EN BANC HEARING ON AMERICAN ONLINE, INC., AND TIME WARNER, INC. APPLICATIONS FOR TRANSFER OF CONTROL CS DOCKET NO. 00-30 Pages: 1 through 202 Place: Washington, DC Date: July 27, 2000 EN BANC HEARING ON AMERICAN ONLINE, INC., AND TIME WARNER, INC. APPLICATIONS FOR TRANSFER OF CONTROL CS DOCKET NO. 00-30 FCC 445 12th Street, S.W. Washington, D.C. Thursday, July 27, 2000 The parties met, pursuant to notice, at 1:09 p.m. APPEARANCES: COMMISSION Chairman William E. Kennard Commissioner Susan Ness Commissioner Harold Furchtgott-Roth Commissioner Michael K. Powell Commissioner Gloria Tristani PANEL Mr. Steve Case, Chairman and CEO, America Online, Inc. Mr. Gerald Levin, Chairman and CEO, Time Warner, Inc. Esther Dyson, Chairman, EDventure Holdings Barry Nelabuff, Professor, Yale University Barry Orton, Professor, University of Wisconsin Mark Cooper, Director of Research, Consumer Federation of America Manuel Mirabal, Chair, Hispanic Association on Corporate Responsibility and Chair, National Hispanic Leadership Agenda James Love, Director, Consumer Project on Technology Cathy Cunningham, City Attorney, Irving, Texas Richard D. Parsons, President, Time Warner, Inc. Barry Schuler, President, AOL Interactive Services Group William F. Reddersen, Executive Vice President, BellSouth Corporation Preston Padden, Executive Vice President, Disney/ABC Steven Weed, Vice-Chairman, American Cable Association Ross Bagully, CEO, Tribal Voice, Inc. Christopher Melcher, Vice President and General Counsel, RMI.NET AUDIENCE Ms. Nancy Block, Executive Director, National Assocation of the Deaf Mr. Barry Steinhorn, Attorney, American Civil Liberties Union Mr. Jeff Shester, Consumer Group Advocate P R O C E E D I N G S (1:09 p.m.) CHAIRMAN KENNARD: Good afternoon and welcome to this en banc hearing on the proposed merger between AOL and Time Warner. I'm very pleased to see you all here this afternoon, and we're very much looking forward to hearing the presentations of all of our distinguished panelists today. I want to thank all of them for taking the time to appear before us today on this very important matter. I think more than any other potential acquisition or consolidation in recent memory, the proposed merger of these two companies, AOL and Time Warner, has really captured national attention. And there's good reason for this, because ultimately, this merger could ordain the essential nature of America's broadband services. There are a lot of important questions that we're seeking answers for here today. Will the merger deliver on promises, including accelerated broadband deployment, more innovative services and continued commitment to multiple broadband platforms? Or will it, instead, impair the competitive, consumer-driven evolution of these technologies and stymie growth in new markets such as interactive television and instant messaging? I very much look forward to listening to all of the panelists today and hearing the answers to these important questions. Before we do that, I'd like to take just a moment to discuss my perspective on reviewing mergers of this kind. We are here today because Congress has mandated that this Commission investigate whether approval of transactions like this one are in the public interest. As in all such cases, we have a statutory duty to verify whether this merger would violate either the implementation or enforcement of the Communications Act in our rules and, most importantly, whether it might interfere with the progress towards any of our statutory objectives as we try to bring more competition and more services to the American public. It is the burden of the merging parties to persuade us that the merger is in the public interest and will yield clear public interest benefits. I wanted to say a brief word about the issue of cable access. Some people call it open access, other people call it forced access. I will just call it cable access. I believe that the promise of the Internet is in its remarkable openness, and I hope that this merger would only expand on this openness. I'm very concerned about this issue of access to the cable broadband platform, so much so that I will ask my colleagues shortly to open a separate proceeding on this particular issue. But I very much want to hear about that issue in the context of this particular transaction today. But I want to emphasize that this discussion on cable access should be a debate about means and not ends. I think everybody agrees that the broadband platform should be an open platform. So this is a question of how we get there. Whether we get there through regulation and government intervention or whether there are market forces that will drive to an open platform. Finally, I want to note that this is a public proceeding, and since my tenure here at the Commission, I have worked very, very hard to make sure that the debate over transactions like this is open and transparent and in full public view. I believe it's imperative that the public get this chance to view our decisionmaking process, the kind of questions that we ask and to get all the details and implications of this particular transaction and to voice their own hopes and concerns about it. Well, I look forward to today's proceedings, and I trust that all of the parties involved will do their best to assist us at the FCC in doing our job to make sure that the American consumer is well served. Commissioner Ness? COMMISSIONER NESS: Thank you very much. We're on the threshold of an extraordinary era. Today's hearing provides the Commission with an invaluable opportunity to better comprehend the rapidly converging communications marketplace and the effect of these changes on the American public. Mergers such as the one we will discuss today have the potential of fundamentally reshaping the communications landscape. Public attention has been brought to this merger due to a couple of factors. First, it's the largest merger before this Commission. Indeed, one of the largest mergers in history. This combination is significant in its scale. But the size of the transaction, while historic, need not itself lead to any intervention by the Commission. Big is not necessarily bad, unless it leads to anticompetitive behavior harmful to industry or consumers. Also, commenters have raised a plethora of intriguing topics related to the dynamic technologies and services provided by the merging parties. These range from more traditional communications policy issues, such as cable carriage of broadcast signals and access to vertically integrated video programming providers, to relatively new issues such as interactive television and the inter-operability of instant messaging. I believe our biggest challenge today is to maintain a disciplined focus as we digest the issues before us. Given a marketplace in fundamental transition, we must exercise our jurisdiction and authority with great caution. To that end, just as in any other transaction before us, we must ask the following questions: Will the proposed transaction violate the Communications law and regulations, impair the Commission's ability to implement the Act or interfere with the objections -- objectives, rather, of statutes, over which Congress gave us stewardship? Also, will the proposed transaction yield tangible and specific pubic interest benefits and will such benefits outweigh harms, if any, that are posed by the transaction? A number of commenters have alleged that there are potential harms from the merger that will frustrate the Commission's ability to fulfil its statutory obligations. Among other things, some have identified potential harms relating to control of conduits, control of content and applications, and the web of interrelationships between providers or these infrastructures and services. Each of these potential harms must be examined through the prism of our core communications policies, such as fostering competition among multiple broadband platforms and video providers, deployment of advanced services to all Americans, diversity of content, and product and service innovation. And in each instance, we must ask ourselves whether the potential harms are caused by or exacerbated by the merger of these parties. An issue does not implicate the fundamental concerns of the Commission, no matter how timely or interesting it might be, or is not merger-specific should not affect our decision whether to grant, condition or deny the merger application. So the purpose of this hearing, like the other en banc hearings we have held in the past several years, is to hear directly from the parties and to provide an immediate opportunity for others to respond. The decisions we render should be informed by the broadest possible understanding of the markets and the consumer interests at stake. So I look forward to a very vigorous debate today, responsive to the issues by the parties and responsive to the issues of the American public. And finally, whatever we decide to do in this proceeding, we should do so expeditiously. We do not serve the public interest by prolonging the merger review process unnecessarily, thereby casting a pallor of uncertainty over an entire industry. Thus, I'd urge us to complete our deliberations in a thoughtful but punctual manner. Thank you very much. CHAIRMAN KENNARD: Thank you, Commissioner Ness. Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. The parties before us today have submitted license transfer applications to the Commission. Unlike tens of thousands of other license transfer applications that this agency reviews each year, this one has been singled out for heightened scrutiny and now, for the first time ever, a public en banc hearing. I cannot support the Commission's review of the merging parties beyond their license transfers, for three reasons. First, although the Commission purports to review the merger of AOL and Time Warner, it is in fact -- it in fact does not have the statutory authority to do so. Second, despite the unprecedented public hearing, the Commission's process lacks transparency. And third, today's hearing serves no purpose other than to provide a forum for criticism of the merger and for the parties in turn to plead for this Commission's approval. As I have stated before, the FCC does not possess statutory authority under the Communications Act to review the mergers or acquisitions of communications companies. Rather, the licensing provisions of the Act require the Commission to review applications for license transfers. Specifically, the Act merely directs the FCC to determine whether the transfer of licenses serves the public interest, convenience and necessity. For tens of thousands of license transfers annually, that review is perfunctory. Nothing in the Act grants the Commission jurisdiction to approve or disapprove mergers that consequently involve the transfer of licenses. To be sure, the transfer of licenses is an important part of any merger, but it is simply not the same thing. A merger is a much larger and more complicated set of events than the transfer of FCC permits. It includes, to name but a few, the passage of legal title for many assets, corporate restructuring, stock swaps and the consolidation of corporate headquarters and personnel. Clearly, then, asking whether a particular license transfer would serve the public interest, convenience and necessity entails a significantly more limited focus than contemplating the industrywide effects of a merger between the transferee and the transferor. Our inquiry should be limited to whether the proposed transferee has and will comply with applicable Commission regulations. Our inquiry should not consider, for example, how the combination of the two companies might affect other competitors in the industry. That is the responsibility of the federal antitrust agencies, the Department of Justice and the Federal Trade Commission. Yet, as with past prominent companies who have filed for license transfers as a consequence of a merger, this Commission has used the highly visible nature of the parties here today as an excuse to expand the agency's jurisdiction to include merger review. The Commission seems to believe that any matter or practice that occurs as a result of the merger is within its jurisdiction. While many seem to accept this theory without much question, its logic leads to absurd results. Surely not even the staunchest advocate of the Commission's authority would claim power to review AOL Time Warner's plans for new corporate headquarters at Columbus Circle, but this event is as important -- is an important part of the merger and is no more related to the use of the radio licenses at issue as the other issues that the Commission seems intent on reviewing. At least I have not heard anyone draw a principled distinction among aspects of the merger if this is the subject of review, not the license transfers. That would avoid this sort of ridiculous outcome. The Commission's review of license transfers and, in conjunction, its unauthorized review of mergers, lacks transparency and consistency. The Commission annually approves thousands of license transfers without any scrutiny or comment while others receive minimal review, and a select few are subjected to intense regulatory scrutiny. Today, unfortunately for AOL and Time Warner, they are the first applicants required to expend time and money preparing for a public hearing before the full Commission. This hearing illustrates the highly disparate level of review given to applicants that arise under identical statutory provisions. This is problematic, because merging parties have no way of anticipating the scale of FCC review that will apply to them. Regulated entities have little basis for knowing ex ante, how their applications will be treated, either procedurally or substantively. The Commission's review of license transfers should not be arbitrary and discriminatory but, rather, uniform and predictably -- predictable. Finally, I would like to emphasize that today's hearing is an entirely novel and unprecedented approach to the review of license transfers. As far as I can tell, there is no justification for this event other than the fact that AOL and Time Warner are large and highly visible companies in the communications industry. In all proceedings, the Commission notifies the public and receives written comments. This proceeding has been no different. We have received abundant comments from the public, including from most of the witness' today. And this proceeding has dragged on for six months, far too long. Mr. Chairman, you could end this at our next public meeting next week. You can invoke Section 5.D of the Communications Act, with the objective of rendering the final decision within three months -- it would only be three months late -- from the date of filing in all original application renewal and transfer cases. This hearing does not add to our knowledge. It is a public spectacle. I hope that the witnesses and their comments today will answer the following four questions: What specific authority does this Commission have to consider the issues you raise? Second, if the answer is the public interest standard under Title III, how can this Commission apply a different public interest standard for AOL and Time Warner than it applies for any of the tens of thousands of other identical license transfer cases? Third, if your issue is not the public interest standard, such as cable access, as the Chairman mentioned, why should the issue not be addressed through general rulemaking that would apply to the entire industry, rather than to just one firm within the industry? And fourth, are the issues raised, such as anticompetitive behavior, being reviewed by another federal agency with clear statutory authority? Thank you, Mr. Chairman. I look forward to the testimony of the witnesses. