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[ AOL Time Warner Execs Back 2001 Growth Targets - WSJ ]
WASHINGTON -- The Federal Communications Commission has conditionally approved the $106 billion merger between America Online Inc. (AOL) and Time Warner Inc. (TWX).
FCC approval was the final regulatory hurdle to the coupling of the world's No. 1 Internet service provider with the world's largest media company. The approval ends a process that began over one year ago, when the two companies announced their deal on Jan. 10.
Key conditions of FCC approval include a requirement that AOL make its popular AOL Instant Messenger service open to exchanging messages with competing services. But the condition would only take effect once AOL begins offering "advanced" instant messaging services.
That represents only a partial victory for AOL's competitors, including Microsoft Corp. (MSFT) and Excite At Home (ATHM), which wanted to mandate interoperability immediately.
The FCC said it would also start a general proceeding that could bar any interactive television service - not just AOL - from blocking content provided by competitors. The Federal Trade Commission has already barred AOL from such discriminatory practices against any competing interactive television services that travel across Time Warner cables.
The FCC also addressed a relationship between the merged company and the nation's largest cable provider, AT&T Corp. (T). AT&T has a 25.5% stake in Time Warner Entertainment, a limited partnership with Time Warner Inc., a stake that the FCC believes AT&T must sell.
Until then, AOL-Time Warner may not enter into any agreements with AT&T that gives an AOL-Time Warner ISP exclusive access to any AT&T cable system. Nor may the new company enter into any agreement with AT&T that affects AT&T's relationship with ISPs not affiliated with AOL-Time Warner.
Both Republican commissioners voted to approve the merger but dissented from all of the conditions. One of them, commissioner Michael Powell, is seen as the likely next chairman under the Bush administration. Neither Powell nor his GOP colleague, Harold Furchtgott-Roth, appeared with the three Democrats to announce the deal's approval.
But current Chairman William Kennard said he was only able to vote for the merger because of the conditions.
"With the merger of AOL and Time Warner, we are seeing the creation of a new platform for communications based on the Internet," he said. "Our challenge is to make sure that consumers get the full benefits of this new world technology without importing the dangers of monopoly and bottlenecks from the old world. We have met this challenge."
Consumers Union, which had fought hard for conditions on the merger, agreed.
"The combined actions of the FCC and FTC (Federal Trade Commission) have transformed a merger that threatened competition into one that could actually expand consumers' choices for high-speed Internet and interactive TV services."
Consumers have also pushed hard to sever the links between AT&T and Time Warner, a position the merger seemed to adopt.
But the conditions were met with dismay by the cable industry as a whole, which opposed a rulemaking on the nascent interactive television industry. The industry has also fought government-enforced access by unaffiliated ISPs to cable systems, and the National Cable Television Association stressed its view that the ISP access conditions "must be viewed as AOL-specific," and not as establishing principles for all cable operators.
The NCTA added that the FCC's plans to consider general rules for interactive television "is totally unwarranted by the facts. It's regrettable that, in order to break an apparent deadlock over merger conditions, the commission decided to take this action."
Powell said in a statement that while there are "serious questions" regarding AOL's dominance of instant messaging, the record in the review didn't support the conditions.
"No competent antitrust authority, to my mind, would conclude that such intervention is necessary, nor do I believe such an analysis would withstand judicial review," said Powell, who served in the Justice Department's antitrust division in the former Bush administration. He called the majority's view that instant messaging is an "essential facility" for nearly all future, real-time Internet communications a "breathtaking prediction and conclusion by a regulatory agency."
The condition, he said, could set a precedent leading to regulation of the Internet, a step the FCC has declined to take to date.
AOL spokeswoman Kathy McKiernan noted that the conditions don't affect the company's current Instant Messenger service, and have no financial impact on the company. "But it is a competitive field, and we will be watching closely on how it matures," she said.
Conditions governing AT&T and open access "are consistent with our mode of operation and our business model," she added.
The deal was initially thought to raise few regulatory issue as a merger of complementary interests. But that proved not to be the case as the Federal Trade Commission, working closely with the FCC, raised numerous questions regarding the deal's effect on the market for high-speed Internet service, on the free flow of competing Internet content on Time Warner's high-speed cable Internet pipelines, and the nascent interactive television services.
The FTC on Dec. 14 addressed these issues by approving the merger subject to what was regarded as a tough set of conditions. But the FTC said another hot-button issue, open instant messaging, wasn't affected by the merger, leaving competitors to lobby the FCC to use its broader "public interest" authority to pry open AOL's system.
But the five-member FCC split over how tough its own conditions should be, slowing the review. In the end, Kennard said the conditions addressed three main areas: high-speed Internet over cable, Instant messaging, and the relationship between AT&T and Time Warner.
