All systems go for AOL Time Warner after FTC nod

The most arduous legal obstacle facing the biggest corporate merger in US history was swept away on Thursday after Washington's five-member Federal Trade Commission gave its unanimous approval to America Online's $111bn takeover of Time Warner - but with stringent conditions attached in the form of a consent decree.

With only approval from the Federal Communications Commission now standing in its way, the new AOL Time Warner combine told staff that it would begin operating as one company by the end of this year or the early days of 2001.

'Right from day one, the force driving AOL Time Warner will be change. We intend to leave the starting gate fully prepared to operate as a focused, flexible global enterprise committed to leading the next stage of the Internet revolution,' promised chairman Steve Case and CEO Gerald Levin in an internal communiqué circulated on Thursday afternoon.

The new executive team, which has promised to deliver $1bn in cost-savings and 30% earnings growth after just one year together, is now expected to unveil a raft of joint initiatives that take advantage of their combined strength. Until now, those executives have been tightlipped on where the potential synergies might come for fear of aggravating the approval process.

The FTC's approval, which came almost a full year after the merger was first announced in January, ends one of the most protracted regulatory negotiations on record. The awesome breadth of the new company prompted dozens of competitors, notably Walt Disney, NBC and Microsoft, to join numerous consumer lobby groups in campaigning against the proposed merger.

At issue were concerns that an entity that combined the world's leading Internet service provider (ISP) with the world's largest stockpile of content and also the second largest cable operator in the US would steamroll any competitors in the emerging business of supplying high-speed Internet access.

In addition, the FCC still has reservations about Time Warner's continuing ties to AT&T and about AOL's potential to further dominate the instant messaging domain. Both those concerns are widely expected to be answered within the next two to three weeks and final approval granted quickly thereafter. The European Commission has already blessed the union.

Under the five-year agreement reached with the FTC, AOL Time Warner is obliged to open up its cable network - the second largest in the US after AT&T's - to competing ISPs. According to FTC chairman Robert Pitofsky this consent decree marks 'the first time that any cable system has pledged to put another's ISP on its own cable system.'

The agreement ensures that one rival ISP must be made available to subscribers before AOL launches its own cable service and two others within 90 days. Others should also be added unless technical obstacles such as capacity constraints prevent this from happening. 'Diminishing profits will not be a good reason for keeping other ISPs off,' warned Pitofsky, who reserves the right to appoint a trustee to administer deals with outside ISPs should AOL Time Warner fail to enter into agreements with rival services within the allotted time frames.

Time Warner has already struck a deal with Earthlink, the nation's second largest ISP after AOL, on terms that serve as a blueprint for other rivals. However, since that deal only kicks in during the second half of 2001, AOL will have to wait until then before offering its services over Time Warner's broadband pipes.

In addition, AOL Time Warner is prohibited from interfering with any content that is passed along its cable system through rival ISPs or with the ability of non-affiliated providers of interactive TV services to conduct their two-way traffic with subscribers.

Exclusivity was also a major sticking point, given the scope of Time Warner's assets that include two full-fledged film studios in Warner Bros and New Line Cinema, not to mention another leading production force in Castle Rock Entertainment.

From now on, AOL Time Warner is prevented from discriminating on the basis of affiliation in the transmission of content, or from entering into exclusive arrangements with other cable companies with respect to ISP or interactive TV services. Moreover, the newly-merged giant is obliged to inform the FTC of all complaints from Internet and interactive TV suppliers which feel they are unable to obtain Time Warner's news and entertainment services on reasonable terms.