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Powell. COMMISSIONER POWELL: Thank you, Mr. Chairman, and let me be the first also to welcome Mr. Case and Mr. Levin and all our other distinguished visitors and panelists from whom we will hear today, as well as members of the public a discussion and a debate about a matter of clear pubic importance. Since its announcements, the proposed merger of America Online and Time Warner has assumed almost mythical proportions among regulatory, legislative and business circles, particularly here in Washington, and as a policy and analytical exercise, this transaction has proven to be irresistible both to those who applaud its promise and to those who fear the merged entity's potential power. By seeking to combine some of the most unique and valuable assets in both the communications and content worlds, the parties have spread before policymakers, advocates, competitors and pundits a smorgasbord of tasty issues for us to sample or devour as we choose. This merger is particularly challenging to review, not so much because of its formidable size but because of its novelty. Normally, when the government reviews a merger, it focuses principally on existing products, services and markets. It takes a snapshot, if you will. But here, we are faced with a merger that is born from a revolution that is in its infancy, and the merger's great promise and possible dangers rest principally in the future, a future that changes rapidly and often unpredictably. It is very difficult to grasp the effect of this combination on consumers in markets that have barely emerged or have yet to be created at all. Thus, the Commission will struggle mightily with how to deal with necessarily abstract issues and will face tough questions, as when to yield to the market's judgment and when to embark on a government-crafted solution. In this vein, I would caution that identifying possible problems that result from this merger is not the same thing as having a workable regulatory solution. We should keep squarely in mind that regulation imposes significant costs on producers and consumers. Valid rules require valid and stable economized and technological assumptions that may be difficult to come by in this innovating space. The hurdles of enforcement are substantial. Additionally, we should recognize that regulatory intervention necessarily directs the course of a market and may distort it by diverting capital away from certain enterprises and towards others. Whether this is wise in a burgeoning, rapidly changing, innovation-driven market is subject to debate and some questions. Finally, I think it's important to say a word about who we are and what we do. It is important to emphasize that many of the interesting challenges, questions and concerns that might arise from this combination are not within the scope of our review, nor are we necessarily empowered to address any and all such questions. Along these lines, I would repeat the caution of the Chairman and many of my colleagues in public statements that we do not regulate the Internet. While our authority does extend to much of the infrastructure that affects Internet service, we must react cautiously and perhaps even skeptically to invitations to intervene in matters that involve Internet content, products and services. It is extremely important, then, that we focus on the matters that will inform our decision and not dawdle too long with issues that do not lend themselves to an FCC regulatory solution. With that, I look forward to hearing from the panelists, and thank you for convening the hearing, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Tristani. COMMISSIONER TRISTANI: Before I go to the brunt of my remarks, I would like to thank you for holding this hearing. I, for one, was an advocate of having an en banc hearing, because this merger has not only caught the attention of Washington, it has caught the attention of many, many citizens across this country. It's something that I know we're all getting an unprecedented amount of e- mail on, letters on, questions on, and this is one small way that Americans, that the public can have a sense of what happens in the halls of the FCC in Washington when these issues are concerned. I'm delighted that the press is here, because I know this is getting good coverage, and I'm hoping that, in a future hearing, we'll have some kind of an interactive dialogue with the public. We should have thought of that before. Having said all of that, there is a procedural concern that I have, and that's that yesterday, this Commission announced over our Web page that in order to get into this room or to view this hearing at Commission, citizens would have to come at 8:00 in the morning, starting at 8:00 to get a ticket. Now I know that was well-intentioned, because there were security concerns, there were concerns about we'd have overflow, but I think in the future, Mr. Chairman, that if we're going to limit or have different procedures in place, we need to let the public know with sufficient notice -- at least a week's advance -- because I have no clue if there are people that might have wanted to attend this hearing -- and I'm talking about American people, not our usual crowd of friends and lobbyists and attorneys -- that weren't able to come here because they had no clue that you had to use these special procedures that, frankly, Mr. Chairman, I didn't learn about till someone from the public called me and then brought them to my attention. With that, today we will be hearing from the proponents and opponents of the AOL Time Warner merger. This proposed merger is not only one of the largest in United States history but combines the control of conduit and content in an unprecedented fashion, implicating issues that are at the core of our democracy. It raises the specter of barriers to the free flow of information and the marketplace of ideas. If the shelves in the marketplace of ideas are stocked by too few hands, a kind of digital imperialism may replace a well-informed citizenry. In the face of this, the Commission's statutory authority and obligation is abundantly clear. The public's interest must be advanced if this merger is to be approved. When the proposal before us is viewed through the public interest lens, several significant concerns and questions arise. I will highlight only a few here. I am particularly concerned about the impact of this proposal on the diversity of voices and ideas. I am also concerned that this merger may limit a consumer's choice regarding Internet service providers and/or cable delivery services. One question is repeatedly raised. Does the dominance over instant messaging by one corporation create impermissible barriers to competition and to the free exchange of ideas. If the extent to which instant messaging has penetrated the online world is as great as the record indicates, can America afford to leave its ownership in the hands of a single entity whose fiduciary duty is to its shareholders and not to the public? Another persistent question is whether the Commission should address the issue of open access or wait for an industrywide proceeding. These and other pressing questions will not be answered today, but we must answer them before we complete this merger review. In closing, I am reminded of Winston Churchill's remarks during the battle of Britain. When asked if Britain's goose was cooked, he remarked, "This isn't the end, this isn't even the beginning of the end. It is perhaps the end of the beginning." If parties are right, we are entering the digital century. Maybe so. Specious limitations on this Commission's authority to protect and advance the public interest belong in the last century. Today marks a new beginning in our duty to protect the public interest through a review of mergers such as this one. CHAIRMAN KENNARD: Thank you, Commissioner Tristani. Commissioner Tristani is right. We have a legal obligation to make a public interest determination as to whether this particular transaction will serve the public interest, and that is why we're holding a public hearing -- so that the public can be involved in that determination. And I just wanted to note for the record that this hearing is not unprecedented. Every major merger that's come before this agency, at least during my tenure, we've had an en banc, Commission level hearing like this, including Bell Atlantic, GTE, SBC Ameritech and AT&T TCI. With that, I wanted to outline just a few of the housekeeping matters that we'll be addressing today -- COMMISSIONER FURCHTGOTT-ROTH: Mr. Chairman, I -- CHAIRMAN KENNARD: Certainly. COMMISSIONER FURCHTGOTT-ROTH: I just, I can't let that remark go without some clarification. I'd be very grateful if you could submit for the record the dates and the minutes of those hearings that were held at the Commission level. I don't recall being present at them. Perhaps others were. CHAIRMAN KENNARD: Well, I do recall you being present at them and asking some questions. In fact, I remember your opening statement was very much like the opening statement that you just made, so, but I'd be happy to give you a tape of that meeting, in fact. COMMISSIONER FURCHTGOTT-ROTH: Meeting? Was it singular? Or were there one for each of these other major mergers, Mr. Chairman? CHAIRMAN KENNARD: As I recall, there was an en banc hearing that considered each of those mergers. I don't think we need to belabor this point, but I would be happy to submit the record, not, the tape to you, not for the record in this proceeding but just for the record of, for the purpose of clarifying the point. Are there any other remarks from the bench before we move on? Hearing none, I just wanted to clarify some housekeeping matters before we go on so that everyone will know what to expect this afternoon. We will have opening statements from representatives of the two applicants, who are seated here at the table now. Then, we will have three other panels. One will be a panel that will broadly put the merger in context, with two panelists. And then, we will have two larger panels. One will address consumer perspectives, and the other will address industry perspectives on the transaction. I'll ask all of our panelists to confine their remarks to five minutes, and we want to reserve some time for questioning from the bench after the panelists have had an opportunity to speak. We have a very crowded agenda today, so we're going to have to be very, very disciplined about keeping this moving. We have a timekeeper. I'll ask all of our panelists to keep an eye on our timekeeper, who is our secretary, Magolly Sollis here at the Commission. And please work with us here to that we can get through this, and everyone will have an opportunity to state their case. With that, let's begin with our first panel. It is the opening statements of the applicants before us, beginning with Steve Case, the chairman and CEO of America Online. MR. CASE: Good afternoon, Mr. Chairman and Commissioners and thank you for this opportunity to talk about the proposed merger of AOL and Time Warner. As you all know, there has been a fair amount of discussion about what this merger will mean and a fair amount of misinformation. So both Gerry and I have been look forward to coming here today to explain what we believe the merger will mean, not only for our companies but also for consumers. We think, when you look at all the facts, you will conclude that the merger of AOL and Time Warner will benefit consumers and serve the public interest. We are confident that together AOL and Time Warner will build a company that helps to take the Internet to the next level, connecting, informing and entertaining people around the world as never before and benefiting consumers in valuable new ways. Just as important, we want to make clear that our commitments to consumer choice and competition will help lead our industries into the Internet century in a way we can all be proud of. That's what the merger of AOL and Time Warner is really all about. Helping to lead a second Internet revolution that reaches as many people as possible as quickly as possible and serves the public interest. There are three key reasons why we believe this. One, we are confident that the proposed merger of AOL and Time Warner will drive the Internet's development, helping to spur a new era of innovation and robust competition. Two, we are confident that our merger will help consumers make the most of that innovation, increasing their choices and enriching their lives. And three, we are confident that our merger will help to build a truly global medium, leaving no community behind. So let me go through each of these points and the principles that underlie them. First, our merger would help to drive the development of the Internet. I don't think I have to tell anybody in this room that the Internet is transforming the landscape of communications and media. This transformation is evident in everything from the time people now spend online, the way it's really embedded now in their lives, to the way it's shaping our expectations of what media can and should be able to do. And this is just the beginning. Broadband and wireless connections, an ever-increasing array of devices to conveniently access the Internet anytime and anywhere, and the intersection of traditional and digital mediums are fueling a powerful new era of innovation. It's consumers, not technology, that are driving these developments, and that's the way it should be, indeed, it has to be. In this new environment, companies of every size will compete to bring consumers what they want when they want it at prices they can afford, and in ever more useful, convenient ways. This cycle of competition and innovation has brought the Internet and both of our companies to where they are today. And it's always benefitted consumers. The next HBO, the next CNN, the next AOL, these are the kind of remarkable breakthrough innovations AOL Time Warner could create for consumers across a whole variety of platforms. And we have no doubt that our commitment to innovation would prompt our competitors to develop new and better offerings of their own. One of our most recent innovations, AOL TV, is a good case in point. By using open standards, this new interactive television service actually enables interactivity provided by any broadcaster. AOL TV will be an enabling platform for broadcasters and programmers. We have approached it in a way meant to benefit consumers, benefit content producers and benefit broadcasters. As many of the people in this room know, interactive TV has not yet begun a widely used product. Broadcasters and programmers have little incentive to develop interactive content, because there's not an audience, and service providers have difficulty creating an audience without compelling interactive content. The merger of AOL and Time Warner would go a long way towards ending this chicken and egg problem. Built on open platforms, AOL TV can help to jump start an entirely new industry, with many competitors. There are many other areas where we hope to spur innovation, such as finance, healthcare, telecommunications and online music. With music, for example, we believe that AOL's experience in making interactive services easy and secure, combined with Time Warner's skill at providing music attuned to consumer tastes, will speed the advent of digital downloading that both protects artists and service providers for the benefit of consumers. So let me be clear. A combined AOL Time Warner will be able to stimulate even more innovation and