Does AOL Have a Plan B?

The merger of America Online (NYSE: AOL) and Time Warner (NYSE: TWX) has generated a lot of press since it was announced almost nine months ago, but there's been little hard news so far. The deal requires approval from the Federal Communications Commission (FCC) and the Federal Trade Commission (FTC) in the U.S., and also from the European Commission, which represents the 15-country European Union. No definitive word has come from any of those bodies, but approval is not a sure thing.

Does AOL have a Plan B if merger approval is denied?

In the U.S., the main stumbling blocks to the merger's approval now revolve around the companies' commitment to let other Internet access providers offer services on their cable systems. The merger itself is partly the result of AOL's need to offer its services over cable. This is, of course, the "open access" issue for which AOL actively campaigned prior to the Time Warner merger agreement.

Although it's questionable how big a role gaining access to Time Warner's cable system played in AOL's urge to merge, the company has to factor its need to secure cable distribution into any fallback plan. That plan also needs to account for how Time Warner's cable system covers only part of the country, and has a potential "footprint" (the area in which it offers service) roughly one-third the size of its nearest competitor, AT&T (NYSE: T). Given this, AOL couldn't adequately address its cable distribution needs even if the deal were approved unconditionally tomorrow.

The world is the footprint
While Time Warner's cable footprint may be geographically limited, the merger will also bring AOL an enormous content portfolio that demands distribution as broad and deep as possible. Recall the pre-merger "AOL Anywhere" strategy, which Jeff Fischer discusses in his research report on AOL. With or without Time Warner, AOL wants to ensure that its products reach the world at large and that customers feel its presence throughout their everyday lives. For AOL, the world is the footprint.

AT&T has ambitions, too. It has been a keen observer of the AOL-Time Warner regulatory approval process, because of its equity positions in certain Time Warner properties. These notably included the Road Runner cable Internet service provider, which AT&T inherited through its recent acquisition of MediaOne, and which is the main rival to the AT&T-controlled Excite@Home (Nasdaq: ATHM).

In a nutshell, the government's wariness of ties between AOL-Time Warner and AT&T led to some of the conditions placed on the MediaOne merger, including some divestment options, which AT&T is contesting.

AOL-Time Warner and AT&T are not only negotiating with the regulators, but also with each other, either directly or, in effect, indirectly through the regulators. Through the various concessions they make or withhold, and the new inducements each can offer, Plan B scenarios for the AOL-Time Warner merger start taking shape.

Scenarios
It's possible that the companies could reach a comprehensive, FCC-approved open-access agreement if the government relaxed AT&T's current MediaOne divestment obligations and AOL-Time Warner made appropriate concessions and perhaps related side deals directly with AT&T. The question would be how Excite@Home and Road Runner might figure into such a deal. There are a lot of chips and hands that can be played.

And, what if the merger is denied altogether?

Through a partnership, AOL and Time Warner could get many -- though not all -- of the benefits they expect from the merger. That's a possibility if the deal falls through. In that situation, AT&T and a non-merged Time Warner could reach an agreement that, as above, leads to a comprehensive open-access structure. Such a deal could also give AOL, as a media company, what it perhaps values above all else: Massive and essentially unfettered distribution of its properties and those of its partners.

In this scenario, we see each of the companies doing what it does best. In that regard, one can imagine that Excite@Home would be split up as part of such a deal -- with AT&T keeping the original @Home part, and the Excite Network becoming one of Time Warner's media properties.

Is Plan B Plan A?
Looking at this from another, even more speculative point of view (one that admittedly finds us deep into conspiracy territory): Is it possible that, under the right circumstances, AOL would prefer that the deal not happen?

Rather than getting approval and merging with Time Warner, could AOL's goal be to use the idea and the mere possibility of the merger -- and thus the approval process itself -- as a way of "lobbying by other means" for its preferred business environment?

After all, while individual business deals might be important -- and surely this is an important deal -- even more important is the environment in which business is done. Does that environment benefit or hurt a company, enable or inhibit opportunity? That's what open access is really about.

The change in AOL's approach to open access after announcing the Time Warner deal was read as a change in its "commitment" to open access. It appeared obvious, since AT&T and Excite@Home had spent the previous year portraying open access as contrary to the interests of cable Internet companies. No wonder regulators and others remain skeptical.

That analysis, though, mistakes a lobbying campaign and its methods for an approach to doing business. Lobbying campaigns are based on momentary circumstances. Business strategies, even on the Internet, are less variable and more rooted in an analysis of the business itself.

America Online's "commitment" to an open access operating model is based on its understanding of how the online medium works, and how it can be best structured. That may or may not be in anyone else's interest. As we've written before, the evidence points to AOL's ability to thrive in an open environment.

The irony may be that even if the AOL-Time Warner merger is not approved, AOL will likely get much of what it wants simply by having brought the issue forward, forcing the debate, waiting for the broad consensus to find itself in agreement.

All of which raises the question: Is it possible that AOL's Plan B is really its Plan A? Let us know your opinion in this poll:

Is AOL only after open access to broadband?

1. Yes, they agreed to merge solely in order to open access.
   
2. Open access was part of it, but the content was just as important.
   
3. No, open access was a non-issue.
   
4. No, AOL will fight against open access.
   
5. Yes and No. They'll provoke open access rules, then cancel the merger.