EC Conditions on Time Warner/AOL Deal Expected

The European Commission insists the outcome isn't certain, but most onlookers now expect it to approve the $US183 billion merger of America Online and Time Warner at the expense of Warner Music's planned $US20 billion joint venture with EMI Group PLC.

The two deals -- whose total value depends on fluctuating stock prices -- are inextricably linked, said a national competition regulator close to the Commission investigation. "If the Commission's problems with the EMI joint venture are resolved either way, then that removes the major impediment in the way of the Time Warner/AOL merger," said the regulator, requesting anonymity.

A Commission source said that a negative decision on the EMI/Warner Music joint venture is likely, and confirmed that this removes the main obstacle to the AOL/Time Warner deal.

"This is still speculation," said Commission spokeswoman Amelia Torres. "There can be no decision until the commissioners have voted. (Competition Commissioner Mario) Monti hasn't even decided which way to vote yet," she said.

"The main problem with the AOL/Time Warner merger is music distribution, so by sacrificing the EMI joint venture, I could see those concerns disappearing," said Gerwin Van Gerven, a competition lawyer at Brussels law firm Linklaters & Alliance. The firm doesn't have a professional interest in either deal.

Vertical integration is an issue in all content formats, not just music, Van Gerven said. "I don't know whether dropping EMI will get rid of all the dominant vertical links established by the merger. No doubt the Commission will demand some additional conditions before approving the deal," he said.

The most likely concessions the Commission will demand include the breakup of AOL's 50-50 joint venture with German media group Bertelsmann AG. Bertelsmann owns BMG, one of Europe's largest music companies. Similarly, AOL could be forced to part company with French media and utilities group Vivendi SA, a partner in AOL France.

Van Gerven said the Commission will likely call for Time Warner not to discriminate against non-AOL affiliated ISPs (Internet service providers) for the provision of online music for a set period of time -- possibly five years after the deal is signed. AOL has already pledged that for three years it will not force content providers wanting to sign a deal with AOL in the U.S. to make the same commitment to AOL Europe.

The Commission has until Oct. 18 to decide on the EMI/Warner Music joint venture and until Oct. 24 to rule on the merger. Neither case is on the agenda for this Wednesday's meeting of commissioners, so the decisions will be taken on Oct. 11 or 18.

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