RealTime IT News

Don't Dispel Regulatory Woes for AOL, Time Warner

While analysts generally expect smooth sailing during regulatory clearances for Monday's $182 billion merger between America Online Inc. and Time Warner Inc., several hurdles must be climbed before the deal's done.

America Online (AOL) has never focused on building an Internet infrastructure. The company outsources its connectivity to MCI WorldCom Inc. As a result of being a non-facility based ISP, Steve Case, AOL chairman, said he does not expect any regulatory hurdles to the deal.

"The only real concern people might have is on the issue of open access," Case said. He added that both AOL and Time Warner would be committed to the principle of choice and would open their cable network to competing Internet service providers.

But potential regulatory obstructions to completing the proposed merger will not be revealed until the two companies file with the federal agencies. The Hart-Scott-Rodino Antitrust Improvement Act requires the merger come under federal antitrust review.

Both the U.S. Department of Justice and the Federal Trade Commission could be a part of the congressional merger review. The Federal Communications Commission will most likely testify at the hearings and weigh in with its own separate review of the deal.

Bill Whyman, Legg Mason Precursor Group analyst, said open access is not the only regulatory issue that the AOL-Time Warner deal could face. According to Whyman, the merger will be reviewed by many different regulatory agencies before the two companies can cement the deal.

"AOL and Time Warner will be asked a lot of questions by the federal regulators at the FCC and the DOJ concerning anti-trust issues," Whyman said. "Then the merged company would also have to obtain the approval of the cable franchise license transfers at a local level of authority. One area that may be messy for AOL is what to do with Road Runner."

Whyman said that before federal regulators determine whether AOL would need to divest itself of Road Runner they have to determine what market the cable Internet access provider serves.

"Is Road Runner cable service one part of the broadband market, or is broadband just a segment of the larger Internet access industry," Whyman asked. "If Road Runner is simply Internet access, then there is plenty of competition for AOL and there would be no need to divest."

He said regulators at all levels are struggling with traditional horizontal marketplace thinking because the existing rules don't seem to apply to our changing world of converging technologies among vertical industries.

"The AOL-Time Warner deal is just beginning to take issue with regulatory shortcomings over tech issues. This is a merger is a harbinger of how existing rules do not apply to converging technologies.

"If you look at these huge conglomerates as a whole, there may be antitrust ramifications, but if you look at them as an amalgamation of tiny bits of different services, then the companies operate in a highly competitive market."

Comparatively, the FCC has viewed the merger of MCI WorldCom (WCOM) and Sprint Corp. as a bad deal because both companies own substantial Internet backbones and the regulators fear combining the nation's second- and third-largest long-distance providers.

Whyman said the federal rationale is looking at the MCI-Sprint