Cutting Aol Time Warner Down To Size

How much will it have to give up to please the trustbusters?

Suddenly, America Online Inc.'s engagement with Time Warner Inc. is looking troubled. Nine months after the companies announced their merger, regulators on both sides of the Atlantic are getting big jitters about the $183 billion marriage. To get the deal past the trustbusters, the world's largest online service provider and America's largest media company may have to give up much more than they ever expected.

Time Warner may have to abandon its $20 billion merger with British music label EMI Group, according to industry sources. And AOL Time Warner may have to make an unprecedented commitment to open its cable systems to competing Internet service and content providers. "Antitrust officials have reached the choking point on consolidation," says Gene Kimmelman, co-director of the advocacy group Consumers Union.

EU FEARS. At issue is the combination of AOL's dominance in online access--thanks to its 26-million members--with Time Warner's fast cable pipes and vast music, TV, and film holdings. Regulators fear the new company could dominate the delivery of online content over broadband cable. U.S. Federal Trade Commission staff members are prepared to block the deal if the companies don't agree to key conditions, say sources familiar with the talks. Agency staffers are asking AOL Time Warner to sign a consent decree that would ensure that competing ISP's get similar terms as its in-house ISP services when they link to Time Warner's broadband cable pipes.

A different problem has the European Union concerned: the potential dominance of AOL Time Warner in the booming online music business. According to a nonpublic Aug. 23 EU document obtained by BUSINESS WEEK, the Europeans fear that the Time Warner's-EMI merger will give the new AOL Time Warner so much clout over music content that rival labels will be compelled to distribute their music over AOL. In the end, the EU may well threaten to block Time Warner's purchase of EMI unless the companies sell some music properties to give rivals a leg up to compete. For now, though, the companies believe the deal will pass muster. "Any attempt to limit consumer choice would be bad business," says AOL spokesperson Kathy McKiernan.

Both the EU and the FTC have similar worries over possible discrimination in content. And if trustbusters can't get AOL and Time Warner to give rival ISPs and content providers fair access, some threats are swirling in the background. They may ask competing cable operator AT&T divest its 25% stake in Time Warner Entertainment Co. Regulators may also demand that AOL sell its $1.5 billion investment in Hughes Electronics Corp., owner of satellite broadcaster DirecTV Inc., a cable rival.

With talks heating up, both companies are hanging tough for now. Time Warner says it has already struck a private open-access agreement with Juno Online Services, an ISP, and promises more such deals. But both it and AOL are balking at the FTC's broader conditions. They say regulators should impose an industrywide rule, instead of singling out one company.

With so much at stake, of course, much of that is posturing--and no one expects AOL or Time Warner to walk. So far, industry sources say the talks with the FTC have gone nowhere. But the EU begins grilling company execs about both deals on Sept. 7 and 8 and will conclude its review by Oct. 24. Meanwhile, FTC aides are expected to make their final recommendations to the five-member agency as early as mid-September. AOL says the talks have been "constructive," and it remains confident the merger will close by mid-fall. So don't be surprised if they blink on some of these issues in order to get the deal done.

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