competition, and consumers will be the winners. The second point. Our merger will further benefit consumers by increasing their choices. In today's competitive environment, consumers know they have choices -- over 7,000 ISPs, millions of Web pages, and new ways of connecting to the Internet -- and consumers exercise that power every day. That's what our AOL anywhere strategy is all about. Making AOL available whenever and however consumers want it. Beyond the Time Warner cable systems, AOL has already formed alliances with DSL, wireless, and satellite providers from Bell Atlantic and SBC to Sprint and Hughes. A combined AOL Time Warner could carry on these agreements and seek new opportunities to distribute our content and communications services on multiple platforms nationwide. And you can be assured that if and when other platforms are developed, AOL will want to be on those as well. At AOL, we are also deeply committed to delivering access to a broad array of the best content available, regardless of who produces it. This will be true in a post- merger world, just as it is true today. It has been suggested that a combined AOL Time Warner might somehow favor our content over that of our competitors through caching or some other technical means. So again, let me be very clear. AOL has never done anything like that and we never under, because it would diminish our members' online experience. For those same reasons, a combined AOL Time Warner would build on our companies' demonstrated commitment to open access. Real progress has been made on this issue in the past couple years. I have always been a believer in open access, and I'm proud of the role AOL has played in getting us, and increasingly the marketplace at large, to where we are today. It is gratifying to see that most of the country's largest cable companies, including Time Warner and AT&T, are moving forward with open access policies and implementation plans. On the day we announced our merger, we committed to open Time Warner's cable network for competition with multiple ISPs. A month later, we took the next step, jointly releasing a memorandum of understanding that is the framework for delivering AOL and other ISPs over Time Warner cable. As Gerry will talk about in a minute, we are increasingly optimistic about how soon we will have a multiple ISP environment on the Time Warner cable systems. We understand that the Commission will be taking an industrywide look at the open access issue, and we want to assure you that we will be continuing our own efforts to ensure that there really is real choice among ISPs as quickly as possible. So again, let me be clear. The cable systems in a combined AOL Time Warner will not discriminate against other ISP's on the basis of affiliation with us. We are serious about our commitment to open access, because we know it is good for our business and good for consumers. The same pro consumer attitude has guided our business practice on other products, like instant messaging. This is probably the area where the most misinformation has been circulating, so I'd like to take a moment to set the record straight. Let me start at the beginning. We developed instant messaging technology and introduced it as a feature over a decade ago. As our members realized the value of realtime online communication, they began asking to reach beyond the community of AOL members, so three years ago we made instant messaging freely available to all Internet users. Today, we can clearly see the innovation that our decision helped to spur. There are now more than 40 companies, including Microsoft, Yahoo and AT&T that are providing their customers with similar features. CHAIRMAN KENNARD: Mr. Case, could you please wrap it up. MR. CASE: I don't have to tell anyone in this room that the challenge we all face now is to create server- to-server interoperability that allows users of all these different services to talk to each other seamlessly. To that end, AOL has taken several steps forward. Indeed, we've recently submitted to the IETF the only architectural plan for true interoperability, and we are committed to moving forward with interoperability. It's a problem the industry has faced together before when standards for e-mail interoperability were devised, and we weren't even dealing then with the challenge of realtime communications, but we learned from that process that interoperability alone isn't enough. We must also take steps to protect people's privacy and security. This is especially true for AOL, where so many of our users are families and young people and, therefore, where the risk of privacy breaches and inappropriate spam are the greatest. Let me again be very clear. We are fully committed to working within our industry to create true server-to-server interoperability, but we are equally committed to protecting consumer privacy and security. We have an opportunity to get it right this time, and we intend to make the most of that opportunity. Finally -- and I'll wrap up -- CHAIRMAN KENNARD: I hope so. MR. CASE: Because this is an important one. I think it's particularly important to you, Chairman. We believe our merger gives us the opportunity and the responsibility to help extend the benefits of the Internet to every community around the world. We all know that the future is about more than bytes or bandwidth. It is about how we use new technology to improve people's lives. In fact, nothing has been more crucial to this effort in terms of integrating our companies than our shared commitment to be a catalyst for meaningful change, not only in our companies and our industries but also in our communities locally and globally. And there's no more urgent task before us than bridging the digital divide. One of the things Gerry and I are most looking forward to do is joining our resources and sharing our ideas to expand digital opportunity to all communities. We take this challenge seriously, not only as a company but also as individuals with a shared personal conviction that we must use our leadership to build a better world. These are commitments that will drive and the principle that will guide a combined AOL Time Warner. Our goal is to be able to look back on this time and say we helped create a medium that had a positive impact on people's lives, and that, we think, will most assuredly serve the public interest we are all committed to upholding. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Case. Mr. Levin? MR. LEVIN: Chairman Kennard, Commissioners, last January when Steve and I announced this merger, it was with the vision of creating the first Internet-powered media and communications company. In the short time since then, the velocity of technological change has continued to accelerate and only reinforces our confidence in the promise of this new venture. From Time Warner's perspective, this merger represents a very logical step in our efforts to increase consumer choice in communication services and content, which we understand is the Commission's bedrock policy. Expanding consumer choice is a part of who we are. It's as basic to our corporate DNA as editorial independence and integrity has been to Henry Luce's Time, Inc., and Ted Turner's CNN. Since HBO's debut 28 years ago, Time Warner has been a leader in overthrowing the paradigm that limited the public's programming choices to those selected by a triopoly of broadcast networks. Our leadership in expanding consumer choice in the television marketplace has proven quite successful. The new networks we've developed from CNN to TNT to the Cartoon Network have enriched people's options for more programming. And the billions we've invested in our cable systems have dramatically enlarged the number of channels, not just from Time Warner but from a wide variety of sources. This includes MSNBC and FOX, public affairs from CSPAN, innovative kids' television from Nickelodeon and Disney, ethnic and gender-focused programming from BET and Lifetime. It also extends to Time Warner Cable's successful introduction of 24-hour local news services in a number of our systems. And while we're proud of our role in breaking open the television universe, we also recognize that we've been one of the first to take advantage of digital technology to present revolutionary new options like high-speed interactive services, video on demand, telephony and data delivery. Our early experiments going all the way back to Cube, in Columbus, Ohio, Quantum, in Queens, New York, presage our effort to establish the first fully interactive digital network in Orlando, Florida. And over the past five years, we've invested more than $6 billion in the development and deployment of broadband architecture. So whatever the delivery mechanism, whether wired or wireless, cable or satellite, it's obvious that the digital revolution has put the global economy in general and the global media industry, in particular, on fast forward. We now see that, while we began with America's leadership, that leadership is already being challenged in Europe, Asia and Latin America. And it was that shared understanding of the intense global competition that the Internet is spawning which helped give our initial conversations the sense of real urgency. We also recognize the opportunity to create a company specially adapted to the uncharted terrain. One that can offer consumers an astounding array of quality content from the widest selection of sources, along with Web features, services and communities that provide ease, convenience and personalization. Let me be very particular to the Commission about the three things that we think you should focus on, which are the public benefits which flow from this combination. First, as well as making traditional media more accessible for online and interactive applications, our company will be a leader in developing new services, including news and lifestyle information on demand and interactive television, and this will help accelerate our competitors' efforts to innovate. Second, by actively pursuing our marketplace-driven multiple ISP initiative, we'll ensure real consumer choice on our cable systems, but importantly provide a catalyst for other cable companies to follow suit. And third, as we speed up deployment of broadband capacity, we will increase the consumers' appetite for broadband services and clearly hasten deployment across competing platforms, whether that's cable, DSL, wireless or satellite, which we believe is a critical FCC goal, pursuant to Section 706 of the '96 Telecommunications Act. The merger of Time Warner will be especially beneficial to bring the public real diversity of Internet service providers, and we are committed to making our services available on a nonexclusive basis over a multiplicity of platforms. Our company will promote a competitive environment, which encourages all broadband platforms. We will also carry out the initiative articulated in our memorandum of understanding. This is what we've already done. We've already moved to restructure our Road Runner partnership, thus enabling us to introduce multiple ISPs substantially in advance of the 18 months remaining on the Road Runner exclusivity. In addition, we are negotiating with AOL and, importantly, with other ISPs, about providing high-speed Internet service. And finally, in our Columbus, Ohio system, we have begun technical trials providing multiple ISP service. And we've, therefore, taken our commitment from the ideal to the practical. And by doing this, we've prompted other cable operators to modify their business plans to provide for multiple ISPs, and you can see already that in DSL, satellite and wireless, all these providers are accelerating their own deployment. So, from the consumers' point of view, we're providing and stimulating more choice, better value and lower prices. Finally, no medium in history has surpassed the wildly democratic potential of the Internet to break down the barriers to human communication or to overturn the limits on cross-cultural understanding and expand the educational and economic prerogatives of people everywhere, because the Internet, which cannot be controlled by any company or any government agency, is the technology of human freedom. So it is our hope that we can bring about and stimulate this revolution, a hope I believe we hold in common with the Commission. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Levin. We'll now have a period for questioning from the Commissioners. I had a couple of questions I want to begin with. My first question is about the cable access issue. It's one that we have been grappling with here at the Commission for about two years, and we have -- as I said in my opening remarks, we all believe in openness. Obviously, it's been good for the Internet and it's important for the future of the Internet as we move to broadband, but thus far, we've heard a lot of good intentions. We've seen some industry agreements, nonbinding industry agreements, I might add. We've seen some technical trials. But it's my belief that until we actually see an open access platform in cable broadband implemented where people can actually see it and touch it and feel it and the ISP community can actually get confidence that they'll have access to it, that there will continue to be a lot of skepticism on this issue, for good reason. I would like to ask you, when can we expect to see this? When can we expect to see an open access platform in cable broadband that will give us some confidence that this is really going to happen? That the market is driving toward this. MR. LEVIN: Well, first of all, Mr. Chairman, we are trying to roll back the exclusivity bar to beginning multiple ISPs that was intrinsic in the Road Runner partnership, and we have begun that restructuring, and I am confident, although it requires the consent of all the parties, that we will achieve that so that we don't have to wait 18 months before we can actually begin. And I would hope by the end of the year we will be able to do that. Secondly, we are entering into multiple-affiliation agreements with third-party ISPs, and I expect shortly we will make the announcement about the first third-party affiliation agreement which, again, will confirm that marketplace template for the arrangement. And finally, the trials that I've referred to are actually very important because up until now the ability to install and service high-speed Internet access has had to be proven in the marketplace. And that activity, I think, has proceeded sufficiently so that we now have confidence. And we have installed the first, what I'd call multiple-ISP router in Columbus, Ohio. The trials have begun, and I'm optimistic that by the end of the year, we will also have in place the sufficient software to enable the multiple billing of ISPs. The other thing I would say, Mr. Chairman, is that I do think the understanding that was signed between Time Warner and AOL is binding on us and, in fact, it made several breakthroughs that I think are quite significant. And that's where our activity, I think, will lead the industry in several respects. And we are now embedding those provisions into our affiliation agreements. MR. CASE: If I could just add, I think, you know, from some of our previous discussions, that I share your passion about the importance of open access in terms of preserving the open character of the Internet, and also would share your skepticism that until it's actually happening, it sounds like a lot of promises. But I would note that a year ago, when the Commission looked at this, the Commission concluded at that time that there was a reasonable probability of competition in broadband. It wasn't just about