Time Warner/ AOL merger awaits final approval
Earlier this month, the would-be merger of the biggest internet service provider (ISP) in the United States, America Online (AOL), and Time Warner, the media giant, received approval from the European Union's (EU) antitrust regulator.
Now the merger must pass muster with two U.S. regulatory bodies, with the first the Federal Trade Commission (FTC) scheduled to present its ruling this week.
The proposed merger, which was announced in January, would bring together two of the largest new and old media empires in an all-stock transaction initially valued at $350 billion. The marriage would mark another phase of internet development with ISPs shifting their strategic focus by increasing their content to turn online services into additional distribution channels. The AOL/Time Warner merger would create the "first vertically integrated content provider" distributing Time Warner's music, news and films through AOL's internet distribution network.
The merger is also a sign that the hands-off approach of federal regulators during the early years of ISP development has now ended as big companies seek strategic alliances to diversify their offerings and possibly drive out competitors. In the past, U.S. antitrust authorities have opted to leave internet services untouched so as to not retard the development of online technologies or hinder investment.
The EU's commissioner for competition gave the go-ahead for AOL's purchase of Time Warner on the condition that the America online giant cut its ties with the German media conglomerate Bertelsmann, one of the world's top-five music distributors, to stop the two companies from dominating the growing market for online music delivery in Europe. Likewise, Time Warner had to nix its plans to merge with music producer EMI.
The AOL/Time Warner merger now needs the O.K. of U.S. regulators. Unlike the European Commission (EC), American antitrust regulators will mull over a separate set of criteria since the union of the two giants will have a much greater impact on competition on their home turf. The first regulatory body, the FTC, is reviewing the details of the proposed merger to determine the market conditions that it would create.
The FTC is concerned that AOL and Time Warner would have unfair advantages in the development of interactive television services and online instant-messaging service, two areas that AOL already dominates. First, it wants assurances that Time Warner will open its cables to its competitors and not give AOL special treatment in controlling its online service, especially with the prospect of high-speed internet access via television looming on the horizon. Whereas Time Warner owns no cable networks in Europe, the company is the second-largest cable provider in the United States, where it provides service to about 20% of the country's cable TV subscribers. Hence, the regulatory authority is nitpicking a memorandum of understanding that AOL and Time Warner submitted in which they agreed to give their competitors access to Time Warner's cable connections.
Second, the FTC wants AOL's instant-messaging service, which allows users to immediately send and receive online notes faster than via e-mail, to be made compatible with rival systems. It also wants assurances that AOL will not block rival services from connecting to its online instant-messaging network.
Meanwhile, the second regulatory body, the Federal Communications Commission (FCC), said two weeks ago that it would wait for the FTC ruling due Oct. 27 before continuing its own inquiry into the matter. But before the ruling is issued, AOL and Time Warner will likely ask for a delay to buy time for additional negotiations with the FTC, since the regulatory body is scrutinizing several aspects of the prospective merger. And the FTC will be willing to hear them out to reach an agreement, albeit with heavy concessions from both to ensure fair competition, since it rarely initiates lengthy court hearings for mergers. As long as the U.S. regulators have a solid agreement that the merged company will enact certain enforceable measures to ensure a fair marketplace, the deal will be approved. The new phase of internet development, like the first, is too technologically important to prohibit.
