Will AOL Deal Force Cable Open?

Will AOL Deal Force Cable Open?

BY DAVID CONNELL

Industry officials disagreed on whether the strict rules imposed in approving the merger of America Online and Time Warner would affect the future rollout of broadband services.

Cable executives believe the agreement with the Federal Trade Commission, with tougher-than-expected requirements that Time Warner Cable’s pipe be open to competitive Internet service providers, applies only to the companies involved.

ISPs hoped the decision would serve as a template for further open access regulation. Even so, only mid-size ISPs will benefit, while larger and smaller ISPs will face a challenge.

The FTC’s stunning 5-0 vote approved the combination of the largest online company and a traditional media giant.

For all the furor the merger has caused since it was proposed, no major rival stood up and complained that an Internet monopoly had been blessed, not even Walt Disney, which fought the merger.

"The unprecedented open access and non-discriminatory conditions imposed by the FTC today represent a huge victory for consumers and for competition," says EVP Preston Padden. "We look forward to working with the newly combined company in all areas, including the development of new media."

"Sure, the negotiations will be tough, but I don’t anticipate any insurmountable obstacles," a Viacom executive adds.

"(AOLTW CEO Gerald) Levin and Sumner (Redstone, chairman of Viacom) have known each other and done business together for a long time," he says. "With (AOLTW co-COO) Bob Pittman’s early career association (with MTV), I don’t think that hurts our prospects."

Viacom’s programming will be carried because, he says, "Ultimately, we have strong brands here that reach different niches. MTV with teens and young adults with music, kids with Nickelodeon. Those brands have currency on the Web."

Generally, the FTC’s ruling on open access forces AOL Time Warner to make available on its cable systems at least one alternative ISP, No. 2 Earthlink, before offering AOL. And it must sign at least two other non-affiliated ISPs.

If the company can’t reach agreements with ISPs, an FTC trustee will do it for them.

Once AOL Time Warner signs the required third ISP, "They can keep (other ISPs) off their system for technical reasons only," says FTC Chairman Robert Pitofsky.

"They must have a good reason to keep four, five and six off the system. The possibility of declining profits for AOL Time Warner is not a good reason," according to Pitofsky, who says the commission wanted true "open access," not merely "competitive access."

The FTC also imposed rules for interactive TV.

"Time Warner may not interfere with the ability of a subscriber to use, in conjunction with ITV services provided by a person not affiliated with AOL Time Warner, interactive signals, triggers or other content AOL Time Warner has agreed to carry," the commission said.

As a final condition, the FTC said AOL must offer its services to DSL customers at prices comparable to those cable subscribers pay where the two services overlap.

"The superior broadband platform today is the cable platform," says Richard Parker, director of the FTC’s competition bureau. "Our concern was moving a dominant ISP onto the best platform and taking away competition. We couldn’t see what would replace (AOL on DSL platforms)."

Parker adds that the commission feared Time Warner’s relationships with other MSOs, especially AT&T Broadband, meant AOL could become the dominant ISP on cable.

Parker says the government would have fought the merger had the companies not accepted the FTC’s conditions.

"I believe this was a fundamentally illegal merger to start with," he says. "That was remedied by these provisions."

While AOL and Time Warner say the FTC agreement is "a model for other cable systems throughout the country," some cable officials were quick to say other operators should not be bound by the conditions imposed on AOL Time Warner.

"The FTC’s conclusion can be debated, but these unique circumstances do not apply to any other cable system operator," says National Cable Television Association president Robert Sachs. "No other cable company serves more than a small fraction of the Internet access market."

On the other hand, Center for Media Education executive director Jeff Chester calls on the Federal Communications Commission, which must still sign off on the merger, to follow the FTC’s lead.

"This is the model, folks, like it or not," Chester says. "You can forget about managed access — it’s open access or nothing."

Others say the FTC’s ruling wasn’t firm enough.

"I wish the ruling had more teeth. The cable companies have been able to restrict access to their systems up until now, and this ruling will only work if the conditions are truly enforceable," says Steve Davis, SVP-policy and law for Qwest Communications, which is seeking access to AT&T’s cable networks for its high-speed Internet service.

Analysts view the commission’s access provisions as being good for medium-sized ISPs, but potentially troublesome for the largest and smallest Internet players.

"From the point of view of an Earthlink, the deal probably works in terms of getting access to those eyeballs," says Mike Goodman, a senior analyst at The Yankee Group.

Smaller ISPs won’t be able to afford access.

"Hey, but life is not fair, and these smaller guys were hoping to go along for a free ride," Goodman says.

Small ISP NorthNet disagreed. Director-marketing Steve Heims says the ruling "gives the little guys a fair chance."

A powerhouse such as Microsoft could appear as a threat to AOL Time Warner, creating a different access problems for its MSNO.

"They would like the smaller regional ISPs because they will always have the upper hand," says Strategis Group Senior analyst Keith Kennebeck.

Keep in mind AOL Time Warner is doing this because it was forced to, he says.

Shirley Brady, Mike Reynolds and Mavis Scanlon contributed.