In an Octopus’ walled garden

(Upstart) The Federal Trade Commission’s ruling is in, and it seems the approved version of the America Online/Time Warner merger won’t present us with the scary online Death Star that advocates warned of.

Yes, the new company will have a market cap of about $112 billion and about 85,000 employees—at least until the inevitable “cost efficiencies” kick in. Yes, it will own some of the most fruitful media properties in the world, with Warner Brothers movies, CNN news content and all those Time-Life magazines. And yes, those ingredients will be combined with the services and marketing muscle of the 26-million-customer AOL and the Netscape browser, which AOL owns.

And finally, yes, the Federal Communications Commission gets the honor of announcing whether it’s soup yet or not.

But the conditions the FTC imposed before blessing the Case-Levin nuptials went far enough to allay the fears of many opponents that the new AOL Time Warner would be an online octopus—a media juggernaut crushing every ISP competitor in its path—that all the parties involved decided to treat the approval as a done deal.

The Walt Disney Co., which spent months of lobbying and hours of Congressional testimony depicting the merger as the death rattle of free Web speech and Internet competition, sent the new couple a congratulatory nosegay in the form of an offer to work together “in all areas, including the development of new media.”

Meanwhile Dave Baker of EarthLink—another early-and-often foe of the combo—called the deal “a win-win-win” for all parties involved, now that his ISP gets an E-ticket ride in all Time Warner’s major metro cable areas.

Suddenly this media octopus is looking less like the giant squid Kirk Douglas fought in “20,000 Leagues Under the Sea” than the rubber octopus Bela Lugosi wrastled in the Ed Wood classic, “Bride of the Monster”—all floppy tentacles and flaccid dialogue.

The magic must be in the FTC’s terms, right? Right. Here they are in a nutshell:

The new company can’t keep its cable network to itself. Time Warner must offer EarthLink ISP service in its most profitable markets, and must recruit two other independent ISPs within 90 days.

Nor can AOL Time Warner structure the business terms of transport to favor its own online services. (A good thing because Road Runner has had a dubious lease on life for years now.)

Interestingly, AOL Time Warner will not be able to limit the streaming of video a la Excite@Home. As streaming multimedia becomes more advanced, that could mean the new company will have to sit by and watch an online challenge to premium cable channels unfold over its own network.

On a more problematic note, AOL must continue its efforts to offer access over DSL even in Time Warner’s cable markets. The problem will be in measuring the strength of that effort, since almost any movement in AOL’s DSL product will constitute acceleration. AOL DSL has been spinning its wheels almost since the company announced that high-speed initiative, primarily because the ILECs the company is working with are having problems rolling out any kind of DSL service, even their own.

Now for the really gray areas. The FTC handed down no decision on collateral topics such as access to interactive television set-top boxes or interoperability of instant messaging services. The FCC gets its ups on the merger in the coming weeks, and indications are that the regulators may use their last at-bat under a Democratic administration to force AOL to hook its Instant Messenger, which rules the IM roost, into those of competing services.

Then there’s content. There’s not much sense speculating now what AOL Time Warner will do with its supposedly dynamite media properties; they’ll try a combination of wide availability and “premium” content aimed at subscribers, then go with what earns best results.

It’s notable, though, that AOL Time Warner says it retains the right to deploy its Time Warner content as it sees fit. While the leaders are paying lip service to the power of the open marketplace, saying that it’s “not in the company’s interest” to restrict access to its proprietary material, neither AOL’s online service nor Time Warner’s cable properties have made news recently for giving anything away. Time Warner, in fact, got its hand slapped last May for knocking Disney properties off its owned-and-operated stations during spring sweeps over a compensation dispute.

I was at the National Cable Television Association show while the Disney blackout happened, and I can attest that Gerald Levin got accolades from his fellow cable operators like he was Sly Stallone jogging the back streets of Philly in “Rocky II.”

And the complexity of interconnections involved at cable headends opens up a whole world of Gates-ian possibilities for stacking the deck against competing services: not just access to the content, but the speed of downloads, the durability of the link and the quality of caching all can degrade a user’s experience. There’s many a slip between the click and the clip, and cable Internet companies have been known to use all of them as excuses for poor service.

Finally, there are the little matters of oversight and enforcement. The FTC appointed a panel to monitor compliance with the consent decree, and the FCC will most likely do the same. Those panels will make note of complaints from customers trying to use other ISPs than those owned by the new company.

But what will happen if those panels detect a bit of backsliding in those conditions? Well, let’s just say, don’t look for lines of moving trucks outside AOL Time Warner headquarters. Nobody’s busting up this behemoth over a few bad reviews—especially under a Republican president.

Editor-in-Chief Brian Quinton eludes predators by squirting blinding clouds of “ink” from sacs located near his gills. E-mail him at brian_quinton@intertec.com.