AOL, Time Warner Plan ISP Deals

by Alec Klein

Wednesday, November 15, 2000

America Online Inc. and Time Warner Inc. are moving to strike deals giving some of their biggest Internet rivals access to cable television lines in an attempt to win government approval of their merger, according to sources familiar with the negotiations.

In recent days, Time Warner and AOL, the world's dominant Internet service provider, have stepped up talks with one-time nemesis EarthLink Inc., the nation's second-largest ISP, sources said. AOL and Time Warner also are trying to put the finishing touches on a proposed contract with Juno Online Services Inc., the third-largest ISP in the country, Juno's chief executive confirmed yesterday in an interview.

Both deals would give the AOL competitors access to Time Warner's extensive cable television network for Internet service.

The Federal Trade Commission last week gave Dulles-based AOL and Time Warner of New York up to three weeks to satisfy its concerns about competition in the marketplace, or else the government likely will go to court to block the $183 billion deal.

Some at the FTC want the companies to sign a cable-access deal with a competitor before the merger is approved, sources have said. By doing so, federal officials could review the contract to make sure the terms are fair and nondiscriminatory.

Under one scenario, the FTC would require that the companies offer terms in any deal that are at least as favorable as those in their initial contract with an ISP. Such a benchmark would free the federal agency from having to closely monitor the companies after the merger is approved. The two sides have discussed a settlement in which the combined company would sign one competing ISP in each of Time Warner's cable markets and eventually open up the lines to two more unaffiliated competitors.

Time Warner spokesman Edward Adler declined to comment. AOL officials declined comment as well.

In July, Time Warner announced that it had a letter of intent that would allow Juno to offer its online service over Time Warner's cable lines. For months, negotiations moved slowly, but now a 30-to-40-page contract is close to being signed, said Juno's chief executive, Charles E. Ardai.

Ardai declined to discuss the specifics of the agreement with Time Warner, but he said that "in rough outline" the deal is similar to Juno's contracts with telecommunications vendors that provide Internet service over telephone lines. Juno pays the vendors, such as WorldCom Inc., fees for the use of their networks, based on the amount of time Juno subscribers spend online. In the case of Time Warner, the fee would not be based on user time, but on the number of users on the cable line, he said.

Ardai also indicated that the deal would require revenue sharing that would be based in part on whether the customer is signed up by Juno, or Time Warner.

New York-based Juno gets about 60 percent of its revenue from subscription fees and the rest from advertising and other e-commerce fees. Juno, which generated about $30 million in revenue in its third quarter, said it had 3.7 million active subscribers as of Sept. 30., of which 2.95 million get access for free. About 750,000 subscribers pay for Juno's premium online service, which costs about $10 a month.

The Juno chief, however, said some issues remain to be resolved, including whether Time Warner will offer more favorable financial terms to its own Internet service after the merger is completed.

"Will they use their position of power to give their own house [Internet] service an unfair competitive advantage not only over Juno but over others?" Ardai said.

He said another concern is how Time Warner will require Juno to connect to its cable network. "Will Time Warner say in order to participate, you have to put hardware in 4,000 or 10,000 locations, which would be prohibitively expensive," he said. "That could interfere with the open-access offer being a real offer."

Juno is slated to participate in Time Warner's open-access trial run in Columbus, Ohio. The test, which would connect nonaffiliated ISPs to Time Warner's network, is expected to take place in the next 30 days, sources said.

Meanwhile, EarthLink officials declined to comment on their negotiations. But sources said the terms being offered are better than previous proposals offered recently by Time Warner.

The negotiations represent a reversal from September when EarthLink accused Time Warner of offering terms so onerous it called into question AOL and Time Warner's commitment to open access. Atlanta-based EarthLink has about 4.6 million online subscribers, about one-sixth the size of AOL.

Time Warner had offered some ISPs access to its cable lines but only if Time Warner received 75 percent of their revenue from all subscriptions and 25 percent of their revenue from other sources, including e-commerce transactions.

AOL and Time Warner have also pursued a cable-access deal with Denver-based RMI.Net, officials of the regional ISP confirmed yesterday.

"We have had some informal conversations with them," said RMI spokesman Jeremy Bronson, but he added that they have not engaged in "formal negotiations."

RMI, which has more than 100,000 subscribers, is set to participate with Juno in Time Warner's Ohio trial. "The next step from there will be to look at the business terms," Bronson said.

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