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AOL-Time Warner Merger
The New York Times January 11, 2000,
MEDIA MEGADEAL: THE OVERVIEW;
AMERICA ONLINE AGREES TO BUY TIME WARNER FOR $165 BILLION; MEDIA DEAL IS
RICHEST MERGER
America Online, the company that brought the Internet to the masses, said yesterday that it had agreed to buy the largest traditional media company, Time Warner, for $165 billion in what would be the biggest merger in history and the best evidence yet that old and new media are converging.
By agreeing to give up its independence in return for an ample premium on its stock price, Time Warner is acknowledging that the Internet is central to its music, publishing and TV businesses and that its own efforts to create online operations have been lackluster. Under the direction of its 41-year-old chairman and chief executive, Stephen M. Case, America Online, despite the occasional stumble, has surged far ahead of its online competitors, largely on the strength of its marketing skill and ability to make technology easy to use.
America Online, in turn, would gain access to Time Warner's entertainment and information empire. And of more immediate importance would be that the company -- whose 22 million paying subscribers now use modems and telephone lines to go online -- would get access to Time Warner's cable television systems.
Those systems, which now serve 13 million subscribers, would enable America Online to start offering much speedier Internet and interactive television services. Until this deal, no major cable company would carry America Online's services.
The new offerings might include Internet versions of Time Warner's media properties, like news from CNN or movies from Home Box Office, combined with a range of features more sophisticated than the Web sites, chat rooms and e-mail services that are now staples of America Online.
The earliest impact might come in music, where America Online is already developing technology for a digital jukebox that could store and play songs from Warner Music and other labels.
And for consumers generally, whether they now or ever subscribe to America Online or Time Warner services, yesterday's announcement is very likely to portend other mergers and alliances that could hasten the development of and availability of high-capacity information and entertainment networks.
The deal, which was negotiated with such secrecy that it took the industry by surprise, also brought a new realization about the extraordinary stock-market values that America Online and other Internet companies have reached the last 18 months. Although analysts have long predicted that the stars among the Internet upstarts would wind up part of larger media empires, the deal indicates that it could be the Internet companies that do the buying and the old media that sell out.
"The dot-com guys have sort of won," said David B. Readerman, an analyst with Thomas Weisel Partners, a San Francisco brokerage firm. "AOL was able to serve up its stock and buy Time Warner, walking a way with incredible media assets."
Another winner is Mr. Case, who is to become the chairman of the new company, which would be called AOL Time Warner. Time Warner's current chairman and chief executive, Gerald M. Levin, 60, would serve under Mr. Case as the new company's chief executive.
With a market value of $342 billion, based on yesterday's closing stock prices, the combined corporation would be the fourth-most-valuable company in the country, after Microsoft, General Electric and Cisco Systems. And its stock market value would roughly be equal to the gross domestic product of Mexico.
Besides requiring the approval of both companies' shareholders, the combination will face the usual review by antitrust regulators as well as a complex web of local reviews as cable television franchises are transferred into America Online's name. It will also require review by Federal antitrust regulators. The Clinton administration has not yet decided whether to refer the matter to the Justice Department, which has examined America Online's past acquisitions, or to the Federal Trade Commission, which approved the merger between Time and Warner Communications 10 years ago.
Although some consumer groups and members of Congress called for careful scrutiny of the merger, the companies said they did not expect any problems because their businesses do not overlap and neither company dominates its respective markets. No other Internet-access provider, however, has more than about a tenth as many customers as America Online. The companies said they hoped to close the deal by the end of the year.
Mr. Case was already a billionaire but not the instant sort created by some of the newer Internet companies -- many of which, unlike America Online, have never achieved a profit. America Online became profitable in 1998 and has earned $879 million in the last four quarters, on sales of $5.2 billion, far more than any other Internet company. Mr. Case worked for 15 years, through obscurity and ridicule, to achieve his vision that chatting on a computer screen would become as important a communications medium as the telephone or television.
It was Mr. Case who proposed the combination last October to Mr. Levin, winning an initial hearing by offering him the chief executive's title in the combined company. After much haggling over the financial terms, the deal was cemented at a five-hour meeting at Mr. Case's house in Northern Virginia on Thursday night.
As measured by its revenue in the last 12 months of $27.7 billion, Time Warner is already the largest of the conventional media companies. (But the Time Inc. publishing division, on which Henry Luce founded the company with Time magazine nearly 70 years ago, would represent less than 15 percent of AOL Time Warner's revenue.) If the merger is completed, the new company would be an even more powerful player in a wide range of industries.
AT&T, which is in the process of becoming the largest owner of cable television systems, would face a more formidable America Online, which had been trying to gain access to AT&T's cable systems. And Microsoft would be contending with an even bigger rival as computer software continues to evolve into Internet-based services -- a field in which America Online has excelled.
Indeed, in light of yesterday's announcement, analysts and executives were quick to predict that more media and technology companies would run to the altar.
"The combination of old and new media companies will happen far faster because of this," said George Bell, the president of Excite@Home, the company controlled by AT&T that offers high-speed Internet services over cable systems. "Fundamentally, Time Warner has something AOL doesn't have: great media brands built up over decades. The time isn't there for Internet companies to build that content. Time just won't hold still."
By the same reasoning, other media companies might see the virtue in finding a partner with Internet competence -- as did Time Warner, whose decision to sell out is a tacit admission that the biggest and most talented publishers and studio executives have been at a loss to figure out how to apply their talents to new media. Time Warner was an early player in interactive television, through the Full Service Network, an expensive prototype it introduced in Orlando, Fla. And its Pathfinder service, one of the pioneering sites on the World Wide Web, was never able to turn the company's substantial brands like Time and Sports Illustrated into a major force.
Few of the other media companies have done any better online. Only Walt Disney, with its Go Network, is among the 10 top Internet services.
The big cable operators, including AT&T and Time Warner, have long wanted to be the exclusive Internet providers on the systems they own. But America Online has been calling for open access -- the ability to offer a high-speed service over any cable system just as it offers its current service through the wires of any telephone company.
In yesterday's announcement, Time Warner pledged to support open access to its cable systems by any Internet provider. In practice, neither of the merger partners would have much business incentive to deal exclusively only with each other. Were America Online to restrict itself only to Time Warner's 13-million-subscriber cable systems, it would be missing the opportunity to serve the tens of millions of other people already on the Internet who might be willing to sign up for a new, high-speed AOL.
The man who started CNN two decades ago, was Ted Turner, Time Warner's 61-year-old vice chairman and its largest shareholder. Yesterday, Mr. Turner explained his support for the merger.
"When I cast my vote for 100 million shares, I did it with as much excitement as I felt the first time I made love some 42 years ago," Mr. Turner said. "I voted for it because we will have a stronger company that will create value. It's not so easy to go out and recreate AOL. No one has been able to do it so far."
