It all sounds so genteel, so cooperative. But in reality the two companies are locked together in a complex and controversial corporate embrace–one that trustbusters and communications regulators are carefully examining as they decide whether to approve the AOL Time Warner merger in the next few weeks. At the heart of the concern are interlocking corporate relations between AT&T and Time Warner, the No. 1 and No. 2 cable companies. As a result of a series of acquisitions, AT&T has ended up owning a chunk of Time Warner, and the two companies share ownership in cable systems and popular programming networks. Trustbusters have examined whether AT&T and Time Warner might be in a position to use those massive holdings to discriminate against rivals. Regulators, consumer advocates and others are wary that the two would provide favorable distribution, promotional and price breaks to their own affiliates, while denying access to competitors. In theory, critics argue, AT&T and AOL Time Warner could jointly cordon off large parts of the New Economy for themselves, creating “walled gardens” of digital media, data, e-commerce and communications offerings that they control. “We can’t let AT&T and AOL Time Warner have a lock on the new digital medium,” declares Jeff Chester, head of the Center for Media Education. “They are the giant digital superpowers.”
Already regulators have sought to bust up some of AT&T’s and Time Warner’s links. This summer the Federal Trade Commission and Federal Communications Commission ordered AT&T to shed interests it shares with Time Warner. Among the choices: a 25 percent stake in Time Warner Entertainment, which owns Time Warner’s cable-TV operations, HBO and Warner Bros. studios. Now consumer activists want the government to go further. They’re insisting that regulators order the two media giants to sever their ties once and for all as a condition of approving Time Warner’s marriage to AOL. AT&T and Time Warner wouldn’t comment for this article. In the past, both have insisted they have no intentions of monopolizing the media world and that their overlapping interests are harmless. The two companies say that the government has already restricted their relationship so much that it would be difficult for them to behave in an anticompetitive manner.
Nonetheless, to meet regulators’ requirements, AT&T has been trying to sell back to Time Warner some of its prized entertainment assets. The conventional wisdom in media circles is that a deal will eventually be struck. Here’s where it gets interesting. AT&T is trying to sell the 25 percent Time Warner Entertainment stake. Because Time Warner owns the other 75 percent of the unit and controls it completely, it is the only logical buyer. But AT&T and Time Warner are billions of dollars apart in valuing the assets. And Time Warner, under no official order to divest, has little incentive to close the gap. As a result, negotiations have all but stalled.
In fact, relations between AT&T and Time Warner are increasingly strained these days. Last week AT&T’s beleaguered CEO, Michael Armstrong, made a trip to Washington to schmooze with legislators. But according to Washington lobbyists, Armstrong left the impression on Capitol Hill that AT&T, like many others, also now suspects that a Time Warner married to AOL might be too powerful. Meanwhile, AOL Time Warner is aware that AT&T has quietly tried to stir up trouble in Washington, insiders say. Time Warner believes AT&T is trying to gain lucrative advantages as it seeks to comply with regulatory divestiture orders. Divesting at the right price might also boost its sagging fortunes. Its core phone business is eroding, along with its stock.
AT&T’s and Time Warner’s connections are a byproduct of the media industry’s extraordinary consolidation in the last several years. Since 1998 AT&T and Time Warner have spent a combined $300 billion or so, including the proposed AOL Time Warner merger, on major deals to advance their New Economy strategies. And that doesn’t include the billions each has spent to make its cable operations Internet-ready broadband systems. AT&T emerged as the top player in the cable industry by acquiring cable giants TCI and MediaOne.
But that’s where it gets complicated. With each acquisition, AT&T inherited chunks of Time Warner. TCI’s Liberty Media unit owned a 9 percent Time Warner stake. (Liberty, TCI’s programming unit, owned significant chunks of the Discovery Channel, Starz Encore, QVC, USA, BET and others.) MediaOne, meanwhile, came with the 25 percent chunk of Time Warner Entertainment. In the late 1990s, Time Warner acquired Turner Broadcasting (CNN, Cartoon Network, TBS). Then last January AOL, the world’s largest Internet company, agreed to acquire Time Warner. The result of all the dealmaking: two separately controlled, but intimately linked, vertically integrated powerhouses. In theory, each is capable of supplying and distributing its own content over TV and the Internet via its own broadband cable or wired and wireless phones.
For its part, Washington has sought to safeguard against abuses. In reviewing the companies’ acquisitions, cross ownership has been allowed, but with restrictions on shareholder votes and board seats that usually accompany a big stake. AT&T ended up with a chunk of Roadrunner (also partially owned by AOL Time Warner). But when it acquired MediaOne, which co-owned rival broadband provider Excite@Home, the Justice Department objected, forcing AT&T to divest its Roadrunner holdings. Now, with the AOL Time Warner deal in front of regulators, critics are calling even more loudly for the two companies’ bonds to be broken.
For now, however, fears of an abusive AT&T-AOL Time Warner alliance seem exaggerated. Despite their ties, the behemoths have failed to agree on any of the far-reaching collaborative moves crucial to each company’s core strategies. AT&T’s plan to expand its local telephone business using AOL Time Warner broadband cable has gone nowhere. Similarly, AOL has sought unsuccessfully to arrange broadband Web connections for its subscribers over AT&T cable systems. Those major initiatives seem unlikely until Time Warner and AT&T manage to appease regulators. That necessity has squeezed AT&T, which for now is the only one required by the Feds to divest joint holdings.
Those factors were part of the backdrop for AT&T boss Armstrong’s lobbying trip last week to Capitol Hill. No one at AT&T dares to openly discuss its strained relations with AOL Time Warner. And it couldn’t be determined just how ex-plicitly Armstrong presented AT&T’s unflattering judgment of Time Warner in Washington. He is lobbying ostensibly for Congress to relax regulation capping the size of cable-TV holdings. But Washington sources say AT&T is hoping the fuss Armstrong is making in Washington will move the FTC to force AOL Time Warner to divest some of the overlapping assets–just as AT&T itself has been forced to do. With both companies then under the gun, AT&T might strike a better deal in restructuring its Time Warner link. Yet despite the strains in their relationship and mounting pressure from regulators, AT&T and AOL Time Warner are likely to be linked in major business dealings in the future. As the two hulks of the coming broadband revolution, they will only find it harder to stay out of each other’s business. But if regulators and consumer advocates succeed, they will also even meet as competitors.