The conditions bar AOL-Time Warner from offering advanced Instant Messenger service -- defined as streaming video -- until it has complied with one of three requirements. The company must either show its service is interoperable with those of competitors, or enter into a contract with at least one significant, unaffiliated provider with two others to follow in six months, or show the condition is no longer necessary because of a changing market.
FCC lawyers were reluctant to impose the requirement without clearly linking it to a change brought by the merger: the availability of high-speed cable pipelines capable of supported advanced AIM service.
The FCC's Internet service condition tightens the FTC's order last month. The FCC warned AOL-Time Warner not to interfere with a customer's choice of ISP, or with an ISP's relationship with its customers.
For example, unaffiliated ISPs must be able to display their "first screen" when consumers sign on, rather than AOL's. They must be able to bill subscribers directly, and AOL must not discriminate by degrading performance. Tristani said the order also contains language meant to help local and regional ISPs get access.
In addition to restricting AOL-Time Warner's relationship with AT&T, the FCC also order the company to notify the agency if it increased its stake in Hughes Electronics. Hughes, a unit of General Motors Inc. (GM), owns DirecTV, a direct satellite competitor to cable.
America Online and Time Warner tout the merger as the creation of the "world's first Internet-age media and communications company," capable of global delivery of branded news and entertainment programming across a converging media platform. They say the deal will accelerate the roll-out of high-speed Internet service through Time Warner's cables, and drive growth of electronic commerce and advertising.
AOL as the world's largest ISP serves over 25 million members through America Online and another 2.8 million through CompuServe. In addition to AOL Instant Messenger, it owns leading Internet products such as ICQ, MapQuest and MoviePhone; the AOL.com and Netscape.com portals; Netscape Communicator software; and leading Internet music providers Spinner.com and Winamp.
Time Warner's vast holdings include the nation's second-largest cable system; leading cable networks such as CNN, HBO and Cinemax; magazine franchises such as Time, People and Sports Illustrated; record labels, and film and television studios and libraries such as Warner Brothers Pictures and Castle Rock Entertainment.
Clearing the way for the marriage of two media giants that promises to touch consumers at nearly every turn, the Federal Communications Commission approved the merger of America Online and Time Warner yesterday, creating the nation's biggest media company.The FCC's vote marks the last regulatory hurdle for the $106 billion corporate union, which brings together an octopus of popular brands like America Online's Internet service, CNN, Warner Bros. films, People magazine and the television series "The West Wing."
It also positions the new company to compete in what many analysts believe will be the Internet's future: the convergence of television, high-speed connections and the Web.
"This is a historic moment for consumers everywhere and a tremendous step toward our goal of becoming the world's most respected and valued company," said Steve Case, chairman of the newly named AOL Time Warner, in a statement.
The merger's immediate effect on consumers will be relatively minor, analysts predicted. Among the most noticeable may be an eyeful of America Online advertisements in formerly Time Warner products like Fortune magazine or on cable channel HBO.
"Nothing will change in the foreseeable future as far as I can see," said David Marks, an Internet industry analyst with the Gartner Group, a market research company based in Stamford, Conn. "It's fun to talk about them controlling everything from production to distribution, but it's easier said than done."
In fact, it could be years before AOL Time Warner reaches full maturity. Many of the technologies the combined company intends to dominate are in their infancy, such as interactive television and high-speed Internet access.
Further complicating the matter is an array of limitations imposed on AOL Time Warner by federal regulators. Getting their blessing took nearly a year of intense negotiations that focused on keeping the merger from harming consumers.
"I believe we have found the appropriate balance," said William Kennard, the FCC's chairman, during a news conference last night after his fellow commissioners voted unanimously to approve the merger.
In its decision, the FCC compelled the combined company to make its popular instant online messaging system compatible with a rival through its high-speed cable connection. Also under the agreement, Internet service providers carried on that system will be able to control the start-page that people see when they first log on.
These requirements are in addition to ones the Federal Trade Commission laid down last month. Among the most significant was that AOL Time Warner allow at least three other Internet companies to use its cable lines.
The concessions appear to have mollified the objections of most companies to the merger. Many, like Walt Disney Co., had voiced concern about America Online's dominance, but now appear appeased.
"When this merger was announced a year ago, we were enormously concerned about the possible harm to consumers," said Gene Kimmelman, co-director of the Washington office of Consumers Union. "What could have been a disaster for consumers now holds the potential to promote competition and consumer choice."
Nevertheless, Barry Parr, an Internet industry analyst with IDC, a market research company based in Framingham, Mass., said, "Consolidation in general has not been a friend to consumers." He added that AOL Time Warner may fail to produce some of the benefits it promised to the public and to the corporation itself.