AOL Time Warner control of various industries:
INTERNET SERVICE
AOL: 54%
OTHER: 46%
Most United States consumers get access to the Internet from America Online.
CABLE SYSTEMS
TIME WARNER: 20%
OTHER: 80%
Time Warner provides cable service to 13 million people, making it the nation's No. 2 provider.
PUBLISHING
Time Warner publishes 33 magazines, which are read by 120 million people. It is also the country's eighth-largest book publisher.
CIRCULATION, IN MILLIONS
TIME: 4.00
PEOPLE: 3.25
SPORTS ILLUSTRATED: 3.15
SOUTHERN LIVING: 2.45
MONEY: 1.90
MOVIES
TIME WARNER: 18%
Films from Warner Brothers and New Line Cinema, both part of Time Warner, grossed $1.4 billion last year, about one-fifth of the domestic total.
TELEVISION
Time Warner owns the WB network, which ranks fifth in prime time, and 10 cable channels.
SHARE OF U.S. HOUSEHOLDS
WB NETWORK: 5.0%
TBS: 1.6%
HBO: 1.5%
TNT: 1.2%
MUSIC
TIME WARNER: 16%
Time Warner sold 119 million records last year, about one-sixth of all records sold.
(Sources: ISP Report; Yankee Group; Subtext; Hollywood Reporter; Nielsen Media Research; Soundscan; company reports)(pg. A1)
Deal Stirs Concerns About Internet Access
The Washington Post January 11, 2000,
As antitrust matters go, the $ 183 billion combination of America Online Inc., the nation's largest Internet service provider, with media and entertainment conglomerate Time Warner Inc. is not expected to trip many alarms with federal regulators, analysts said yesterday. In a strict sense, the two companies are engaged in different businesses and their merger would eliminate little or no competition.
But the sheer scope of the deal--it would be the largest in history--and the reach of the combined companies could intensify debate over who controls access to the Internet as it becomes increasingly central to much of American life.
News of the deal sparked worries that corporate consolidation now imperils the free-for-all quality of the global computer network. If such expressions of concern grow loud, the Federal Communications Commission or antitrust authorities could condition approval on promises that the new AOL Time Warner would guarantee "open access" to the Internet, allowing its high-speed Internet customers to connect to the service provider of their choice, some analysts said.
In a sign that the debate has political currency, Sen. Mike DeWine (R-Ohio), chairman of the antitrust subcommittee of the Senate Commerce Committee, and Sen. Herb Kohl (D-Wis.), the panel's ranking member, released a joint statement pledging to hold congressional hearings on the deal's impact on "the so-called 'marketplace of ideas.' "
"Is this merger the beginning of the end of the Internet as an effective counterweight to traditional media outlets," the senators asked, "or is this just another step on the road to making the Internet a more useful and usable source of information?"
As AOL raised the banner on its corporate capture yesterday in New York, it pledged that it would not restrict customer choice in choosing an Internet service. "We're committed to the concept of opening this up," AOL chief executive Steve Case said in an interview.
But consumer advocates were not assuaged. "Consumers do not want to be beholden to a giant media-Internet dictatorship," said Gene Kimmelman, co-director of Consumers Union.
The latest deal also heightens questions about another major telecommunications merger, AT&T Corp.'s pending purchase of cable giant MediaOne Group Inc. In buying that company, AT&T would inherit a 25 percent stake in Time Warner's cable systems. Yesterday's news means AT&T would wind up owning a piece of the new AOL Time Warner. The cable world has long been marked by complex ownership webs, but how this complication will affect the FCC's ongoing review of the AT&T-MediaOne deal was anyone's guess.
At the heart of AOL's move to take over Time Warner is the growing belief that the next generation of the Internet will demand unprecedented speed, allowing sophisticated graphics and video to be fused with the current computerized fare. Cable wires have emerged as a leading conduit for the new high-speed Internet, competing with DSL, a technology that runs over phone wires. AOL has now ensured itself a way into the roughly 13 million households served by Time Warner's cable systems.
But what about AOL's rivals? Will they also be able to sell their services over Time Warner's cable systems? For months, AOL has led a pitched battle to force cable companies to share their wires with Internet service providers, much as local telephone companies are required to let competitors connect to their systems. The company has funded the OpenNet coalition, which portrays itself as a grass-roots group pressing for "open access" to cable.
The open-access debate was prompted by AT&T's push into cable. The long-distance company snapped up Tele-Communications Inc. and then MediaOne in a bid to ride those wires into homes, selling both high-speed Internet and telephone connections. As part of its merger with TCI, AT&T inherited a contract giving Internet provider Excite At Home the exclusive right to sell service over the TCI system.
AOL urged cities around the country to adopt rules requiring AT&T to let other Internet providers serve customers on the same terms. It sought to persuade the FCC to mandate an open-access policy nationally. The commission, led by Chairman William E. Kennard, has declined to regulate, citing worries that rules could discourage cable companies from upgrading their systems for high-speed Internet links.
Cable officials portrayed AOL's advocacy cynically. They said the company stood for open access only so long as it was on the outside: Once AOL did a deal with a cable company--it had been negotiating with AT&T before taking Time Warner--its passion for open access would wane.
Not so, AOL and Time Warner said yesterday. "AOL Time Warner will be committed to ensuring consumer choice," the companies said in a press release, adding hopes that "this merger will persuade all companies operating broadband platforms to provide consumers with real choice."
But that statement masked a stunning reversal: AOL also renounced government-imposed rules as the means of ensuring open access. "We always hoped it would come through the marketplace, rather than having to have government get involved," Case said at a news conference. "We are going to take the open-access issue out of Washington, out of city hall, to the marketplace," added Time Warner chief executive Gerald Levin.
Given that AOL is largely responsible for putting the issue into the government arena in the first place, some seized on those statements. "As soon as AOL becomes the largest high-speed Internet provider in the country, they have every incentive to harm competition and consumers in the very same way they claimed cable companies were doing," Kimmelman said. "If you can't beat 'em, join 'em."
Scott Cleland, an analyst with Legg Mason Precursor Group, said AOL still needs access to other cable systems. "Time Warner only reaches 20 percent of the cable households and 12 percent of American households," he said. "AOL still wants to reach the other 88 percent."
Some analysts saw the deal as bad news for DSL providers, who use telephone lines to deliver high-speed Internet service. But others took AOL's credo--"AOL Anywhere"--at face value. Though cable is clearly a major part of its plans, so are links to customers via DSL and wireless phones, they assumed. "AOL is all about capturing eyeballs," said Jason Oxman, senior legal counsel at Covad Communications, a leading DSL provider. "It doesn't care what network it uses to get there."
Some analysts said the deal ensures that the FCC will continue to eschew open-access rules and allow the market to give consumers Internet choice. Last month, AT&T signed a letter of concurrence with MindSpring Enterprises Inc., the nation's second-largest Internet service provider, outlining the principles of open access that will apply after Excite At Home's exclusive contract expires in 2002. Now, AOL says, the new combination will be added to the open-access column.
