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A dispute over the number of competing Internet service providers that must be given access to Time Warner’s cable systems is holding up an antitrust agreement between America Online Inc., Time Warner Inc. and the Federal Trade Commission, sources said. The FTC is demanding that AOL open the cable system to more ISPs than the company believes it can technically support, according to sources familiar with the discussions. FTC lawyers are asking that the new ISPs be allowed to offer service much sooner than AOL and Time Warner consider feasible. They are also asking for AOL to let them use the system on terms that AOL and Time Warner consider financially disadvantageous, the sources said. FTC staff lawyers have so far refused to budge, one source said. AOL and Time Warner have countered with a more modest proposal to allow open access to the cable system. “Essentially the fight is over how much, how fast and over what terms,” one source said. Yet sources said the parties will meet this week to try to narrow their differences with the goal of a preliminary agreement by the end of next week. Besides the open-access issue, the agreement would require AOL to sell its stake in the DirecTV Inc. satellite-broadcast system. One source noted that it is in the best interests of the government and the companies to reach a deal. AOL and Time Warner want to close the transaction as quickly as possible, the source said. Every day the transaction is pending places the company at risk. For instance, negative reports over the weekend about the deal caused Time Warner’s stock price to fall $3 at the opening Tuesday. More significantly, the companies cannot start enjoying the benefits of the merger until it is approved, the source said. For the government, a deal is important because it would have great difficulty winning an antitrust challenge, a source said. It would have to prove Time Warner cable would become a bottleneck for broadband services such as interactive television and on-demand movies, the source said. The problem with that contention is the existence of DSL, satellite and wireless services, which offer consumers alternative access to broadband. The government and the companies are short on time. Sources familiar with the situation said FTC staff lawyers are due to recommend to senior commission officials by the middle of this month whether the agency should block the deal or accept it with conditions. The five FTC commissioners are unlikely to decide until early October. “Things are moving forward,” a source said. “We expect a recommendation in approximately two weeks.” As previously reported, the FTC worries that AOL may bar other Internet service providers from offering broadband services over Time Warner cable. Such high-speed connections will be required for consumers to enjoy the next generation of Internet services, such as pay-on-demand movies and music. AOL and Time Warner acknowledged this concern in January when the deal was unveiled. They have signed a non-binding pledge to open the system to competing ISPs. They also announced a pilot program with Juno Online Services Inc. in which the ISP will offer a competing broadband service to some Time Warner cable customers. Lawyers for AOL and Time Warner are working on a draft consent decree modeled after the 1997 agreement the FTC reached in the Time-Warner-Turner Broadcasting merger. The decree would essentially transform AOL’s and Time Warner’s voluntary open-access pledge into a binding agreement. FTC lawyers also want AOL to sell its investment in DirecTV, which uses satellites to offer programming to households. The product competes with Time Warner’s cable assets and could become a vehicle for high-speed Internet access. AOL has appeared willing to sell the investment, which it made before it considered buying a major player in the cable industry. The deal came under intense scrutiny this week after The Washington Post ran stories Monday and Tuesday highlighting previously reported problems with open-access and DirecTV. The Wall Street Journal weighed in similarly Tuesday. Both stories said agency lawyers would recommend the commission block the deal unless AOL addressed both problems. Two sources said the leaks to the papers were part of an FTC effort to pressure AOL and Time Warner into settling on the government’s terms. An FTC spokesman declined comment. In a research note sent Tuesday, Merrill Lynch & Co. analysts Henry Blodget and Kristen Campbell dismissed the recent “noise” that the deal might be in trouble. “We continue to believe the deal is on track and think it is possible that it could close ahead of schedule,” they wrote. The analysts said the FTC and European Commission, which meets this week to discuss the deal, could impose some restrictions such as the sale of DirecTV or open access requirements. “But we do not expect such conditions, if any, to impact the financial performance or strategy of the company,” Blodget and Campbell wrote. Copyright (c)2000 TDD, LLC. All rights reserved.

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