Eisner seeks to sabotage AOL/Time mega-deal

Walt Disney boss fears New Economy media merger will shut out rival content providers from the internet

Law makers, lobbyists and communications specialists in Washington have found themselves distracted by a dark, moody video designed to send a chill down their spines. With disturbing images and ominous music, it is the closest thing to a horror movie they are likely to see in their line of work.

Law makers, lobbyists and communications specialists in Washington have found themselves distracted by a dark, moody video designed to send a chill down their spines. With disturbing images and ominous music, it is the closest thing to a horror movie they are likely to see in their line of work.

The distraction, however, is serious. The 10-minute video, mundanely titled Consumer Choice in the Broadband Marketplace of Tomorrow, is no less than an attempt by the Walt Disney Company to scupper the proposed mega-merger between its archrival, Time Warner, and America Online.

The video argues that the new company could muscle its way to a position of abusive monopoly on the internet and in future communications delivery systems, threatening to put Disney and other media conglomerates out of business altogether.

It accuses AOL of creating a "walled garden" ensuring that its 23 million customers are exposed only to its own services. It accuses Time Warner of perpetrating "notorious exclusionary acts" to keep competitors off its turf. Together, the video says, the two companies could simply "force feed" consumers a diet of their own products and create "the mother of all bottlenecks".

The video is just the start. Today the Federal Communications Commission convenes hearings to look into the Time Warner-AOL deal and consider government regulation to guarantee fair competition. The Federal Trade Commission is already conducting a non-public investigation of its own, and the European Commission has called for further scrutiny before allowing the merger.

Six months after their stunning merger announcement, the largest in corporate history and one that would create the world's largest multi-media company, Time Warner and AOL have cause to worry that the marriage will be postponed, cancelled, or at least hedged about by conditions, rules and prenuptial agreements.

The party most energetically seeking to establish just cause or impediment is undoubtedly Disney, which after a year of prickly negotiations with Time Warner over the distribution of its own television channels on cable networks has decided to declare out-and-out war.

In a raging 85-page filing lodged with the FCC on Tuesday, Disney says that if the merger goes ahead the new company should immediately be split in two to separate its content and distribution networks - a proposal that looks a lot less preposterous since the similar ruling against Microsoft.

"Disney's concern is that the combination of AOL and Time Warner will significantly augment each company's respective bottleneck monopolies over the distribution of news, information and entertainment content," the filing argues, "thereby increasing the combined company's ability and incentive to engage in exclusionary behaviour at multiple levels of broadband content and distribution."

An area of particular concern is a technology known as Interactive Television - broadband delivery of Net services through TV cables - which Disney says could be worth a total of $25bn (£17bn) by 2005.

It is perhaps unsurprising that Disney, with other Time Warner rivals such as the NBC network, which lodged a filing of its own with the FCC this week, would raise such arguments. Although Disney has an internet portal, Infoseek, and a streamlined Net operation known as the Go Network, it cannot begin to match AOL's online consumer power and faces a risk - even without the merger - of being dwarfed by the New Economy.

The worry dogging Time Warner and AOL is that Disney appears to be winning at least part of the argument. The crux of the matter is open access - in other words, ensuring that control of the delivery of internet and other media services does not lead to control of the content.

Having been an ardent proponent of open access before the merger, AOL's chief executive, Steve Case, rapidly changed his tune following January's announcement, arguing that such access "would come through the marketplace, as opposed to the government having to get involved".

Any inclination that regulators might have had to trust Time Warner/AOL on this point was tested in May, when a simmering row over cable TV access caused Time Warner to throw ABC and other Disney-owned channels off its networks in several US cities during so-called "sweeps week" - the key benchmark period when advertising rates are set according to programme popularity.

To add insult to injury, a message on cable screens read "Disney has taken ABC away from you". Disney, naturally, cried foul and ended up winning on just about every front.

Service was restored, with a profuse apology, after 36 hours, and the dispute over how many Disney channels to include on Time Warner's cable menu, and at what rate, was resolved almost entirely in Disney's favour.

Time Warner, meanwhile, opened the way to just the kind of regulatory scrutiny it hoped to avoid. Orrin Hatch, chairman of the Senate Judiciary Committee, wrote to the Federal Trade Commission arguing that the merger "could give the combined company an ability to leverage its market power, to the detriment of consumers, into all areas of e-commerce".

Time Warner and AOL are fighting back as best they can. Steve Case said the two-way split proposal was "silly and absurd" and argued that Disney's concerns about access had already been aired and settled with federal regulators. Time Warner spokesman Ed Adler said: "Our commitment to content diversity is crystal clear and couldn't be stronger.''

Observers are betting, however, that some kind of regulatory framework will be introduced. Already the concerns raised on both sides of the Atlantic have put off any talk of finalising a deal until November at the earliest.

What happens today before the FCC could be crucial in determining further intervention. And it is not impossible that the biggest merger in history might not take place at all.