EU to Object to AOL-Time Warner Merger

European regulators have reached a preliminary conclusion that America Online Inc.’s proposed acquisition of Time Warner Inc. would create a dominant company that could hurt competition, according to a document reviewed by Reuters.

European regulators have reached a preliminary conclusion that America Online Inc.’s proposed acquisition of Time Warner Inc. would create a dominant company that could hurt competition, according to a document reviewed by Reuters.

The European Commission has drafted a 45-page statement of objections that outlines the regulators’ concerns about the mega-merger. The document could be the opening salvo in negotiations to prevent the new entity from discriminating against rivals.

The EU has preliminarily determined that the merger, “would create a dominant position in the markets for online music delivery, music software, Internet dial-up access, broadband Internet access and integrated broadband content as a result of which effective competition would be significantly impeded in the common market,” the document said.

AOL and Time Warner officials will meet with European Commission’s competition department in a closed-door meeting Wednesday and Thursday in an effort to persuade the regulators that their objections are unfounded.

The EU objections could also spell trouble for the two companies. In the past few years American competition agencies have coordinated closely with the Europeans, often reaching similar or complementary conclusions.

In addition, the European regulators raised similar concerns about competition in the music industry as it considers the proposed joint venture between Time Warner’s music operations and EMI Group Plc (EMI.L), according to a second statement of objections reviewed by Reuters Friday.

Among the EU’s biggest concerns with the AOL-Time Warner deal, now worth an estimated $132 billion, was the massive concentration of content the new company would have, ranging from publications and music to films and retail outlets.

“The more content AOL acquires and the bigger its community of users, the less reasons for a subscriber to abandon AOL’s walled garden and the more reasons for potential Internet users to join AOL,” the EU statement said.

In the merging companies’ defense, they have pledged not to discriminate against competing content providers or Internet services and have signed a memorandum of understanding promising to provide competitors access to Time Warner’s cable systems.

At next week’s meeting, AOL, Time Warner plan to go to great lengths to persuade regulators that concerns are unnecessary with Time Warner President Dick Parsons and Barry Schuler, AOL’s head of interactive services, attending.

“We look forward to meeting with the European Commission and are confident we’ll satisfy them that the AOL Time Warner merger poses no competitive problems in Europe,” said AOL spokeswoman Tricia Primrose.

One independent analyst said that, while the EU’s objections are noteworthy, there are conditions and commitments that are enforceable by regulators and can mitigate many of the anti-competitive concerns raised.

“The questions in the antitrust mind is do they want to police it, do they want that obligation, and do they think they can police it adequately,” said Scott Cleland, an analyst at the Precursor Group.

Given the EU’s statement of objections, skeptics seemed to have an impact with regulators who have been deluged with information and concerns about discrimination.

The Walt Disney Co. (NYSE:DIS – news) and BellSouth Corp. (NYSE:BLS – news) , have complained that AOL Time Warner could put its content before competitors, give sweetheart deals to affiliated partners and give priority to the transmission of their own content.

“AOL could refuse to distribute third parties’ film content or threaten to refuse to distribute in order to negotiate the most advantageous commercial terms,” the EU said, according to the document.

The EU said AOL Time Warner also could steer users to affiliated content, advertisements and give preferential placement to its own content while degrading third party content and slowing transmission speed, among other things.

Plus, AOL’s access to the vast media empire of Time Warner would be in addition to having EMI’s music library and Bertelsmann’s publishing arm at its disposal, which raised concerns among the European regulators, especially as new technology emerges and people turn to the Internet for music.

For example, the EU said AOL’s instant messaging function could allow users to share audio files, form chat rooms or develop loyalty clubs and incentives to bring in new users, giving the company a significant edge over competitors who do not have similar unfettered access to content.

“The combination of Time Warner’s content with AOL’s distribution network gives rise to a snowball/network effect: more content attracts more subscribers, more subscribers attracts more content and so on,” the EU statement said.

Although, AOL has little broadband service in Europe, which may work in the merging companies’ favor when they plead their case next week overseas.

The EMI joint venture deal would give Time Warner and, ultimately AOL, a dominant position in recorded music, the licensing of music rights for on-line delivery and performance and all music software to listen to music, the EU said.

The EU said the companies believe it would be 10 years or more before on-line becomes a mass market. On-line music would have no “significant impact on the market behavior” of the companies “in the physical market within the foreseeable future.”

Both decisions are expected to be announced by the EU Oct. 4. However, the EU has until Oct. 18 to rule on the Warner Music/EMI joint venture and six days longer to give its verdict on AOL/Time Warner.

Author: Jeremy Pelofsky

News Service: Reuters


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