The Reason for the AOL-Time Warner Merger? Depends on Who’s Asking

With the apparent scuttling of the WorldCom-Sprint deal, there is muttering about the next megadeal that needs government’s approval: the merger of AOL and Time Warner. Of course, that muttering has been going on for some weeks now as it’s seemed increasingly likely that the government might make this tougher than was first thought. Just the other day AOL CEO Steve Case commented that while the planned linkup may be big, the two companies are “different in character” and “will not be dominating any one segment.” And Time Warner’s chief, Gerald Levin, underlined at a recent shareholders meeting (where shareholders formally offered their approval of the deal) that, “there is really no overlapping business.”

Of course, if the companies were such an oddball pairing, who together would have no more market power than they had separately, then there wouldn’t have been much point in the deal in the first place. But you can expect to hear more of the same from the merger hopefuls between now and July 27, when the Federal Communications Commission will hold a public hearing that will likely include appearances by both Case and Levin: Both honchos will do their level best to explain why the key to the whole Time Warner and AOL arrangement is its total lack of synergy.

When this deal was announced, it was all about synergy, or convergence, or whatever you want to call the advantages that accrue to a conglomerate that controls both a lot of content and the means to distribute it. While the WorldCom-Sprint merger was basically horizontal–there certainly was a good deal of overlapping business there–the AOL-Time Warner merger is mostly vertical, with very little in the way of duplicated business. When the deal was announced–and when shares in both companies started taking some lumps in the days immediately afterward–the story spun by proponents was all about how well these pieces fit together. There was no talk from top AOL or Time Warner executives about how the companies are “different in character” and “will not be dominating any one segment.”

It’s still not clear whether the additional FCC scrutiny is particularly meaningful or is simply the sort of thing that one could expect during a big, complex merger. But the regulatory concerns about this deal are still significant, and they all come down to “vertical” issues–most notably, will content that is not controlled by the company get fair access to the company’s distribution channels? AOL’s handling of the debate over whether to allow non-AOL instant-messaging fans to communicate with their AOL pals without being forced to use AOL technology has not exactly built the company a reputation for openness.

Part of the speculation about the motives of regulators boils down to the armchair-psychologist theory that the government is more likely to go after AOL-Time Warner because it is simply feeling cocky, having smacked around Microsoft, and now having apparently derailed the massive WorldCom deal. It’s hard to know what to make of such speculation. Even regulators are human, so I suppose it’s possible that hubris will be a factor. But it sure won’t help matters for Time Warner to condescend to those regulators with a lot of disingenuous talk about the context of their merger. After all, browsers and operating systems are “different in character,” too.