FCC Approves AOL Time Warner Merger

(January 12, 2001) The FCC approved the merger of AOL and Time Warner with conditions regarding open access to broadband cable Internet access and interoperability of advanced instant messaging services.

The FCC has released its own summary [PDF] of its Order approving the merger, a press release, and statements by each of the five Commissioners. It has not released the most important document -- the Order itself.

The merger approval Order provides that the merged entity, AOL Time Warner (AOL), shall not restrict the ability of any current or prospective ISP customers to select and initiate service from any unaffiliated ISP which, pursuant to a contract with AOL, has made its service available over AOL's cable facilities.

It also provides that AOL must permit each ISP to have a direct billing arrangement with those high-speed Internet access subscribers to whom the ISP sells service.

It also provides that AOL's instant messaging (IM) services must interoperate with competing IM providers before it can offer videoconferencing and other streaming video over IM.

Finally, the Order provides that the FCC's Cable Services Bureau will have continuing oversight authority over the merged company.

This FCC proceeding is nominally a license transfer proceeding; the parties applied for radios licenses held by Time Warner to be transferred to the merged entity. However, the proceeding is in the nature of an antitrust merger review, redundant of the review already completed by the Federal Trade Commission (FTC), an agency that has statutory authority to conduct antitrust merger reviews. Moreover, the antitrust analysis conducted by the FCC concerned Internet operations, not the radio licenses.

The decision was expected. The FCC almost never rejects license transfer requests. Rather, it often withholds its approval of license transfers until it extracts the concessions from the parties that it seeks. The numerous concessions in this matter mostly regulate the Internet operations of AOL Time Warner for which the FCC does not issue licenses: instant messaging (IM), interactive TV, and broadband Internet access over cable facilities.

Commissioner Gloria Tristani wrote in her statement that she would have taken an even more regulatory approach. She stated that "AOL's dominant instant messaging platform should be interoperable", and that she had "advocated for even more forceful conditions aimed at achieving interoperability".

Commissioner Furchtgott-Roth wrote in his dissent that the FCC has no legal authority to conduct antitrust merger reviews. Hence, he approved of the merger, but dissented from the imposition of conditions. He wrote: "Because the proposed transfer of radio licenses from Time Warner to the new, combined entity does not raise any compliance issues under any relevant statutory provisions or our numerous regulations, I find the transfer clearly to be in the public interest. I therefore concur in the grant of the license transfer applications. I cannot subscribe to any of the other aspects of this Order, however."

Commissioner Michael Powell, who is rumored to be President Elect George Bush's likely choice to be the next FCC Chairman, wrote the most detailed and reasoned opinion. He stated that "the record and the anticompetitive theory did not support mandating interoperability" of instant messaging.

Commissioner Susan Ness wrote in a brief comment, "You've Got Approval!"

Eartlink, a large ISP that competes with AOL and lobbied the FCC to impose conditions upon AOL, commented on the Order. "EarthLink is pleased," said VP for Law and Public Policy Dave Baker. He stated that "We now look to the FCC in its pending Notice of Proposed Rulemaking regarding high-speed Internet access to extend this choice to customers of all cable systems throughout the country."

On October 12, 2000, the FCC released a Notice of Inquiry titled "Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities." The FCC announced a rulemaking on interactive TV. It stated: "The Commission announced that it will initiate a proceeding to seek comment on interactive television services."

The National Cable TV Association (NCTA) sought to limit the scope of the Order. "The FCC's conditions must be viewed as AOL-specific; its 24 million U.S. Internet customers comprise nearly half of the domestic Internet market. The ruling did not establish principles that can or should apply to all cable operators, none of whom serve more than two percent of Internet users in the U.S."

The NCTA added in its prepared statement that "We strongly disagree with the FCC's announcement of a rulemaking on interactive television. To commence a rulemaking -- one that could bind hundreds of companies that have nothing to do with this merger -- is totally unwarranted by the facts. Interactive television has yet to take form as a business. It's regrettable that, in order to break an apparent deadlock over merger conditions, the Commission decided to take this action. As the Commission gains more information about interactive TV, we are confident it will find there is no basis for regulation in this area."

The Association for Competitive Technology (ACT) criticized the FCC. "ACT is pleased that the FCC has approved the AOL/Time Warner merger," said President Jonathan Zuck. "However, I am disappointed that the FCC chose to include forced access provisions and conditions on AOL's instant messaging that could impair the development of new technologies and deployment of broadband. 

“Forced access lobbyists were again successful in duping a majority of Commissioners. Forced access is wrong on principle, and its practical impact will be to delay and discourage investment in cable broadband upgrades. In the end consumers will be the losers."

"Finally, it’s ironic that AOL  joined the Department of Justice in arguing that it was illegal for Microsoft to add features (like a browser) to Windows, while at the same time, AOL complains that the FCC’s conditions will prohibit AOL from adding features to its market-leading instant messaging service," said Zuck.

Steve Case, Chairman of AOL Time Warner, called the FCC approval "a historic moment". Jerry Levin, CEO of AOL Time Warner said the merger approval "gives us the resources and expertise to strengthen and expand the unique journalistic heritage that is at the core of our company."