cable. DSL, satellite, wireless would emerge as alternatives. And there was a reasonable probability that the marketplace would indeed work. In the past year, I think there's a lot of evidence to suggest both premises were correct. There is far more competition now in each of these other broadband technologies, billions of dollars now being invested to deploy DSL, experiments now being put in place to actually deliver video over DSL. Just last week, Blockbuster announced an initiative to do just that with DSL and phone companies. Satellite companies have done quite a bit, announcing ventures with other ISPs just in the last few weeks. And venture capital is pouring into wireless technologies. And also in the past year, the cable industry overall has gone from a position where they really weren't focused on open access to a position where, now, the majority of the companies are recognizing that it is something that's going to happen and it's better to happen sooner rather than later and it's in their business interest to get ISPs working on their platform, as opposed to a competing platform. So in the past year, I think there's a lot of evidence to suggest that there are competing broadband technologies and the cable industry is moving towards open access. And we recognize that people really are eager to see some definitive agreements and see some systems in place, and we're confident we'll be able to demonstrate that very shortly. MR. LEVIN: It really is the marketplace at work. I just want to underscore. This is not to satisfy a regulatory requirement. The intense activity, particularly in DSL, both from marketing and the provision of services, is really extraordinary, and for a cable operator not to energetically move to provide consumer choice, the cable system will lose out in the marketplace. That's very clear. CHAIRMAN KENNARD: Well, I think that everyone in this room would hope that we have an environment sooner rather than later where we have multiple broadband platforms competing in the marketplace. Cable, DSL, satellite, terrestrial wireless. But what if our hopes aren't realized? What if there are communities in America where their only choice for broadband will be the cable modem product? Will people in those communities have confidence that the market will drive to an open access environment when there are no broadband competitors? MR. LEVIN: Well, I don't think factually that can occur because, first of all, with respect to the telephone system, which is universally available, DSL is being activated broadly. And you can just see it in the marketing activity, so that in almost every community that certainly, we operate in, there is an intense DSL activity. Secondly, satellite, which is universal, covers the entire geography of the United States, is now offering high-speed service and in fact is using either a telephone return path or, shortly, a satellite return path. And finally, I would not underestimate the growth of wireless, because in fact, the ability to have -- and we see this happening already in Europe and in Asia -- the ability to have Internet access, including with impending 3-G, to have broadband access on a portable device, is probably -- all you have to do is test the marketplace. The highest infrastructure valuations today happen to be in the wireless area because of the opportunity for broadband wireless. MR. CASE: If I could just add that the -- we made a big investment in satellite, partly because it is the only way to ensure ubiquity in terms of the national footprint. We're working with Hughes on that project, and even with this merger will continue to work with them and others to develop all these different technologies, so I don't think the concern you have is likely to play out. But if it does, if down the road you find that there really is only one broadband technology and the industry isn't moving forcefully enough to open it up, it would be appropriate for the Commissioner or others to look at that issue and put a national policy in place. As it relates to this merger, these are the companies that are actually doing things about open access. I think the steps we've taken should be applauded, and we really are committed to going from the concept stage to the reality stage, not just around cable broadband technology but also deploying other broadband technologies. CHAIRMAN KENNARD: Okay. Well, it's, just so I understand what you're both saying. Absent a competitive dynamic, absent pressure, competitive pressure from other broadband providers, I understand you to say that there may not be pressure for a market-driven incentive for the cable operator to open their, their broadband platform. Is that right? MR. LEVIN: No, no, no. I wouldn't, I wouldn't articulate it that way. First of all, it is clear that there are going to be multiple broadband providers. But as a matter of business development for the cable system, the importance of developing these new revenue streams, given the fact that the more traditional analog delivery of television signals, or indeed digital delivery of must-carry signals, has a certain ceiling on it in terms of its expansion. The growth opportunities for the cable company really come about in, in the deployment of broadband, so I can say to you that our business plan, with or without the obvious competition, is to make the investment and actually to accelerate the investment in broadband deployment, and then the costs that are the variable costs that are necessary to deliver cable modems. Again, I can't underscore enough that this is a business proposition that grows out of the next development, in this case, the development of the cable industry, both because of the competition and it makes intrinsic sense. MR. CASE: One other point to emphasize is that Time Warner has a significant cable presence, but only 12 percent of households in the United States have Time Warner cable access, so 88 percent we need to reach, the national brand with the AOL service through other means. So it is in our interest more than probably any company's interest to make sure all broadband technologies are open and competitive, easy to deploy and affordable. It would be silly for us to focus just on the 12 percent when we have a national business and need to focus on 100 percent. So it's in our interest as much as yours, maybe more in our interest, to work as forcefully as we can to establish arrangements with all the cable companies to deploy cable broadband, as well as all the DSL companies, satellite companies, wireless companies, so we really have a national footprint, with a tapestry of broadband solutions. MR. LEVIN: You know, history is instructive, because on the one hand, having cable has been very helpful in the creation of all of these services. On the other hand, the history of our company, whether it's HBO, CNN or pay-per-view movies, is to work through cable, satellite and DSL -- any delivery system -- because that's in the nature of content, which should be delivered on every platform. So there's nothing new about this concept of stimulating all of the delivery mechanisms, including the one that Steve Case referred to in an announcement of Blockbuster to use the Enron system and then, ultimately, DSL, to deliver, in effect, video on demand movies into the home. And you don't see any cable mentioned in that release. CHAIRMAN KENNARD: Thank you both. Other questions from the Bench. Yes? Certainly. COMMISSIONER TRISTANI: So what I'm hearing is it makes wonderful, eminent business sense to have open access. I'm hearing that. Can you tell me what your timetable is again? Is it -- MR. LEVIN: Well, let me characterize it. We have at our cable company -- just speaking on behalf of our cable company -- what's known as a multiple-ISP initiative. And we have been -- and this has been true in the industry -- contractually precluded from beginning to have more than one ISP, because of an exclusivity provision in a partnership agreement as a result of a Justice Department mandate. We are trying now to reform that so that we can remove the exclusivity bar. Once we do that, we then turn to the technological capability. So we have now installed the kind of router that's necessary and the software that's needed to distinguish among several ISPs for the consumer. We are now doing that. And finally, you need affiliation agreements and, as a matter of fact -- you know, maybe I should give my e-mail address -- any ISP that would like to come and negotiate with Time Warner Cable, we're open and ready, willing and able. COMMISSIONER TRISTANI: But what's the timetable? MR. LEVIN: Well, as I just said, our -- well -- CHAIRMAN KENNARD: What's the e-mail address? MR. LEVIN: GML -- COMMISSIONER TRISTANI: I'm not being flippant about the timetable. I just want to have a sense of -- because I've heard maybe the end of the year, but could that mean -- MR. LEVIN: Well, but as I've indicated, there is a contractual bar right now. I mean if you look at -- there is an exclusivity provision. COMMISSIONER TRISTANI: But you said those contracts could be reformed. MR. LEVIN: Yes, but it requires other parties to agree to do that. COMMISSIONER TRISTANI: So you can't tell me what a timetable is. MR. LEVIN: No, I, I remain quite confident that we can make that happen faster than anyone else in the industry, because there's another exclusivity provision that runs longer for Excite@Home. I'm confident, but I can't warrant it today, but I'm confident in my ability to make this happen. We've obviously already begun the process of restructuring. And so that the first thing that will happen. Secondly, there will be affiliation agreements. You need an agreement with an ISP that sets the terms and conditions. It's very similar to the terms we had in our MOU. And I think I said earlier that there will be an announcement of an affiliation agreement shortly. Finally, this is a, not a trivial technological activity and, frankly, that's the reason why the industry went slowly to see whether the modems would work, they could be installed, whether the service would be high speed, whether you could bill. We now have confidence in that management capacity. Now you need software, which hasn't existed before, with a router that enables you to address separate ISPs going into separate homes. I'm confident that we will build that software. Our company has a history of doing this. We've done it. We've done it before. And that's why I'm highly optimistic. But most of all, it is a business imperative. It's built into our business plan. Multiple ISPs are necessary for the revenue growth. And besides, in every market that we're in, DSL is being marketed competitively to this concept. MR. CASE: If I could just add. We, as I said in the opening remarks, we understand, probably better than anybody, the importance of open access and also understand the importance of demonstrating a real commitment to open access by having real deals with real unaffiliated ISPs that can be implemented in a real way, quickly. And we recognize that that's an important issue to you. It's also an important issue to us, because our credibility is on the line. I have been arguing for open access for years, and I continue to believe open access is critically important. We just now have the wherewithal, we believe, to achieve that within Time Warner systems sooner than might have been thought, because of this restructuring of Road Runner. And we also are optimistic that we can get other cable companies to embrace it. So we need to demonstrate this quickly, and we will demonstrate this quickly. Not just because we think open access is a good policy decision or that open access is a good business decision, but also because we recognize we have made a commitment and we're going to live up to that commitment. COMMISSIONER NESS: Following up on that, to what extent will you be limiting the number of ISPs that will be able to partake of your system? MR. LEVIN: Again, I'll repeat my invitation. As we said in our agreement, we're not providing any limitation on either the number of ISPs or whether they are national, regional or local. COMMISSIONER NESS: And to what extent will you be making the technology available to other cable systems so that others will be able to also open up their systems? MR. LEVIN: Well, we're -- we are not a technology company, in the sense that we make and sell technology, but anything that we've developed -- for example, the paradigm, the hybrid fiber coax architecture that is currently the industry standard was developed by the engineers at Time Warner Cable. We actually won an Emmy for it. And that template, that architecture has been made freely available. If -- the software that we'll be created -- what's necessary here is not the router, because the routers do exist. What's necessary is software that hasn't been written, to distinguish that the traffic going through belongs to one ISP and not another and make sure that the bill goes to the proper place. That software we will acquire from somebody, who will then be able to sell that software. See, that's my point, that this innovation, it hasn't existed before, so we're the first ones to do it. By making it happen, it then travels to other systems and, again, if it doesn't happen, you have, you know, the telephone companies constantly spending much more money on marketing in the marketplace. So I think the short answer to your question is if it's developed for Time Warner Cable, then others would be able to use it. COMMISSIONER POWELL: Let me just ask more pointedly. By the terms of the Road Runner contract, does it have a natural expiration date and, if so, what is it? MR. LEVIN: It's the end of 2001. December 31st, 2001. COMMISSIONER POWELL: Okay. So at the latest, pursuant to the Justice Department decree, is there a timetable that shortens that? MR. LEVIN: No. I'm trying to be helpful and opportunistic. No. But what the Justice Department has said is that AT&T must divest its interest in Road Runner so that it isn't in both Excite@Home and Road Runner. And frankly, what I'm saying to you is that I'm trying to take that mandate and turn it around so that that event becomes an event to restructure the ownership of the partnership, and while we are doing that, also remove exclusivity. You know, it's something that is another indication of, you know, our commitment to want to make this happen. Because the exclusivity on Excite@Home, I think, extends until the end of 2002. So that's why, maybe, people have not been rushing to enter into affiliation agreements. So that's why I'm trying to do that and, as I say, once we get an announcement out of a third-party affiliation agreement, I think that will encourage others also. MR. CASE: One other point in terms of the timing. The Road Runner and @Home exclusivities also would impact AOL. So, unless the Road Runner date is moved up, AOL will not be able to provide access over Time Warner Cable systems or any other systems, so clearly we have an interest in trying to restructure this, to accelerate the date that all ISPs -- AOL and other ISPs -- would have access. MR. LEVIN: I should -- it's fortunate that I'm accompanied by those who know better than I do -- the Justice Department decree does push for an earlier restructuring if that's possible, so there is an incentive there. COMMISSIONER FURCHTGOTT-ROTH: Would it place Time Warner systems at a competitive disadvantage is this Commission were to condition the license transfers in such a way that Time Warner systems had a different federal mandate for open access than other cable operators had? MR. LEVIN: Yes. Certainly the answer to that is yes. CHAIRMAN KENNARD: Commissioner Powell, did