America Online-CompuServe deal attracts scrutiny in several areas

The Justice Department announced last week that it would review America Online's plan to acquire 2.6 million CompuServe Corp. subscribers in a three-way, $1.2 billion deal with WorldCom.

If approved, the deal would eliminate one of America Online's biggest competitors and result in 60 percent of Americans gaining access from home to the Internet through America Online.


The government must review the deal by law to ensure that it will not result in higher prices or a monopoly.

Considering the loss of competition and the increase in subscribers and service, is there something in the deal that the department should be looking at?


John Lewin

Partner and antitrust attorney, Venable, Baetjer & Howard, Baltimore

The first thing they are going to look at is what impact will the combination of the CompuServe and America Online subscribers have on existing competition. The party most affected will be the Microsoft Network, which has been the third largest operating system. Others will be affected, but the Justice Department will need to do market analysis to see who it will be.

One of the issues they will look at is advertising because this combination makes advertising with America Online that much more attractive. While it represents only 15 percent of revenue, it's likely something that will increase. Will it dry up advertising for Microsoft Network and other competitors?

Is service likely to be impacted? They said they will hold prices to the same amount and treat customers like nothing has happened, but it will most likely change. There is not much that the Justice Department can do to affect what price they will charge.

Now, 60 percent of users will gain access through America Online. Is that a monopoly power? Sixty percent is not thought to be a market power, but it's getting close. They have to look at who else is in the marketplace.

It is unlikely that this deal would have gotten through 20 years ago because it's the combination of the two largest competitors in a highly concentrated market.

Ulric Weil


Senior technology analyst, Friedman, Billings, Ramsey & Co., Arlington, Va.

The Justice Department, in situations of this type, will look at the relevant market.

Step 1 is defining the relavant market. That is a key step. If it's narrowly defined with just online services, then American Online has a major service.

If it's defined to include media markets, then they get a much wider universe -- you get a very broad definition of the market. Then America Online, even after acquiring CompuServe, is just a moderate factor in the market.

America Online's position is that they are operating in a market broader than just online service access. This will take a while to go back and forth, and then a determination will be made on that score.

Step 2. Is America Online acting in a predatory fashion in a narrow market to drive smaller competitors out of the market?


The bottom line is that the legal beagles have worked on these cases before. At the end of the day, the Justice Department will approve the deal, but the end of the day may be six months down the line.

Barry Rosen

Chairman and CEO, Gordon, Feinblatt, Rothman, Hoffberger & Hollander, Baltimore

Generally, in regard to mergers, the Justice Department is concerned that if two competing companies with large market ** shares combine, the combination may result in less competition. LTC Right now, America Online and CompuServe are two competitors, so each price affects the other. When a merger takes out a significant competitor, the Justice Department wants to make sure there are still a significant number of competitors to price fairly.

The Justice Department may also be interested in whether prices will go down because the combined companies might actually be working more efficiently.

The way Justice looks at this is they'll take a group of companies, and rank them by their market share. They then apply a complicated formula to see how concentrated the market is after the merger compared to before.


Justice will want to see if the market is so concentrated that consumers will be hurt because they will have to buy the service at higher prices.

Peter Krasilovsky

Vice president and analyst, Arlen Communications, Bethesda

Essentially, there would be a strong antitrust argument if the customers had less choices and were forced to pay more money in terms of Web access providers.

There is certainly not less choice and no price gouging in this highly competitive environment.

I don't think there will be problems after the review. It's always good that the antitrust people are watching, but I don't think there is a problem here.


Pub Date: 9/14/97