Friday, January 12, 2001
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Posted on: Friday, January 12, 2001

AOL-Time Warner merger gets final federal clearance

Huge challenges ahead for No. 1 media and Internet company

Associated Press

WASHINGTON — The $106 billion merger of America Online and Time Warner cleared its final government hurdle yesterday, paving the way for the creation of the nation’s largest media empire.

Merger at a glance

Offer: $106 billion in stock and $18 billion in assumed debt.

Terms: Time Warner shareholders will receive 1.5 shares of the new company, called AOL Time Warner, for each of their shares; AOL shareholders will get one share of AOL Time Warner for each of their shares, and will own 55 percent of the combined company.

Annual revenue: AOL sales were about $6.87 billion in 2000; Time Warner sales were about $27.3 billion in 1999.

Corporate strategy: AOL’s more than 26 million subscribers would provide an audience for Time Warner’s television programs, movies and publications; AOL would be able to tap Time Warner’s fast cable-Internet lines.

Management: AOL chairman and chief executive Steve Case will be chairman; Gerald Levin, Time Warner’s chairman and CEO, will be chief executive.

The Federal Communications Commission’s approval lets the two companies forge ahead to complete a deal announced a year ago and originally valued at $165 billion.

The new business, to be called AOL Time Warner, combines the largest U.S. Internet provider — with 26 million subscribers — and a media titan that owns such popular entertainment titles as CNN, HBO, Sports Illustrated and Warner Bros.

The FCC approved the deal after requiring the companies to take modest steps to open AOL’s widespread instant messaging service to rival providers over Time Warner’s cable lines. That issue caused protracted debate at the FCC, even though approval long has been expected.

William Kennard, the FCC chairman, said the marriage of old and new media presented the agency with unusual challenges. The commission sought to safeguard consumer choice for new Internet services, but at the same time did not want to regulate too heavily the still emerging technologies, he said.

"I believe that we have found the appropriate balance," he said.

Antitrust regulators at the Federal Trade Commission cleared the deal in December, with broad restrictions to preserve consumer choice as the merged company gains a foothold in the markets for such services as high-speed Internet access.

Time Warner Chairman Gerald Levin will be chief executive of the new business, while AOL chairman and CEO Steve Case will be chairman.

Case was born and raised in Hawaii and is a graduate of Punahou School.

Conditions of merger

Here are some conditions that the Federal Communications Commission attached to the merger of America Online and Time Warner:

Internet access: The FCC built on conditions already imposed by antitrust regulators requiring Time Warner to offer on its high-speed cable lines Internet providers other than AOL. That means subscribers to Time Warner’s superfast Web service could select an Internet provider besides AOL, such as EarthLink or Juno.

The FCC determined that consumers should be allowed to see their selected Internet provider as their first screen when they log on to their computers. That prohibits AOL from making its service the first screen and requiring consumers to open another link to get to their preferred provider.

The commission also required that AOL rivals carried on Time Warner’s high-speed lines be allowed to directly bill their customers.

Instant messaging: The FCC required the combined company to make AOL’s popular instant messaging service work with competing services. But the condition does not apply to the real-time text messages that millions of consumers currently use. Instead, it would only apply once AOL Time Warner begins offering the next generation of instant messaging services over Time Warner’s high-speed cable lines. This could include, for example, consumers being able to video conference each other or send streaming video clips instantly.

Before AOL Time Warner can offer such advanced services, it must either implement an industrywide standard to make different services communicate with each other or enter contracts to show its system can operate with at least three rivals within six months.

This would mean that consumers using advanced instant messaging services by an AOL rival could communicate with an AOL user, similar to the way consumers now on different systems can exchange e-mail.

Relationship with AT&T: AOL Time Warner is prohibited from entering certain types of special arrangements with AT&T, the nation’s top cable company. The FCC addressed a major concern of consumer groups last month when it required AT&T to shed its 25 percent interest in Time Warner Entertainment, a subsidiary that owns most of Time Warner’s cable systems. The commission reasserted yesterday that it had severed that link between the two big cable players.

Interactive television: While not imposing any specific conditions on the companies, the FCC said it will look at whether it should intervene in the market for the new service, which allows consumers to access the Internet from their televisions. For example, the commission will study whether steps are needed to ensure cable companies will not steer viewers away from interactive programming offered by rivals.

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