FCC Hearing Has AOL Rivals Licking Their Chops

America Online's (AOL Quote - Cramer on AOL - Stock Picks) peers aren't shy about opposing its linkup with Time Warner (TWX Quote - Cramer on TWX - Stock Picks).

That should ensure plenty of heated words in Washington Thursday, when AOL Chairman Steve Case and Time Warner Chairman Jerry Levin are scheduled to discuss the deal at the Federal Communications Commission, one of the governmental bodies with authority over the merger. Rivals are seeking to extract concessions from the merger partners in areas in which AOL Time Warner could wield enormous power. Media outfits want the company split to keep it from discriminating against their content; others warn AOL could exploit commercial opportunities at the expense of consumer privacy.

Now several big communications and software companies have joined forces in the continuing battle over Internet instant messaging. This heightens the possibility that the FCC will make so-called instant messaging interoperability a condition for merger approval. Rivals say such an order is necessary to prevent AOL from holding a Microsoft- (MSFT Quote - Cramer on MSFT - Stock Picks) like grip on a service they believe will one day be as widespread and essential as email is to today's Internet users. AOL, meanwhile, needs to make sure the deal gets done, as its stock has flagged since it set the merger in early January. A setback surely wouldn't improve its fortunes on that front.

Big Names

AT&T (T Quote - Cramer on T - Stock Picks), Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks), Microsoft and several other companies said Tuesday they had formed a new coalition, called IMUnified, in an attempt to speed up adoption of standards that would enable users of different companies' IM software to communicate with one another.

Talking Heads Draft agenda for FCC AOL-Time Warner hearing

See also www. fcc.gov

1 p.m. Introductory remarks Chairman William E. Kennard; commissioners Susan Ness, Harold Furchtgott-Roth, Michael K. Powell, Gloria Tristani

1:15 Applicants' introductory remarks AOL's Steve Case, Time Warner's Gerald Levin

2 p.m. The merger in context Esther Dyson, EDventure Holdings; Barry Nalebuff, Yale

2:35 Impact on diversity and competition: consumer perspectives Barry Orton, University of Wisconsin; Mark Cooper, Consumer Federation of America; Manuel Mirabal, Hispanic Association on Corporate Responsibility; James Love, Consumer Project on Technology; Cathy Cunningham, city attorney, Irving, Texas; Richard D. Parsons, Time Warner; Barry Schuler, AOL

3:45 Impact on diversity and competition: industry perspectives William F. Reddersen, BellSouth; Preston Padden, Disney; Steven Weed, American Cable Association; Ross Bagully, Tribal Voice; Christopher Melcher, rmi.net; Parsons; Schuler

Companies that have developed instant messaging services that compete with AOL's AOL Instant Messenger and ICQ operations complain that AOL is dragging its feet on interoperability, as the universal communication goal is known, so it can control the standards and market for instant messaging. AOL, meanwhile insists that it's moving at its current pace -- and blocking companies that have rigged ways to have their instant messaging subscribers communicate with AIM users -- in an effort to preserve the safety and privacy of its users.

At least one of AOL's rivals won't have a difficult time getting the ear of the FCC. Ross Bagully, CEO of CMGI (CMGI Quote - Cramer on CMGI - Stock Picks) subsidiary Tribal Voice, is slated to speak at the FCC Thursday as one of several witnesses to follow Case and Levin. Tribal Voice, a vocal critic of AOL on the IM issue, is a backer not only of IMUnified but also of freeIM.org, launched earlier this year to battle AOL on the compatibility front.

Instant messaging is by no means the only issue that AOL and Time Warner competitors are raising in their attempts to extract concessions from the companies as a condition of the merger. Scheduled to testify is Preston Padden, government relations head at Disney (DIS Quote - Cramer on DIS - Stock Picks), which along with NBC on Tuesday formally suggested that the FCC break a merged AOL Time Warner back into two pieces to prevent discrimination against unaffiliated content and interactive TV suppliers on the company's broadband networks. Another executive scheduled to testify is Bill Reddersen, executive vice president for strategic planning at BellSouth (BLS Quote - Cramer on BLS - Stock Picks), which has expressed concern that its own cable systems might not get access to AOL Time Warner programming.

But interoperability could end up being a key issue. Alex Diamandis, vice president of marketing for instant messaging developer Odigo, says AOL's ICQ and AIM services have a 90% share of the IM market, which he estimates as having 130 million to 150 million registered users. (Because IM users often use more than one service, the actual number of people using instant messaging is probably lower.)

Foot-Dragging?

Though AOL says it's moving toward interoperability, competitors say it's simply stalling as long as it can to hold onto its share of IM users. "The longer you wait, the stronger your registrations are," says Diamandis. "And it's certainly easier to get people to join your service as opposed to switch from another service. ... If forced to interoperate, the longer they wait, the better."

Off the Top AOL shares still below premerger levels

Source: BigCharts

AOL denies the stalling charge. "It's completely untrue," says AOL spokeswoman Tricia Primrose. "The coalition is putting more emphasis on speed than on consumer safety," Primrose adds. "Our top priority remains protecting consumers' privacy and security as instant messaging standards are developed."

Is AOL protecting customers, or is it stalling? Hard to tell. Consider a puzzle that Odigo's Diamandis points out: AOL has blocked its company's software from interoperating with AOL Instant Messenger. But he says AOL has made no effort at all to block Odigo's instant messaging software from working with ICQ's. Primrose says the company considers AIM and ICQ "two very different products." But by deadline time, she hadn't called back to explain the two services' different treatment of Odigo.

Well, maybe the FCC can figure out what's going on.