ROAD RUNNER HITS THE HIGHWAY

With Time Warner set to merge with America Online, the fate of cable ISP Road Runner suddenly seems so complicated that it could be labeled "Acme" and addressed "To: Mr. Wile E. Coyote."

Road Runner is directly what the AOL/Time Warner deal is all about: combining high-speed Internet with content optimized for delivery over broadband links and serving it up to consumers - in Road Runner's case, to about 550,000 consumers.

But that service - owned, along with Time Warner's 13-million subscriber cable television system, by partially owned subsidiary Time Warner Enterprises - is also a potential focus for antitrust scrutiny. Although it trails Excite@Home's 1 million subscribers, Road Runner's purchase by an Internet company whose membership exceeds that of the 10 ISPs behind it has legislators and possibly regulators worrying about anti-competitive effects.

"No one seriously thinks AOL/Time Warner will be scuttled on antitrust [grounds]," said James Loebel, an attorney with Reardon and Spies. "But it's conceivable that the government might ask for the divestiture of Road Runner."

Federal law requires antitrust examination of the merger because of its size, but whether the Justice Department or the Federal Trade Commission will take charge was undecided at press time. Congressional leaders have vowed to hold hearings, but their findings will serve only as recommendations to the examining agency.

Most observers see little reason for the FCC to involve itself directly in the investigations. The most likely pretext for such activity would be the question of open access by ISPs to the merged company's cable systems. However, the agency now seems prepared to take AOL/Time Warner at its word that it will offer access at fair rates to providers competing with Road Runner and AOL.

In fact, during a press conference last week, FCC Chairman William Kennard said the prospect of the merger was "encouraging. I've been saying since the very beginning of this [open access] debate that the marketplace should work this out. Now the devil is in the details, and we'll have to look and see what is really being committed to, but yes, I'm optimistic and still encouraged."

If anything, the FCC may concern itself with Road Runner's fate because of another corporate combination: the purchase by AT&T of MediaOne Group, a 50% shareholder in Time Warner Enterprises along with Microsoft, Compaq, Advance/Newhouse and Time Warner.

AT&T's stake in Excite@Home may oblige it to divest that Time Warner Enterprises holding before the MediaOne deal closes early this year. If so, the company may be willing to sell out to Time Warner - perhaps as a way to re-ignite a joint venture to put AT&T phone service on Time Warner cable. Both companies trumpeted that deal last year, but AT&T's bid for MediaOne came along and sidetracked finalization of the plan.

"Time Warner would like to have that 50% of Time Warner Enterprises back again," said analyst George Coughlin of Tele-Research. "And AT&T might be willing to sell, even without government compulsion, to get the Time Warner cable deal back on track." But AT&T might also decide to retain its Time Warner Enterprises interest as a window into AOL/Time Warner's activities. "It all depends what tack AT&T intends to take toward the new competition - naughty or nice?" Coughlin said.

Finally, there's the question of Road Runner's destiny if AOL/Time Warner retains majority ownership. The service has avoided many of the customer service problems that Excite@Home suffered during the past year, but it also has avoided Excite's subscriber growth and has been hobbled for the past 18 months by an inability to hire a permanent CEO. Many industry watchers believe Road Runner's performance is nowhere near what AOL, one of the leading U.S. marketers and a believer in strong brand identity, will expect from a broadband Internet service.

AOL may offer to spin off Road Runner as a sign of its good faith in the open access issue and to speed the merger approval process, now expected to take about a year, said Amy Cho, a senior analyst with Barton Associates. "I wouldn't be shocked to see Excite@Home making a bid for Road Runner in 2000."