December 15, 2000
After a background report, three experts discuss the record-setting AOL-Time Warner merger.
The NewsHour Media Unit is funded by a grant from the Pew Charitable Trusts.
PITOFSKY: The commission has approved the merger of AOL-Time Warner.
TERENCE SMITH: And with that announcement from Robert Pitofsky, chairman of the Federal Trade Commission, the creation of the world's largest media business moved one critical step closer to reality. The FTC voted unanimously to allow America Online, the nation's largest Internet service provider, to merge with Time Warner, the largest media and cable conglomerate. Since announcing their intentions almost a year ago, the company heads, Steve Case of AOL and Gerald Levin of Time Warner, had to agree to stringent FTC conditions meant to ensure competition in providing Internet services and the interactive television systems of the future. The fathers of the deal forecast a brave new world of technology for what they dubbed the Internet century.
STEVE CASE: AOL-Time Warner will offer an incomparable portfolio of global brands that encompass the full spectrum of media and content, from the Internet to broadcast and cable television to film, to music, to magazines and to books.
TERENCE SMITH: The government required the companies to open its cable systems to at least three competing Internet service providers.
ROBERT PITOFSKY: Especially in this amazing new broad band technology, characterized as it has been by openness, by diversity, by easy access and by freedom. And we wanted, especially in these areas, to assure that this transaction does not close things down.
TERENCE SMITH: Under the terms of the merger, the smaller company, AOL, with some 15,000 employees, will control 55 percent of the new entity. Time Warner has 70,000 staff worldwide. The merger still needs the approval of the Federal Communications Commission. That could come as early as the end of the month.
TERENCE SMITH: For further explanation of the AOL-Time Warner deal and its implications, we turn to Richard Parker, director of the Federal Trade Commission Bureau of Competition, who led the negotiations; Gene Kimmelman, co-director of the Consumers Union Washington office, an early critic of the merger; and to Dennis Kneale, the managing editor of Forbes Magazine, who has followed the technology and entertainment markets since the early 1980s. Gentlemen, welcome to you all.
Richard Parker, tell me, give me a little sense of what these negotiations were like. I understand that you negotiated for months and is it correct that until the very last hour were ready, if necessary, to go to court?
RICHARD PARKER: Correct. We were negotiating this since August. The investigation has been going on since February or March. We've been negotiating this deal since August, over the last four or five months. At the same time we were preparing to go to court.
TERENCE SMITH: To block the merger.
RICHARD PARKER: To block the merger because I felt the merger was an illegal transaction in that it would reduce competition, and that unless we could reach an agreement that would address the negative impacts on competition, that we ought to go to court and challenge it as illegal.
TERENCE SMITH: Gene Kimmelman, you were an early critic of this deal. What do you think of it now?
GENE KIMMELMAN: Well, I think the Federal Trade Commission did a commendable job here. It is really a monumental settlement here because for the first time now on cable systems, consumers will have a choice if they have Time Warner Cable of multiple high speed Internet service providers, not just AOL's Internet service but at least three others. And no other cable system has opened itself up this way. If you use a telephone to get on the Internet, use your telephone line, you can surf the Web and you have hundreds of thousands of providers. It has been a wonderful new revolution in choices for consumers, but for high-speed services, the cable companies have blocked out everyone else. So in accepting this merger, which highly concentrates markets and had many dangers involved in it, what the FTC has done is gotten to the core issue for consumers, made sure there was more choice for Internet services and hopefully we'll have price competition in the future as well.
TERENCE SMITH: Dennis Kneale, what do you think of this? Is it in fact more choice for the consumer, is it enough choice?
|At first glance, remarkable|
DENNIS KNEALE: It certainly will be. Look, at first glance this is remarkable. You have America Online. They bought Time Warner lock, stock and barrel. They own those wires, and a government agency is now coming in and forcing them to open those wires up and let anybody come in and offer services. So, that sounds good, but underneath this I can't help but feel there is a bit of Brer Rabbit in the briar patch here. Don't throw me there. Don't throw me in there. Don't make me up open up my wires. If you look at it, AOL and Time Warner are going to be doing good business. What the FTC has forced it to do is to open up to other service providers. But if AOL is charging $40 or $50 a month for high-speed Internet access, they want to give consumers whichever service provider those consumers want to use. So it's simply good business. So I truly question how big a concession was won here.
TERENCE SMITH: Well, Richard Parker, how big a concession was won here?
RICHARD PARKER: The issue was choice. We demanded consumer choice. They agreed to it. And we think... the commission thought that that remedied the problem. I would add that until yesterday when this merger was announced, there had never been anything other than a house brand Internet service provider on a cable system. This is the first time it ever happened.
GENE KIMMELMAN: Just ask consumers how they feel about having a cable monopoly. Prices have gone up three times faster than inflation. Why? Because it is a monopoly. The moment another wire comes into the community, and very few have, prices on average end up being 20 percent lower. So what we have here is what may be good for AOL-Time Warner because in a competitive market, sure you can make money, but what is good for consumers is they can't make excess profits. That $30 or $40 can't necessarily go up to 60 or 70 or 80 -- and most importantly block out Earthlink, MSN and other potential Internet service providers who want to get higher speed services to customers.
TERENCE SMITH: Is there a promise, Dennis Kneale, in fact that it will not go up but come down?
DENNIS KNEALE: Oh, I think that there is a real possibility the price could come down, but that's going to have nothing to do with what government did. That's going to have do with what the free market will bear and what customers are willing to sign up. If AOL is not signing up enough customers, they'll cut the price, and they'll have to do that, not because of any government edict. The nice thing for consumers here is that what the FTC has done is a big favor for the industry because the industry would have hemmed and hawed for months and months dickering over the terms. And now government has come in and said, come on, let's get going here, so new services will emerge more rapidly and broadband access, high speed access, will probably unfold more rapidly thanks to the FTC's encouragement.
|A non-regulatory solution|
RICHARD PARKER: That was the whole point, in my opinion. The anti-trust laws are for competition. This is a non-regulatory solution, in that all we have done is provided the conditions in which competition can prevail.