you have something? COMMISSIONER POWELL: It was going to be a question, but I'm going to make a comment, in the interest of time. I've read through many, many of your testimonies and your presentations, and on many of these issues that are of some concern by other commentators -- commitments to multiple platforms, open access to ISPs, the commitment not to leverage content distribution systems, not to favor your own content through caching and primary screens, no attempt to leverage the AOL-AT&T linkage -- often conclude with, "Trust me, we won't." And one of the central criticisms of the opponents is that, why should you? And I would concede that in a market in which we don't necessarily know how things will evolve, there may be room for "trusting you," but I thought I would represent some things that concern me. One of the best indicators of that is historical performance. And it seems to me that -- I look at things like the high-profile case in which time Warner was stripping the vertical blinking interval for an EPG. I look at the fact that some fairly heavy-handed tactics by local franchising authorities of Time Warner's and SBC's region on DSL. I look at over a year ago some of AOL's public promises on open Internet messaging services that have still yet to be fulfilled. I'm not personally criticizing those choices. There may be rationales for them, and they both all may be things not even within the scope of our authority but, nonetheless, they are historical backgrounds of credibility on the trust point. And what I would like to emphasize is that I think it's very, very important that the companies, in proving their case, show why there are very powerful economic reasons, not just behavioral reasons, to pursue open models and not leverage content. And Mr. Case, I think you made a good point about, you have to get on systems elsewhere, and I think that's the kind of argument we need to hear. But I would add one refinement. The key is, at what terms and conditions and prices? And I think one of the concerns, or the anxieties raised are that the extreme ability you will have as a content provider may be able to allow you to trade off and dictate terms and conditions that are more favorable to you than others. And I don't need a voluminous response to that. But I just wanted to guide responses to the idea of demonstrating why, as a business matter and economic matter, these are the things we can expect to happen, as opposed to trust. MR. LEVIN: Well, the short answer is really that the, it's the consumer who makes these choices, and if we were ever to exclude, you know, whether it relates to EPG which is a subject that the Commission has under advisement, and we will carry -- whatever line the Commission draws, that's exactly what we will do. But we'll carry anything and everything, because it's the consumer that is making the choice for navigation. And the same thing applies to programming. And that's really the history. If you're not providing the programming or the material or the convenience that the consumer wants, it's very clear that the consumer can go elsewhere and, in fact, now that we're talking about the opportunity to go elsewhere on the Internet, there are all these distribution systems. So the economic compulsion is really overwhelming to service the consumer. Having said that, I have to also comment that I think that this company, these two companies and this new company is distinctive, not only because of its history, but the desire to want to serve the consumer, the public interest with a set of values that really count. I think that's very important to us. So that, yes, we are responsive to shareholders, but we're also responsive to the public interest. Indeed, it's built into our charter. That was the charter at Time, Inc., and it is at AOL, and it will be at the new company. So, we have the best of all possible worlds. We have the recognition that the consumer is making a choice, and you have a company that values its social commitment. MR. CASE: Let me just add that as I said in my opening remarks, there's a lot of misinformation flying around, and I think some of it was embedded in one of your premises regarding instant messaging in particular. And I certainly take issue with that characterization. I actually think our company has been a model for how to take a technology and open it up. But as I said in my opening remarks, we invented this, actually 15 years ago. Three years ago, we made it free so anybody could download the software for free or use it for free. And then in the past year we've licensed it to more than a dozen companies on a royalty-free basis. That's not something that Microsoft, for example, has done with Windows. If the Justice Department, as their remedy in this, suggested that Windows should be put on the Web so anybody could download and use for free and license on a royalty-free basis to a dozen other companies, they would have been laughed out of Washington as a much too stringent remedy. We did both of those things voluntarily and, additionally, have indicated our commitment to interoperability proposed to the IETF in architecture for server-to-server interoperability. So I think we've done a lot to make sure that anybody can talk to anybody, nobody has to subscribe to AOL, you can use it for free if they want, if companies want to create their own interface, they're free to do that. And if we can get agreement with these companies about server-to- server interoperability, we're ready, willing and able to do that. CHAIRMAN KENNARD: Commissioner Ness and then Commissioner Tristani. COMMISSIONER NESS: A number of commenters have been very concerned about your ability, not just to discriminate in favor of your own product but, rather, potentially, to discriminate in favor of the product of other major players in exchange for benefits that you might receive from such relationships. And it's been described as a colony of two 800-pound gorillas dancing, and thereby stomping a number of other smaller players who might want to be able to play in the marketplace. Can you comment a little bit about these concerns that have been raised? And I'm sure we'll be hearing them as the panels proceed. MR. CASE: Want me to start on that one? I think people who make that claim do not understand what's happened on the Internet. What's happened on the Internet is the blowing up of traditional barriers to entry, which is resulting in an unprecedented flood of competition and choice. When I was growing up, the only thing I could watch on television and ABC, CBC, NBC and PBS. Now, you've got dozens of stations in some markets, hundreds of stations in other markets, and millions of Web sites to choose from. So this notion that people are constrained in choice is a little silly. What's happening is unprecedented choice, and we're trying to stimulate more choice on television. We, you know, some say, well, you should worry about these guys because they're potential monopolists. Actually, if those companies are worried about us, it's because we're populists, trying to take the Internet model to television, and instead of consumers going home and turning on the television and watching what the networks want when they want, they want to work like the Internet where they choose to go where they want, do what they want, when they want. So we want to take that Internet model, which is a model of competition and choice, and bring it to television. It's not surprising to me that some companies would rather protect the status quo. Consumers want the Internet model on top of television. COMMISSIONER NESS: The expectation, however, is, for example, you'd have major cable companies exchanging benefits with each other to the detriment of others who do not have cable facilities. Cable still remains, in most areas of the country, as a major bottleneck provider. Can you comment further on that? MR. LEVIN: I don't think that the cable companies are working together with other cable companies in any way. As a matter of fact, I think the history of the cable industry is in fact what Steve Case has just indicated is now being carried out on the Internet. And that's deconstructing the establishment. That's really always been the history, providing more services that were not otherwise available. We used to have this very narrow aperture through which programming can pass. And in fact, each, as each day goes by, there are more services that are being created. And frankly, when we, when I look at the conventions coming up, the political conventions, I think it's time to recognize that the public interest, convenience and necessity has now shifted from broadcast licensees to the cable industry and the Internet industry, because who's going to carry, on a 24-hour basis, everything that's happening in, you know, two of the most important political events so it's available on an interactive basis to all Americans? It's coming from all the cable networks, it's coming from CSPAN, it's coming from local cable news services, it's coming from all the Internet services. It's the most exciting thing to happen. It's not coming from the broadcast licensees. So in fact, I think it's time to recognize that in fact the net effect of creating more capacity, which is what cable has done and what the Internet now explodes on an infinite basis, is providing more choice and more opportunity for independent programmers. The last thing I would say is a lot of the comments we're hearing seem to belie the other proceeding that we're involved in, which is at the FTC, examining the antitrust issues. The issue here is not to protect competitors but to stimulate competition. And I think that's what all this technology is designed to do. MR. CASE: I also would add that there's a big distinction between television of the past and how you think about it and limited channel capacity and whose gets carriage, essentially, and the Internet model, which, essentially, everybody gets access, everybody gets carriage. And certainly on AOL, people can go wherever they want whenever they want, and this notion that we would somehow block the Yahoo domain or somehow slow it down is ridiculous. We, we've never done that, we never would do that. The reason is if we did that, our members would quit, because they don't want a constrained Internet. They want an open Internet, and that's what they get from AOL. If we tried to do some of the things that some of the people are suggesting, it would be harmful to our business. MR. LEVIN: If I could just go back to, again, the difference between the marketplace and a regulatory requirement. The concept of high-definition television, which we've been working on for many, many years. There's more activity taking place by Home Box Office, which is not a regulated licensee in that sense, than by any broadcaster. And the reason for that is the picture quality is exquisite, and it makes a lot of sense from a kind of a competitive advantage. So that's a marketplace desire. It's part of the history of innovation, and I think that needs to be acknowledged, because that's what's driving so much of all of these new services. CHAIRMAN KENNARD: Commissioner Tristani, and then we're going to have to wrap up this first panel. COMMISSIONER TRISTANI: I have here a four-page e- mail that I received from a Joel Payne from Massachusetts. And I told you I got lots of e-mails about this merger, and most of them are, like, two paragraphs, garden variety, deny the merger, they're too big, danger to democracy. Mr. Payne goes into a bit more detail, but his main concern is instant messaging, and you must love the service, and I commend you. If you invented it, it sounds marvelous, and I'm going to check it out. But his concern -- well, first of all, he wants, wants us to deny the merger, but he said, if you do allow it, make sure instant messaging is interoperable and that everybody can have it. I hear you saying that you're already taking a lot of steps to do that but, aside from Mr. Payne's e-mail, a lot of our commenters have said that for about 18 months, AOL has said a lot but done too little in this area. And I hear that you're committed to doing this, but how strong can your commitment be? I mean, can you say this is something that absolutely must be done? And I'll tell you what drives his concern. I didn't know much about instant messaging until I got this e-mail and started thinking about it, but if it's as good as it sounds, I can see a lot of people who are going to say, I'm not going to get any other system that can't use it, and we may end with the one system that has it, and -- MR. CASE: Well, I understand the concern. Again, I'll just try to reiterate some of the facts, that we did open it up and make it freely available, that issue three years ago. COMMISSIONER TRISTANI: Well, but let me ask you, does that mean that everybody that's on the Internet can have it? MR. CASE: Yes. Yes. For free. That three years -- up until three years ago -- COMMISSIONER TRISTANI: So I can have it? MR. CASE: The only way to get instant messaging was to pay us a monthly fee, because it was part of our service. And we said, well, that's a benefit and, indeed, may attract and keep members. Wouldn't it be better for us to open it up for anybody -- COMMISSIONER TRISTANI: So how would I go about getting it for my provider? MR. CASE: Go to AOL.com and you can download AOL instant messenger for free, whether you're using Mindspring or Earthlink or the Microsoft Network or any provider. It doesn't cost you anything to download. It doesn't cost you anything to use it. COMMISSIONER TRISTANI: And I can, I can put it in my system? MR. CASE: Yeah, absolutely. Or you can download it from many other companies like Lycos and Apple and Novel and Lotus, their own customized versions using the same technology. COMMISSIONER TRISTANI: So how come there's been so much e-mail like this? MR. CASE: Because there's a merger pending and there's an opportunity, and people like to focus on issues. COMMISSIONER TRISTANI: It is as easy and simple as doing that? You know, I don't really know -- MR. CASE: Well, I welcome you to download it tonight and see it for yourself. I would also add, I would also add that what's happened in instant messaging is competition. There are some pretty big companies, including Microsoft, who have entered the market. Microsoft launched their messenger services less than a year ago. Last week, announced they 18 million users of it. So this is a market that we're hardly monopolizing. There are many, many, companies -- COMMISSIONER TRISTANI: But let me ask you something. If, let me get back, because you've gone into another issue. But if I don't want to go through the trouble -- and you say it's real easy, but I'm not technology-savvy, and I'd suspect a lot of Americans my age are not either -- if I don't want to go through the trouble of having to do that, what's wrong with there being an open system, where I don't have to do that? MR. CASE: There is nothing wrong with it. That's what we're working toward. COMMISSIONER TRISTANI: Particularly when there are 23 million subscribers who, you know, who are probably my buddies. MR. CASE: The issue right now is anybody can use our instant messaging system for free. Nobody has to pay us anything. COMMISSIONER TRISTANI: But you're not answering my question. Why couldn't there be an -- MR. CASE: No. I'm about to answer your question. Anybody can use any of the messaging systems of any of the dozens of companies, pretty significant companies, Lotus and Apple and Lycos, and so forth, that have their own customized versions of this. What we're trying to now do is server-to-server interoperability so