"Whatever negligible risk there was that government would intervene, that risk is diminishing to zero," a former FCC senior official said.
The FCC declined to comment yesterday. But, in recent statements, Kennard has given no signals he is thinking otherwise.
"We should give the marketplace a chance to work," he said in a speech last month. "We have [fewer] than 2 million broadband subscribers in America, and the most important thing that we in government can do is to create an environment to get these pipes built."
The antitrust review would be handled either by the Justice Department or the Federal Trade Commission. Though forecasts were for a smooth ride to approval, no one offered guarantees.
William Baer, a former head of the FTC's Bureau of Competition, said he saw no major obstacles to the deal, but added that questions about the combined company's control of so many parts of the media market "can't be dismissed out of hand."
European authorities could also play a role. Time Warner has a global presence, and AOL has expanded extensively into Europe. Some of AOL's alliances, such as a strong bond with Germany's Bertelsmann AG, involve direct competitors to Time Warner and could create thorny issues for EU regulators to work out.
FCC Reviews Largest Media Merger Ever, But Impact on the Internet Looms Even Larger: AOL-Time Warner Merger Raises Five Basic Concerns
Center for Media Education Press release July 26, 2000
WASHINGTON, DC...As the Federal Communications Commission's 27 July en banc hearing on the proposed AOL-Time Warner merger approaches, a consumer group warned that the future diversity and openness of the Internet are at risk. Even more important than the largest corporate merger in US history, according to the Center for Media Education (CME), is the precedent that the new conglomerate will set for a closed, proprietary broadband delivery system.
"If, as AOL's Steve Case suggests, this merger signals the start of the 'Internet Century,' declared Jeffrey Chester, CME's executive director, "Chairman Kennard and the FCC must set the appropriate tone for that new era by ensuring the basic ground rules of fair play and competition." Such ground rules, Chester explained, include opening the broadband networks to all ISPs, ensuring nondiscriminatory transport of all data and services, and fostering the development and dissemination of noncommercial, public-interest programming.
At present, Chester noted, cable broadband providers are not required to share their networks with unaffiliated ISPs. The new broadband architecture, moreover, gives network owners an unprecedented opportunity to use their monopoly status to manage network traffic in a manner that favors their own and affiliated content over that of their competitors. The media conglomerates' gain, in other words, will be society's loss.
In light of these dangers, and in anticipation of the FCC's hearing this Thursday, CME submitted a list of questions to the FCC (available at www.cme.org), covering the following five areas of concern:
1. Content and Conduit: Since it will own both programming and the means of delivering that programming, can AOL-Time Warner be counted on for the fair and reliable transport of all sources of news and information? What is to prevent the newly merged entity (or any cable operator, for that matter) from managing its broadband pipes in the same closed, controlled manner that Time Warner manages its cable platform?
2. Network Architecture: Since broadband technologies lend themselves to the manipulation of network traffic to favor some content at the expense of others, what kinds of nondiscriminatory, "arms-length" requirements will be necessary to prevent network operators from favoring their own or affiliated content? Given the need for some form of arbitration among competing claims on network-transmission capacity at any given time, what policies are required to ensure that these decisions will be based solely on technological imperatives rather than simply on market-based considerations?
3. Set-top Boxes: Does the current generation of sophisticated devices pose threats to the privacy of consumers and the diversity of programming? At what point do "personalization" and "customization" of service become manipulative and invasive? Are there other aspects of set-top architecture (e.g., recording capabilities or e-commerce applications) that might be exploited to serve purely proprietary ends, to the disadvantage of Internet users and content providers alike?
4. The Public Interest: In what new ways can the enhanced power of broadband communications be used to serve "the public interest, convenience, and necessity"? Aside from AOL-Time Warner's conclusion that a more bountiful e-commerce shopping mall and easier access to popular entertainment somehow equate to the public interest, what exactly is AOL-Time Warner's vision for serving the public interest in the broadband era? What new standards of performance are needed in this important area?
5. The Future of the Internet: What must be done to preserve and promote the vital civic and noncommercial heritage of the Internet. Does not the proposed merger threaten to undermine severely the independence and diversity of the Internet for the millions of Americans who will enter the online universe through AOL Time Warner's portals? What might be done, in both the public and private sectors, to encourage the development and broad distribution of noncommercial, public-interest programming that might otherwise be overwhelmed by much more heavily promoted commercial fare?
At the hearing on Thursday, Dr. Mark Cooper, research director, Consumer Federation of America, will testify on behalf of CFA, Consumers Union, Media Access Project, and CME.
AOL Restrictions Alleged; Contracts Said to Show Firm Limits Access to Rivals
The Washington Post October 10, 2000
America Online Inc. has imposed contractual conditions on Walt Disney Co. in recent years that aim to deter users from leaving AOL's network to reach competitors on the Web, according to sources who have reviewed the confidential documents.
The Disney contracts, from 1996 to 1999, offer a window into AOL's business practices as the world's largest Internet service provider seeks regulatory approval of its $ 183 billion takeover of Time Warner Inc. A key issue for regulators is whether the combined company would use its corporate power to discriminate against competitors.
Critics say the terms contradict public pronouncements by the Dulles-based online company that it does not--and will not--favor its content over that of its rivals. But AOL executives say customers can freely leave their online offerings to surf wherever they wish on the Web. They say the contract language is intended to prevent companies from using AOL resources to promote competitors of AOL or its partners.
Under one contractual provision, Disney's ABC News unit agreed in 1997 to deter users from leaving the AOL network by limiting or removing special highlighted connections called hyperlinks to other Web sites. If 25 percent or more of the traffic left AOL's offerings, AOL could cancel the contract. Disney, of Burbank, Calif., agreed to similar restrictions in online shopping agreements with AOL in 1998 and 1999.
"What these contracts are [is] evidence of the games AOL is playing, which is to use its power through contracts and through architecture to channel people into their service, which discriminates against people on the outside," said Lawrence Lessig, professor of law at Stanford University and author of "Code and Other Laws of Cyberspace." Lessig added, "That should make us more skeptical of AOL's claims that it wants to give people nondiscriminatory access to the Internet. This belies that claim."
But Paul Cappuccio, AOL's senior vice president and general counsel, disputed the notion that the company was erecting a so-called "walled garden" as "complete bunk." He said that consumers "are free to go wherever they want, and it couldn't be easier." For one, users can simply type in a Web address from the navigation bar at the top of AOL screens. Cappuccio said that it was common business practice for AOL to prohibit partners from linking to sites that compete with AOL or to sites that compete with partners with whom AOL has already struck a deal.
