By overlooking how AOL's content is independent of its ISP, the Federal Trade Commission left unacknowledged fully half of what it was claiming to regulate. To call this oversight by the FTC a loophole doesn't begin to do it justice: It creates an opening big enough to drive an entire industry through.
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Behind the legalese of the Dec. 14 decision, the FTC wanted to ensure that a full range of content and services by rival Internet service providers (ISPs) were available over Time Warner's cable systems, and that this was done without discrimination and in a way that increased competition in the market for high-speed Internet access. To these ends, the Commission put in place a set of cascading conditions, each provision triggering the next.
The centerpiece of the FTC's consent decree is the "open access" rule, requiring AOL Time Warner to put number-two ISP EarthLink (Nasdaq: ELNK) on its cable systems before making AOL or another affiliated ISP available. Then, following AOL's availability, the company must arrange within 90 days to make two more unaffiliated ISPs available. Two additional conditions prevent AOL Time Warner from interfering with another ISP's content, and require it to offer high-speed Internet access over phone lines in areas where its affiliated cable ISPs are available -- thus forcing the company to compete with itself.
AOL's competitors have generally praised the FTC's action, but there is shareholder concern that the order is unfair unless similar conditions are applied industry-wide. In view of the FTC's intentions, however, the order makes basic sense. It ensures that AOL faces competition on its own turf, with EarthLink up front and at least two others behind. And while AOL and Time Warner might ideally prefer to remain unregulated, they did willingly accept the Commission's terms.
Taken at face value, the FTC's conditions don't look like too big a deal. But what do they look like beyond face value?
The catch: Defining the AOL service
The FTC's order is carefully constructed. After defining 45 different terms, it proceeds to bind AOL Time Warner to detailed conditions, even requiring a monthly report detailing compliance, and appointing an independent "Monitor Trustee" to keep things kosher. For all its failsafe intricacy, however, the things overlooked by the order have left the watchdog with a greatly diminished bite.
As defined in the consent order, the conditions for making AOL available apply only in its capacity as a "cable broadband ISP service." That is not, however, the only way the service can be operated, and it's here where the FTC gets undone by its own definitions.
The order doesn't address how the AOL service also operates under the FTC's own definition of "content." Nor does it account for how the service's content and its ISP are essentially independent of each other; how, for example, the heavily discounted Bring Your Own Access (BYOA) price plan has for years made all AOL content and features as accessible through unaffiliated ISPs, broadband included, as they are through AOL's branded ISP.
Throughout the order, AOL is considered only as an "ISP service" and an "affiliated cable broadband ISP." Not once does the order refer to AOL's content, even though the Commission's first goal was to ensure the availability of competing content.
By totally overlooking how AOL's content, like virtually all online content, is independent of access, the FTC leaves unacknowledged and undefined -- and therefore untouched -- fully half of what it was claiming to regulate. To call this oversight by the FTC a loophole doesn't begin to do it justice -- it creates an opening big enough to drive an entire industry through.
Orders and assumptions
On the one hand, the FTC's consent decree spells out conditions AOL Time Warner must meet both before and after it makes the AOL service available over its cable lines. But the order doesn't actually require that the service be made available -- and counterintuitive as it may be, the company is free to not do so.
The consent order is built on the assumption that AOL Time Warner will need to get AOL "on the cable" -- conventional wisdom says that's the main reason for the merger itself. For their part, AOL and Time Warner were happy to let the FTC assume.
The fact is, however, AOL doesn't need to be made available as an ISP -- the BYOA plan makes this plain. Similarly, as a content service, AOL doesn't need to be made available on, or offered over, any particular ISP. Like most content services, AOL is accessible to anyone who wants it, over any ISP. Because the FTC's order does not line up with how things actually work, its restrictive impact on the company will be minimal.
Expanding AOL's operations as an access-independent content service further positions it outside the consent order's limited definitions, and gives the company greater control over how and when the open access provision gets triggered. And although an agreement with Juno (Nasdaq: JWEB), as well as a year's-worth of executive assurances, suggest the company will voluntarily contract with additional ISPs, it could also postpone indefinitely the broader opening of its cable pipes.
The company is unlikely to simply violate the FTC's order. But that order, as we've seen, leaves much unaddressed. In the end, the FTC restricted what AOL Time Warner is allowed to do without adequately accounting for what the company's assets enable it to do, clearly a recipe for unintended consequences.
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