EU confirms clearance of AOL-TW deal

As expected, the European Commission has cleared AOL's $135bn take-over of Time Warner after the two companies agreed to make concessions to ensure that they would not dominate Europe's fledgling internet music market.

These include the agreement that Germany's leading media company Bertelsmann AG will "progressively exit" from its 50:50 joint venture with AOL - AOL Europe - as well as AOL France, which also involves Universal Studios' future owner Vivendi. In addition, AOL and Time Warner agreed that their relationship with Bertelsmann will "be kept at arms length" until the exit is completed. AOL-Time Warner will also make its music available on other on-line networks for a period of five years after the merger is cleared.

The concessions address concerns that together, AOL and Bertelsmann would have been able to leverage their collective strength in the music market, through Time Warner's Warner Music unit and BMG, Bertelsmann's music arm.

Had the Commission not taken action, it said "nothing would have prevented AOL-Time Warner from dominating the emerging market for internet music delivery on-line".

In particular, the Commission said the new company would have been tempted to format Time Warner and Bertelsmann's music in a way compatible only with AOL's music player Winamp, but not with competing music players. Yet Winamp would have been able to play the music of competing record companies because they are formatted in a "non proprietary" way.

"By contrast, competing players could not read Time Warner and Bertelsmann audio files and consequently play their music. Because of the technical limitations of the other music players," it concluded, "AOL-Time Warner would have been able to impose Winamp as the dominant player."

Competition Commissioner Mario Monti said: "The Commission has a duty to prevent the creation of dominant positions in all sectors, be they in the old or new economy. In a music market already characterised by a high degree of consolidation, the danger, which has been averted, was that by allowing AOL to team up effectively with three of the five music majors the resulting integrated company would have dominated the on-line music distribution market and music players."

The decision last week of Time Warner and the UK's EMI to withdraw their planned joint venture from the European merger approval process removed another crucial stumbling block to the bigger AOL-Time Warner tie-up.

But while AOL-Time Warner looks to have won something of a Pyrrhic victory in Europe, it must now face the music in Washington where a coalition of politicians, consumer advocate and business competitors led by Walt Disney have been clamouring for major concessions of their own ' if not outright prohibition of the merger.

On Monday, Orrin Hatch, the influential Republican senator for Utah and chairman of the Judiciary Committee on Capitol Hill, urged that AOL-Time Warner's inherited ties with AT&T be severed. The two giants found themselves linked this year after the phone giant acquired MediaOne Group, and with it 25.5% of Time Warner Entertainment.

'"I am concerned that the AOL-Time Warner merger, if approved with this intertwined interest with AT&T, might have anti-competitive effects to the detriment of consumers", Hatch declared in a letter to the anti-trust officials at the Federal Trade Commission who are currently charged with scrutinising the $135bn deal. Both this agency and the Federal Communications Commission are each expected to make their ruling before the month is up.

The other hot-button issue revolves around that of open access to Time Warner's high-speed cable lines that currently serve nearly a fifth of all American TV households. Although executives at both AOL and Time Warner have pledged to grant rivals complete access to their distribution pipelines, competitors are alleging that they will only be able to do so on onerous terms.

Adding fuel to the fire has been a report by the Washington Post which reported that nearly 40 small Internet companies were asked to give up 75% of their subscriber fees and 25% in revenues from other sources such as advertising as a condition for accessing a cable network in Texas.

Moreover, even one of the largest ISPs, Earthlink, reportedly told the FTC that it would have to hand over around two-thirds of its broadband revenues in its dealings with Time Warner. Ironically, Earthlink was one of AOL's early allies when AOL was arguing for open access when two years ago AT&T bought out the cable empires of both Tele-Communications Inc and MediaOne.