"This principle extends across all media," he said. "It'll be a cold day in the Magic Kingdom before ABC allows The Washington Post to air a 30-second commercial [on ABC] that promotes NBC. Hell, it's not going to a happen. One does not call that the 'walled kingdom.' One calls that common sense."
Cappuccio also said that AOL no longer includes a provision to terminate contracts when 25 percent or more of user traffic leaves the AOL network. "We don't do it anymore," he said. Cappuccio, however, said that provision, too, was a standard business practice. "If everyone is leaving and not coming back [to AOL], it's not a good deal for us," he said.
According to people who have reviewed the 1996 contract, Disney was prohibited from creating links within the AOL network to outside sites on the Web without AOL's written approval. That year, AOL prohibited Disney from selling in its online store a set of products that AOL sold or might sell, including electronic greeting cards, travel and leisure reservations, resort and cruise vacation packages, audiovisual products, and admissions to movies and theme parks. AOL also prohibited the online Disney store from selling travel packages to Walt Disney World in Orlando.
In its 1998 online shopping agreement, say people who have seen it, Disney was prohibited from promoting any Disney content or links that competed with--or could become a competitor of--AOL. Under that contract, ABC was required to limit or remove hyperlinks to its ABC Kidzine Area, a site for children's content, including news, sports and chat rooms, if 25 percent or more of the users left the AOL network. In 1999, Disney agreed to similar online shopping terms.
Sources said that Disney's online shopping agreements with Microsoft Corp. and EarthLink Inc. were not as restrictive, but Disney agreed to the AOL terms because it felt that it needed access to AOL's vast network of consumers.
Louis Meisinger, Disney's executive vice president and general counsel, did not return phone calls placed to his office yesterday.
Opponents say that the Disney contracts back their claims that AOL is limiting consumer choice for AOL's benefit. By keeping consumers within the AOL network, opponents say, AOL can attract more advertising revenue, which it can use to create more content and attract more users. The Federal Trade Commission, in its review of the merger, is looking into how AOL can control content and access to it, sources have said.
Opponents fear that AOL, the world's largest Internet service, and Time Warner, the nation's No. 2 cable company, could control consumer choice over news, children's programming and other content. AOL has about a 50 percent share of the U.S. household market for Internet access with about 26 million subscribers, six times the amount of its closest competitor, EarthLink. New York's Time Warner serves about 20 percent of the U.S. cable market, which can be used for high-speed Internet access.
"AOL's business model is to create a walled garden with an electronic fence," said Jeff Chester, executive director for the District-based Center for Media Education, which is opposed to the merger. "It's inimical to the Internet. It's particularly an egregious practice to limit the right of people on a news site to seek outside sources of information. Their business model is based on preventing the free flow of information on the Internet."
Meanwhile, sources said yesterday that they expect the European Commission, the executive arm of the European Union, to approve the AOL-Time Warner merger tomorrow.
The Washington Post August 24, 2000
AOL Unmoved in Software Dispute; Antitrust Regulators Powerless as Merger Foes Cite Instant-Messaging Feud
What once was considered merely a fun way for teenagers to exchange short electronic messages has become a key source of friction in America Online Inc.'s attempt to win regulatory approval for its proposed takeover of Time Warner Inc.
AOL's rivals have been parading in and out of government offices this summer, calling the company a monopolist and a bully for preventing users of AOL's instant-messaging software from exchanging notes with users of competing programs. More than a dozen legislators on Capitol Hill have written letters expressing concern. Senate and House committees have addressed the topic in public hearings.
Federal regulators reviewing the $ 183 billion merger of the new- and old-media powerhouses have come to share these worries, according to lawyers familiar with the investigations. But they have tentatively decided that it is beyond their powers to remedy the problem by imposing conditions on the merger, making it likely they'll rely on informal pressure instead.
AOL's Instant Messenger is the most popular of the family of software that lets users send one another notes instantly as long as they are connected to the Internet. AOL executives reject the notion that they are doing anything improper by keeping their software incompatible with that of rivals.
The Dulles-based firm gives away the service and freely licenses versions of its software to more than 20 competitors, including EarthLink Inc., Lycos Inc. and International Business Machines Corp.
It says it blocks messages from alternative systems out of concern that such links could make it easier for someone to spread a computer virus or send out unwanted mass mailings.
The debate over access comes at a time when AOL and other major Internet portals are seeking new ways to attract and hold customers. The more customers a company can count and the longer they stay connected, the more it can charge for advertising and the easier it is to induce users to buy additional products and services.
Instant messaging is considered one of the ultimate "sticky" applications because users tend to keep it running continuously on their computers.
Arriving messages pop up in a small box on a recipient's computer screen. Instant messages typically are shorter than e-mail--no more than a couple sentences--but unlike e-mail, they allow users to have an actual dialogue. Instant-messaging services have been popular with chatty youths and with businesspeople who want to send time-sensitive information across offices. Its use is projected to grow as more people connect to the Internet wirelessly through hand-held devices or cell phones.
Forrester Research, a market research firm, estimates that roughly half of the Fortune 1000 companies will use instant messaging by the end of 2001.
AOL promised last summer that it would "fast-track" its efforts to create a common standard for instant messaging. But one AOL official said recently that it would take at least another year to come up with a solution.
AOL's rivals note that they have yet to hear specifics about the proposal and they worry that the company is dragging it feet so it can further solidify its dominance.
Already, more than 84 million people use AOL's software, representing about 90 percent of the fast-growing market, according to some estimates.
"To believe their argument, you have to believe that the Berlin Wall was there to protect the people of East and West Germany. AOL's instant-messaging wall is not to keep people out--it's to keep people in," said Russ Bagully, chief executive of Denver-based Tribal Voice, an instant-messaging company with 8 million users.
He and other AOL rivals compare the system AOL has created to that of a telephone network where MCI WorldCom customers can't talk to Sprint subscribers.
AOL's service is currently limited to text messages. Rivals such as Microsoft Corp., AT&T Corp., Odigo Inc. and Tribal Voice, waging a kind of guerrilla war against AOL, have added features that allow people to trade digital music files and other material.
As part of that battle, the firms have modified their software to let their users communicate with AOL users, but AOL has repeatedly thrown up electronic blockades to keep out those messages.
AOL executives say they are not trying to thwart competition, just trying to protect customer privacy and security until standards can be developed for how competing systems will interact. AOL spokeswoman Kathy McKiernan said any fix that doesn't address such concerns could "ruin instant messaging for consumers."
"From Day One, AOL has been consistent in its support for instant-messaging interoperability," McKiernan said.
The two agencies reviewing AOL's proposed merger with Time Warner, the Federal Trade Commission and the Federal Communications Commission, have summoned dozens of people for interviews about the issue and have requested boxes of documents about instant messaging. But lawyers familiar with the inquiries say investigators have little room to intervene because of how they interpret their mandates.
The FTC, which is conducting the antitrust part of the review, is supposed to focus on market conditions created by the merger, not ones that already existed.
