It’s Official: Time Warner Hitched to AOL

AOL Time Warner Inc. Friday began officially trading on the New York Stock Exchange under the AOL ticker symbol following the Federal Communications Commission’s Thursday evening decision to conditionally approve the merger and create the largest media juggernaut in history.

In a 3-2 vote, the FCC approved the $106.2 billion deal, though it placed restrictions on what it called “advanced instant messaging-based high-speed services” (AIHS) — IM-based videoconferencing for instance — and also required the company to allow consumers to have their choice of ISPs carried on Time Warner’s cable lines without being pressured to subscribe to AOL’s service.

Specifically, before AOL Time Warner can offer AIHS using its broadband facilities, it must either file a petition demonstrating that it has implemented a standard for server-to-server interoperability of names and presence directory (NPD)-based services, or it must file a petition demonstrating that it has entered into written contracts providing for server-to-server interoperability with significant, unaffiliated, actual or potential competing providers of NPD-based services. Finally, the company has the option of seeking relief from the condition by filing a petition demonstrating the condition no longer serves the public interest.

In addition to requiring AOL Time Warner to allow customers a choice of ISPs, the commission’s conditions required the company to permit each ISP using its lines to determine the content of its subscribers’ first screens and that it cannot require ISPs to include specified content or links on those screens. It also prohibited the company from entering into any agreement with AT&T — the largest cable company in the U.S. — that gives AOL Time Warner exclusive access to any AT&T cable system in order to offer high-speed Internet access service. It also prevents the company from entering into any agreement with AT&T which affects AT&T’s ability to offer any rates, terms or conditions of access to ISPs not affiliated with AOL Time Warner.

“The conditions we impose today are forward-looking and fair,” FCC Chairman William E. Kennard said Thursday. “They preserve the openness of the Internet. They protect consumers and avoid heavy-handed regulation by using a narrowly-tailored market opening approach. And they ensure that neither AOL Time Warner nor a government agency will pick winners and losers in this dynamic marketplace.”

Kennard said the commission’s decision was very much focused on the two companies at hand, and should not be seen as a blueprint for further mergers.

“This decision is confined to its unique facts,” he said.

Not all of the commissioners were pleased with the FCC’s ruling. Commissioner Harold Furchtgott-Roth supported the grant of the license transfer applications the companies needed to complete the merger, but said he could not support any other aspects of the order — including the FCC’s conditions — because the commission’s role is not to pass on mergers.

“Unfortunately, the commission in this order continues to engage in just this sort of “merger” review,” Furchtgott-Roth said. “The overwhelming bulk of this document has little, if anything, to do with the proposed transferee’s use of the CARS licenses that are the jurisdictional object of this proceeding. Instead, the order focuses on the transferee’s various lines of Internet business, including instant messaging and interactive television. And it analyzes those business activities to see whether the entities’ future conduct might “impair or frustrate the objectives” of the act. At the end of the day, the commission has speculated about as yet undeveloped facts that are only tangentially related to license usage, and then applied to that conjecture a standard of review that is virtually unknowable ex ante. As I have said before, this approach is funda

mentally flawed.”

Commissioner Michael Powell, widely expected to be named the commission’s next chairman, found the FCC’s decision deeply flawed.

“This is unquestionably one of the most significant mergers in history and I am pleased to support it,” he said. “It has presented challenging issues. The challenge is found in the fact that the merger’s putative benefits and harms lie in the future and will be realized, if at all, only after combining unique assets and offering innovative services. Fascinating as though the issues are, and as serious as they are, I believe the majority has given in too much to their collective imaginations, rather than sound reasoning based on the record, in reaching some of the conditions on the merger.”

However, on Friday he clarified that he did support some of the conditions placed on the merger.

“Although I have concerns that our condition regarding the relationship between AT&T and Time Warner Enterprises is largely duplicative of existing consent decrees by the antitrust authorities, I nonetheless concur in approval of the merger and also in the condition regarding the relationship between AT&T and TWE,” he said.

However, Odigo Inc., a provider of a competitive IM service and one of the loudest voices in the call for interoperability in the industry, felt the commission’s conditions did not go far enough.

“Odigo is happy that the FCC recognized the need for interoperability,” said Alexander Diamandis, a spokesman for the company. “However, we feel the conditions imposed will not bring consumers interop as expeditiously as they should. Given the opportunity, AOL has repeatedly demonstrated that their posture of being in favor of interoperability is disingenuous…and that given any opportunity they will maintain and defend their closed network.”

The Consumer Project on Technology took an even stronger stance in a statement issued Friday morning.

“The FCC should have blocked the merger,” CPT said. “AOL is merging with Time Warner to avoid competition, and the merger will expose the Internet to greater risks of monopolistic control. The conditions put in place by the FTC and FCC are useful and potentially important provisions, but one has to wonder if the FCC or the FTC will have its heart in enforcement under a Bush administration. The two dissents by Commissioners Powell and Furchtgott-Roth were very important. Commissioner Powell, whose father was on the AOL board of directors, and who may be the next chairman, not only was opposed to the conditions placed on AOL Time Warner, but he ridiculed the majority’s decision.”

On the other hand, in a commentary for the Competitive Enterprise Institute published two days ago, James L. Gattuso warned of the dangers of regulating IM.

“…unlike the telephone system with its legacy of monopoly, instant messaging is a service still in its infancy — it’s been just three years since AOL first introduced the service to the public,” he wrote. “IM could evolve into a voice service, a text service with embellishments like e-mail, or develop video capability. We know little about what the service will ultimately look like, and how it will be provided, never mind what the relative market power among the players will be — “Instant regulation” hardly seems called for in such a situation.”

Gattuso noted that interoperability looks easy, but that may not necessarily be the case.

“Supporters of such regulation see FCC action as a natural step — after all, don’t we require telephone companies to connect to each other? But policymakers should be wary of anything that looks so easy. As a first matter, the FCC’s telephone policies have been far from unspotted. Even such seemingly simple things as interconnection have caused years of turmoil. One look at the current morass over telco “reciprocal compensation,” shows how ugly these things can become.”

Unsurprisingly, AOL Time Warner hailed the

decision that brought an end to its year-and-a-day long journey towards unification.

“This is a historic moment for consumers everywhere, and a tremendous step toward our goal of becoming the world’s most respected and valued company,” said Steve Case, chairman of AOL Time Warner. “AOL Time Warner will lead the convergence of the media, entertainment, communications and Internet industries, and provide wide-ranging, innovative benefits for consumers. Our brands, services and technologies already touch hundreds of millions of people and, by closely integrating our assets, we will embed the AOL Time Warner experience more deeply in their everyday lives. At the same time, our company is deeply committed to the communities in which we live and work, and through our philanthropic initiatives, we will explore ways to use the power of media, communications and information technologies to serve the public interest and strengthen society.”

Meanwhile, Goldman Sachs said it saw no surprises in the conditions placed upon the merger by the FCC.

“The closing of the merger now kicks off a series of much anticipated initiatives by the combined companies to leverage its many opportunities; additional details are expected to be outlined at its analyst day at month-end,” Goldman Sachs said. “After both companies under performed last year due to market, economic, and merger uncertainties, we expect the shares to do better this year as investor’s assess the combined company’s efforts to achieve its many goals.”

Goldman Sachs reiterated its Select List and Recommended List ratings on the company.

AOL Time Warner stock was trading down 1.1 percent to $46.70 per share in mid-afternoon trading Friday.

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