FTC Approves AOL-Time Warner Merger

The Federal Trade Commission approved America Online Inc.'s merger with Time (TWX) Warner Inc. on Thursday, after the companies agreed to concessions designed to protect competition in the small but growing markets for high-speed Internet service and interactive television.

The FTC voted 5-0 to allow AOL (AOL) and Time Warner to combine and create a new- and old-media powerhouse that is expected to generate revenues of over US$40 billion a year and present dozens of popular music, television, movie and print offerings. The deal, originally valued at more than $160 billion, is worth closer to $110 billion today because of the huge drop in AOL's share price since January, when the deal was announced.

The deal has already been approved by shareholders and regulators in Europe, but the Federal Communications Commission is still conducting its review. FCC officials have said they will complete their work by yearend. Though the agency may impose some additional conditions, it is expected to approve the transaction.

AOL Time Warner competitors ranging from Walt Disney (DIS) Co. and Microsoft (MSFT) to tiny Internet service providers in Texas and Wisconsin complained that the deal would reduce competition and give AOL and Time Warner too much control over the evolving broadband and interactive television markets. Time Warner is the second-largest cable television provider, with wires passing 20 million homes, and AOL is by far the largest Internet service provider, with almost 30 million customers including its Compuserve service.

Staff of the FTC originally recommended that the agency go to court to block the deal unless the companies made substantial concession on the broadband and interactive TV issues. After months of negotiations, the companies and the agency finally reached agreement on a series of complex conditions.

All along, AOL and Time Warner had agreed that they would allow competing ISPs to offer high-speed Internet service over Time Warner's cable lines. The companies even struck a deal with Earthlink, the second-largest ISP, guaranteeing Earthlink a place on Time Warner's systems.

Thursday's agreement went further, prohibiting the merger partners from offering high-speed AOL service until it could accommodate Earthlink. And once the companies offer AOL, they would have to add at least two more independent ISPs within 90 days in large markets. Other ISPs could also be added. The companies could turn away additional ISPs only because of capacity constraints, technical limitations or a downturn in the cable broadband market.

The FTC was also worried that AOL would abandon its deals with some of the regional Bell companies to offer a high-speed Internet service over those companies' telephone lines using a technology called Digital Subscriber Line service. DSL is the leading competitor to cable high-speed service in most areas. So AOL agreed to price and market its DSL offering comparably to its cable Internet service in areas where both are offered.

Under the agreement, AOL and Time Warner may not limit or block any Internet content offered by competitors over their cable systems.

Regarding interactive television, the FTC took a more general approach. Though major cable companies have been experimenting with interactive TV market for more than a decade, no one has yet found an approach to attract hordes of viewers. AOL is offering its own interactive service, AOLTV, but without much of a marketing push so far.

Under Thursday's agreement, if AOL allows its customers to access information through its interactive TV service, it may not block parts of broadcasts that contain interactivity that could be accessed by competitors' services. AOL must also inform the FTC of any complaints from ISPs or television programmers about content access issues.

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