The FCC is charged with making sure the merger is in the public interest. But some FCC officials think that mandate is limited to telecommunications issues, and there is a question about whether instant messaging falls in that category.
The staff findings by both agencies are preliminary and may change as reviewers keep gathering information on the issue, the sources said. The companies must also get approval from the European Union, which has until the end of October to make a decision.
Thomas Hazlett, a former chief economist for the FCC and an antitrust expert, said federal agencies may still be able to prod concessions out of AOL even if they cannot explicitly do so by law.
"Certain things that go far afield are remedied behind closed doors," he said. "A raised eyebrow is part of the process."
Analysts like Bill Whyman, president of the research firm Precursor Group, says the government's position on instant messaging could shape future policy discussions over corporate attempts to privatize Internet offerings. "It hits at the heart of what the Internet is--nondiscriminatory interconnection--and is an important signal about how open or closed the government will let AOL Time Warner be in the future," he said.
The stakes in the instant-messaging battle are large for many high-tech companies. Instant messaging could be to the wireless Web "what the browser was for the hard-wired PC world," Whyman wrote in recent report.
AOL does not make money off its instant-messaging software today, but analysts believe it could become an incredibly lucrative business in a few years as companies add advertisements to the service's screens and charge fees for voice capabilities, weather alerts or other add-on features.
Yahoo Inc.'s Brian Park, who oversees the firm's instant-messaging service, said the integration required for those types of services is why some companies have rejected offers to license AOL's messaging software and instead are working on their own versions.
Nine companies--including Microsoft, AT&T, Yahoo and Excite At Home Corp.--formed a coalition this spring that they call IMUnified. The group announced it will publish common standards by the end of this month and will make their systems talk to one another by the end of this year.
"It's not just about short messages," Park said. "It's about getting your e-mail with the same user name and password and your stock portfolio and your online shopping bag."
Indeed, Time Warner chief Gerald Levin, asked at a recent Wall Street conference to name the asset that would be the most valuable to the combined company, answered: "Instant messaging."
AOL Sends Mixed Signals on Instant Messaging
The Washington Post October 21, 2000,
When questioned recently by members of Congress, America Online Inc. chief executive Steve Case called the company's instant-messaging system nothing more than a popular component of its online service, one that does not generate revenue.
"We've always viewed it as a feature, not a business," Case said in testimony last month before the House Commerce subcommittee on telecommunications, trade and consumer protection. "It's not really a revenue-generating business for us."
That could change. Company documents obtained by The Washington Post show that AOL has fiercely sought to protect what it calls its "prospective economic advantage" in instant messaging against rival Internet service providers.
AOL counts 61 million users of its AOL Instant Messenger, or AIM, software. It also offers an instant-messaging system called ICQ, with about 80 million users. Together, the products account for as much as 90 percent of the market, according to some industry estimates.
Until now, AOL executives have played down the economic potential of instant messaging in response to inquiries from federal regulators who are concerned about AOL's dominance in this fast-growing field. But in a private dispute with another Internet service provider last year, the Dulles-based company was not reticent about asserting its financial interests.
AOL accused Prodigy Communications Corp. of improperly linking Prodigy's instant-messaging system, called PIM, to AOL's much larger service in order to gain access to tens of millions of new users, according to private AOL legal correspondence.
Instant messages are short e-mail notes that can be exchanged in real time, making them ideal for chatting over the Internet. Some companies, like Prodigy, attempt to make money by running small advertisements on the pop-up screens that contain the messages.
Prodigy's breach of AOL's system allowed it to effectively commandeer AOL's system for its own use, depriving AOL of customers it might otherwise have signed up, an attorney for AOL contended.
"Prodigy's actions constitute tortious interference with prospective economic advantage," said Susan P. Crawford, an outside attorney representing AOL, in a May 12, 1999, letter to Prodigy. "By allowing PIM users to reap the benefits of the AIM service without encountering the AIM interface, Prodigy has deprived AOL of the opportunity to contract with these users and to present them with advertising on the AIM interface."
Crawford added, "AOL will not tolerate piracy of AOL's valuable trademarks and features, and demands that Prodigy's wholesale hijacking of the AIM service cease immediately."
Prodigy, based in White Plains, N.Y., denied the AOL allegations in a letter dated May 21, 1999, saying it did make clear to its users that they were linked to an AOL service. In addition, Prodigy argued that it developed its software based on a freely available technology standard. Barry Felder, an outside attorney representing Prodigy, wrote that AOL's complaints "smack of bad faith and unfair competition."
Felder, however, indicated that Prodigy hoped to resolve the matter amicably. AOL instead opted to block Prodigy's instant messaging system from gaining access to AOL's.
AOL and Prodigy officials declined to comment on their dispute or their attorneys' correspondence.
AOL officials have said the company blocks instant messages from rival systems because it is concerned about its consumer security and privacy. "The only issue on AIM is the security and the safety of AIM members," said an AOL spokesman.
AOL has said it is trying to address those concerns by working within the industry to resolve the technical issues that would make its Instant Messenger inter-operable with other instant messaging services. Meanwhile, AOL executives insist, they license the software royalty-free to competitors and allow users to download the software from the Web for free. Thus, they are not engaged in anti-competitive behavior, they say.
But rival instant-messaging systems say AOL is being less than candid about its plans.
"Contrary to AOL assertions that AOL's licensing terms were an act of, quote, generosity, these letters demonstrate that AOL intends to make a very profitable business out of their dominance of the instant-messaging space," said Blair Levin, former FCC chief of staff and a consultant to several companies that have raised questions about AOL's instant-messaging practices.
In June, Lehman Brothers Inc. estimated the value of AOL's instant-messaging services at $ 4.6 billion, based on the value of AOL's cost per user when it acquired ICQ in 1998 for nearly $ 300 million.
"AOL Instant Messenger and ICQ are among the company's most valuable and under-appreciated assets," Lehman said in its report.
Straitjacket on the Internet?
The Washington Post October 25, 2000
Lawrence Lessig
The world's largest Internet service provider, America Online, is currently seeking regulatory approval for its merger with the world's largest media company, Time Warner. Time Warner owns a gaggle of cable providers; AOL sees cable as the future for broadband Internet access.
A diverse coalition opposes the merger's unless regulators ensure that access to Time Warner's cable is kept open for competition. This coalition includes some of the original architects of the Internet as well as consumer groups, Internet service providers and the Disney Corp.
Sebastian Mallaby [op-ed, Oct. 15] offers readers the inside-the-Beltway view of what this debate is really about: Disney. Disney made an investment mistake, Mallaby writes; it bought a broadcaster rather than a cable company, and now wants regulators to correct that mistake by guaranteeing it access to Time Warner's cable. The others who have been pushing the principle of "open access" have apparently been duped by Disney. The only principle here, Mallaby suggests, is the principle of regulatory pork. And Disney wants more.
