Trust busters challenge giants of wired world

THE SUNDAY TIMES

January 16, 2000

Investors are not the only ones having trouble deciding whether the merger of AOL and Time Warner is a good idea. Competition authorities, too, are starting to focus on the record-breaking deal to determine whether it threatens competition in any of the many markets affected by the merger.

It is not for the authorities to decide whether the move is a wise one in terms of the long-run financial performance of the merged entity. That is up to shareholders, who stand to benefit if there are real synergies to be had, and to lose if the colossus proves unmanageable. But it is the job of the antitrusters to challenge the joining of AOL's Internet access business to Time Warner's cable delivery systems, programming, and library of what is now called "content" if that merger threatens to stifle innovation or reduce competition for consumer patronage.

AOL and Time Warner were quick to advance several reasons why they do not expect the competition authorities to find their merger objectionable. But they also immediately hired the vaunted David Boies, America's preeminent litigator and the man who brought mighty Microsoft to its knees when representing the Justice Department in its antitrust action against Gates & Co.

Good idea. For Boies' talents may well be required to persuade antitrust authorities that the defenses advanced by the new company should carry the day. Consider first the argument that the merger cannot possibly be anticompetitive because AOL and Time Warner are in entirely different industries, and that therefore their joining together can't threaten competition any more than could, say, a merger of an oil company and food processor.

Boies will have to explain to the Justice Department how it can be the case that these companies operate in separate industries, if they are at the same time touting the virtues of "convergence" -- the coming together of PCs, television, the Internet and heaven only knows what else. If convergence is indeed a fact of life, then there is one industry out there, as yet to be precisely defined, and both AOL and Time Warner are players in it. The authorities will certainly want to consider whether the new, vertically integrated company has a dominant position in that single, converged industry.

Besides, the antitrust laws are concerned with more than the effect of mergers on actual, existing competition. They are concerned, too, with threats to potential competition. So the authorities will want to consider whether the merger eliminates Time Warner as a potential competitor of AOL.

After all, Time Warner has tried to enter the ISP business in the past, but failed; the inevitable investigation might just turn up evidence suggesting that it was planning another try.

Indeed, Gerald Levin, Time Warner's chief executive, conceded that if he couldn't pull off this merger Time Warner might well have become a competitor of AOL. According to the Wall Street Journal Levin told reporters, "I was prepared either to go it alone or to see whether something was doable with AOL....I concluded we could either do something with AOL or do it on our own. This is more preferable." To Time Warner, perhaps, but not necessarily as a matter of public policy.

The elimination of a potential competitor might well be a red flag to the trust busters' bull. After all, AOL is the means of access to the Internet for over half of America's consumers, and by this merger may well have removed the one player capable of challenging its huge market share.

Other aspects of the deal will also pique the authorities' curiosity. Before it decided to acquire Time Warner, AOL was engaged in a bitter brawl with AT&T. It seems that Steve Case, AOL's chief executive, was concerned that AT&T would deny his company access to its cable systems. Such mandatory access, AOL argued, was essential if it was to be able to offer its customers high-speed access to the Internet, using the broad-band cable system rather than the clunky, slow telephone wires now used by all save a few AOL customers.

Now AOL is the proud owner of Time Warner's extensive cable systems, which have monopoly franchises in many of America's top media markets, including New York City. Case was quick to announce that AOL's competitors would have open access to those cable systems. But years of experience with the Baby Bells, who have set terms of access to their local telephone wires so onerous as to make it economically infeasible for competitors to use them, suggests that vague promises of open access are useless. It will be interesting to see whether AOL Time Warner can offer access terms that will satisfy the competition authorities that the new company will not squeeze AOL's competitors off its cable systems, as Time Warner tried to do when it denied Fox News access to its wires in order to stifle competition with its own news channel, CNN.

The possible anticompetitive impact of AOL's integration into the cable industry is exacerbated by the fact that it also has a $1.5 billion investment in Hughes Electronics' satellite delivery system, which is supposed to provide a competitive alternative to cable. It is not certain that the authorities will look with favour on AOL's integration into both the cable and satellite delivery systems.

If the authorities do decide that AOL has a dominant position as an Internet service provider, they will also be interested to learn how it plans to decide who shall get on the first screen subscribers see when they log on. Will customers be directed to Time Warner web sites, such as those operated by its CNN news service? And will CNN's competitors be allowed access to that key screen on non-discriminatory terms? Any threatened stifling of consumer choice will certainly be frowned on.

None of this is to say that the deal is certain to run afoul of America's antitrust laws. But approval is neither automatic nor certain.