No matter what, the merger creates a colossal company that has no peer in the media industry. It is so big that its annual revenue, nearly $30 billion, rivals the national budget of Switzerland.
America Online, based in Dulles, Va., is the largest Internet service provider with 25 million subscribers and owner of the Netscape Internet browser. Time Warner, based in New York, is the world's largest entertainment company with movies, music, magazines, cable television channels, cable television lines and sports teams.
When their merger was first proposed on Jan. 10, 2000, near the peak of the Internet frenzy, it was valued at $165 billion. But since then, the frenzy has worn off, and the value of the deal has declined with the stock market to $106 billion.
Headquarters: Dulles, Va.
Founded: 1985
Chairman/CEO: Steve Case
Employees: 15,000
FY 2000 revenue: $6.89 billion --
FY 2000 net income: $1.23 billion --
Web site: www.aol.com.
World's largest online service with 25 million subscribers
A leader in the development of interactive television
Most popular platform for electronic-commerce
Leading provider of instant messaging service.
America Online
CompuServe
Netscape
AOL MovieFone
AOL Instant Messenger
Digital City
Spinner
Winamp
Headquarters: New York
Founded: 1990
Chairman/CEO: Gerald Levin
Employees: 70,000
1999 revenue: $27.3 billion
1999 net income: $1.95 billion
Web site: www.timewarner.com.
Owns leading news brands, such as Time Magazine and CNN
Most successful premium TV network - HBO
Powerful global music company.
Cartoon Network
Time
People
Sports Illustrated
Warner Music
Time Warner Cable
Looney Tunes.
Sources: AOL, Time Warner and other resources New York Times News Service
The Associated Press contributed to this report. / E-mail Verne Kopytoff at vkopytoff@sfchronicle.com
NEW YORK -- AOL Time Warner Inc. (AOL) expects to meet its ambitious revenue and cash-flow growth targets during its first full year of operation, Co-Chief Operating Officer Robert Pittman said Friday.
"We're more committed than ever" to the targets, Pittman told Dow Jones Newswires in an interview, a day after Internet service provider America Online Inc. closed its blockbuster acquisition of media giant Time Warner Inc.
Executives from both America Online and Time Warner had previously vowed that the merged entity would post earnings before interest, taxes, depreciation and amortization, or EBITDA, of $11 billion in the company's first full year. That would represent a 30% increase from year-earlier levels, on a pro forma basis.
They also promised to deliver revenue of $40 billion in AOL Time Warner's first year, representing a 12% to 15% annual increase. Co-Chief Operating Officer Richard Parsons also backed the targets in the interview.
Analysts have become increasingly skeptical that the new media and Internet behemoth will be able to meet those targets. Their concerns were largely fueled by Time Warner's warning last month that its fourth-quarter results would be lower than expected due to weak ad revenue and softness in its music and film businesses.
But Pittman suggested softness in the advertising market wouldn't hurt AOL Time Warner too much. "What happens is advertisers pull back on nonessential buys" and concentrate on essential media properties like those owned by AOL Time Warner, he said.
Pittman noted that advertising represents just one portion of AOL Time Warner's overall business. Much of its revenue comes from the tens of millions of paying subscribers to its magazines, cable television and Internet access. "That's a damn strong customer relationship," he said.
Moreover, the company will be able to fill open ad inventory with in-house advertising from areas such as its music and film businesses, Parsons said.
The executives said the conditions imposed on the merged entity by federal regulators won't hurt AOL Time Warner. The company will be required to open its cable television lines to third-party Internet-access providers, and to eventually open advanced versions of AOL's instant-messaging system, for instance.
"We said we were going to go that way as a business matter anyway," Parsons said. "But regulators want to be sure that one or two years from now, no one can point back and say, 'Oh, you took those guys' word for it, you let them move away, and that's contrary to what they said."'
On the other hand, Parsons also said he believed that Federal Communications Commission Chairman William Kennard was "keen" to avoid imposing conditions that would stifle innovation.
Such innovations will become apparent to consumers soon, the executives hinted. Parsons said he expects AOL Time Warner to introduce a new high-speed, or broadband, Internet service this summer. The company also plans upgrades to its instant-messaging service, possibly to allow transmission of video and other services, for example.
Pittman said AOL Time Warner would continue to explore "untethered communications," or providing content and services over wireless devices like cell phones and personal digital assistants.
From Wall Street's perspective, the real test of AOL Time Warner's mettle will be in the numbers. "I think they are looking at, will we indeed deliver $11 billion in EBITDA, and will we have their confidence," Pittman said. "They should hold our feet to the fire."
In recent trading, AOL Time Warner shares fell 97 cents to $46.26, on volume of 22.2 million.
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