Mallaby is caught in a cartoon. This debate is not about Disney--just as it was not about AOL when AOL asked San Francisco to require open access to AT&T's cable lines, nor about AT&T when AT&T asked Canadian regulators to require open access to Canadian cable lines. This debate is about the environment within which the next generation of the Internet will develop.
Two models of network design have governed telecommunications over the past century. One produced the Internet, the other cable TV. Under the design that gave us the Internet, control is decentralized. The network owner cannot control the content or applications that run on the network. Users choose from an almost unlimited range of content and applications.
Under the design of cable TV, the network owner does control the content. It decides what shows should run. If it doesn't like ABC, it gets to remove ABC from its wires--as Time Warner in fact did last May after an argument with Disney.
The cable model was chosen by Congress at a time when cable served just dumb TV. In the 30 years of cable's life, there has been little innovation from serving dumb TV. But now cable wants to serve something new on its wires--broadband Internet. And the question for regulators is: Under what model? Should the cable company have the power to control Internet content just as it controls TV content? Should it be allowed to discriminate against content it doesn't like, or content that doesn't pay? Should it be allowed to demand a tithe from Amazon for books ordered across its wires? Or from Disney for cartoons streamed from Disney's channel?
These questions are difficult, as they implicate both innovation for the Net and justice for cable providers. The model of the Internet has produced extraordinary innovation just because the network owner didn't control what innovation would be allowed. The same would be true if broadband Internet were kept free from the network's control. But cable companies complain that they earned the right in Congress to the control of cable TV and should be allowed to extend that model to whatever content they wish.
AOL and Time Warner have promised to limit this control by keeping 10 percent of their bandwidth open to outside competition. But 90 percent remains under the traditional cable TV model. And while much of this 90 percent will serve traditional TV, much will serve "interactive content."
Many are skeptical about even the 10 percent, believing AOL-Time Warner will build too much control into their licenses. But a much more fundamental issue is at stake. Cable TV has bought the right to control traditional dumb TV. What reason is there to permit it to extend that control to the Internet? Cable didn't invent the Internet, nor did its closed architecture inspire the innovation the Internet did. Rather than extending the model of cable TV to cover the Internet, why not extend the model of the Internet to cover all Internet-active TV?
If there were some reason to believe we would get more innovation and more diverse content with the Internet controlled the way cable TV is, then there might be a reason to allow cable to extend its model. But history gives us no such reason. The innovation of the Internet came from freeing the innovators from control by the network owners.
The merger of these two giants of content and access will test the commitment of federal regulators to the principles of openness that produced the Internet. Allowing cable to control broadband access and use would compromise the promise of the Internet. Allowing the model of the Internet to govern more of cable would mean more innovation and diversity. This is the principle at stake in this dispute, not the Mickey Mouse intrigue that captured Mallaby.
The writer is a law professor at Stanford University.
Marketing & Media FTC Approves AOL-Time Warner Deal
The Wall Street Journal 12/15/00
In a unanimous 5-0 vote, the Federal Trade Commission approved the $110 billion merger of America Online Inc. and Time Warner Inc., creating an unprecedented media giant but requiring it to play by a tough set of rules intended to protect competition.
Most important, the companies agreed to open their cable lines to competing Internet services and to accept continued federal monitoring of their progress in that area. It is the first time a cable company has agreed to provide such access to rivals, and it could set a pattern for the industry.
The FTC's action essentially began the process of opening up cable lines across the nation, said Barry Schuler, president of interactive services at AOL. "We are confident the rest of the industry will follow suit." He said that open access helps AOL, and was "a big part of why we did the merger."
The settlement with the FTC also includes a number of provisions that prevent AOL Time Warner from reneging on its promise to open up its lines. In an unusual move, the FTC appointed a "monitoring trustee" who will oversee the company's compliance and report to the Federal Communications Commission on any violations. That provision delighted many of the hundreds of small Internet-service providers, who feared that they wouldn't be able to stand up to the AOL Time Warner behemoth.
"This gives me faith that the little guy in Oshkosh actually can be listened to," said Stephen Heins, director of marketing for NorthNet Internet Provider LLC, which has 2,500 subscribers in Oshkosh, Wis. In another positive move for small Internet-service providers, the FTC ruled that after it adds three Internet competitors on its systems, AOL Time Warner can't arbitrarily limit the number of additional rivals unless it faces technical limitations. These provisions were added at the last minute, after a week of lobbying from small Internet-service providers.
FTC Chairman Robert Pitofsky said those concerns played into the FTC's thinking. "We were concerned about not just competitive access, but open access." He also said the provisions of the pact expire in five years, rather than the usual 20 years, because market conditions in high technology change so fast.
Already, the deal has begun to put pressure on cable companies to open their high-speed cable lines. Qwest Communications International Inc., of Denver, requested yesterday that AT&T Corp., New York, let it offer Internet access over its high-speed cable lines in Colorado and Washington. Mr. Pitofsky said he expects the access provisions outlined in the merger approval to be a standard for how Internet services work with cable companies in the future.
The FCC, which is also reviewing the merger, has started a separate inquiry into whether and how to require all cable companies, not just Time Warner, to open their lines to rival Internet providers. The FCC has said it hopes to finish its review of the merger by the end of the year but that is now in doubt.
Commissioners just yesterday received drafts of the final merger decision and it usually takes several weeks for the commissioners to review the draft and vote on it. Analysts say AOL Time Warner has a lot to prove. "The easy part is over and the hard part is just beginning," said John Corcoran, analyst at CIBC World Markets. "Wall Street will give AOL Time Warner nine to 12 months to make its numbers. If they're not able to do so, we think the street will be merciless."
A Done Deal
The FTC signed off on an agreement that clears the biggest hurdle for the AOL-Time Warner merger:
Open Access
AOL Time Warner must offer at least one competing Internet service on its cable lines before offering AOL service. Within 90 days, it must offer two other competing Internet service providers and it must negotiate with others in `good faith' after that.
Content
AOL Time Warner can't interfere with content passed along its cable lines. AOL Time Warner must also provide the commisssion with notice of complaints of failure to provide broadband content to Internet service providers.
DSL Marketing
AOL Time Warner must market AOL's service over digital subscriber lines provided by telephone companies in Time Warner cable areas in the same manner and at the same retail pricing as it offers AOL's DSL service in non-Time Warner cable areas.
AOL-Time Warner Merger Clears FCC --- Final Regulatory Approval For $103.5 Billion Deal Is Won After Year Wait
The Wall Street Journal 01/12/2001
WASHINGTON -- America Online Inc.'s $103.5 billion merger with Time Warner Inc. vaulted its final hurdle as the Federal Communications Commission approved the deal, while imposing conditions to protect competition on the Internet. The last of the regulatory approvals came late yesterday, a year and a day after the deal was announced. In its order, the FCC imposed conditions on instant messaging, a powerful online communications channel, and also placed limits, as expected, on AOL's dealings with the largest cable owner, AT&T Corp. The agency also placed further conditions on AOL's relationships with competing Internet services.
