overnment regulators are finishing work on a list of conditions they would like to impose on America Online and Time Warner for the $165 billion merger of the companies to be approved, people involved in the talks between the government and the companies say.
Most important, they say, the government wants to force the combined company, to be known as AOL Time Warner, to open its cable television systems to other companies that want to offer high-speed Internet services.
The government, AOL's competitors and some consumer groups have worried that without such restrictions, the combination of the America Online service, with 24 million members, and Time Warner's cable systems, available in 20 percent of the country's homes, could dominate the evolution of the Internet.
Another issue apparently of concern to the government are the cross-holdings between the combined company and AT&T, the No. 1 cable operator. AT&T owns 25 percent of Time Warner Entertainment, a holding company for some of Time Warner's cable and production assets.
AT&T and Time Warner jointly own the Road Runner high-speed Internet service, and there are other joint ventures. The government is considering pressing the companies to undo at least some of these arrangements or otherwise ensure that the two companies do not deal with each other on more favorable terms than with other companies, people involved in the negotiations said.
While some of these proposed restrictions may be objectionable to America Online, none of them is likely to be so severe as to block the completion of the deal, industry executives and consumer advocates agreed. "There was never any question the deal would go through," said Jeff Chester, executive director for the Center for Media Education, one of four groups that filed objections to the merger. "The only question is what safeguards will be in place."
After reports about the potential regulatory hurdles appeared in The Washington Post and The Wall Street Journal, America Online's stock fell yesterday by 44 cents, to $57.06. Time Warner fell $2.88, to $81.50.
To a large degree, the safeguards being proposed are formal versions of policies that America Online has already proposed. AOL has said it will open its cable systems to competing Internet providers, although it does not want government restrictions as to the terms of such deals.
And AOL and Time Warner have been looking at ways of approaching their dealings with AT&T — not only their current ventures, but also prospects like offering AT&T telephone service to Time Warner Cable subscribers and America Online members, and making the Excite@Home high-speed Internet service, which is controlled by AT&T, available on Time Warner's cable systems.
"We are convinced we will successfully address the issues raised in our review," said Kathy McKiernan, an AOL spokeswoman. "And we are on track to close the deal in the fall."
Analysts also played down the potential restrictions.
"It is still possible that the regulators will impose some conditions, but we do not expect such conditions, if any, to impact the financial performance or strategy of the company," Henry Blodget, an analyst with Merrill Lynch, wrote in a note to clients.
Mr. Chester said, however, that if AOL did agree to these conditions, it would represent a significant victory for the consumer groups.
"Will this prevent AOL Time Warner from becoming the most powerful company in digital media? No," he said. "And are they opposed to allowing other voices to be heard? No. But we would create a policy that will give other voices the right to be heard."
The merger is being reviewed by two federal agencies, the Federal Trade Commission and the Federal Communications Commission. People involved in the review say that the F.T.C. is taking the lead in shaping the government's response so far. Lawyers in the Bureau of Competition at the F.T.C. are shaping their recommendations for limits on the merger, but they have not yet submitted them to Richard G. Parker, the director of the bureau, who in turn must submit his recommendations to the full commission and its chairman, Robert Pitofsky.
Negotiations between the commission staff and the two companies are accelerating, people involved in the talks say. And there could be an agreement rather than a more confrontational government action.
The merger is also receiving a close review by the European Commission, which is considering it alongside Time Warner's agreement to buy the EMI Group, a record company. The commission is especially concerned with the resulting company's control over music in a digital age. Executives involved in negotiations with the European officials say that AOL and Time Warner may have to make significant changes in the deal to buy EMI.
Competitors and consumer groups have asked regulators to impose additional restrictions on AOL and Time Warner, although none of these issues have been discussed at length in the negotiations between the companies and the government, people involved in the talks said.
Some want AOL to sell its 5 percent stake in the Hughes Electronics division of General Motors which runs the DirecTV satellite service, a potent competitor to cable. Some are concerned over AOL's instant-messaging system, which does not allow access by many rival messaging systems. And others want to make sure that the open-access rules also apply to interactive television services.
"If open access applies to a Web site, it should also apply to a cable channel," said Preston Padden, a lobbyist for Walt Disney, which has been vocal in its opposition to the AOL-Time Warner deal. He said the company was concerned that Disney's properties, like the ESPN cable sports networks, might be at a disadvantage in offering interactive services to AOL Time Warner's brands, like the CNNSI network.
Ms. McKiernan said AOL was committed to equal access for interactive programming services as well. But Mr. Padden said such commitments were not as good as government mandates.
"There is a big difference between an honest, nondiscriminatory, government-mandated open access on the one hand and a private deal you've negotiated when you have all the leverage," he said.
