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News > Deals
Heat builds on AOL-TWX
July 26, 2000: 1:43 p.m. ET

Spirited exchange seen at FCC hearing, after NBC joins Disney in opposing deal
By Staff Writer Franklin Paul
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NEW YORK (CNNfn) - Critics turned up the heat this week on America Online and Time Warner's $120 billion merger plan, setting the stage for a spirited showdown when friends and foes of the deal gather to testify before regulators on Thursday.

The Federal Communications Commission hearing, set to begin at 1 p.m. ET, for the first time gathers in one room the betrothed corporate leaders with its staunchest critics, led by entertainment conglomerate Walt Disney Co., which sees the deal as a potential barrier to the distribution of its content.

graphicFor months Disney has lobbied that AOL Time Warner, as the gatekeeper to millions of cable TV and Internet customers, could unfairly restrict access to its vast networks.

Announced in January, Dulles, Va.-based AOL (AOL: Research, Estimates) and New York-based Time Warner's massive merger has raised eyebrows among those who question whether there will be fair access to the populous Internet market serviced by American Online, and to the cable television market run by Time Warner, the parent of CNNfn.com.

Both companies have pledged that open access will remain a priority following the closure of the deal, which requires the approval of U.S. and European regulators.

But in an 85-page court filing this week, Burbank, Calif.-based Disney renewed its opposition to the deal, charging that it threatens consumers ability to access certain services, including Interactive television, and that each company eventually would show preference to its own in-house brands, rather than give consumers a choice.

graphic"AOL and Time Warner have shown over and over again that they will not hesitate to thwart competition and consumer choice to maximize monopoly profits," Disney said.

Disney's chief lobbyist, Preston Padden, earlier this week told CNNfn that the merger threatens customers right to choose the content they prefer. (379K WAV, 379K AIFF)

Disney (DIS: Research, Estimates), like Time Warner (TWX: Research, Estimates) a leader in the entertainment arena, suggested the government impose numerous measures that would ensure that, for example, Disney-operated channels could gain access to Time Warner's cable systems, and not be bumped in favor of programming back by Time Warner.

Even better, Disney asserted, would be the complete split of AOL Time Warner's content and distribution systems.

"The surest remedy would be a separation of content from distribution, as has been required in the past when there has been bottleneck monopoly power in distribution of entertainment and news media," the company said. Disney's document also spells out instances where it believes AOL and Time Warner have excluded other vendors.

Time Warner, which has said it expects little government interference in the deal since the two companies do not essentially compete, reacted to the Disney's new charges with incredulity.

"Disney's proposal is absurd," said Time Warner spokesman Scott Miller. "There is absolutely no basis for any condition of this sort on this merger."

NBC voices opposition


AOL Time Warner's critical hurdles won't end there. In an unexpected move, General Electric's network subsidiary NBC on Tuesday joined the fray, arguing that the merged company would have the ability to secure competitive advantage over its Internet and video rivals urged the FCC to impose strict conditions.

"The ability of the merged entity to favor its affiliated content in both television and the Internet -- and in interactive television and electronic commerce applications -- raises serious public policy issues regarding competition, the free flow of information and consumer access to diverse voices and content," said NBC General Counsel Rick Cotton.

Time Warner shrugged off the complaint.

"The issues raised by NBC's filing have already been addressed in detail by AOL and Time Warner," said Miller. "As we have said from the day our merger was announced, AOL and Time Warner's commitment to content diversity, open access and consumer choice is absolute. It couldn't be stronger."

"We are committed to delivering to consumers a broad array of the best content available regardless of who's producing it, and to making our own content available as widely available across as many platforms as possible," he said.

The increasingly loud volume and edgy tone of the saber rattling reflects the growing power of media companies as a source of entertainment and communications for consumers and a vital brand-building pipeline for advertisers.

Wall Street experts said that AOL Time Warner's rivals have nothing to lose by their protests, and doubt the overtures will slow the consummation of the deal, which is expected before the end of the year.

"I think it's natural for two major competitors to seize the moment and gain some potential concession, perhaps getting AOL Time Warner to promise distribution for their product," said Edward Hatch, media analyst at SG Cowen Securities in New York.

"But the other companies are playing the cards that they have been dealt," he added, noting that neither NBC nor Disney has partners with significant cable or Internet pipelines. "Given the great distribution that Time Warner and AOL have, they are trying to secure a spot."

Consumer groups also concerned


To be sure, AOL Chairman Steve Case and Time Warner Chairman and Chief Executive Gerald Levin will champion the pact, illuminating the FCC's five-member panel to the far-reaching benefits consumers could reap from a company with dominating positions in the music, publishing, news, entertainment, cable and Internet industries.

Introducing clouds to their rosy view will be the job of opponents, certain to replay for the commissioners what some say is AOL Time Warner's ability to abuse that power. In particular, Disney is sure to remind the panel of Time Warner's decision in May to block ABC Television's programming from its cable systems in several areas across the nation, a card played during a bitter contract dispute with ABC, a Disney unit.

graphic"When Time Warner kicked off Disney, that was the best example consumer advocates could find to demonstrate what our fears are," said Jeff Chester, executive director of the center for media education, a Washington D.C.-based organization dedicated to improving the quality of electronic media.

Chester said that other consumer groups oppose the pact, unless certain assurances are made regarding the "future diversity and openness of the Internet."

"We have told the Federal Trade Commission and the FCC that we (and) the major consumer organizations of this country oppose this merger, because it increases the concentration of power, and creates unprecedented control over the Internet," he said.

He adds that another critical point of contention is the growth of cable modem use, a market that is expected to grow sharply as consumers move toward high-speed connections in their home. These broadband connections, provided by cable operators like Time Warner and AT&T, are expected to deliver next-generation services such as interactive TV and Web access.

graphic"There is room in the broadband market place for the big media players and everybody else," said Chester. "What we are saying is that the network deserves to be open to everybody who doesn't run a $160 billion corporation."

Last week, after Time Warner's second quarter earnings were released, Gerald Levin said the company plans to restructure its partnerships in its Road Runner high-speed cable Internet service to allow multiple online service providers access to the conduit sooner than previously anticipated.

In addition to Disney, AOL, and Time Warner representatives, speakers at the FCC hearing will include technology guru Esther Dyson, and also Mark Cooper, research director for the Consumer Federation of America, who will testify on behalf of several consumer advocate groups. FCC Chairman William Kennard will oversee the hearing. Back to top

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