"These conditions in their essence are designed to protect the open, competitive nature of the Internet," said FCC Chairman William Kennard. "These are the characteristics of the Internet that we all cherish." The five-member commission voted unanimously to approve the deal, but split 3-2 along party lines on imposing limits. The agency's two Republicans opposed any strictures, while the three Democrats, led by Chairman Kennard, backed them.
The transaction -- the largest U.S. merger to date -- closed last night and unites an Internet behemoth and the nation's biggest media company. AOL has 26 million subscribers, while Time Warner's holdings include two major movie studios, cable-TV channels, 20 million cable subscribers, seven record labels and 36 magazines.
Although the merger is expected to quicken the growth of high-speed, or "broadband," Internet access and such services as interactive television, its announcement galvanized consumer advocates wary of abuses by new-media giants and spurred fears that a few companies would dominate news and entertainment. It also drew opposition from corporate rivals anxious about becoming lost in the new company's shadow.
"AOL-Time Warner will be the unquestioned broadband leader, with over half of the nation's online audience -- no one else is close," said Scott Cleland, a policy analyst with Precursor Group here.
Last month, the Federal Trade Commission approved the merger with conditions requiring Time Warner to open its high-speed cable lines to AOL's competitors before AOL itself would be permitted to offer service over those same lines. The FCC added modest terms to those conditions to ensure a direct relationship with customers in such areas as billing.
The FCC focused more sharply on instant messaging. The technology, a fast way to send short online notes, is expected to blossom into a platform for exchanging large amounts of data, including video and music files. In its order, the FCC requires AOL to open up its instant-messaging service to competitors as it begins to offer advanced services, such as video streaming, over Time Warner's high-speed cable lines.
Before AOL offers such services, it must either show that it has adopted an industrywide standard for instant messaging or enter into a contract with a competitor, such as Microsoft Corp., that provides for network interoperability to allow communication with users of competing systems. Within six months, two more such contracts must be in place, the FCC said.
AOL and Time Warner said in a joint statement: "We are very pleased with the FCC's favorable vote today on our merger. This final regulatory approval represents a tremendous win for consumers."
AOL has maintained that it will allow its instant-messaging users to communicate with rival services when the privacy and security of AOL customers is guaranteed. The FCC order will push AOL to move more quickly in opening up the service, analysts said.
The FCC declined to impose conditions on AOL's foray into interactive television, but said it would open a separate proceeding to examine whether federal rules should be required to promote competition in the nascent market. The decision not to include any such rules in this approval ensures that, if they are developed, they would be shaped by a Republican-controlled commission appointed by the new administration.
Walt Disney Co. had pressed hardest for rules on interactive TV, but seemed satisfied last night with the FCC's action. "Consumers and competition will be well served by the additional Internet open-access conditions and by the important proceeding on interactive television," said Preston Padden, director of Disney's Washington office and the most vocal corporate critic of the merger.
Consumer advocates applauded the FCC's action. "It goes a long way in almost every area -- we're doing high-fives here, and AOL should be too -- because it shows that open access can be a workable business model," said Andrew J. Schwartzman, president of Media Access Project, a consumer law group here. Consumers Union, in a statement, praised the FCC's demand that AT&T and AOL sever the ownership links between AT&T and Time Warner, the two biggest providers of cable television, serving about half of the consumers in the country. The group called last night's order "a huge victory for consumers because it creates an opportunity for significant rivalry between AT&T and AOL-Time Warner in the cable-programming and Internet-services markets."
Leading the charge at the FCC for tougher conditions was Commissioner Gloria Tristani, a Democrat and former New Mexico state regulator appointed by President Clinton. She had been negotiating with the agency's other two Democrats for requirements forcing AOL to more quickly open instant messaging to rivals, but the effort fell short and she voted with the majority.
The commission's two Republican commissioners backed the deal but didn't support imposing conditions, arguing that the FCC lacked jurisdiction, and at least three votes in favor of each provision was needed for its adoption.
One of the two Republicans, Michael Powell, is expected to be named chairman of the FCC by President-elect George W. Bush; the current chairman, Mr. Kennard, is expected to step down within a week. In a statement, Mr. Powell questioned the legality of the conditions. "No competent antitrust authority, to my mind, would conclude that such intervention is necessary," he said, adding that the conditions probably wouldn't survive a court challenge. He called the majority's view that instant messaging is an "essential facility" for nearly all future real-time Internet communications a "breathtaking prediction and conclusion by a regulatory agency."
He also cautioned that the conditions are a first step toward regulating the Internet, something lawmakers have said they wanted to avoid.
The Conditions
The FCC's approval of the merger between AOL and Time Warner included the following terms:
Instant Messaging:
Option 1: AOL can't offer advanced services, such as video streaming and voice communications, over its Instant Messenger until it grants access to at least one IM rival. Within six months, AOL would have to open up Instant Messenger to at least two more rivals, or shut down advanced services.
Option 2: AOL can agree to adopt an industry-approved standard for open-access to instant-messaging services.
Option 3: If AOL can prove that the open-access conditions are no longer in the public interest, the company doesn't have to abide by the advanced-services rule.
ISPs:
AOL and Time Warner mustn't restrict Time Warner's cable subscribers from choosing an Internet-service provider other than AOL.
Interactive TV:
No restrictions on interactive TV, the system that allows viewers to access digital information in real time with television programming. But the FCC said it would begin an inquiry into ways to ensure competition.
AT&T:
AOL Time Warner and AT&T can't enter into exclusive agreements with each other that will affect rival ISPs' access and terms of access to AOL-Time Warner and AT&T's cable systems.
E-Business: Rivals Face Battle With AOL Time Warner, Despite Deal's Conditions
The Wall Street Journal 01/15/2001
After a year of regulatory wrangling, rivals of AOL Time Warner Inc. won restrictions on the conduct of the new giant. But just how much these curbs will matter remains to be seen.
Soon after federal regulators gave the final nod last week to the largest U.S. merger ever, competitors and consumer groups hailed the restrictions as a victory. The requirement that AOL Time Warner eventually open up parts of its instant messaging, cable-TV and interactive television systems to competitors represents a big reversal from a year ago, when some consumer groups feared the deal would be approved without conditions.
"The elation, which I share, is the function of a bright light in very dark times," says Lawrence Lessig, a law professor at Stanford University who is an expert in technology-regulation issues.
But even with such conditions, there are growing concerns that few rivals can thrive in the face of a colossal company that has 26 million online users, 148 million registered instant-messenging users, 12.8 million cable subscribers and millions of magazine readers, not to mention the company's vast library of films, its tens of thousands of television properties, from Bugs Bunny to Batman, and recording artists who include just about every one-name female pop star -- Madonna, Cher, Jewel, Enya and Bjork -- on the planet.
