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FTC Approves AOL Time Warner Merger with Hefty Restrictions

The world's largest Internet services company Thursday cleared the second-to-last hurdle in its quest to acquire the No. 2 cable company in the U.S., though the restrictions imposed will lead to intense government scrutiny.

The Federal Trade Commission, in an unanimous 5-0 decision, gave its approval to the $109 billion merger of America Online Inc. and Time Warner Inc. The next and final stop is the Federal Communications Commission, whose chairman, William Kennard, has said he expects the merger can be cleared by year's end.

The FTC had hung up the merger for months over the issue of open access. Time Warner's cable service, second only to AT&T in size, serves 20 million households in the U.S., and its stable of media properties -- the largest in the U.S. -- ranges from Fox, CNN, Warner Bros. and HBO to magazines like Sports Illustrated, People, Fortune and Time. Numerous groups, from ISPs to public advocacy groups, have set themselves against the merger -- arguing that the merged entity known as AOL Time Warner would harm competing Internet service providers by blocking them from lucrative markets through a monopoly on the Internet's high-speed infrastructure.

The FTC had argued that the merger would violate Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act by lessening competition in the broadband access market, undermining AOL's incentive to promote DSL service as an emerging alternative to cable broadband, and restraining competition in the market for interactive television.

"There were serious antitrust problems here that needed to be addressed," said FTC Chairman Robert Pitofsky.

In an effort to counter this argument and gain the FTC's favor, AOL and Time Warner Wednesday evening signed a pledge that declared AOL Time Warner would work to ensure that competing services would have access to its cable lines. The FTC approved the consent order, saying that it would "remedy the likely anticompetitive effects of the proposed merger."

"In the broad sense, our concern was that the merger of these two powerful companies would deny to competitors access to this amazing new broadband technology," Pitofsky said. "This order is intended to ensure that this new medium, characterized by openness, diversity and freedom, will not be closed down as a result of this merger."

Pitofsky added that the agreement will preserve competition and possibly enhance it.

Terms of the Consent Order

The pact requires that at least one AOL competitor must offer high-speed cable access in cities served by Time Warner before AOL can itself offer high-speed cable service on those lines. The agreement also calls on Time Warner to open its lines to two more competitors within 90 days, and to negotiate with further ISPs in good faith. The agreements must be approved by the FTC, and if AOL Time Warner fails to secure deals with two more competitors within the time frame mandated by the commission, the FTC reserved the right to appoint a trustee with the authority to enter into agreements on Time Warner's behalf. Additionally, in Time Warner's smaller cable divisions, the company would be required to enter into agreements with at least three non-affiliated ISPs within 90 days of making its own broadband service available, also subject to the commission's approval. In that case the commission also reserved the right to appoint a monitor with the authority to enter into deals on the company's behalf if the deadline is not met.

Also, the commission required that Time Warner include a "most favored nation" clause in all alternative cable broadband ISP service agreements submitted to the FTC for approval. The clause would require that if "AOL executes a cable broadband ISP service agreement with another cable company, AOL Time Warner must provide the Monitor Trustee with a copy of the cable company agreement, give notice of the execution of the cable company agreement t