Privacy, Business and Law

Time Warner’s (NYSE: TWX) recently announced partnership with EarthLink (NASDAQ: ELNK) to offer broadband cable access to the second-largest ISP’s subscribers is the latest attempt by Time Warner and AOL (NYSE: AOL) to overcome regulatory hurdles threatening the pending merger between the two media giants. And although the three companies will be heavily impacted by the review of the Federal Trade Commission later this month, the scope of the outcome far eclipses the three companies involved.

While the proposed merger has proved challenging for the media giants, its completion may boost digital entertainment companies that are languishing due to the absence of the large-scale availability of broadband Internet. The last two quarters have pummeled the small-cap technology sector, particularly content-driven digital media companies. Their situation is more precarious than most other technology stocks, as their success is dependent not only upon demand in a down market, but also the increased availability of broadband channels by which digital content may be delivered to consumers.

If the FTC and the Federal Communications Commission accept the plan to add EarthLink subscribers to Time Warner’s cable systems and approve the merger, we could expect broader access to high-speed Internet connections over the Time Warner cable network with AOL, EarthLink, and possibly other competing ISPs down the road. Perhaps more importantly, these partnerships reinforce the new paradigm of open access, which some analysts believe the cable industry is increasingly adopting as a preemptive strike against regulatory action. Furthermore, it is reasonable to believe that other cable operators will follow suit by opening their own networks to unaffiliated ISPs to evade regulatory concerns.

This could bring about the long-awaited demand for digital media content provided by such companies as ACTV, Inc. (NASDAQ: IATV), Princeton Video Image, Inc.(NASDAQ: PVII) and Dynamic Digital Depth, Inc. (CDNX: DDE), three companies covered by SmallCaps Online research analysts. And this demand may come much sooner than analysts have heretofore predicted. However, the biggest questions for these companies remain: How will digital media content be adopted via broadband cable providers, and which small-cap digital media companies will benefit?

The answer is partnerships. Partnerships are crucial to the survival of these digital media companies as partnerships most validate these early-stage technologies. An ISP (such as AOL) brings the content created by these companies to the consumer, and broadband channels infinitely enhance this experience. Small digital media companies depend upon alliances with the bigger players in the broadband game to provide consumers access to their technologies.

Accordingly, ACTV has partnered with AT&T Broadband, OpenTV (NASDAQ and AEX: OPTV), Motorola (NYSE: MOT), Liberty Digital Inc. (NASDAQ: LDIG) and Liberty Livewire Corporation (NASDAQ: LWIRA), all of whom are clamoring for an edge in the digital television space. Princeton Video has partnered with Engage Inc. (NASDAQ: ENGA) and RealNetworks, Inc. (NASDAQ: RNTW) to insert its iPoint technology, which offers interactive and individualized virtual advertising and enhancements for consumers, into broadcast and streaming video. Dynamic Digital Depth has integrated its OpticBOOM 3D Plug-in into Apple’s QuickTime 5 Internet software for 3D viewing over the Internet. These are all examples of how digital entertainment companies are using partnerships to bring their proprietary content to the marketplace.

The best hope for these companies is for broader acceptance of their technologies with the possibility of being bought by bigger players. And with increasing access to broadband channels, ISPs will find escalating demand for content. If the authorities accept the Time Warner-EarthLink partnership as a valid remedy to regulatory concerns and the AOL-Time Warner merger is completed, it could make cable broadband access a reality for many of AOL’s 25 million subscribers and EarthLink’s 4.6 million subscribers as well as become the model for open access in the industry. The clear winners are consumers who desire broadband access—and the small digital media companies with compelling content that can rise above the competition.