Exam time for AOL/Time Warner

As the Sprint/WorldCom merger spirals into the void and Microsoft and the Department of Justice settle in for a protracted antitrust war, the combination of the world's largest ISP and one of its premier cable and content providers is attracting more regulatory attention than most observers expected six months ago.

Although no one is predicting that the $124 billion merger of Time Warner and America Online will come to grief, handling multiple investigations simultaneously may prove tricky - especially if the pair wants to avoid having conditions imposed on their combination.

"The merger is complex because both companies are so dominant in so many lines of business - even if those businesses are fairly different and discrete," said Arthur Newman, an analyst with ABN Amro. "They both have many varied investments, products and content and transport relationships. I think the Microsoft antitrust decision has energized U.S. officials to study the monopoly potential of these blockbuster mergers more deeply than ever."

After requesting information in early June about AOL's efforts to make its Instant Messenger and ICQ products interoperable with other providers' instant messaging systems, the FCC returned at the end of the month with a second batch of questions covering a broader ground.

The new questions covered everything from AOL's new interactive TV service and its investment relationship with Hughes Electronics - parent of the DirecTV direct broadcast satellite network - to AOL's plans for its high-speed DSL product and its 15% stake in TiVo, the personal video recorder company.

The FCC set a July 27 date for a hearing on these issues before the full commission under Chairman William Kennard, rather than under the auspices of the Cable Services Bureau, which is where it delved into the AT&T/MediaOne marriage.

The Federal Trade Commission has asked for documents and depositions on the instant messaging interoperability issues. That investigation probably will take several months to complete, according to reports.

Meanwhile, the European Commission announced that it will conduct a four-month investigation of the antitrust implications of the merger, rather than fast-tracking its analysis of the deal. The concern is the vertical integration of Time Warner's content with AOL's online services - particularly Time Warner's possible dominance of online music sales should its Warner Music division take control of a joint venture with EMI Group, one of Europe's largest music publishers.

That deal, approved on June 26 by EMI shareholders, would give Warner EMI Music a 20% share of the worldwide market for recorded music, with annual sales of as much as $8 billion. EU regulators are concerned by the size of that market shareand its combined effect with a separate promotion and sales deal between AOL and German music publisher Bertelsmann, completed March 17.

EU regulators also expressed anxiety about the possibility that AOL/Time Warner would be able to influence technical standards for downloading online music and would parlay its U.S. market strength into European dominance in paid Internet content such as films, TV programs and financial news.

For their part, AOL and Time Warner are treating the various investigations as the price of getting big.

Speaking at a shareholder meeting that approved the merger in late June, Time Warner Chairman Gerald Levin maintained that such scrutiny was always expected. The long-form EU study "is consistent with our own declaration that we intend to close the merger sometime this fall," he said.

AOL also has issued statements that the various examinations are "a normal part of the process" of getting the merger approved.

Nevertheless, some analysts found it interesting that the ISP announced a deal last week that will expand its existing relationship with E! Entertainment Networks into a three-year deal that will scatter E!'s entertainment programming across a swath of AOL products, including Netscape Netcenter, AOL Moviefone, ICQ and AOLTV.

The deal may allay fears of consolidation on the Web by giving a prime position to content from a company owned jointly by Walt Disney, Comcast and AT&T.

"It helps to settle the issue of whether AOL will feature only Time Warner content," said Lise Buyer, analyst for Credit Suisse First Boston.