In the face of government pressure, Time Warner agreed Monday to allow Earthlink to offer high-speed Internet access over its cable television systems if the government approves Time Warner's proposed merger with America Online.
The terms of the deal were not disclosed, but they have been provided to the government.
AOL and Time Warner have said all along that they will allow rivals on their systems, but the government has been pressing to see the terms in order to determine whether America Online's own Internet service will have an unfair advantage.
The two companies also said that the merger deal now may not close until early in 2001. Ever since they announced their deal on Jan. 10 the companies have said they expect to complete it this fall.
But the arrangement has received far more scrutiny in Washington than the perfunctory review the companies expected, largely prompted by the opposition of rival media companies, especially the Walt Disney Co.
While Earthlink, the No. 2 Internet service provider after AOL, has not formally opposed the deal, it has said that it wants to make sure that the merged company, which will be known as AOL Time Warner, will allow it to offer high-speed access on equal terms as AOL's own service.
Garry Betty, Earthlink's chief executive, said Monday that the pact worked out over the weekend answered the company's concerns.
"Time Warner in good faith has come forward with an arrangement that we think can be a model for others," he said. "We have no objections to their deal going forward."
A Time Warner spokesman said the company was in negotiations with other providers of Internet service.
Preston Padden, an executive vice president of Disney, said the agreement "looks like a giant step in the right direction," although he said that Disney had not seen the details of the pact. In particular, he said, Disney is pleased that the deal allows Earthlink to offer certain forms of interactive television. Disney has long feared that AOL Time Warner may block it from offering interactive services linked to its ABC and ESPN television networks.
An Earthlink spokesman said that the arrangement incorporated a range of devices beyond personal computers, including television sets. Earthlink, however, does not now offer any television services.
AOL and Time Warner said that they had extended by two weeks the Nov. 30 deadline for review of the merger by the Federal Trade Commission. An FTC official said, however, the agency still hoped to finish its review by Nov. 30, although no meeting date had been set.
The official added, however, that more issues remained to be settled besides the cable-access question addressed by the Earthlink deal. But it is unclear which issues will be most significant as various members of the five-person commission have different concerns, the official said. Three members must vote to approve the merger.
In addition, the deal must be approved by the Federal Communications Commission, although this agency is not expected to be as tough as the FTC. European regulators and the shareholders of each company have already approved the merger.
Until the AOL Time Warner deal was announced, the nation's big cable operators had each granted exclusive access to one high-speed Internet provider. Time Warner was linked to a service called Road Runner, which it controlled. AT&T and most of the other major cable companies backed Excite(at)Home. AOL was the most vocal of many Internet companies demanding that cable operators allow competing services.
After the AOL and Time Warner merger deal, the companies said they would allow competition on Time Warner's cable systems. But rivals complained that the terms they offered in initial discussions were unusually harsh. For example, the companies demanded that other companies not price high speed access lower than AOL Time Warner's own service.
Betty of Earthlink said Time Warner had eliminated many of those restrictions.
Under the proposed agreement, he said, Earthlink can buy high speed access from Time Warner and resell it to Earthlink customers at any price it chooses on its own bill. In reality, he said that Earthlink's service will likely carry a similar price to the $40 a month that Time Warner now charges for Road Runner.
Conversely, Time Warner cable will offer Earthlink's service along with AOL's to its subscribers, at any price it chooses, adding the service to the cable bill. This is much like its current practice of promoting Viacom's Showtime movie network as well as its own Home Box Office.
Earthlink did agree to share with Time Warner a percentage of revenue it received from advertising and to give Time Warner space for content and ads on its home page. This is no different from the practice in which cable networks allow local systems to sell a certain number of commercials each hour, Betty said.
Earthlink, he added, will have a higher gross margin in dollars, after paying Time Warner for the telecommunication services, than it does with its current service. The company now has a gross margin of about $14 a month on each slower dial-up Internet account. With a $40 per month high-speed service, that implies that it would most likely pay Time Warner less than $26 a month. That is a better deal than the $30 that Time Warner had demanded in earlier negotiations. Excite(at)Home, by contrast, pays its cable operators about $26 a month.
Betty declined to confirm the $26 figure or to specify further the financial details of the arrangement, but he said that Earthlink was guaranteed that its terms would be no worse than those offered to AOL's service or any other Internet service.
Earthlink also is guaranteed that it will be able to offer Internet service as soon or sooner on Time Warner's systems than any other company, including America Online.