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 (FON)
merger as a traditional long-distance issue, not as vertical convergence of
technology.
“If Sprint and MCI merge, they become one broadband player in a global
market,” Whyman said. “There are no antitrust issues. However, traditional
regulatory thought sees the deal as anti-competitive because the two
companies could dominate the long-distance market,” Whyman said.
“Regulators need to decide where the traditional LATA boundaries lie in
today’s global Internet marketplace.”
If the AOL-Time Warner (TWX) deal passes regulatory scrutiny, Internet service
providers would be divided into two camps, those that are content rich with
universal appeal and those that are not. Whyman said the bar would be
essentially raised among competing ISPs.
“The deal would split ISPs into two camps, rich content services and access
providers. Because those ISPs without original material would be relegated
to the content equivalence of free access providers, the competitive bar
among ISPs has just been raised,” Whyman said.