you can download some other system and the servers talk to each other in a way that protects the privacy and security and prevents spam and pornography and things like that. COMMISSIONER TRISTANI: Which is back to -- MR. CASE: That requires a technical architecture, which we have submitted to the IETF, which companies are now able to comment on. COMMISSIONER TRISTANI: When did you submit that? MR. CASE: About a month ago. COMMISSIONER TRISTANI: About a month ago? Because I think we got into another issue. Yeah, you can do it eventually, but the idea is since this is such a wonderful -- MR. CASE: Well, to be honest, this is an issue which troubles me, because I think if today we were sitting here with a huge market share in instant messaging and the only way to get instant messaging was to pay AOL a monthly fee, and people said, you know, maybe, because instant messaging is becoming more important, maybe this company should actually make it available to other companies on some kind of license basis, I think nobody would have hypothesized that an appropriate, fair thing to do would be require us to give it away free to consumers and license it on a royalty-free basis to companies. I think that would be viewed as overreaching, just as I think that would be viewed as overreaching if the government thought that, you know, the way to deal with the Microsoft issue was to basically put the Windows on the Web -- anybody could download it for free and any company could modify it and use it for free. But we did both of those things voluntarily, and now we're going an extra step and trying to work with the Internet standards body, IETF, to promote server-to-server interoperability that will allow anybody to talk to anybody using any system in a way that protects privacy and avoids spam and a lot of other problems that could emerge. I think we should be applauded for what we've done. CHAIRMAN KENNARD: We'll have some more discussion on instant messages. Commissioner Powell, you'll have to have the last comment, because we -- COMMISSIONER POWELL: I just want to, again, try to make sure we sharpen these concerns. I applaud and am more impressed by the second half of your answer, but I want to say something about the first. It is classic information industry network effect to give product away in order to build and install base to substantial levels, and only then, when you have substantial customer bases, to then potentially try to develop new and more value-added services from which the revenue comes. I'm sure I wouldn't ask you nor would you want to commit that any and all services that would be generally categorized as instant messaging will stay free forever. For example -- MR. CASE: I think it's highly likely they will stay free forever. It hasn't in industry, but we have no plans to change that. We believe instant messaging is a feature, not a business, and we want to make that feature broadly available. COMMISSIONER POWELL: Well, it would be one thing if it's, if you're going to make some representation it will stay free forever, but we expect, and I think that we would applaud, that there'll be development of innovations using that technology, for example, net-to-phone functionality for voice services will then offer, I think as it is on AOL, for a cent a minute or two cents a minute, there are service relationships and fees associated with those services. And I think those are good things, but those are not free things, and a free thing can be a leverage to things that ultimately produce revenue. And I just want to emphasize that that's part of the concern, and I don't, again, I don't think that it means it's wrong, but it, but it means that I think it's important in the responses to be focused on to what degree -- MR. CASE: Well, if I could just quickly respond. I understand the network dynamic, and I would just add that, as I said before, Microsoft launched a messaging service 10 months ago and now has 18 million users, so it hardly suggests that somehow the network effects in this particular feature are such that it's somehow impeding competition. I think competition is robust. I think Microsoft is going to integrate, unless the government doesn't allow them to, that messaging service in the operating system and will have far more than 18 million customers a year from now. So it's a vibrant, competitive market. CHAIRMAN KENNARD: Thank you very much for your testimony, and we'll invite the next panel to come up, which is Esther Dyson and Barry Nalebuff. Thank you. While people are coming up for this next panel, I'd like to ask everyone here to please turn their cell phones off. This is the FCC. We love cell phones but not in our open meetings, so please turn them off. We're very pleased to have our next two panelists, Esther Dyson and Barry Nalebuff, and I'll remind you to please confine your presentation to five minutes so we can have some time for a free interchange with you. Esther? MS. DYSON: Thank you very much, Chairman and Commissioners. I'm glad to be here. I'm neither an economist nor a lawyer, so I am generally going to try and set some perspective from the viewpoint of a longtime industry observer, a venture capitalist and someone who's intimately involved with some of the policy issues for the Internet's infrastructure. I'd like to start out by saying that I think these hearings are tremendously important and useful. The Federal Communications Commission may have some very specific things it can and cannot do, but the role of government is not simply to either interfere or let things move forward without interfering. It is to educate the citizenry broadly, to educate the press, the consumers. I think what we want here is neither federal regulation nor is it self-regulation. It is regulation by the marketplace. And in order for that to happen, the marketplace has to be informed. Consumers may have a lot of choice, but if they don't know what those choices are, if they aren't aware of them, they won't be able to exercise them. So I want to say from the start, even though I do believe this merger should go forward, I think these hearings are an important part of the process of what the government should be doing. And with that, I'd like to talk in my remaining three minutes about the marketplace and a little bit about the government's role. This market is changing incredibly rapidly, and I don't think the Federal Communications Commission or Time Warner or AOL or I or anybody here could really figure out what is going to happen, but it's clear to me that the way people are looking at this market now seems to be missing a number of very interesting phenomena. Nobody here today has mentioned Napster or Gnutella. This whole -- we're talking about the content business as if the business of eating were entirely Lutess and perhaps McDonald's. But there's a huge amount of home cooking going on. And AOL built its business by providing its users access to each other more than it did by providing content. It is now heavily reliant on commerce. Content is almost -- it's like the beer you serve in a bar, but what you're really selling is the ambience -- the bartender, the other people in the bar. And to look only at content is to miss the point. We're looking today also at access. We're, again there's going to be huge amounts of competition from various other players. This has been gone into at length. But another part to mention is the whole billing relationship with the customer. That's, that's what AOL has now, to some extent. It sells access to these consumers for purposes of e-commerce. And in that way, it's going to be competing with banks, with utilities, with Amazon.com. The real key is to have that customer relationship, and here I would like to disagree or at least point out something that I think was missed. Through AOL you can indeed get to all these other Internet sites, and they would be incredibly stupid to try and block access. But they do provide links. They have favored marketing partners, for which they are paid. And that's part of what the issue is here today. How much choice does the consumer have and know about? How easy is it? At what point does making things incredibly convenient for the consumer limit the consumer's choice because he doesn't know about what else is out there? And that's why I think consumer education is tremendously important. In that context, then, the role of the government, I think, should be to let this go forward but to raise concerns -- to say this is what we're going to be watching for. Some people will say, well, that's unpredictable and arbitrary and the government should stick to its knitting and simply implement the laws, but this is a fast-changing market. There are concerns. There are concerns about things like instant messaging and, yes, AOL is starting to do the right thing, but I would hardly say it's voluntary. I would say it's in response to consumer and political pressure. And God bless it. I like to see that happen. And I see hearings like this as part of that whole process. Finally, there is indeed all the issues of open access, and Barry's going to talk about this, but let me just end by saying open access is not just a matter of principle, it's a matter of pricing. And so, watching those contracts and the terms of those contracts is indeed an important function. Thank you very much. CHAIRMAN KENNARD: Thank you very much. Dr. Nalebuff. MR. NALEBUFF: Chairman, Commissioners, many people here, myself included, are trying to understand the future of the Internet, its impact on our lives and the economy and how this proposed merger will change the course of history. Yes, actually I think the stakes are that big. And at the same time, I think that predicting the future of the digital economy is actually hopeless. In fact, given the flux of the environment today, I would be more than content to predict where we are today. So that leaves us in a predicament. The stakes are high and our knowledge is low. In this type of an environment, how do we best set policy? My answer here is simple. Keep a level playing field so that the best man, woman, technology company may win. This one single rule should be what guides any policy prescription. Now, of course that's easier said than done. What is the field? Is it home? Work? Mobile? What is level? Do we want to emphasize levelness within a technology, and thereby promote intersystem competition? Or emphasize levelness across technologies, and thereby promote intersystem competition? We certainly don't want to create equality by bringing everyone to the lowest level. And the current environment is decidedly unlevel. While phone and cable technologies are converging, the regulatory environments have not. There are open access requirements on DSL that do not exist for cable. Do we relax requirements on DSL? Create requirements for cable? Try to find some middle ground? Or simply rely on competition to sort things out? I think that creating a level playing field for open access will be your most challenging problem, and that is where I will focus my remarks. I believe that it is in the self-interest of Time Warner AOL to provide access to their system and that this is in line with their public statements. The question is at what price and with what terms? The bundling of a cable modem pipe and an ISP is not all that different than bundling an operating system and a network browser. The ability to sell a package of complementary goods and services as a bundle offers the bundler a tremendous advantage in the marketplace. By "complementary," I mean goods that enhance each other's values, as in hardware and software, hamburgers and french fries or, in this case, broadband cable pipes, ISPs and content. What's interesting here is that the advantage of the bundler comes from being able to offer a lower -- not higher, but lower price. And this is now where you see my role as a theorist come into play. When two separate firms get together to coordinate their pricing of complementary products, such as A and B, the monopoly price is lower than the result with uncoordinated pricing. The intuition is that when the price of A falls, that helps expand the market and part of those gains go to B. Unless the sellers of A and B work together, they won't fully recognize those gains, and thus the price will be too high. This is in direct contrast to when firms coordinate the price of substitutes or competing products, and thereby raise the price. When firms coordinate the price of complements, the price goes down. Thus, at first glance both the firms and the consumers are better off. The only reason that you may be wish to be concerned is that those who don't or who can't bundle are left at a big disadvantage and over time that may change the nature of competition. Bundling is neither win-win nor win-lose. It's win-win-lose. A win for the bundler, a win for consumers today, and a lose for those who are excluded from the bundle. This brings us back to the issue of a level playing field. Do you want to help keep the level field -- the playing field level for players who are left out of the bundle? What does the FCC want to do for players who, like AOL just a few months ago, are worried they'll have no one to dance with? If all consumers could choose between competing bundles for broadband, this wouldn't be a concern. In many places, competition does exist, from DSL bundles, from RCN second cable line, from wireless, cable and satellites. I expect that third generation mobile wireless technology will really solve this issue, but we are not there yet. Therefore, the question is whether or not to level the playing field by giving other ISP and content providers access to the Time Warner AOL bundle. I don't wish to regulate how the elements of a bundle should be prices when broken up into its components. The resulting arguments over setting those prices would be a lose-lose game. But we do have the advantage of AOL selling dial-up service and content as an add-on to those with Internet access. That leads me to ask whether the price they set for those two services, whatever they choose, might be a useful proxy for how much to discount the cable bundle when offering their cable pipeline services to other players. In particular, I think the discount should be at least the bring-your-own-access price, currently $9.95, plus some fraction of the extra price for dial-up service, currently $12.00 -- to get to the $21.95 price -- reflecting the basic ISP services. My final point is that there's another subtle example where the playing field today seems tilted. And it's a problem I think you should be concerned about, and it's something, actually, we heard again and again in Mr. Levin's testimony. This proposed merger is what has caught your eye, but practically every single issue that you will talk about today could also arise as a result of contracts, typically exclusive contracts. And you've heard about the problems that have been created by the Road Runner contracts and the @Home contracts, many of which are trying to be undone today. I believe that the FCC and other government agencies should be paying as close attention to these contracts as they do to merger agreements. Thank you. CHAIRMAN KENNARD: Thank you. Thank you both for that testimony. It was wonderful testimony. Let me follow up with a couple of questions, first for Dr. Nalebuff. Is there a role in this future of telecommunications as you see it for anyone who doesn't or can't bundle? Will we lose the unbundlers, if you will? Or the unbundled companies. MR. NALEBUFF: If, in the end, there is enough competition in different types of platforms, the advantages of opening up those platforms