its cable systems in several markets as part of a bitter contract dispute.

At several points during the hearing, Time Warner President Richard Parsons made the point that the merger's opponents arguments were rooted in business disputes rather than public policy concerns. At one point, he said Disney officials threatened to oppose the merger during the May negotiations if Time Warner did not agree to certain open access provisions -- a claim Padden did not dispute.

After the meeting, Parsons told he believed that message resonated with the commission.

"What Disney was doing is called extortion," he said. "In any other channel, it's called leverage."

But Padden was equally emphatic that Disney did not ask for any preferential treatment during the negotiations, only promises that Time Warner would not discriminate against other content providers as new communications mediums became available.

Tearing down instant messaging walls

Other critics also weighed in at Thursday's hearing, including the Consumer Federation of America and representatives of rival "instant messenger" providers. AOL dominates the market for instant messaging, which allows users to chat online with one another.

AOL's foes want the FCC to force the company to make its system compatible with other services - allowing the messaging services of smaller firms to link up with AOL's millions of users.

AOL officials noted theirs was the only company so far to have formally proposed a plan to create universal messaging protocol, but could not provide a specific timeframe as to when such a system could be operable.

In the end, several competitors noted the debate boiled down to a condition of trust -- in other words, could AOL Time Warner be trusted to follow through on the promises it's making now.

"We're dealing with a theme of trust that doesn't apply anymore," said William Reddersen, executive vice president of BellSouth Corp. (BLS: Research, Estimates), which is also opposing the merger. "All that remains is for their promises to be refined and codified as a condition to approval."

Parsons said afterward that both companies remain confident they will gain regulatory approval for the deal. The one issue the FCC might struggle with, he said, is open access to Time Warner's cable lines.

When asked directly how the merger might be impacted if the FCC required that conditions be codified in order to gain its approval, he said: "In my judgment, it's not the appropriate response, but at the end of the day, it's not going to stop the merger.

"All the other stuff, hey, we don't even compete with these guys on."

FCC to decide on licensing

At the opening of the hearing, FCC Chairman William Kennard said the commission would have to decide whether the planned merger would help speed the growth of broadband Internet access or stymie access to technologies such as interactive TV and instant messaging.

He said the commission would hold a separate meeting to discuss the issue of broadband access to cable lines by Internet services providers.

"I am very concerned about this issue of access," Kennard said. " I think everybody agrees that the broadband platform should be an open platform. This is a question of how we get there."

The FCC must decide whether the transfer of broadcast licenses to AOL is graphicin the public interest. The Federal Trade Commission will determine whether the deal conforms to antitrust law.

The merger also requires European regulatory approval. The companies have said they expect the deal to close by the end of the year.

But the pact has raised eyebrows among those who question whether there will be fair access to the populous Internet market serviced by America Online, and to the cable television systems operated by Time Warner. The companies have pledged that open access will remain a priority following completion of the deal.

Levin, who is slated to become CEO of the combined company, told the commission that the company is moving forward in allowing other Internet service providers (ISPs) to use its cable system as a conduit for their offerings.

graphicTime Warner's Road Runner high-speed Internet access venture will soon announce the first affiliation with third-party ISPs, he said. The cable company has had an exclusive contract with Road Runner that runs through the end of 2001. The pact has prohibited third-party providers.

Case, of AOL, also defended the company's instant messaging service.

AOL has argued that it wants to make its system compatible with its rivals' programs, but said it has big concerns over privacy breaches and online security issues that must be resolved.

"I don't have to tell anyone in this room that the challenge we all face now is to create server-to-server interoperability that allows users of all these different services to talk to each other seamlessly," Case said. "To that end, AOL has taken several steps forward."

One FCC commissioner told the panel that regulators have a massive task ahead in considering the merger, which he said is unprecedented in scope and fraught with abstract issues.

The deal between Dulles, Va.-based AOL, the nation's largest Internet service provider, and Time Warner, a New York-headquartered media powerhouse that controls cable, film and print businesses, was announced in January.

Initially, the merger was valued at about $165 billion in stock plus assumed debt. But the value has fallen to roughly $120 billion as the prices of both companies' shares have slipped in the subsequent months.

In Thursday trading, AOL stock gained 1/2 to 54 on the New York Stock Exchange. Time Warner shares rose 1/16 to 77-3/16. Back to top


AOL-Time Warner deal moves closer - June 23, 2000


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