RealTime IT News

AOL Plays The Washington Game

Initial market reaction to Tuesday's news that America Online Inc. (AOL) and Time Warner will allow other ISPs to use their cable lines indicates investors are unsure if the decision will benefit the two companies once they merge.

AOL shares edged up in pre-opening trading to 61 15/16 from Monday's closing price of 60 9/16, but slipped back to 59 1/8 by early Tuesday afternoon. Time Warner, meanwhile, was at 86, down slightly from Monday's close of 86 11/16.

In the long run you can expect consumers and ultimately investors to applaud the move. It will give Internet users a wider choice of access providers, and will keep AOL on the right side of the open-access debate. But of greater concern to AOL in the short-term is the reaction of an entirely different target audience: anti-trust regulators and advocacy groups raising warning flags about the effect of the merger on consumers.

It's no coincidence that AOL-Time Warner's plan to let competitors use its cable lines was unveiled immediately before Senate hearings on the merger Tuesday in which the two CEOs in question -- AOL's Steve Case and Time Warner's Gerald Levin -- were slated to testify.

With the specter of Microsoft's protracted battle last year with the Department of Justice fresh in their minds, neither executive wants to become a familiar face on Capitol Hill. They also undoubtedly learned a lesson from watching Bill Gates' tortured testimony in the Microsoft case: When dealing with the feds, cooperation works a lot better than obfuscation.

Shares of AOL and Time Warner have fallen sharply since the deal was announced on Jan. 10 as investors grappled first with valuation questions accompanying the marriage of a fast-growing Internet leader with a larger, slow-growth "old media" company, and then with growing qualms that the deal could be scuttled over antitrust fears.

An endorsement of the merger last week from Merrill Lynch Internet analyst Henry Blodget helped reverse some of the weeks-long decline in AOL's stock. By quickly and successfully navigating its way through Washington's regulatory waters, AOL could further bolster investor confidence in the merger.