to, if you'd like, single providers, I think will allow them to exist. On the other hand, whether or not venture capitalists and the market will fund those companies in a world where they're not sure to get access is a question. The fact that they do have access now on dial-up or in the case of DSL certainly is helpful. I'm less worried, I guess, in a world in which you could have bundle against bundle competition. But I think it is inevitable that people who are -- who don't have a bundle to offer will be at a disadvantage in the marketplace. CHAIRMAN KENNARD: Okay. And let me -- I don't mean to characterize your testimony. I'm really just trying to understand here. Are you saying that in order to create that environment where someone who is not able to bundle its access to the platform, if you will, are you suggesting that requires some government intervention to make that happen? MR. NALEBUFF: I believe that they will certainly have access. The question is at what terms and what price. And moreover, I believe that if you required everything to be unbundled, actually prices would be higher, and adoption would be slowed down and consumers would be worse off. And so there is this tradeoff, if you'd like, between success today, penetration today and serving consumers today, and the ability of people to play going forward. I don't have more of an answer, I guess, than that. CHAIRMAN KENNARD: Okay. Fair enough. Other questions? COMMISSIONER POWELL: Yes. Ms. Dyson, I was really quite intrigued by your, your observation that by the nature of this medium and this phenomenon itself, there's a certain really high value to being able to go where you want, when you want in the way that you want, and that there is an economic incentive to do that, and I think it's an important point. And you pointed out that the more critical issue is favored status potentially, or links, or what consumers may not know about something. I, too, used to be sort of more persuaded by that argument, but I wanted to probe with you something that at least modified my thinking about it. I'm struck by the fact, in Internet space, that one's brand is, in fact, directions to their house. That is, if I'm Commissioner Mike.com, that's not only who I am, that's where I live. And in advertising or raising the prominence of my brand, I'm also raising the prominence of how to find me. And we could all go outside and sit on Independent Avenue and watch Metro buses go by with extraordinary amounts of dot com advertising. Television revenues and ads last year increased dramatically by virtue of the increased advertising by dot com companies. We tend to forget, I think, that reaching consumers about the possibility of sites or Web sites and access is not limited to whatever portal or medium accesses on the instrument itself. And I have a hard time seeing the day when I see an ad for Gaps.Jeans.com that I want to go to and AOL won't let me get there and forces me to go to Levis. We're going to have a very nasty conversation very quickly. And could you sort of comment on that phenomenon and whether that mitigates that concern to some degree. MS. DYSON: Well, I'm not sure whether I agree with you or disagree with you. I, the point I was trying to make is, though, even though you can type in GapJeans.com, and people will, and you can also go to a search engine, you are, when you get to, for example, the AOL site, there's going to be a link that says come to such and such a place. There are going to be ads, and you can follow those links. That happens a lot as opposed to people typing stuff in. And at the same time, there is a new generation, which unfortunately is not testifying, at least not so far as I know, which is 22-year-olds, who are much more comfortable with the medium, are used to using search engines and floating around and so forth, but there is, there is a challenge to have you get onto that piece of prime real estate, which is whatever the consumer sees when he first logs on, whether it's the AOL home page or -- a depressingly small number of people pick their own home page, which is not that of their primary provider. So the issue is making sure that at least those contracts are disclosed. If I get linked to someplace, I should know that somebody paid something to have me go there. That it wasn't that somebody thought it was simply the best place to buy jeans, but that they get 29 cents for every, every time I buy a jeans there. It's becoming, for better or worse, a very mercenary world. That's probably better than a world where people control things for political reasons, but it is very, very commercially driven. COMMISSIONER POWELL: I guess the point I was making is I'm concerned about the overstatement of the sophistication required for a user to get to something other than the favored link that the provider, by virtue of the bombardment and, by the way, often rich experiences of television advertisement, which people will say is the singly greatest mass marketization tool, advertising, newspapers, magazines, I mean everything is dot com. My five-year-old thinks everything is dot com. And I know that there's this youth component, but I'm not so sure that -- I guess I'm questioning that one's knowledge about what's available is really as sophisticated a function when there is this mass marketization of dot com addresses anyway. MS. DYSON: Again, I think there is this incredibly large commercial component, but people are also very much driven by their friends, and they -- the whole Napster, Gnutella phenomenon. They go where it's not commercial. And they understand that difference in a way that maybe the adults don't. They know what's commercial and what's not and, of course, they understand people are going to be trying to advertise to them. They, they're much more cynical than we are. But those things exist. And that was all I was trying to say. I have a fair amount of faith in the consumer, but I also believe in the role of the press and government and everybody else in educating them about what's going on. CHAIRMAN KENNARD: Mr. Furchtgott-Roth? COMMISSIONER FURCHTGOTT-ROTH: I would particularly like to welcome our witnesses, and particularly Professor Nalebuff. He and I were undergraduates together and sat through Professor Houseman's public finance course together. I think I had the seat right behind him, and if I'd been more clever I would have perhaps copied from Professor Nalebuff's notes, because he was the star of the class. And I think I may be one of the few people in the audience today who actually understood everything professor Nalebuff had to say. I particularly want to ask you, Professor Nalebuff, about the following situation, and this gets to a level playing field. Most of the issues that have been raised today potentially come under the rubric of potential anticompetitive behavior. The merger, at large, as opposed to license transfers -- the merger, at large, is being reviewed by the Federal Trade Commission. If the circumstances had been slightly altered, if perhaps the market valuation of the companies at the time of the acquisition had been slightly different, it might well have been the case that Time Warner had acquired AOL, in which case this hearing would not take place, because this agency would have no license transfers to review, there would have been no application for license transfers to come to the FCC. There are two situations. You might even describe them, as an economist, as two games that might be followed. One, in which -- and two entities come before one antitrust authority. And I wonder if you could comment first on whether any and all the issues that have been raised today will in fact be reviewed by the Federal Trade Commission in their antitrust review. And second, whether the outcome of a single -- the review by a single antitrust agency is likely to be different from a review by multiple antitrust agencies. MR. NALEBUFF: I have to say that you have obviously picked up on the -- quite rightly that many of the issues here are as much competition policy and antitrust as they are communication policy. I am also in Esther's camp in the sense of getting companies to talk about what their policies will be, establishing track records, getting this out in the open, I think will actually solve many of the concerns that people are, people have. Take one specific case. I think it is possible for cable operators to control and limit possibly access through their pipes. That if they decided that they didn't want Napster, no matter who your ISP is, it's possible they could block that. I think, in the end, they're not going to do it. I think that there will be a public discussion about this point and, as a result, if people thought that this was one of the things that they would go ahead and do, the clamor against that would actually prevent it from happening. So my view is that, like Esther's, that the process of getting people to talk about their plans for the future and the kind of commitments that they intend to make, the type contracts, is actually a good substitute in this case for regulation. And if they do that once or if they do that twice, I don't think it hurts. And that's my take. CHAIRMAN KENNARD: Sounds like a good endorsement for this hearing. Any other questions from the bench? Commissioner Tristani. COMMISSIONER TRISTANI: I wanted to follow up, professor, on your comment about contracts, which you made in your statement and you've just made now when you said the FCC and other government agencies should pay more close attention to these contracts. Can you enlighten me as to what paying close attention might mean? MR. NALEBUFF: Well, we see today how much effort Time Warner is going through to get out of the contracts that it was so happy to enter into two years ago. We see the problems that are possibly caused by the @Home contracts. So to the extent that you are all concerned with issues of open access, to the extent that this is in the companies' own interests, you know, how do we get ourselves to this position today? And the answer is that these companies signed contracts which do not look to be in either the public interest or their own interest, where we sit today. And yet, part of the problem was there was no discussion about those at the time. They sort of went under the radar. And I suspect that having the same type of public attention, press attention to the contracts that would literally keep other players out of the market and shape the game -- well, let me go back one step -- as a game theorist, I think the way you win, the way you succeed is not necessarily just by playing the game well, but by changing the game. And ways you can change the game include changing the players, as we see through this merger, and sometimes by changing the rules. And that's a way of doing it -- contracts are a way to do that. And so when we see cases where the game is being fundamentally changed, either through the playing field, the rules, the players is a time when we should be thinking about the consequences of that. CHAIRMAN KENNARD: Commissioner Powell? COMMISSIONER POWELL: I had a pretty broad-reaching question about -- people seem to accept quite simply that vertical integration or bundling is, A, necessarily going to prove advantageous as a producer or provider and, B, will automatically be accepted by consumers, when there are some fairly nontrivial examples, historically, of incredibly failed attempts to do that. Particularly, oddly enough, in information industries. Many people widely believe that Apple Computer Corporation's refusal to license other producers of its systems limited its network in a way that put it under water for a very long time. Similar, vertical integrations by IBM in hardware and/or software. The lists go on. Ford Motor Company doesn't produce steel anymore, as opposed to doing this. And there are some interesting examples of even bundled services being rejected by consumers. Some things as simple as they don't want a $350 communications bill, but they seem to be more comfortable when they're on six different ones. Could you opine a little bit about how safe an assumption it is that these vertical integrated companies and/or this bundled services will actually prove superior or is detrimental as suggested. MR. NALEBUFF: I think you're spot on there, and companies have gotten better and more sophisticated in their use of bundling. If you'd like, you don't just have a happy meal choice. You can also buy a hamburger or fries or a drink too, but you're given incentives to do all three. I think the notion that you would bundle and not give people any incentive to buy the individual components would be foolish both from a business perspective, as well as from a policy perspective. And so now the question is how much of an incentive will you have to buy what bundle? What are the combination of bundles that will be available? And who will be invited to play in those games? And so, yes, you can try to carry it too far, but I think we've seen, especially in the software industry, just the dramatic success of software bundles. And here, I actually don't mean Explorer and Windows. I really mean Office. MS. DYSON: I'd just like to add that another phenomenon that's going on is outsourcing, and AOL itself got rid of its own ISP operations and found it more effective to operate that way. I think you're going to see a lot of banks and other people offering ISP services not because they themselves own anything but because they're reselling them. And again, they have that consumer operation. So what looks like bundling from the point of view of the consumer may well be an assembly of different services from different providers. And that often is more effective, because nobody's very good at doing everything. And it's controlling that access, again, that is the issue. CHAIRMAN KENNARD: Commissioner Ness? COMMISSIONER NESS: You mentioned earlier that what we need to see is more disclosure of the provisions of the contract, and if consumers know what would be in these contracts, then they would be able, presumably, to make better choices as to where they want to go and what they want to see, and public pressure on the companies to provide more opportunities. How do we achieve such disclosure? Is this something that will happen within the marketplace itself? Either one of you. MS. DYSON: Ideally, you do it by getting the press to write about it, by holding hearings such as these, by getting consumers to ask, by creating competitive pressure. If that doesn't work, you probably, as the FCC, call up your friends at the FTC. There are -- and it's not simply what contracts some provider may have with another provider. It is what -- how much is being paid for this link. And you know, there's a question. How much do consumers want to know? How much do they take for granted? But I would like to see simply a broad education system where people understand this stuff. And if they don't, then maybe it's the government's job to educate rather than to regulate. But I hope the press pays more attention to this stuff, makes consumers more economically literate. CHAIRMAN KENNARD: Any other questions from the bench? Hearing none, we'll move to the next panel. Thank you both very much. We really appreciate your taking the time to do this. And I wanted to publicly acknowledge and thank Esther Dyson's work with ICANN. That is a tremendous public service, not only for the country, for the world, and we're very appreciative of your work. (There was a brief recess.) CHAIRMAN KENNARD: Okay, we're prepared to begin our next panel. We have a very distinguished set of panelists here. I also want to note that there are