Microsoft is reportedly planning to block any potential AT&T Broadband / AOL Time Warner merger.
The Financial Times has reported that Microsoft plans to prevent AOL Time Warner from buying a stake in AT&T Broadband, possibly by providing financial backing for a rival bid. The report follows negotiations between AT&T and various US cable operators, including AOL, following Comcast’s $52.4 billion bid for the unit at the beginning of July.
AT&T rejected the Comcast bid because it felt the price tag was too low and because of problems with Comcast’s shareholding structure. The rejection leaves AOL as one of the most obvious suitors for the company.
A deal would make AOL undisputed leader of the US cable market, creating an operation with 29 million subscribers and 40% of the market. The group would dominate broadband Internet access in the US, adding this to its existing leading portals and huge stable of content. This would also give AOL a major advantage in its dealings with archrival Microsoft, subverting the software giant’s attempts to rule eCommerce through its .NET platform.
However, there are several reasons why an AOL takeover may fail. Complex tax rules mean that a straight takeover would incur a heavy tax liability, whereas Comcast’s merger plan would not. AOL could avoid this by structuring its bid as a merger between its existing cable interests and AT&T Broadband, but it would be left without control of the merged company.
In any case, regulators might take a dim view. FCC guidelines aim to prevent cable operators reaching more than 30% of the market. Given the close scrutiny that the AOL/Time Warner merger provoked, regulatory clearance could require heavy divestments to cut the business’ market share. This would undermine the logic behind the deal.
Microsoft would doubtless oppose an AOL deal if it reached competition hearings. But given Microsoft’s own competition woes, the serious losses incurred by its existing cable ventures, and the strong chance that an AOL bid would fail anyway, it’s too early to talk of Microsoft bidding to keep its rival out.