"AOL Time Warner still has the incentive and the opportunity to play games," says Mr. Lessig. "It will require a continuing strong signal from regulators that certain games will not be tolerated."
AOL Time Warner counters that to keep these various systems closed is bad business. "If interoperability can be delivered in a way that's good for consumers, we're going to do it" says Barry Schuler, chairman and chief executive of the AOL Inc. unit.
Still, smaller rivals in the instant-messaging market, the high-speed Internet access business and the nascent interactive television industry may quickly find themselves swamped. AOL Time Warner has massive throw-weight, cross-promotional abilities and deep pockets. The little guys may have had trouble competing with America Online and Time Warner separately before their merger. But even with the moves to promote competition, many believe the merged company could hasten the demise of some smaller companies.
"There's only one player who can beat 'em: Microsoft," said one FCC official, speaking anonymously. Though the restrictions ensure competition, "there's a lot to be said for worrying about the small player." Added John Corcoran, an analyst at CIBC World Markets: "Prospects look mildly brighter on the surface. But just because you can interoperate [with messaging and interactive TV services] only means you can live a little longer."
Most of the controversy centers on the online instant-messaging market, which allows users to see which friends are online by checking a "buddy list" and then exchange real-time messages. AOL has two messaging services -- its stand-alone Instant Messenger software, with 61 million registered users, and ICQ messaging software, with 87 million -- giving it possibly more than 80% of the hard-to-measure market. For years, rivals have tried to get AOL to open its Instant Messenger service so that rival software from Microsoft Corp., Yahoo! Inc. and others could link up. AOL has long promised to open up its service when users' security can be assured. But so far, it says the industry hasn't found a way to do that.
The FCC's restrictions don't force AOL to open its current text-based system, only future versions of the system that include videoconferencing. But videoconferencing is a technology that has never taken off, despite decades of experimentation and product introductions. People like text just fine, often ranking e-mail higher than the Web as the reason they log onto the Internet.
Technically, there's nothing to prevent AOL from simply keeping its messaging system text-based and closed. "We don't have any [current] plans to offer some of those things that they're suggesting," says Steve Case, chairman of AOL Time Warner. "It has no impact with the instant-messaging service that people are using today."
That's exactly what competitors are afraid of. "We're not going to see any progress over the short term," says Jon Englund, vice president for government affairs at Excite@Home Corp., which provides a high-speed Internet service that's a rival to Time Warner's system.
Microsoft vows to counter AOL's dominance of the instant-messaging market by promoting its MSN Messenger service, which has grown quickly to roughly 18 million registered users, to the 230 million visitors to its Web sites. It isn't interoperable with other systems, though Microsoft says it will be soon. It's part of a coalition with Yahoo and other messaging software companies that are working on a uniform standard.
To lure subscribers, MSN Messenger offers promotions, such as free long-distance calling that connects a user over the Internet to someone else using a regular phone. The company also has aggressively entered into partnerships with wireless carriers to enable cellphone users to chat via text. In another sign the industry is trying to develop instant messaging into a platform for all kinds of communications, Microsoft will likely integrate instant messaging into future versions of its e-mail software Exchange, which has 40 million users.
Microsoft may have plenty of resources, but smaller players are simply going to have to outrun AOL Time Warner, by such things as offering better customer service, coming up with new features or employing clever marketing. "We're not as big as Microsoft," says Alex Diamandis, vice president of marketing at Odigo Inc., an instant-messaging software company. "It's a battle for us."
The FCC also included provisions to protect small Internet service providers that hope to offer high-speed access over AOL Time Warner's cable lines. The company must allow competitors to have control over their customers, their bills and the first Web page these users see. The agency also aims to prevent AOL Time Warner from favoring its own subscribers with better technology than what is available to rival providers using the same cable system.
AOL argues that these provisions help smaller Internet service providers that now have a new way to deliver high-speed services under the rules that require it to open up its cable lines to such competitors.
But the provisions don't do anything to ease other enormous hurdles that small Internet service providers face. They will need intensive technical expertise and significant capital resources just to qualify to put their services on the AOL Time Warner system, and they must negotiate the financial and other terms of contracts with the system. "The small guy will have a hard time competing," says Garry Betty, chief executive of EarthLink Inc. His company, the second-largest U.S. Internet service, was one of the first to strike a partnership with AOL Time Warner to offer high-speed Internet access over the company's cable system.
Mr. Betty thinks that if smaller players only bring a few hundred new subscribers to the cable system, "Time Warner wouldn't spend a whole lot of time and energy trying to get them up and running." Steven Heins, marketing director at tiny NorthNet Internet Provider LLC of Oshkosh, Wis., which has 2,500 users, agrees. "It will definitely winnow out many people. This is not an area for the faint of heart," he says.
Once AOL offers its own online service on Time Warner's high-speed connections, the company must bring at least three other rivals onto the cable system, according to an earlier decision by the Federal Trade Commission. Regulators have mandated such openness for the telephone system, but some Internet service providers are having a hard time installing high-speed connections over new digital phone lines. "We fully expect passive-aggressive behavior," says Mr. Heins.
Regulators created a mechanism by which competitors can complain about any lack of compliance by AOL Time Warner with the rules. They also appointed a "monitoring trustee" who will oversee the company's compliance and report to the FCC on any violations. If the company is found to violate rules, it could face criminal penalties or fines, much like the fees levied against local phone companies.
Regulators said very little about the nascent interactive television market, except that AOL Time Warner must not discriminate against rival programmers by failing to transmit on its cable systems any embedded interactive features in TV shows, such as a link to a Web page, that another media company may have put in place. Otherwise, the FCC simply said that it will hold rule-making proceedings on interactive TV. Walt Disney Co. which sharply lobbied regulators to curb AOL Time Warner's influence in interactive TV, was pleased to hear about future agency proceedings. But some industry watchers think the incoming Republican administration may not follow through with those sessions, leaving AOL Time Warner unbound. "AOL Time Warner may find this continuing oversight becomes a non-issue," says Mr. Corcoran, the CIBC analyst.
Some rivals say AOL Time Warner's sheer size will make their lives more difficult. They fear the company has the kind of power to negotiate better terms from TV programmers. That's an issue that always worries executives at satellite television company EchoStar Communications Corp. "Certainly with the greater size of the combined company it concerns us even more," says David Moskowitz, a senior vice president of EchoStar.
Likewise, the company could be difficult to negotiate with. If its cable system agrees to carry a rival's programming, it would have to pass on any interactive features. "But AOL Time Warner has to agree to carry" such programming in the first place, says Jeff Chester, executive director of the Center for Media Education, a consumer advocacy group. "And that's a big if."
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