representatives from AOL and Time Warner at the table here. They will not be making opening statements, but they will be available to respond to arguments and critiques from the other panelists. It's my view that we have a more robust discussion if we can get a little bit of a debate going. It usually fleshes out the issues a little bit more and it makes for more interesting dialogue. So that's why Mr. Parsons and Mr. Schuler are sitting at the table. And with that, I'd like to begin with our first panelist, Professor Orton from the University of Wisconsin. And I'll ask that you give your name and affiliation for the record when you begin your statement. Professor. MR. ORTON: I'm Dr. Barry Orton, professor of telecommunications at the University of Wisconsin, Madison, and I'm a consultant to local governments who are franchising authorities in cable television. I'm an original founder of the National Association of Telecommunications Officers and Advisors and president of its Wisconsin chapter. I advised the city of Milwaukee and 28 Milwaukee area suburbs on the Time Warner AOL merger and, in fact, one of those suburbs was Brown Deere, Wisconsin, the hometown of Deborah Latham's family. So I've been representing local municipalities for about 20 years on cable matters. After reviewing the technical, legal and financial qualifications of AOL Time Warner and receiving assurances that existing franchise obligations would remain intact, my Milwaukee area franchising authorities all approved the transfer of control last month on my recommendation. They did not consider open access platform issues as part of their transfer process, and they are convinced that this is a national issue rather than an local issue. However, they are concerned about the local impacts of broadband convergence as reflected in this merger. Historically, they have had good experiences with Time Warner and its predecessors, going back to original Warner Amex back in the early '80s that got the original franchise in the Milwaukee area. From most communities' perspective, Warner has been a relatively good cable operator and a responsible corporate citizen. They have been, as you heard, at the forefront of experimentation with two-way cable and in development of quality programming. They were one of the original social contract cable operators, as you know, and they've been long supportive of public educational and governmental access on the local level. The willingness of the Milwaukee area municipalities I represent to approve this merger largely stems from the fact that the Time Warner entities holding their franchises remain in place, and Time Warner has agreed to continue to abide by the provisions of those franchises. There is a level of trust that's been built up from long-term service and from relationships with Time Warner's people. When problems have occurred, there has been good faith efforts to find solutions and make corrections. America Online has a far different history and does not enjoy the same level of trust on the part of local governments. Their repeated failure to provide adequate service capacity to meet the demand their marketing generates has a track record that makes local officials very nervous, quite frankly. AOL -- to most professional users and long-term users of the Internet, AOL has been looked at as the sandbox where people learn to use the Internet and perhaps graduate to more sophisticated services. My colleagues in education, particularly in distance education, have told me from various parts of the country that they have had problems with students who tried to take distance education courses who were on AOL, because they don't have all the full features that others do, for example, the ability to take full attachments from anywhere. And that's been a real detriment to some individuals trying to take distance education while on AOL. In some periods between 1996 and 1998, AOL's performance quality and level of customer service rivaled the worst cable operators before cable re-regulation in the '92 Act. If AOL hadn't been in the virtual marketplace but in the real marketplace and they sold hundreds of thousands of tickets to Bruce Springsteen concerts with only 50,000 seats available for the public, they probably would have been indicted. The three successive assurances of voluntary compliance with multiple state attorney generals, where they were explicitly forced to correct every part of their operation from the size of their modem pool to their refund policy to their telephone support system, their marketing materials and service capacity really bear looking at very carefully. In 1996, 20 states required AOL to refund customers who tried and failed to cancel their service and AOL abruptly switched to a 1995 flat monthly rate. In 1997, 36 attorneys general required them to stop advertising until they could provide sufficient modem access. In 1998, a 44-state attorney generals voluntary compliance act forced AOL to clarify its free trial offers, disclose its minimum -- its premium surcharges, its cancellation procedures and reform its other business practices. As Ohio Attorney General Betty Montgomery said in 1998, "The problem we're experiencing with AOL is similar to a parking attendant that sells too many monthly passes. When drivers show up at the garage, it's already full of cars." You should look at these voluntary compliance assurances and their subsequent reports to the attorney generals that they were actually meeting the terms of those and, in case you have problems getting them, which we did, I've finally gotten them and I've passed them on to the cable bureau staff. So I would recommend your looking at that. Finally, I recommend that you consider your regulations established under Section 76 through .309 that allow local governments to enforce minimum standards for telephone availability, installation and service calls and outages for cable television, and expand those to include high-speed cable modem service so that local governments could have the tools to answer the inevitable complaints they will get when providers of all sorts on cable modem service, whether it's @Home, Road Runner or others have outages, have service call problems, have telephone problems. Give local governments the tools they need to enforce those kinds of customer service standards, and I think some of -- at least the customers that do have problems will have someplace to go. Thank you. CHAIRMAN KENNARD: Thank you, professor. Mr. Cooper? MR. COOPER: Thank you, Mr. Chairman. My name is Dr. Mark Cooper. I'm director of research at the Consumer Federation of America. The Consumer Federation and its member groups have testified on this issue from Cambridge to Los Angeles to Broward County, Florida. We believe that the principle of nondiscriminatory access is not technology-specific. It has governed the communication and commerce highways of this nation since its founding, from roads to canals to railroads to highways to telecommunications network, open access, nondiscrimination is a standard that stands above technology and accommodates changes in technologies. Open access is above economic interests. Economic interests must be subservient to the principle of nondiscrimination. We firmly believe that if we had not taken up that fight at the local level, there would be no national policy debate, there would be no concessions. It is the cities across this country who voted for open access and went and got sued by AT&T that have created this debate and turned all of the major newspapers in this country around on the issue. For while consumers have enjoyed the benefit of hundreds of competitors on the narrowband Internet, things are moving in a very different direction on the broadband internet, which of course the Department of Justice has defined as a separate market. We have a dramatic increase in the concentration from recent mergers. We have the refusal of vertically integrated facilities owners to provide open access. We have the failure of proprietary platform owners to inter-operate for communications. The chokepoints on the broadband Internet are clear, backbone, bit rates and bootstream. The sticky features that lock consumers into the Internet platforms have been identified, instant messaging, keywords, e-mail addresses and electronic programming information. A handful of dominant firms are leveraging those chokepoints to extract economic rents and foreclose choices to consumers. The cable industry has succeeded for several years now to prevent competition by banning streaming video. Millions of consumers have been denied a choice of ISPs on their cable modem systems. The dispute over AOL's instant messaging practices has simmered for a year with no end in sight. AOL's would-be cable subsidiary has given the public and policy makers a brutal lesson in what it looks like to negotiate with someone who can pull the plug. If wire owners can give their own programming an edge, we will not have fair competition for eyeballs. What is quite clear is that as the commercial value of the Internet increases, these companies are more than willing to destroy its openness in pursuit of their proprietary economic interests. These powerful interests will frustrate commercial negotiations for nondiscrimination. Two years after we first asked for open access, the exclusionary contracts are still in place. Virtually no deal -- details of nondiscrimination have been provided. And there is no way for any individual ISP to assert a right to that nondiscrimination if they are frustrated. The frailty of the voluntary access promises was demonstrated in Los Angeles when AOL was asked to simply put its MOU at the back of the franchising agreement. And it objected vigorously. How can it be that it is in the economic interests to provide open access but when you ask, would it hurt them if they were required to do so, it suddenly becomes a disaster? The two cannot both be true, unless they want commercial leverage in negotiation, which is exactly what they're exercising. We do not have to tolerate the refusal to interconnect and to provide open access. The U.S. Appeals Court in the Ninth circuit clearly concluded that the "provision of conduit services of underlying telecommunication services are, in fact, subject to a common carriage obligation," that 200-year-old principle I mentioned at the beginning of my remarks. Open access is the law of the land. Open protocols and fair competition for eyeballs must be the policy of this Commission. We have outlined four specific steps that this Commission should take before they allow this merger to go forward. And one of them might well be until they deliver those promises, don't approve this merger. Wait till the end of the year or the middle of next year until you see what open access looks like before you let the merger go forward. And that may be a fifth one. First, in order to maximize rivalry between companies, you should prevent them from owning any interest in each other's operations. There's a handful of them left competing for consumers in this industry. Second of all, although cross-technology has never disciplined market forces in this industry, we must maximize that policy by not allowing any entity to own more than one platform technology. Third, to prevent the leveraging of market power in conduit in facilities into the content market, we must have open access. And fourth, proprietary -- CHAIRMAN KENNARD: Thank you, Dr. Cooper. Mr. Mirabal. MR. MIRABAL: Thank you. My name is Manuel Mirabal. I'm chair of the board of directors of the Hispanic Association on Corporate Responsibility, better known as HACR. HACR is a coalition of 10 of the largest Hispanic national organizations working on public policy in the U.S. We represent the interests of 36 million Hispanic Americans. HACR has a vital interest in the proposed merger. We believe it is essential that the potential economic and social benefits of the Internet and telecommunications revolution must be available to all segments of the population. We further believe that the proposed regulatory process, which we're seeing today, is necessary. These hearings afford citizens the right to be heard, and through this process, we must ensure that the interest of the public is protected. HACR has serious concerns about the claims AOL and Time Warner have made. I have concerns that the merger will not foster a more competitive environment, offer more choices nor create social benefits. We believe that the merger will create a dominant entity, which has the potential to limit competition, restrict content and monopolize services in an industry that continues to evolve rapidly and that will penetrate more and more into our everyday lives. The combined record of both applicants in responding to the needs of the Hispanic community consists of minimal efforts to address programming, cable service and Internet access. Furthermore, neither company has responded to our request for information concerning the impact of the merger on the Hispanic community. Consequently, we are deeply concerned that this merger will make matters worse than they are now for the Hispanic community, because of the limited ability of this community to afford costly Internet services, the existing disparity in access to Internet and telecommunications services and the limited geographical cable service areas, which exclude large segments of our community. We, therefore, are urging the Commission to deny the application for transfer of control by AOL and Time Warner. Combined, the new company would become a cable Internet media conglomerate, dominating three important and distinct elements of this industry -- cable and television content, Internet content, and cable assets. The potency of this vertical integration in one company, we believe, could serve to dampen competition and harm all consumers. Diminished competition would disproportionately affect the Hispanic community due to socioeconomic reasons. AOL brings with it 23 million narrowband customers. Time Warner brings a dominant position in the delivery of entertainment news and educational programming in geographic markets it serves. With this impressive collection of assets and dominance in the related markets, the combined AOL Time Warner will be able to behave in ways that could limit consumer choice and harm competition. This merger, which brings these elements together under the control of one company may prove a threat to the competition in conduits and content if left unchecked. AOL Time Warner will have complete control of content and distribution in markets served by Time Warner Cable and may engage in controlling content by denying or complicating access to their cable delivery system. It's not enough that Mr. Levin and Mr. Case have signed a nonbinding memorandum of understanding pledging to open their cable lines to multiple Internet services. We have to see that in place. The new company will also have greater incentives to control or discriminate with regard to content as we move into the uncharted territories of Internet interactive television. Cable has a virtual monopoly in the delivery of this television service, and that doesn't appear to change in the near future. Absent conditions prohibiting AOL Time Warner from discriminating against content it does not own or control, it is conceivable that the new company could dampen competition. Of equal concern to the potential risk of content discrimination, should the merger be approved without safeguards to protect the consumer, is the threat to competition in the market of delivery of broadband and content services. The potential for consumers to be harmed by the dimi