DENNIS KNEALE: America Online has been saying for more than a year - America Online has been saying the right thing to do is to open up cable lines and let various Internet service providers come in and sell their services. This is what America Online said to local governments about AT&T when AT&T bought cable lines. America Online has just come back around full circle to do what it said was the right thing to do for business reasons, not even for regulation reasons. The concessions here aren't that great. The thing that really surprises me is that a government agency is now ordering America Online to offer this other kind of high speed service over phone lines called DSL, which stands for Digital Subscriber Line. A government agency is telling a business what kind of business it should offer. That's remarkable to me. They're supposed to offer it even if they lose money. Why don't you let the free market figure out what services should be offered based on the demand that consumers show for what they want.
TERENCE SMITH: Gene Kimmelman.
GENE KIMMELMAN: I think the Federal Trade Commission is trying to get us back to the free market here because what they're saying is --
TERENCE SMITH: Let Gene finish.
GENE KIMMELMAN: America Online was very highly supportive of getting its services out on cable wires for DSL service when they didn't own cable companies. Now that they own a major cable company that serves about 20 percent of all consumers in the country, the danger was they would withdraw their services from a competitor so as to make the cable company the monopoly in this area. All the Federal Trade Commission has done is said keep competing, keep the lines open for both the telephone wire and the cable wire to compete. That's all they've done. Also we're trying to get to the free market, which has government backing of phone lines requiring that any Internet service provider can reach consumers and consumers can reach anyone over the Internet with a phone wire. Now you can call that the heavy hand of government or an edict but what it is is a wide open free market that has enabled thousands of Internet services to be made available to the public. We want to move to that model on cable systems. And the Federal Trade Commission has just helped push AOL-Time Warner along. And I'll also point out while AOL has made a lot of promises over the last few years, they were never willing to have public accountability for the contracts they signed, for who they put on their systems. They just said trust us. As they became larger and larger owning cable systems serving a broad portion of the American public, we didn't think it was appropriate just to trust them. We thought it was appropriate to make them accountable through the government to the American people so that choice is really there.
TERENCE SMITH: Richard Parker, did you get the minimum that you felt had you to get in this deal? Did you get everything you wanted?
|Remedy the anticompetitive problem|
RICHARD PARKER: We got everything we needed to remedy the anticompetitive problem. What we were doing is resolving an antitrust case. There were two outcomes here: One, we could go to court and block it or ask a judge to block it, or two, we could come up with what was necessary to solve the problem. We did the latter.
TERENCE SMITH: Dennis Kneale, I wonder, the issue here is choice. Is there enough choice, or will there be enough choice for the consumer as this shakes itself out?
DENNIS KNEALE: Of course there will. There will be enough choice as market demand justifies and encourages. It will be very little choice if no one wants to order the services at all. I think there will be plenty of choice. I don't think that AOL and Time Warner are going to be unable to pull off some kind of conspiracy that they otherwise would have wanted to pull off. I talked to the chairman of another major cable company, one of the top four players, and he said offering various choices from various providers is the right way to do business. We'll sign up more customers that way and now AOL and Time Warner can go ahead and do that, but I believe they would have done that anyway. It is nice to have those safeguards in place. Fine they are not going to rapaciously run over the land, but I'm not really sure how much it is going to keep America safe from rapacious corporate greed.
TERENCE SMITH: All right. Gene Kimmelman, are there things missing from this agreement that you and the Consumers Union sought?
GENE KIMMELMAN: Yeah, there are. This was a very strong antitrust issue, but there are a lot of other competitive issues. As the chairman of the FTC, Mr. Pitofsky, yesterday pointed out, Time Warner co-owns cable systems with AT&T. Together they serve about half of all consumers in the country. They did not split that ownership. So we're going back to the Federal Communications Commission....
TERENCE SMITH: Which is the next hurdle.
GENE KIMMELMAN: That's exactly right - and asking them to ensure that the two largest cable companies in the country cannot co-own those cable assets and potentially collude. They have a broader statutory authority to do what is in the public interest. It's not of the narrow antitrust standard. We are hopeful they'll take care of that. There are complaints about instant messaging on AOL -- that competitors cannot get their customers linked up with AOL's instant messaging customers. We think there ought to be interoperateability of all instant messaging services, so the FCC can take care of that as well.
TERENCE SMITH: Did you look into that point?
RICHARD PARKER: We looked at both points. With regard to the co-ownership of AT&T, they were not in front of us and we could not impose a remedy. We do however have a provision that AOL cannot enter into an exclusive agreement to be an Internet service provider or an interactive TV provider on the AT&T system. The instant messaging we did look at; we looked at at length but could not find an antitrust merger specific issue there.
TERENCE SMITH: Dennis Kneale finally, what should we look forward to -- more mergers like this?
DENNIS KNEALE: More mergers. You know, there are so few left, it feels like. Yeah. I guess you'll see more consolidation of cable, but it will be second tier, third tier guys and the little tiny guys are all going to be getting together. Prices of cable systems went through the roof. That will probably have to ease before we will see more consolidation. New services will come. All of this stuff is going to happen far more slowly than we ever think. Remember we've been talking about interactive television a whole lot since 1992-93. It is just around the corner. It still ain't here.
TERENCE SMITH: All right. Dennis Kneale, Gene Kimmelman and Richard Parker, thank you all very much.
The NewsHour Media Unit, including this site, is funded by grants from: