[Senate Hearing 106-1090]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1090
AOL & TIME WARNER MERGER
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 2, 2000
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Martha P. Allbright, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
C O N T E N T S
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Page
Hearing held on March 2, 2000.................................... 1
Statement of Senator Abraham..................................... 38
Statement of Senator Breaux...................................... 7
Statement of Senator Bryan....................................... 6
Statement of Senator Burns....................................... 1
Statement of Senator Cleland..................................... 7
Statement of Senator Dorgan...................................... 5
Statement of Senator Gorton...................................... 4
Statement of Senator Hollings.................................... 3
Prepared statement........................................... 3
Statement of Senator Rockefeller................................. 6
Statement of Senator Stevens..................................... 30
Statement of Senator Wyden....................................... 4
Witnesses
Berman, Jerry, Executive Director, Center for Democracy and
Technology..................................................... 51
Prepared statement........................................... 53
Case, Steve, Chairman and CEO, America Online.................... 8
Prepared statement........................................... 11
Kimmelman, Gene, Co-Director, Washington Office, Consumers Union. 64
Prepared statement........................................... 66
Lande, Robert H., Senior Research Scholar, American Antitrust
Institute...................................................... 90
Prepared statement........................................... 91
Levin, Gerald, Chairman and CEO, Time Warner, Inc................ 13
Prepared statement........................................... 16
AOL & TIME WARNER MERGER
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THURSDAY, MARCH 2, 2000
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10:35 a.m. in
room SR-253, Russell Senate Office Building, Hon. Conrad Burns
presiding.
OPENING STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. The Committee will come to order. I would
like to welcome everyone here today to this hearing, which
concerns an issue of critical importance to the future
development of the Internet, the proposed merger of two massive
players in the Internet access and media content fields, and
that has to do with America Online and Time Warner.
The purpose of the America Online-Time Warner merger would
be, or the proposed merger, I should say, would be the largest
merger in history. The amount of money involved is staggering.
The initial price on the January 10 announcement was over $156
billion.
This Committee takes its oversight role very seriously,
particularly when scrutinizing a combination of such
unprecedented scope. Of particular importance in fulfilling the
Committee's due diligence duty is a close examination of the
potential effects on consumers of such an immense company.
AOL has about 21 million subscribers today, which is about
six times larger than the nearest competitor for Internet
service, and that is MindSpring. Time Warner is the Nation's
second largest cable provider, with a vast array of video,
music, and print content that pervades America's every-day
life.
From the checkout stands in the afternoon to the couch at
home in the evening, clearly the proposed combined company has
the potential to use the vast power for the good of America.
However, while the proposed merger before this Committee has
the potential to provide consumer benefits, we also know the
difference between potential and reality. While the combination
of Time Warner's enormous treasure trove of content and America
Online's 21 million subscribers could provide exciting new
services, several serious public policy issues are raised by
the creation of such a potentially dominant entity.
In assessing the potential future effects of the proposed
merger, it is usually most helpful to look at the current
market behavior of the players involved. With this in mind, I
am particularly troubled by the recent developments in the
instant messaging area. Instant messaging is a real time chat
format which allows users to communicate quickly and cheaply
with each other.
America Online alone has over 45 million registered
subscribers, and after its 1998 purchase of ICQ, the major
alternative instant messaging system, currently commands over
80 million messaging users overall. These users generate nearly
a billion messages a day, far more than the entire mail volume
of the United States Postal Service.
The mode of communications is especially popular with young
people, who favor it over traditional telephone conversation in
many cases. As we all know, what has made the U.S. telephone
network the envy of the world, and a tremendous positive
economic force, it is the fact that it is available everywhere
to all users. The fact that anyone can access the network makes
it vastly more valuable to everyone.
The spectacular growth of the Internet itself was made
possible by the development of open networks, not closed
systems. Unfortunately, in the instant messaging area, I fear
we are headed in the other direction. Just yesterday my
colleague, Senator Hollings and I were presented with a letter
from all of the major competitors that offer instant messaging
services stating that their products are being purposely
blocked by the dominant provider of such services, America
Online. This letter was signed by many companies, including
AT&T, AltaVista, Prodigy, and others too numerous to mention
here.
This very Committee heard just last summer that serious
efforts were being undertaken by America Online to deal in good
faith with these interoperability problems so that all
consumers could benefit. In a July statement issued by the
chairman of the working group designed to solve these problems,
AOL stated that it, quote, believes that users should be able
to exchange messages regardless of which product they use.
AOL also said it was, I quote, fast-tracking these efforts.
Well, it is 7 months later, and these blocking problems are
more evident than ever, and I look forward to the testimony of
the witnesses to clarify these recent events.
Another issue that many Members of this Committee will be
interested in, I assume, would be the so-called open access. I
followed with great interest the announcement on Tuesday of
this week that AOL and Time Warner committed to give their
broadband cable customers direct access to Internet service
providers on a nondiscriminatory basis. While I was never in
favor of Government intrusion and regulation of the cable
networks, I applaud the efforts to reach privately negotiated
settlements.
I should add that while the memorandum appears to be a
positive first step, on closer inspection several questions are
raised about how binding such agreement will be, and I look
forward to a more detailed description of how this
understanding would translate into the marketplace with our
witnesses, and I look forward to your testimony today.
I would also like to invite Mr. Case and Mr. Levin if they
would--March 21, we kick off this year's activities in the
Internet Caucus, and we will invite both of you to be a part of
that, coming up on March 21. You might have your people put
that on your calendar, and I thank you for coming today.
Now I turn to my good friend, Senator Hollings.
STATEMENT OF HON. ERNEST F. HOLLINGS,
U.S. SENATOR FROM SOUTH CAROLINA
Senator Hollings. Thank you, Mr. Chairman. I think I can
save us time by including my statement in the record here at
this point. Let me thank the staff for preparing this
statement, because I am not intelligent enough to prepare one
on this subject.
Things are breaking so fast, and we come from a policy of
open access, and not having control of both content and
message. That has been constant throughout our history with TV.
Both of you folks at the table are way smarter than we are, but
you understand that in the television industry we would not
even let the networks produce their own programs. That was to
try, under the First Amendment, freedom of speech, more
flexible programs than otherwise, and even in the 1996
Telecommunications Act, I remember we put in there for the Bell
Companies if they got into video programming that they have
open access, nondiscriminatory conduct and everything else.
Now, what I am trying to see is, we have seen the
tremendous merging of content and delivery, and anybody that
studied John D. Rockefeller--who did not make his money on oil,
he made his money on the distribution and delivery of that oil,
and I see that you smart folks are really producing--and I will
wait my turn for the questions, but it looks to me you all are
running down--you all have got the Microsoft book, going right,
straight down the Microsoft route that has got them in court
right now, but I do thank you, and I would yield to my
colleagues.
[The prepared statement of Senator Hollings follows:]
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
The merger of AOL and Time Warner represents the synthesis of old
and new media, narrowband and broadband, and content and delivery
systems. It also represents the union of the world's largest Internet
service provider and the world's biggest entertainment and media
company. As such, it raises several public policy concerns that require
significant examination.
AOL has 23 million subscribers, six times larger then
its biggest Internet competitor.
According to the International Data Corp (IDC), a
Massachusetts research and financial data firm, AOL controls
more than 40 percent of the Internet services market.
Time Warner controls the second largest cable system
in the country, owns 20 percent of the cable lines and serves
12.6 million cable customers.
Time Warner produces its own content and owns CNN
Network News, Cinemax, HBO and TNT, as well as Warner Brothers'
movies.
On the print side, the company publishes numerous
popular magazines such as Time, People, Sports Illustrated,
Southern Living, Fortune and Money, which are read by 120
million people.
There is tremendous potential for the exercise of undue market
power and the discriminatory treatment of its competitors by this
merged company. AOL already has used its market clout to forge
agreements with top computer manufacturers to have its Internet access
service bundled on new computers. This of course was the basis for the
Microsoft anti-trust suit by Justice. In fact, that suit was directly
tied to Netscape which is now owned by AOL. Now under this new
agreement, new computers purchased from Dell, Compaq, and Gateway will
have AOL's software.
It also is my understanding that AOL has developed a new 5.0
software that reportedly disables its competitors when installed on a
user's computer, and is the subject of class action litigation in
Arizona, Washington and Oregon. In order to rectify the problem
consumers must call the AOL help line and reprogram their computer.
While AOL is espousing nondiscriminatory treatment and choice, it is
using software that makes it difficult to use multiple service
providers. Will there be other changes in the Internet's architecture
or AOL's software that will make it difficult for others to compete on
a level playing field against AOL.
Finally, this transaction raises the potential for discriminatory
practices with respect to content delivered over the Internet/cable
platform that will be deployed by AOL-Time Warner. When we passed the
cable act in 1992, we were acutely aware of the dangers posed by the
vertical combination of both content and distribution systems, and the
inevitable temptation of the owner of both the content and distribution
system to discriminate against their competitors. Then, in the
Telecommunications Act of 1996, we included a provision to ensure that
if the telephone companies provided video programming, they could not
``unreasonably discriminate . . . with regard to material or
information (including advertising) provided by the operator to
subscribers . . . or in the way . . . material or information is
presented to subscribers.'' Now we have a cable-Internet merger in
which economic incentives will exist to favor their content, news,
material, and information, over that of competing content and news
information providers. The FTC and Congress should seriously consider
whether this combination should be subject to similar principles of
non-discrimination.
I look forward to the testimony of our witnesses today on these
important issues.
Senator Burns. Thank you very much. Senator Gorton.
STATEMENT OF HON. SLADE GORTON,
U.S. SENATOR FROM WASHINGTON
Senator Gorton. Mr. Chairman, in listening to both you and
Senator Hollings I share many of your apprehensions. This is a
huge merger. It looks as though it could easily lead us to a
point where we have only a handful of major providers in the
most dynamic part of our economy, and I share many of the
reservations, though not necessarily all of the conclusions of
the three members of the second panel that is going to appear
before us here today.
And I think it is right and proper on your part that we
should take a very careful view of this merger, and should
review it with at least a sufficient degree of apprehension
that we require a heavy burden of proof on the two merging
partners, and that they are not going to lessen competition and
openness in the field together, and they play such a dominant
role in.
Senator Burns. Thank you very much. Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. I will be very
brief, and I want to pick up on what Senator Hollings said. It
seems to me that in the 21st Century the money is to be made in
interactivity, and I think when you look at the vision that the
two of you have discussed with this merger. I think your vision
is what we will need to examine. There are two areas in
particular that I would look at with you.
First, because of the size of this merger and the number of
people involved, to a great extent what the two of you are
doing is going to have enormous ramifications for privacy
policy in this country. Senator Hollings has a lot of good
thoughts on this. Senator Burns and I have a bipartisan bill
with respect to this issue. Senator Kohl has signed on to it.
Mr. Case, I heard you say a couple of days ago that you
were essentially ready to back privacy legislation and, given
the fact that this is perhaps number 2 now in the polls with
respect to the American people, I would like to see you outline
your views on privacy this morning. You will be asked about
what you think the elements of a good privacy statute ought to
be. That is number 1.
The second area, so that you two will be aware of what I am
going to ask, is this question about how to make sure that
there is no discrimination against unaffiliated content
providers. As you know, there is great concern in this country
with respect to all of the other content providers who are not
affiliated with your system about how they are going to get a
fair shake, and I would like to have you all outline how it is
that those folks are going to be treated fairly, so we do not
end up in a country where, to get some of those content
providers, people have got to scroll along for eons in order to
get access to those materials. That is what I will be asking.
Mr. Chairman, I look forward to working with you and
Senator Hollings in a bipartisan way.
Senator Burns. Thank you very much. Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. Let me
thank Mr. Case and Mr. Levin for coming today. I have spoken at
some length about my concern about concentration. That is not a
secret. My concern about concentration deals especially with
the question of how does concentration affect competition?
When we rewrote the Telecommunications Act our interest was
in fostering aggressive, robust competition, and that is what I
am going to be interested in today. How does this merger affect
competition?
And let me also say that I think privacy matters a great
deal. As Senator Wyden indicated, privacy is one of the policy
areas that we are very interested in.
And I would also say that I was surprised and also found
appealing the announcement earlier this week about open access.
I think that is certainly a step in the right direction, but we
must be concerned, as all of us proceed, about the competitive
forces that can exist in the marketplace in telecommunications
and entertainment. What are the competitive forces that will
allow the consumer, the best possible product at the best
possible price? I am interested in hearing all of the witnesses
discuss today the effect of this proposed merger on those
issues.
Again, both of you are very successful businessmen who have
built interesting and wonderful companies. Let me just say that
with respect to the $1 billion instant messages, my children
contribute a lot to that $1 billion a day, regrettably. We are
working on paring that down just a bit.
But this is a fascinating time and a fascinating industry.
I am very interested in your presentations, and the
presentation of the panel following you.
Senator Burns. Thank you very much. Senator Bryan.
STATEMENT OF HON. RICHARD H. BRYAN,
U.S. SENATOR FROM NEVADA
Senator Bryan. Thank you very much, Mr. Chairman, for
convening this important hearing, and thanks to our
distinguished witnesses for appearing here today. I think this
merger raises some potentially troubling implications in terms
of public policy, and at least two areas that are of concern to
me have been mentioned by my colleagues. These areas include
the impact this merger has on competition, and whether there
will be open access.
Mr. Case, you appeared before this Committee last year,
prior to the merger. At that time you made, I thought, a very
compelling argument. You urged us to consider having the FCC
open a rule. I want to explore whether or not, after the
announcement, you think we need to followup on that with some
additional action, either at the regulatory level or at the
legislative level and, as two of my colleagues have mentioned
previously, the issue of privacy is not just a phantom issue.
It is not ephemeral. It is an issue that I hear from my
colleagues and from my constituents virtually every day.
The Wall Street Journal did an opinion poll sampling last
year with a focus on the millennium. What are the concerns that
most Americans have in the next century? It was an open-ended
poll. The single largest responding category at 29 percent
expressed a concern about loss of privacy. I want to explore
those issues with you, as I know a number of my colleagues may.
Again, I look forward to the opportunity to ask some
questions, and thank you, Mr. Chairman.
Senator Burns. Thank you, Senator.
Senator Rockefeller, I wonder if you might autograph one of
those books that Senator Hollings was referring to.
[Laughter.]
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. That is on distribution and not on
collection.
[Laughter.]
I would say to our two witnesses that I do not necessarily
start out skeptically on this merger. There are a number of
questions that I need to have answered, and time will help us
do that as well as this hearing. This whole phenomenon of the
new economy is moving forward, and I am not inclined to try to
stop it unless it is unwilling to address certain areas I think
that you will be, and I have some questions for you about this,
but you know, the privacy question is huge.
Senator Hollings has asked me to do some work on that, and
I am going to because he has asked me to and also because I
think it is a huge issue. Another important issue is the whole
question of not undermining consumer choice when it comes to
broadband.
But I do not start out skeptically. I start out with an
open mind, and a willingness to hear how you respond to what
people have to say because that is what hearings are for, and
you have both the FTC and the FCC to go through. The FCC
doesn't ordinarily turn down mergers of this sort. The FTC may
very well approve it, I do not know, but your presence here is
important, and how you answer questions will be extremely
important.
Thank you, Mr. Chairman.
Senator Burns. Thank you, Senator.
Senator Stevens.
Senator Stevens. I applaud the merger. I am happy to be
here and hear your statements. I hope my colleagues will let us
get to that.
Senator Burns. Thank you, Senator Stevens.
Senator Breaux.
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. Now, should I say anything?
[Laughter.]
Well, I thank the chairman, and I think you can tell the
scope of this hearing is very important because you have heard
from every Member of the Committee, and that is what happens
when the subject matter is as important as this.
You know, it seems like now more and more we have less and
less. I mean, it seems like every day we have fewer oil and gas
companies, fewer airlines, fewer railroads, and fewer
telecommunications companies in this country, and big is not
necessarily bad, but this is a country, as all of you know who
are very competitive in your fields, that has been built on
competition. The question I think we legitimately need to look
at is how, when you have less and less, do you have more
competition? It is a legitimate question. I know you are
prepared to respond to it, and I look forward to your response.
Thanks.
Senator Burns. Senator Cleland.
STATEMENT OF HON. MAX CLELAND, U.S. SENATOR FROM GEORGIA
Senator Cleland. Thank you very much, Mr. Chairman. I am
intrigued at this possibility this morning of our hearing. As a
Democrat, I do not get a chance to encounter billionaires very
often, so I just came to sit and stare.
[Laughter.]
Additionally, coming from Georgia----
Senator Breaux. You look at Rockefeller every day. We've
got one.
Senator Cleland. But he's ours.
[Laughter.]
Knowing the history of TBS in Atlanta, and how it became
Time Warner, and knowing Ted Turner as I do, I am also
fascinated to see the guy who attempts to be Ted Turner's boss.
[Laughter.]
So we welcome you both today. Let me just say, in 1966 Time
Warner did purchase TBS in Atlanta. A few months after that
merger the TBS subsidiaries of Time Warner employed almost
8,000 employees worldwide, and almost 5,000 in Georgia, and
today those numbers have risen to over 9,000 employees
worldwide and over 5,500 located in Georgia, so I think that
was a good purchase and a good deal.
As the TBS continues to launch new products, these numbers
will continue to grow, I am sure, and create growth in other
segments of our economy in Georgia and in the country. Now the
merger we are discussing today has the potential, I think, to
imitate many of these same positive results.
It involves two dynamic leaders and two powerful
industries, and it is no coincidence that it was announced just
hours into what Mr. Levin has coined the Internet Century. I am
very interested in learning how the merging of TV, movies,
print media, with the Internet can really help average
Americans, can help the consumer.
The proposed merger between AOL and Time Warner, the
largest in U.S. history, offers a tremendous opportunity to
help shape the future of the Internet. This understandably
creates a great deal of interest, speculation, and some
anxiety. There is really no precedent for the merger of a media
provider and an Internet provider. It leaves the merger open to
interpretation of what is likely to happen.
I personally am looking at this with great optimism and
hope and faith, and belief in AOL and Time Warner that they
will take full responsibility in this incredible undertaking.
From the public interest standpoint, it is AOL and Time
Warner's responsibility, I think, to handle the future in such
a manner that your handling of both distribution and content
will not produce an unfair advantage in the marketplace. Many
of your competitors are expected to follow your lead in the
future, so you have a grave responsibility to lead us all
bravely and courageously and responsibly into the 21st Century.
Many have already formed opinions on what the future holds,
but nobody really knows what the future may hold. I am
particularly interested in this in terms of the bottom line,
what it does to the life of the average American. Does this
merger help the average consumer of goods and services and
information in America? I will be looking forward to your
responses.
Thank you very much, Mr. Chairman.
Senator Burns. Thank you, Senator. Twenty years of
officiating football, I assume the captains have introduced
themselves. I will toss the coin to see who gets to kick and
who gets to receive, but whoever would like to lead, and we
welcome Steve Case and Gerry Levin, and we appreciate your
attendance here this morning, as there is quite a lot of swirl
around this proposed merger, and a lot of information, so we
thank you for coming this morning, and whoever would like to
lead.
STATEMENT OF STEVE CASE, CHAIRMAN
AND CEO, AMERICA ONLINE
Mr. Case. I will start. We certainly understand the ground
rules in terms of who is kicking and who is receiving. You get
to kick, and we are here to respond as best we can.
[Laughter.]
Senator Burns, I really enjoyed your opening statement, but
then you came to the however, and it got a little more
troubling. I look forward to talking about instant messaging,
and privacy, and open access, and some of the other issues that
have been raised, and I apologize to Senator Rockefeller for
somehow having his family name dragged into this.
[Laughter.]
I also am reluctant to go forward with this statement after
Senator Stevens' comments, but I do think it answers many of
the questions that have been raised. As a starting point I
think it would be worth moving through it, and I will try to do
it quickly.
We see this merger, as you might imagine, as an opportunity
to increase consumer choice and to spur new innovation, and to
build further on notions of consumer trust and confidence and
to really--I think it is something you all referenced in your
comments, to extent the benefits of this Internet revolution to
everybody.
In a few short years the Internet has already begun to
transform our every-day lives and our businesses, and our
schools certainly, and our homes, and also in our Government
today we are on the verge of what we think will be a second
Internet revolution, and it is a time of incredible innovation
and intense competition.
We welcome that competition, because we believe our
companies and this new company will be stronger because of it,
so while we believe the combination of our companies will allow
us to make the most of what we see as the changing world, there
are a few things that will not change.
First, we will continue to provide consumers with the
broadest, most empowering range of choices, fostering the
innovation and competition that are the Internet's driving
force. In the Internet age, companies must constantly innovate
if they expect to succeed, and history shows that the most
powerful innovations are created when we find new ways to join
the emerging technology with existing content.
We hope AOL-Time Warner will lead a new era of innovation
within our industry by providing consumers with an ever-
expanding array of content from music, to movies, to
publishing, to communications, to financial services, and AOL-
Time Warner will never limit content diversity on any of our
systems. If we did try to do that, consumers would waste no
time in migrating to other Internet and media services.
A second commitment is, we will continue working to earn
consumers' trust and confidence. At AOL, we have put in place
what we think is the best privacy policy in the industry, built
on core principles of notice and choice. The same is true for
Time Warner, a company that is committed to journalistic
integrity and consumer choice both on and offline.
I want to thank this Committee for keeping consumer trust
and confidence at the top of your agenda. Many companies,
including both Time Warner and AOL, supported legislation to
put in place protections for information about children using
the Internet could not be gathered without parental consent.
We understand the importance of trust to Internet
consumers. As you know, the FTC is reviewing our industry's
self-regulatory efforts. Armed with the information the FTC
report will provide, we can engage in a deliberative process
among Members of Congress and the industry and consumers which
will tell us whether other privacy legislation is necessary,
and I will personally be happy to work with you to try to reach
the best result.
One thing is certain, though. We share the same goal, which
is protecting consumers and their families by establishing a
new standard of privacy and security for the digital age, while
permitting the Internet to continue to flourish.
Third, we will continue to work to implement open access,
further increasing consumer's choices and enriching their
online experience.
Last year, as has been mentioned, I told this Committee
that history demonstrates that as long as infrastructure on
which the Internet is built remains open, competition and
innovation will flourish, and the Government and industry
should work together to ensure a vibrant Internet marketplace.
We are seeing real progress in the marketplace on
implementing open access, and we are proud of the role we have
played in stimulating that progress. Implementation of open
access all across the Nation is no longer a question of
whether, but rather, of when.
On the day we announced this merger, AOL and Time Warner
committed to open its cable network for competition through
multiple ISP's. This week, we took the next step, releasing a
memorandum of understanding that will form the framework for
delivering AOL and other ISP's over Time Warner cable, and give
consumers real choice.
Let me be very clear about what that framework means for
consumers. Broadband consumers will not go through AOL unless
they choose AOL. If they choose another Internet service
provider, they will not see AOL or its front screen, and they
will not be blocked from any content they wish to see. That is
real open access, and it is the right policy grounded in the
right principles for consumers, for the cable industry, and for
the growth of the Internet.
Finally, we will continue to broaden the reach and extend
the benefits of the Internet, leaving no community behind. Both
AOL and Time Warner have taken significant steps to help close
the digital divide, the gap between those who have access to
these new tools and those who do not.
At AOL we are helping to launch PowerUP, a private public
partnership to teach young people the skills they need and give
them the guidance they need to make the most of their potential
in this new, connected world. This is not just a problem of the
inner city. That is why the AOL Foundation created the AOL
Rural Telecommunications Awards, which awarded grants to people
who are using the interactive medium to revitalize towns with
less than 10,000 people.
We will take this challenge seriously at AOL Time Warner,
not only as a company, but as individuals with a shared
personal conviction that we must use our leadership to build a
better world. These are the issues we all need to address to
truly build a global medium that empowers people and truly
benefits society, not just the Internet industry.
The truth is, as many of you know, without the Government's
leadership on projects like ARPANET, and without the support to
the NSF, the Internet would still be a distant dream. Without
your leadership and support in the future, the Internet may
never reach its full potential. We have a once-in-a-lifetime
opportunity to shape this medium while it is still young, and
there is definitely room for a continuing partnership between
Government and industry to ensure we do it right.
I appreciate the time and effort the Committee is taking to
hear about this important merger, and I thank you in advance
for the work you will continue to do in the months and years
ahead. Together, we believe we can build a medium that will
improve people's lives and a medium we can be proud of.
Thank you.
[The prepared statement of Mr. Case follows:]
Prepared Statement of Steve Case, Chairman and CEO, America Online
Good morning, Chairman Burns, Senator Hollings and Members of the
Committee.
As you know, on January 10, AOL and Time Warner announced our plan
to join our two companies--creating the world's first truly global
media and communications company for the Internet Century.
We see this merger as an opportunity to increase consumer choice
and spur new innovation, to build consumer trust and confidence, and to
extend the benefits of the Internet Revolution to every community. We
intend to make the most of this opportunity.
In a few short years, the Internet has already begun to transform
the way we live our lives--changing the way we communicate with
friends, family and even our political leaders, the way we shop and are
entertained, the way we strengthen our communities at home and build
the world community.
Now, we are on the verge of a second Internet revolution.
Technological advances are increasing the range of online content
people can enjoy and use--from cable broadband, satellite, and DSL
connections, to a new generation of wireless and handheld devices that
make the Internet available anywhere, at any time.
This is also a time of incredible innovation and intense
competition. We welcome that and believe that our new Company will be
stronger because of it. The Internet never could have become a driving
force of the new economy--and neither AOL nor Time Warner could have
gotten where we are today--without consumer-driven competition.
Change this fast and far-reaching brings with it new
opportunities--but it also brings new responsibilities. So, while we
believe that the combination of our companies will allow us to make the
most of the changing world, there are a few things we won't change:
First, we will continue to provide consumers with the
broadest, most empowering range of choices, fostering the
innovation and competition that are the Internet's driving
force.
Second, we will continue to work hard to earn their
trust and confidence.
Third, we will continue to work to implement open
access--further increasing consumer's choices and enriching
their online experience.
Finally, we will continue to broaden the reach and
extend the benefits of the Internet--leaving no community
behind.
Let me start with our first and most important commitment at AOL Time
Warner: empowering consumers and encouraging innovation.
In our business, consumers are the ultimate venture capitalists--
they guide our business models and drive our ideas. Consumers have been
empowered, and they are exercising their power every day--seeking out
the Internet service that meets their needs and the content that
matches their interests: movies, books, stock quotes, even polling
data.
One thing the last few years have made crystal clear is that in a
rapidly changing, Internet-supercharged economy, companies must
constantly innovate and continuously remake themselves if they expect
to attract customers.
And history tells us that the most profound, life-changing ideas
come to life when people find valuable new ways to join emerging
technology with existing content.
HBO combined the idea of cable television and Hollywood movies--and
transformed the way we think about entertainment. CNN took cable into
the realm of TV news--and changed the way we learn about the world. In
the same way, VCRs transformed the movie industry, and CD technology
transformed the music industry.
We hope AOL Time Warner will lead a similar new era of innovation--
providing consumers with an ever-expanding range of content across
industries, across platforms, across media--from music to movies to
publishing to communications to financial services.
And, let me be very clear: AOL Time Warner will never limit content
diversity on any of our systems. If we limit content, if we do not
promote a diversity of voices, if we do not maintain scrupulous
journalistic standards, then consumers will waste no time migrating to
other Internet and media services.
Second, AOL Time Warner will build on the consumer trust and confidence
that have made our brands among the most trusted in the business.
As separate companies, we have made a commitment to consumers--and
we have kept it. As one company, we will continue to make that
commitment--and we will continue to keep it. We will take building
consumer confidence and trust to the next level--working within our
industry and with all of you to craft responsive and responsible
policies that address consumers' concerns.
Let me clarify what I mean by this. The Internet will never reach
its full potential if people don't feel comfortable and secure using
it--nor will they let their children use it.
This Committee and others know this, and I want to thank you for
keeping these issues at the top of your agenda. At AOL, we have put in
place what we think is the best privacy policy in the industry, built
on core principles of notice and choice. The same is true for Time
Warner--a company that is committed to journalistic integrity and
consumer trust, both on and offline.
As you know, many companies, including both Time Warner and AOL,
supported legislation last year to put in place special protections for
children using the Internet so that information about them cannot be
gathered without parental consent.
We understand the importance of trust to Internet consumers--and I
would be happy to work with any of you to determine if other privacy
legislation is necessary and when it should be pushed forward. I
believe that any legislation that this Committee considers should be
looked at only after the FTC has had a chance to do its review of
current self regulatory efforts and the FTC's Committee on Access and
Security has issued its report. This way, we will have the information
we need to engage in a deliberative process among Members of Congress,
the industry and consumers--and that is how we will reach the best
result.
Our commitment to build consumer trust and confidence doesn't stop
there. We have also provided ``Parental Controls'' for families and
teachers to customize their children's experience in cyberspace. I am
proud that nearly 80% of America Online's members with children in the
home use Parental Controls today.
One thing is certain--we share the same goal: protecting consumers
and their families and establishing a new standard of privacy and
security for the digital age, while permitting the Internet to flourish
in these changing times.
Third, we will make open access a reality for consumers--further
increasing their choices and enriching their online experience.
Last year, I appeared before this Committee to talk about this
issue. I said then--and I believe just as strongly today--that the
history of the Internet has demonstrated that as long as the
infrastructure on which it rests is open, competition and innovation
will flourish. I also said that I believed government and industry must
work together to ensure a vibrant Internet marketplace.
For the most part, people in government agreed on the goal but
wanted it to happen in the marketplace. We are now seeing real movement
in the marketplace--and I'm proud of the role we've played in bringing
us to this point. Our push on this issue, along with the calls for
action by consumer advocates and government leaders, has led to
significant progress in the past year toward consumer choice in cable
broadband service. Implementation of open access nationwide is no
longer a question of whether, but of when.
As you know, on the day we announced our merger, AOL and Time
Warner committed to making its cable network open for competition by
multiple ISPs and to provide open access. This week, we took the next
important step forward, jointly releasing a Memorandum of Understanding
that will form the framework for delivering AOL and other ISPs over
Time Warner cable--and give consumers greater choice.
We are looking forward to putting that framework into practice as
soon as possible. For now, I would like to be very clear about what it
means, in simple terms, for consumers.
Broadband consumers will not go through AOL unless they choose AOL.
If they choose another Internet Service Provider, they will not see AOL
or its front screen. And they will not be blocked from any content they
wish to see.
That's meaningful open access. I have believed for a long time that
open access and consumer choice among ISPs is the right policy,
grounded in the right principles, for consumers and the growth of the
Internet. I am also convinced it is the smartest business practice for
the cable industry and the future of cable Internet service.
And so we are committed to working together with our industry to
ensure that open access is common practice--and that consumers across
the country are the real beneficiaries.
Finally, AOL Time Warner will be committed to ensuring that the
benefits and opportunities of the Internet reach every community--
leaving no one behind.
The Commerce Department--and this Committee--recognized early on
that there is a widening gap between people who have access to the new
technology and know how to use it, and those who do not. This ``Digital
Divide'' threatens to place the promise of information technology
beyond the reach of those who stand to benefit from it the most.
Both AOL and Time Warner have already taken significant steps to do
our part to close the Digital Divide. I am proud of the role we are
playing at AOL to help launch PowerUP, a unique public-private
partnership to create a network of community technology centers that
teach young people the skills they need--and that give them the
guidance they need--to make the most of their potential.
Contrary to common perception, this is not just a problem in the
inner city. In fact, rural Americans are much less likely than their
urban counterparts to have computers, e-mail, even basics like phone
lines. That's why the AOL Foundation, together with the National Center
for Small Communities, created the AOL Rural Telecommunications Awards.
Last year, we awarded $10,000 in grants to four winners who are using
the interactive medium to revitalize towns of 10,000 people or less.
One of the things I am most looking forward to at AOL Time Warner
is joining our resources and sharing our ideas to close the Digital
Divide. 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 the issues we need to address to build a truly global
medium that empowers people and benefits society.
And when I say we, I mean all of us. I don't just mean the Internet
and communications industry. I mean consumer groups and community
leaders, and I mean government.
The truth is, without the government's leadership and support--on
projects like ARPANET and its support through the National Science
Foundation--the Internet would still be a distant dream. And without
your leadership and support in the future, the Internet may never reach
its full potential.
We have a once-in-a-lifetime opportunity now to shape this medium
while it still young--and do it the right way.
So, I appreciate the time and effort the Committee is taking to
hear about this important merger, and I thank you in advance for the
work you will continue to do in the months and years ahead. Together,
we will build a medium that improves people's lives--and one we can all
be proud of.
Thank you.
Senator Burns. Mr. Levin.
STATEMENT OF GERALD LEVIN, CHAIRMAN AND CEO, TIME WARNER, INC.
Mr. Levin. Thank you, Chairman Burns and Senator Hollings,
and all the Members of the Committee. I have to start by saying
that I feel very comfortable being in this Committee room
because we have, in fact, been working together for so many
years, I think with the common goal of delivering to consumers
the broadest choices in telecommunications and media. We have
worked together on telephone competition, the satellite
delivery of broadcast programs, the advent of digital
television and, of course, cable deregulation.
I think one common aspect of all of that has been to try
and do something that makes sense for the consumer in the face
of rapidly expanding technology, and that is really where we
are today, so I am proud that we have shared the same goals,
and actually would like to acknowledge your recent success in
the Satellite Home Viewer Improvement Act and certainly, of
course, in what I think was landmark legislation, the 1996
Telecommunications Act.
Just a brief word of my history. For almost three decades,
actually going back to a time when some cable mavericks like
myself and Ted Turner had what then seemed a quixotic dream of
overthrowing the stranglehold that the network triopoly had on
the basic form of communication, television, and I am pleased
to say that that dream has been realized because today we have
returned power to the consumer, the viewer, to choose what she
or he wants.
I am also very pleased with the array of programming that
cable has stimulated, from premium services like Home Box
Office to very significant networks like CNN, Disney,
Discovery, ESPN, Nickelodeon, CNBC, and of course, C-SPAN,
which provides a tremendous public service.
Also, encouraged by a lot of that activity, we built in
1994 the first true switch digital interactive system in
Orlando, Florida. We learned a lot from that experience, and
were encouraged by it, so much so that we now see, with the
advent of the Internet--and our own expenditure in the last 4
or 5 years has now passed $6 billion to upgrade our systems--to
have developed the kind of digital bank account that can
accommodate so many different opportunities for the consumer.
I would like to go back and just again commend the
Committee for the 1996 Telecommunications Act, because I think
that really was the landmark shift that enabled almost
everything that has occurred since that time. It was that Act
which shifted telecommunications policy from relying on
regulation to a policy fostering competition amongst industry
players. Let me quote from the preamble of the 1996 Act
describing your vision ``to provide for a procompetitive
deregulatory national policy framework designed to accelerate
rapidly private sector deployment of advanced
telecommunications and information technologies and services to
all Americans.''
With the onset of the Internet, which is by far the most
profound revolution certainly in any of our history, and
probably for the republic itself, you have something that is
wildly democratic (lower case d) with no central control
whether by a Government agency or by any corporation. Indeed,
any citizen in any part of the world is free to publish on the
Internet. It is the most extraordinary event I think in the
course of human history, because for the first time we have
truly a networked society.
So AOL Time Warner was really born to be a new kind of
company for the 21st Century. I know we have talked about the
economic size of this transaction, but I can assure you that
there were three philosophic areas that I had to satisfy myself
on with respect to this combination that were actually much
more important than the financial characteristics of the
transaction.
The first is something that is a part of our heritage at
Time Warner, and that is journalistic independence. I feel my
trusteeship--and now through AOL Time Warner, and confirmed by
Steve Case, is that we are here to preserve, protect, and
defend CNN and Time Magazine and the journalistic independence
that they operate under without fear or favor, or any kind of
business encroachment. That is the first fundamental principle
to which we mutually have attested.
Second, and not just because we are here, or are engaged in
hearings this week, we have agreed on the principle of
nondiscriminatory access, and what that means, and I will state
it flat out, is that with respect to Time Warner cable systems
no preference will be shown for affiliated services, soon to be
AOL Time Warner, versus unaffiliated services. We have a long
history of doing that, not just because it makes good policy,
but because it absolutely corresponds to what the consumer
wants, consumer choice.
On the flip side of that coin, I would also say to you that
there is no intention that the wonderfully diverse material,
creative material coming from Time Warner will be exclusively
distributed through AOL, so these are principles that we both
agreed to. On Tuesday, as you know, we put out a Memorandum of
Understanding, to which we are both committed.
Finally, and probably most importantly, is a sense of
shared values. I know that the Committee and the Congress is
the proprietor of the public interest, but in even the history
of my own company, in Henry Luce's will there was a statement
that the company is to be operated not just in the interest of
shareholders, but in the public interest, and in fact both Time
Warner and AOL share this social commitment.
So this is not a question of being the largest company.
This is a question of whether we can use the skills and the
resources in the private sector, working cooperatively with the
public sector and foundations and educational institutions to
make a difference in the public we serve.
So that we hold the following values to be truly
significant. The issue of privacy is not for us simply a matter
of business practice. It's just fundamental to respecting human
dignity, and we will talk more about that.
The phrase, the digital divide, is something that we take
seriously because it is an apt description of the continuation
of the inequality in this Nation that is now going to be
unfortunately hastened. AOL has been not only on record but
Steve Case is personally committed to meeting that challenge,
so that we do not end up with an information aristocracy.
And then finally, I would say something that we have not
heard yet this morning, but that is really the importance of
education, and what can we do with this combination, with this
technology. Really, our ultimate responsibility is with respect
to the young people not only in our country but around the
world. Frankly we view this, and I view it personally, as a
moral imperative. When I see the conditions that some of our
most gifted teachers have to operate under, we are bound and
determined to make a difference there.
So I guess I should stop. We have put our full statement in
the record, Mr. Chairman. I would be happy to answer questions.
[The prepared statement of Mr. Levin follows:]
Prepared Statement of Gerald Levin, Chairman and CEO, Time Warner, Inc.
Chairman Burns, Senator Hollings and Members of the Committee, I'm
very pleased to be appearing before you today. I feel at home in this
Committee room where we have worked together over many years to deliver
consumers the broadest choices in telecommunications and media. From
telephone competition to satellite delivery of broadcast programs to
digital television to cable deregulation, we've shared a goal of
creating consumer choice in both content and distribution in the
context of ever-changing technology. I am proud to share these goals
with you and sincerely acknowledge your many successes, most recently
in the Satellite Home Viewer Improvement Act and, of course, the
landmark 1996 Telecommunications Act. I'm particularly grateful for
this opportunity to speak about the planned merger between Time Warner
and AOL and will be glad to answer any questions you might have.
I know our merger announcement came as a surprise to many, and the
truth is for such a large transaction, it was worked out in a
remarkably short period of time.
From my perspective, the AOL-Time Warner merger wasn't a bolt from
the blue, but the fulfillment of almost three decades spent in the
media business. I began my career with the quixotic hope--or so it
seemed--of using cable television to overthrow the stranglehold the
broadcast triopoly had on television. Mavericks like Ted Turner and
myself believed that the real power of television would only be
unleashed when it became a medium driven by consumer choice, with
programming alternatives far beyond what three advertising-supported
networks could deliver.
The success of that once-radical notion is reflected today in
premier pay-television networks like Time Warner's Home Box Office, and
our cable systems' lineup of hugely popular networks such as CNN, TBS,
Disney, Discovery, ESPN, Nickelodeon, CNBC. . . . The list is long.
Although we'd never claim that this early experience with cable
gave us a clairvoyant glimpse of the Internet, it was profoundly
formative. I for one was left with the conviction that we'd barely
touched the potential of technology to empower viewers to become their
own programmers, with no real limits on their options.
Possessed of this belief, I committed my company in 1994 to the
deployment of the world's first fully interactive digital network in
our Orlando, Florida, cable system.
Short term, that full service network didn't instantly lead to the
rollout of interactive television. Long term, the risk Time Warner took
resulted in our cable engineers creating a breakthrough architecture
that melded fiber-optic trunk lines with the coaxial connection to
subscriber homes to offer a switched broadband avenue for
interactivity.
In 1995, Time Warner made a $5 billion commitment to rebuild its
systems with this broadband architecture--a commitment which now stands
at $6 billion. In fact, my faith in cable's pivotal part in the future
of digital interactivity was so strong that at a time when reregulation
put cable out of favor with investors, Time Warner undertook major
acquisitions to expand its cable footprint.
In 1996, the Members of this Committee recognized that exciting new
services could flourish only if the policy paradigm shifted its focus
from relying on regulation to fostering competition among industry
players. The preamble of the 1996 Telecommunications Act aptly
describes your vision ``. . . to provide for a pro-competitive, de-
regulatory national policy framework designed to accelerate rapidly
private sector deployment of advanced telecommunications and
information technologies and services to all Americans . . .'' it was
that historic shift in policy that significantly contributed to the
growing certainty that something profound was taking place in the
telecommunications sector. We are grateful for your wisdom in creating
the policy environment that allowed that to happen.
From the very moment Time Warner was opening the way for broadband
delivery, the first great wave of a truly networked society arrived in
the form of the Internet. Today, we're all awash in that wave, or
better yet, surfing it, and the sea change has been so sweeping and
profound that it's hard to believe that the word Internet itself didn't
enter Webster's until 1997.
The growth of the Internet over so short a time reflects the sheer
velocity of what's taking place: in 1995, there were 19 million
Internet users; five years later, over 200 million. That number will
cross one billion by mid-decade. Led by America Online's easy-to-use,
consumer-friendly service, a constantly increasing number of people are
making e-mail, instant messaging and e-commerce an integral part of how
they live, work and communicate.
It would be hard to exaggerate the implications of the Internet
revolution. For the first time, human beings have at their disposal a
universal, limitless connection that no government, corporation or
centralized agency can control. Every user has the ability to offer
something new. Every web site contains the possibility of meeting
consumer needs in more attractive, efficient ways, so that the noise
you hear across the economic landscape is that of time-honored--in some
cases, centuries-old--business hierarchies as they crash to the ground.
The first lesson of the Internet has already been written: if you
think you can do business in the realm of digital interactivity the way
you've always done business, think again. . . . Thinking again is
precisely what Time Warner has been doing for the last five years, as
we refocused on achieving a company wide digital transformation.
I've spoken of what that digital transformation did for our cable
customers, providing broadband capacity for high-speed delivery of the
Internet. But that was part of a far larger effort. Our multi-billion
dollar upgrade also allows us to offer many of the enhanced services
our consumers are so eager for. These include increased video
offerings, digital television, interactive services and soon, telephony
services over the same architecture. As you know, we currently provide
facilities based telephone service to businesses through our
competitive local exchange carrier. We intend to provide local
residential telephone service and, ultimately IP telephony, which we
are now testing in Portland, Maine.
Impelled by the nature of our content businesses--operations
intimately involved with artistic and intellectual expression in every
form--we were pioneers in adapting our flow of creative offerings to
this environment. People throughout Time Warner understood the
irrevocable impact of what was occurring. They embraced the almost
inconceivably broad canvas the Internet provides for expanding the
reach of their minds and imaginations.
The challenge for Time Warner was never facing up to the historic
significance of digital interactivity. We jumped that hurdle while
other media companies were still debating if there was a race. The
challenge was time. The global economy in general and the global media
industry in particular are on fast forward. They have entered a new
context: Internet time. As you know, America's leadership in deploying
and using the Internet around the world is unique. However, there
exists the fierce competitive determination of entrepreneurs across the
globe to catch and surpass us.
From my early conversations with Steve, it became clear that we
both understood that those who wished to stay ahead in the instant-to-
instant evolution of this medium didn't have the luxury of waiting on
events. We saw that the company of the future--a company with the
creative infrastructure to provide a constant stream of quality content
plus a genetic appreciation of how to form web communities and how to
serve them easily and conveniently--had yet to come into existence.
The solution to that puzzle was quickly obvious to both of us: by
putting together AOL and Time Warner, we could create the first
enterprise not only fully prepared to compete on the Internet--a
prototype for the 21st century--but a company that could be a decisive
spur to bringing consumers everywhere the speed and immediacy of
broadband across all delivery platforms, wired or wireless, thus
unlocking the fullest possibilities of interactivity.
For my part, while the economic rationale for our merger was
compelling, it wasn't sufficient. Before I could take the step of
joining America Online in a merger of equals, I had to satisfy myself
about three basic premises.
First, at the very core of Time Warner--the cornerstone of our
global reputation and the enduring basis of the bond of trust we've
created with audiences in every part of the world--is commitment to
journalistic independence.
Ten years ago, in the landmark decision that allowed the Time-
Warner merger to go forward, Chancellor William Allen of Delaware's
chancery court spoke of our journalistic culture as ``unique,'' and
deserving of protection and preservation. The addition of CNN in 1996
made that culture even richer and more far-reaching.
I have always regarded the defense of that heritage as utterly
central to my responsibilities as CEO, and in light of the continuing
expansion of news and information outlets--many of which we carry on
our cable systems--I've had a heightened awareness of Time Warner and
CNN's role in upholding the standard for reliable, unbiased journalism.
Steve Case has been equally clear about his unwavering commitment
to journalistic independence, and his unprompted offer to have me serve
as CEO of AOL Time Warner was a further reaffirmation of that belief.
Second, as a prime mover in the design, development and deployment
of broadband networks, Time Warner assumed the huge financial risk of
that investment in the face of strong competition from DSL, DBS and
other broadband providers.
In building our broadband capacity, we recognized not just the
possibility of consumers having a choice among ISPs but the
desirability.
Historically, as we learned so clearly with HBO, the provision of
choice is a boon to the dynamic growth of cable subscriptions and a
prod to the creation of new and better programming.
AOL and Time Warner now have a shared commitment in the form of a
Memorandum of Understanding between our companies to provide consumers
with multiple ISPs in a genuinely competitive broadband marketplace,
and we will be happy to elaborate on that commitment.
Third, fundamental to how Time Warner defines itself is our sense
of community responsibility. This has been basic to who we are from the
very beginning, and was best summed up in Henry Luce's formulation that
we would always operate ``in the public interest as well as the
interest of shareholders.''
But we're under no illusions.
Like you, we recognize the need for a significant increase in
corporate involvement focused on helping equip schools with the
resources they need to prepare students to enter the digital economy.
Personally, as someone who has witnessed firsthand the struggle of
dedicated teachers to overcome the shameful inequalities embedded in
our educational systems, I regard this need as a moral obligation.
As the Members of this Committee have so frequently articulated, if
ever there's been ``a clear and present danger'' to the future of
American society, it's in the ``digital divide'' that threatens to
aggravate long-standing patterns of discrimination and injustice. From
the inception of my discussions with Steve Case, I've been impressed
with the passionate sincerity of his desire to ensure that his company
plays an important role in bridging that divide.
Nothing has been more crucial to the agreement we've reached to
merge our companies than our vision of AOL Time Warner's ability to be
a catalyst for meaningful change in the way our country--indeed, our
world--offers its children the opportunity for creative expression,
intellectual enrichment and material success.
As large as our merger may seem, it pales beside the open-ended
expanse of broadband media, and the wired and wireless access available
through PCs, TVs and the burgeoning multiplicity of hand-held devices.
From the consumer's point of view, the intense--and intensifying--
competitive struggle to offer everything from telephony to digital
downloading of music and entertainment to video on demand embodies the
best of all possible worlds: more choice, better value and lower
prices. And all that can be offered to consumers while still protecting
their privacy, an issue of vital public interest that I pledge AOL Time
Warner will continue to address in the most serious manner.
Members of the Committee, I'm grateful for this chance to express
to you my bedrock belief in the positive implications of the merger
between AOL and Time Warner. Although the age we've entered will be
brutally unsparing of companies that can't or won't move fast enough,
it will also empower citizens as never before.
If we do it right--and I'm profoundly optimistic that a clear
understanding by both the private and public sectors of what's involved
will ensure we do--we will add new dimensions to our economy and our
democracy.
I think it's obvious that AOL Time Warner is only the first of many
competitive realignments intended to form enterprises with the agility
and array of resources to thrive on this new terrain. Given the talent,
imagination and values that AOL Time Warner will possess, I'm also
confident it will be the most socially responsible and competitively
successful.
Along with my colleagues at AOL and Time Warner, I look forward to
working with you to make sure that individuals and communities
everywhere can use the most powerfully liberating communications tool
in human history to amplify and inspire, in Jefferson's wonderful
phrase, ``the pursuit of happiness.''
Thank you.
Senator Burns. Thank you very much, and both of your full
statements will be made a part of the record. I am also going
to ask unanimous consent that the MOU will be made a part of
the record also, and the letter that Chairman Hollings and I
received yesterday. *
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* The information referred to was not available at the time this
hearing went to press.
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Senator Burns. I want to talk a little bit about this
instant messaging. As you know, as we moved through the 1996
Act, we knew how difficult it was going to be to deal with the
incumbent entity in the exchange business, in the telephones.
We know that was going to be one of the most difficult areas,
to unbundle and to deregulate. After all, this industry had
been in the regulatory cocoon for so many years.
And as I look at instant messaging, I am seeing we have to
avoid, later on, dealing with this situation here with maybe an
incumbent in the business of instant messaging.
I would ask the--so far we have shown very little in the
area of developing systems that are interoperable, and I wish
you could bring this Committee up to date, Mr. Case, on where
we are in that, and sort of the five W's we are asking, and if
you could bring us up to date, and I may have another question,
another followup question with that.
Mr. Case. Sure. I look forward to it. First of all, it is
interesting to think of ourselves as an incumbent, since in
1996 I think we had maybe a few hundred thousand customers, and
we were struggling to just stay in business.
As it relates to instant messaging specifically, the letter
that I received--I think it is the same one you said--stated
the following: our sole concern--this is all the companies
raising this concern to you. Our sole concern is with ensuring
that all Internet users can enjoy the immense benefits of fully
interoperable instant messaging capabilities, and avoid the
dangers of a balkanized system. That is precisely what we are
working to achieve, so let me give you some background on this
and the progress we have made.
We invented this notion of instant messaging more than 15
years ago, when we launched our first service in the fall if
1985. That was at a time when people thought this was just
about accessing news, or buying things, and maybe getting
people to talk to each other would be useful. We thought
building a sense of community was important, and we invested in
building this notion of instant messaging, and for a decade,
the only way to get that feature was to subscribe to our
service.
Several years ago we thought, because of the importance of
messaging, that we should not require somebody to be a
subscriber to AOL to benefit from this instant messaging
capability, so I think it was about 2 years ago we decided to
release AOL Instant Messenger as a free product on the Web,
free to download, and free to use, so that anybody who wanted
to participate in this instant messaging community could get it
for free, and use it for free, which was a sort of unusual
step, people thought when we took that.
Then, starting about 18 months ago, we started hearing from
some companies that said, we really want to work with you to be
part of this messaging community, we do not want a balkanized
role, we want an inclusive role, and asked if we would make our
technology, our protocols available to them so they could build
their own instant messaging software.
And over the ensuing year and a half, and particularly in
the last few months, we have signed, now, a dozen agreements,
including the leaders in the corporate community, including IBM
and Sun and Novell, and leaders in portals, such as Lycos, and
leaders in Internet service provisions, such as MindSpring and
EarthLink, and this week we announced certain wireless
initiatives with Motorola and Nokia and Bell South, and we
also--I remember doing a deal with Apple and Real Network, so
there are many, many companies that we basically allowed to use
these protocols to build their own products, to call it
whatever they want. For example, I think it is the Lycos
Instant Messenger, not the AOL Instant Messenger for Lycos.
So we have taken a lot of steps to make it an inclusive
community. We have licensed it broadly. I think the licensing
policy we have had is quite unusual in the software industry.
It is not something you see from Microsoft or Sun or other
companies. I do not know of any other company that has
basically made its software freely available to users, and
easily licensed to other companies on a royalty-free basis, so
I think we have done a number of things to create this
inclusive community.
We have not licensed it to everybody. There are some
companies, unfortunately, that have chosen to hack into our
servers, as opposed to license this. We think it is very
important, in the recent spate of problems with cyber terrorism
and Web sites, to indicate how important it is to protect the
safety and security and privacy of people, so we have some
minimal standards.
People have to agree to participate, and what we are
talking about is not just software, but also the community, and
when you use this instant messaging software you actually
communicate with our servers that we are paying for and
participate in this community that everybody can be part of.
So I would say that we should be applauded for innovating
and creating instant messaging, for then taking the step of
making it freely available to any consumer anywhere in the
world. They can get the software for free and the servers for
free and then licensing it on very straightforward terms to
most of the leading companies around the world, and we will
continue to do that, working with other companies and other
groups to try to make this notion of messaging part of our
future.
Senator Burns. Thank you very much. I am going to move on.
Do you have opening statements? I am sorry, Senator Snowe.
Senator Abraham. No statements.
I am going to move right along, and so everybody has a
chance, Senator Hollings.
Senator Hollings. Thank you, Mr. Chairman, and right to the
point, we admire both of you. You are brilliant, and you have
been very successful. This Committee is not against success,
and incidentally we are not against innovation. You have got to
be innovative to keep pace with fast-breaking technology.
Mr. Chairman, let me ask that you put in the holdings here
of Time Warner, the Columbia Journalism Review. There are five
pages of holdings there.
I would like to also add into the record the Internet
service providers, a list of those, their rankings, the service
providers, showing America Online is seven times bigger than
its nearest competitor and generally 100 times bigger than the
rest.
[The information referred to follows:]
Columbia Journalism Review, Media Owner's Index
Time Warner--Books
Time Life Books
Time--Life International
Time--Life Education
Time--Life Music
Time--Life AudioBooks
Book-of-the-Month Club
Paperback Book Club
Children's Book-of-the-Month Club
History Book Club
Money Book Club
HomeStyle Books
Crafter's Choice
One Spirit
International
Little, Brown and Company
Bulfinch Press
Back Bay Books
Little, Brown and Company (U.K.)
Warner Books
Warner Vision
The Mysterious Press
Warner Aspect
Warner Treasures
Oxmoor House (subsidiary of Southern Progress Corporation)
Leisure Arts
Sunset Books
TW Kids
Leisure Arts
Time Warner--Cable/DBS
HBO
HBO Home Video
HBO Pictures/HBO Showcase
HBO Independent Productions
HBO Downtown Productions
HBO NYC Productions
HBO Animation
HBO Sports
Cinemax
Time Warner Sports
International
HBO Asia
HBO en Espanol
HBO Ole (with Sony)
HBO Poland (with Sony)
HBO Brasil (with Sony)
HBO Hungary
Cinemax Selecciones
Other Operations
HBO Direct (DBS)
Comedy Central (50% owned with Viacom)
CNN
CNN
CNN/SI
CNN International
CNN en Espanol
CNN Headline News
CNN Airport Network
CNN fn
CNN Radio
CNN Interactive
Court TV (with Liberty Media)
Time Warner Cable
Road Runner (high speed cable modem to the Internet, with MediaOne
Group,
Microsoft, and Compaq)
Time Warner Communications (telephone service)
New York City Cable Group (largest cable cluster in world--over 1.1
million)
New York 1 News (24 hour news channel devoted only to NYC)
Time Warner Home Theater (Pay-Per-View)
Time Warner Security (residential and commercial security
monitoring)
Kablevision (53.75%--cable television in Hungary)
Time Warner Inc.--Film & TV Production/Distribution
Warner Bros.
Warner Bros. Studios
Warner Bros. Television (production)
The WB Television Network
Warner Bros. Television Animation
Hanna--Barbera Cartoons
Telepictures Production
Witt--Thomas Productions
Castle Rock Entertainment
Warner Home Video
Warner Bros. Domestic Pay--TV
Warner Bros. Domestic Television Distribution
Warner Bros. International Television Distribution
The Warner Channel (Latin America, Asia--Pacific, Australia, Germ.)
Warner Bros. International Theaters (owns/operates multiplex
theaters in over 12 countries)
Time Warner Inc.--Magazines
Time
Time Asia
Time Atlantic
Time Canada
Time Latin America
Time South Pacific
Time Money
Time For Kids
Fortune
Life
Sports Illustrated
Sports Illustrated Women/Sport
Sports Illustrated International
SI for Kids
Inside Stuff
Money
Your Company
Your Future
People
Who Weekly (Australian edition)
People en Espanol
Teen People
Entertainment Weekly
EW Metro
The Ticket
In Style
Southern Living
Progressive Farmer
Southern Accents
Cooking Light
The Parent Group
Parenting
Baby Talk
Baby on the Way
This Old House
Sunset
Sunset Garden Guide
The Health Publishing Group
Health
Hippocrates
Coastal Living
Weight Watchers
Real Simple
Asiaweek (Asian news weekly)
President (Japanese business monthly)
Dancyu (Japanese cooking)
Wallpaper (U.K.)
American Express Publishing Corporation (partial ownership/
management)
Travel & Leisure
Food & Wine
Your Company
Departures
SkyGuide
Magazines listed under Warner Brothers label
DC Comics
Vertigo
Paradox
Milestone
Mad Magazine
Time Warner--Music
Warner Music Group--Recording Labels
The Atlantic Group
Atlantic Classics
Atlantic Jazz
Atlantic Nashville
Atlantic Theater
Big Beat
Blackground
Breaking
Curb
Igloo
Lava
Mesa/Bluemoon
Modern
1 43
Rhino Records
Elektra Entertainment Group
Elektra
EastWest
Asylum
Elektra/Sire
Warner Brothers Records
Warner Brothers
Warner Nashville
Warner Alliance
Warner Resound
Warner Sunset
Reprise
Reprise Nashville
American Recordings
Giant
Maverick
Revolution
Qwest
Warner Music International
WEA Telegram
East West ZTT
Coalition
CGD East West
China
Continential
DRO East West
Erato
Fazer
Finlandia
Magneoton
MCM
Nonesuch
Teldec
Other Recording Interests
Warner/Chappell Music (publishing company)
WEA Inc. (sales, distribution and manufacturing)
Ivy Hill Corporation (printing and packaging)
Warner Special Products
Joint Ventures
Columbia House (w/Sony--direct marketing)
Music Sound Exchange (w/Sony--direct marketing)
Music Choice and Music Choice Europe (w/Sony, EMI, General
Instrument)
Viva (w/Sony, Polygram, EMI--German music video channel)
Channel V (w/Sony, EMI, Bertelsmann, News Corp.)
Heartland Music (50%--direct order of country and gospel music)
Time Warner--Online/Other Publishing
Road Runner
Warner Publisher Services
Time Distribution Services
American Family Publishers (50%)
Pathfinder
Time Warner--Merchandise/Retail
Warner Bros. Consumer Products
Warner Bros. Studio Stores (as of December 1997, 170 stores
worldwide in over 30 countries)
Theme Parks
Warner Brothers Recreation Enterprises (owns/operates international
theme parks)
Time Warner Inc.--Turner Entertainment
Entertainment Networks
TBS Superstation
Turner Network Television (TNT)
Turner South
Cartoon Network
Turner Classic Movies
Cartoon Network in Europe
Cartoon Network in Latin America
TNT & Cartoon Network in Asia/Pacific
Film Production
New Line Cinema
Fine Line Features
Turner Original Productions
Sports
Atlanta Braves
Atlanta Hawks
Atlanta Thrashers (NHL team, begin play in 1999)
Turner Sports
World Championship Wrestling
Good Will Games
Philips Arena
Other Operations
Turner Learning
CNN Newsroom (daily news program for classrooms)
Turner Adventure Learning (electronic field trips for schools)
Turner Home Satellite
Turner Network Sales
______
ranking internet service providers by size
This page is maintained by Nick Christenson, [email protected]. It
was last updated on February 25, 2000.
The point of this page is to track the relative sizes of the larger
Internet Service Providers, where size is measured by some notion of
the extent of their customer base. Very little information has been
made publically available on this, and as far as I can tell, no attempt
has ever been made to collate it. The purpose of this page is to make
this attempt. It will disappear if anyone with real time and resources
ever decides to track this information and make it public. Since the
page has been around since the summer of 1998 and this has not yet
happened, this doesn't look too likely.
About the only way to gain real information on the size of the
customer base of any ISP is via their own announcements. Because of
various ISP's philosophies regarding disclosure, some of this data
comes from far more accurate and up-to-date sources than others. This
is an unfortunate necessity. Of course, we have no real idea what the
methodology is that they are using, nor can we tell whether these
numbers are in any way accurate. Further, as is especially the case for
the free service ISPs, it's hard to gain consensus on what these
numbers mean, or how meaningful they are. Nonetheless, this information
can show some relative sizes without needing to be horribly accurate.
The vast majority of the information here is compiled by me as I
read various sources of ISP news. A sizeable fraction of the data is
submitted to me by kind souls from around the Internet. This page is
better for everyone because of their contributions. If you ever hear an
ISP quote its size in any non-confidential context, please email this
number to me, the name of the ISP, and information I can use to cite
the figure. I don't intend to quote a number I cannot verify. Of
course, representatives of the ISPs themselves are invited to send me
their numbers when they can be disclosed publicly.
The goal of this page is to list every ISP doing business in the
United States that can legitimately claim more than 100,000 subscribers
and list their actual size as accurately as possible. Some are listed
that are smaller than this threshold, but I make no commitment to try
to list these, especially if they do not have a nationwide or at least
a large regional presence.
This is the information I have been able to find so far, along with
a set of ISPs that may also be of sufficient size, but for whom I have
no information.
----------------------------------------------------------------------------------------------------------------
ISP Subscribership Date Source
----------------------------------------------------------------------------------------------------------------
America Online 21,000,000 20000202 CNET News
----------------------------------------------------------------------------------------------------------------
EarthLink 3,100,000 20000204 CBS MarketWatch
----------------------------------------------------------------------------------------------------------------
NetZero 3,000,000 20000110 Yahoo!
----------------------------------------------------------------------------------------------------------------
Compuserve (AOL) 2,500,000 20000119 AOL web site
----------------------------------------------------------------------------------------------------------------
Prodigy 2,000,000 19991122 Yahoo! After taking over FlashNet and SBC's
user bases
----------------------------------------------------------------------------------------------------------------
AT&T WorldNet 1,800,000 20000201 Internet News
----------------------------------------------------------------------------------------------------------------
Microsoft Network 1,800,000 19990715 Yahoo!
----------------------------------------------------------------------------------------------------------------
Old EarthLink 1,600,000 19991020 CBS MarketWatch (merged with MindSpring on Feb.
7, 2000)
----------------------------------------------------------------------------------------------------------------
Freei.Net 1,500,000 20000120 Internet News
----------------------------------------------------------------------------------------------------------------
MindSpring 1,297,000 19991020 CNET News (merged with EarthLink on Feb. 7,
2000)
----------------------------------------------------------------------------------------------------------------
Excite@Home 1,000,000 19991206 CNET News
----------------------------------------------------------------------------------------------------------------
WebTV 900,000 19990707 CNET News
----------------------------------------------------------------------------------------------------------------
Gateway net (AOL) 740,000 20000119 AOL web site
----------------------------------------------------------------------------------------------------------------
One Main 675,000 20010131 Yahoo!
----------------------------------------------------------------------------------------------------------------
Bell South 650,000 19991109 Internet News
----------------------------------------------------------------------------------------------------------------
lstUp.com 550,000 19991018 CNET News
----------------------------------------------------------------------------------------------------------------
RCN 523,728 20000210 Yahoo!
----------------------------------------------------------------------------------------------------------------
AltaVista 500,000 19991216 Yahoo!
----------------------------------------------------------------------------------------------------------------
GTE 491,000 19991129 San Francisco Chronicle
----------------------------------------------------------------------------------------------------------------
Roadrunner 420,000 19991129 San Francisco Chronicle
----------------------------------------------------------------------------------------------------------------
IBM Global Internet >400,000 19980421 Computer Retail Week (Acquired by AT&T WorldNet
on December 8, 1998)
----------------------------------------------------------------------------------------------------------------
Juno 550,000 20000110 CBS MarketWatch
----------------------------------------------------------------------------------------------------------------
Netcom/ICG 400,000 19990107 San Jose Mercury News (at the time of the
MindSpring buyout)
----------------------------------------------------------------------------------------------------------------
US West 350,000 19991122 US West web site
----------------------------------------------------------------------------------------------------------------
Voyager.net 355,000 20000214 Yahoo!
----------------------------------------------------------------------------------------------------------------
SW Bell/Pacific Bell 300,000 19980515 Pacific Bell Internet press release
----------------------------------------------------------------------------------------------------------------
Espernet.com 274,000 19991001 CNET News
----------------------------------------------------------------------------------------------------------------
Verio 260,000 19990630 Yahoo!
----------------------------------------------------------------------------------------------------------------
FlashNet 244,000 19991007 FlashNet web page (at the time of the time of
the Prodigy buyout)
----------------------------------------------------------------------------------------------------------------
Bell Atlantic 200,000 19991129 San Francisco Chronicle
----------------------------------------------------------------------------------------------------------------
Concentric l97,000 19991100 Second hand from a Concentric employee
----------------------------------------------------------------------------------------------------------------
Sprynet 180,000 19990107 San Jose Mercury News (at the time of the
MindSpring buyout)
----------------------------------------------------------------------------------------------------------------
Eisa.com 165,000 19991201 Eisa.com web page
----------------------------------------------------------------------------------------------------------------
Internet America 147,000 20000127 Yahoo!
----------------------------------------------------------------------------------------------------------------
ALLTEL 133,000 19991115 ALLTEL press release
----------------------------------------------------------------------------------------------------------------
JPSnet 115,000 19990303 JPSnet press release
----------------------------------------------------------------------------------------------------------------
RMI.net 107,000 19991216 Yahoo!
----------------------------------------------------------------------------------------------------------------
Slash net 100,000 19980518 Internet Week
----------------------------------------------------------------------------------------------------------------
IDT 80,000 19981020 IDT website
----------------------------------------------------------------------------------------------------------------
ViIlageNet 70,000 19991123 VillageWorld press release
----------------------------------------------------------------------------------------------------------------
BiznessOnline.com 63,000 19991230 BiznessOnline press release
----------------------------------------------------------------------------------------------------------------
Primary Network 60,000 20000124 Primary Network press release
----------------------------------------------------------------------------------------------------------------
First World 58,700 20000216 Yahoo!
----------------------------------------------------------------------------------------------------------------
Covad 57,000 20000125 Covad press release
----------------------------------------------------------------------------------------------------------------
PDQ.net 45,000 19990913 PDQ.net web site (at the time of the Internet
America buyout)
----------------------------------------------------------------------------------------------------------------
Teleport 40,000 19991130 OneMain website (at the time of the OneMain
takeover)
----------------------------------------------------------------------------------------------------------------
21st Century 37,000 19991213 Internet News (at the time of the RCN takeover)
----------------------------------------------------------------------------------------------------------------
BigNet 35,000 20000202 Email from the BigNet CFO
----------------------------------------------------------------------------------------------------------------
TIAC 33,000 19990622 Internet News (at the time of the PSI buyout)
----------------------------------------------------------------------------------------------------------------
Log on America 30,000 19991028 Yahoo!
----------------------------------------------------------------------------------------------------------------
Metricom 29,000 19990729 Yahoo!
----------------------------------------------------------------------------------------------------------------
FIRST 20,000 20000123 Email from the 1st.net CEO
----------------------------------------------------------------------------------------------------------------
Brigadoon 7,000 19981102 CNET News
----------------------------------------------------------------------------------------------------------------
Primenet ? ? No info on their web site
----------------------------------------------------------------------------------------------------------------
Worldcom ? ? No info on their web site
----------------------------------------------------------------------------------------------------------------
Panix ? ? No info on their web site
----------------------------------------------------------------------------------------------------------------
Infinet ? ? No info on their web site
----------------------------------------------------------------------------------------------------------------
Senator Hollings. Now, having said that, what I am looking
for is your statement here about open access, and I see that on
open access there are two references here, one with respect,
Mr. Case, to AOL 5.0. Can we call--this has just come out, just
get along with AOL 5.0.
If America Online is your only route online, sure, but
people who juggle multiple Internet providers have had a
different story to tell, after having their other accounts
incapacitated by the new version of America Online's software.
Then they say, for example, when you call and reference
them, AOL spokesman Tricia Primrose said we have seen very few
problems like the ones you describe, but, says this individual,
we called AOL--this was a Washington Post reporter, and I will
give you a copy of the story. When we called AOL technical
support instead we waited on hold for 55 minutes and then were
quizzed as to why we would want to have another ISP.
But AOL's representative did eventually come through with
repair instructions. I am seeing that. All the emphasis about,
yeah, we have access, but that does not amount to access, and
then when you intimidate even the powerhouse Disney--you
recently moved the cartoon network of your own entity from
Channel 67 in New York to Channel 22, but you took the Disney
Channel from 33, and you put it up to 66. The Disney people are
afraid to come and testify, because we don't want to irritate
the Lone Ranger.
You have gotten powerful enough now where they say, good
gosh, we just changed, whereby you favored your own content and
repositioned everything, and if we come up and we say what we
are really afraid of, we will get cutoff further.
In the past year, America Online has entered into strategic
relationships with Gateway, Compaq, and just last month Dell,
and then you have deals with Hewlett-Packard and Ace. Now,
these manufacturers constitute over 50 percent of the market.
That is why I said in my opening comment that I was worried
that you were going down the same road as Microsoft. There is
nothing wrong with having a monopoly. It is whether you use the
monopoly to abuse the process and withstand competition, and
that is what we are looking at here in this Committee.
We do not want to have to legislate and mess up the
wonderful communications and electronics explosion, but when we
see these trends, when we see you have already got four class
actions and everybody moving, and you keep moving, you talk
access but you have to wait 55 minutes to even get it
explained; when you see that you are powerful enough to take
even again the more powerful and get them afraid to come and
even testify because they might get put off the channel, much
less a bad spot on the channel--let me hear your comments, both
of you. That is what this Committee is worried about.
Mr. Case. I would be happy to respond. Gerry can add to it.
First, in our industry there are all kinds of data. Some of it
is more accurate than others, but I think if you look at the
recent statistics we are not seven times bigger than our next
largest competitor. There have actually been some mergers with
MindSpring and EarthLink.
That we are the leader by far, and we are grateful so many
consumers have agreed to subscribe to us, but you said
something like 100 times bigger than the rest, and that is not
really the dynamics. We are the leader in our market. Time
Warner is the leader in several markets. We are not dominant in
anything, and I think any comparison to Microsoft is not an
accurate one.
As it relates to AOL 5.0, there is a number of points
there. We integrate the Microsoft Windows dialer protocol
within our software because it runs on top of the Windows
operating system. It is the same thing that almost all the
ISP's do, including AT&T and Microsoft and MindSpring and
Earthlink. 95 percent of our customers do not use another ISP,
and for them this is a more seamless experience.
If you are in the 5 percent that want to use a multiple ISP
you are able to do that, and if you call us we will explain how
to do it. We have recently posted some information online. I am
sorry to hear anybody had to wait 55 minutes. We actually have
7,000 people and spend quite a bit of money to make sure if
people do have a problem they can get a response quite
promptly. I think that has been helpful in terms of growing our
business and the loyalty of our members.
As it relates to Disney, certainly Gerry understands Disney
better. I am surprised to hear that Disney is intimidated. We
have discussions with them on many things. I do not think the
debate over channel placement is going to be quite the same in
the future that perhaps it was in the past.
If you have a world like the Internet with almost infinite
choices, there is not a notion of channel placement. They make
their own decisions about what content goes on their own ABC
Network and things like that, so I am surprised to hear them
apparently suggesting privately to you that there is some issue
there, but maybe I should talk directly with them about that.
As it relates to Gateway and Dell, we do have agreements
with many PC manufacturers, as do almost all the ISP's out
there. Consumers have many choices in terms of PC's, and that
is why that business is so darned competitive and prices have
come down so rapidly, and we are happy to work with PC
manufacturers, but there are many that do not work with us, and
many that provide many options to their consumers.
So hopefully that is responsive to your question. We do
believe that we are doing a lot of good things in terms of
creating great services. We are not always perfect. Sometimes
we make mistakes. We make mistakes, we try to correct them and
move on, but I think the fact that we have grown so rapidly in
the last few years is really consumers voting, in a world of
7,000 ISP's out there to choose from, that AOL is providing
something unique, and we do spend a lot of time and a lot of
hard work to try to make that the case, and part of what we
provide our members is access to everything.
We really do believe that the Internet should be an open
platform, and if you sign on to AOL you can go anywhere you
want and do anything you want, and the notion of carriage that
existed in the traditional world of television, for example, is
not really relevant on the Internet, because in a sense it is
universal carriage.
Nobody has to do anything to get carried. Everybody has it
instantaneously, and millions of people have created Web sites,
so it is really a new world. I think it requires a fresh
perspective, and we are trying to bring it through our company,
and this combination I think will allow us to do some more
interesting things for more customers in more ways.
Mr. Levin. Why don't we have just a brief conversation
about channel positioning. I think, Senator Hollings, someone
must be referring to the cable system in New York City. It is
just a factual misrepresentation.
The Disney Channel in New York City is a paid television
channel, and so the consumer actually pays for that channel, so
the channel positioning as it is with HBO or Cinemax, or the
Stars, and Encore, I mean Stars I think is on Channel 90. I
have never heard a complaint from them because the consumer
knows exactly where to go, because he pays separately for it.
The Cartoon Network, in fact, does not compete in that
sense with the pay Disney Channel. It really competes with
channels like Nickelodeon and, in the City of New York,
Nickelodeon is on Channel 6, and the Cartoon Network is on
Channel 22.
Having said that, a lot of these channels are basically
moved around to really accommodate, for example, companies like
Disney. Disney has ESPN and ESPN-2, and in many systems they
have asked to have their channel moved to a higher position so
that the two could be together.
And besides, I think we are obviously living in a world
where for broadcast stations, where this Committee has--and
Disney should certainly be following the public interest.
There, you want to keep the channel positioning that people are
used to with over-the-air television. But in the case of cable
channels you look at the cable channels and the satellite, they
could be at 292 or 653. That era has long passed, so I honestly
believe this is a spurious issue.
Senator Burns. Senator Stevens.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Let me start off by saying I think you
have changed the lifestyle of our country. Having a freshman in
college out on the West Coast, we thought we would be an empty
nest, but we really find that we are capable of having instant
communication throughout the day, and it really has changed a
lot, and I cannot thank you enough for what you have done so
far.
I do want to have just one question, and it sort of has
several facets. Sometime ago you announced with your merger
that you intended to provide telephony over cable lines. I
would like to know if you can give us an update on that, and
particularly when that might commence. When we visited
previously I asked the question about the concept of universal
service, and paying into that fund if you do have interstate
telecommunications.
We would also like to know a little bit about what you have
in mind further--you mentioned just briefly, Mr. Case, about
improving access to rural areas. I think that is one of the
real problems about the future. The speed with which we access
your system in rural Alaska is a lot different from here in
Washington, D.C., and I think we are liable to be behind the
curve for a long time if we do not find some way to have
greater access to rural areas, but that is sort of a broad
question. I would appreciate if you would comment on those
issues.
Mr. Levin. Senator, with respect to telephony over cable
facilities, since the passage of the 1996 Act we have a very
robust competitive local exchange carrier, a CLEC that serves
many cities around the country using a cable platform, and with
telephone switches principally serving for both telephony and
high-speed Internet access small businesses.
At the same time, we have what I will call residential
circuit switch telephony in Rochester, for example, serving
homes and apartments, and then in Portland, Maine, we have the
beginnings of a new phase in telephony, what we will call
Internet protocol telephony, IP telephony, which really rides
on top of the high-speed cable modem that cable systems are now
putting in, and which is the subject of our memorandum of
understanding.
You can ride on top of the digital routing that goes into a
computer. You can plug in a plain old telephone and use the
Internet for, in this case it is called packet switching, as
opposed to circuit switching, for the normal telephone system.
So that is the next development we will see, and what this
really suggests, and even going back to the discussion of
instant messaging and e-mail, the whole concept of
communications is really rapidly emerging.
So that there are so many different ways to communicate
with your family, and even in remote areas in Alaska, every
facility needs to be used, particularly in that case satellite,
and it is one thing we should keep clear. It is not just cable
that is providing broadband access. It can be provided through
what is called DSL, through a telephone line. It has certain
limitations. But definitely by satellite, and AOL has been very
active with Hughes, so that this new form of--I will call it
telephony, but it is really a new form of communication, can be
delivered almost universally.
The issue of making sure that for plain old telephone
service, the universal service charge, you know, that there is
an adequate way of financing the system, I think we all need to
work on that. Everyone acknowledges the objective.
Mr. Case. If I could just add, I was born and raised in
Hawaii, and actually a little known fact is Hawaii became a
State the day I was born, so I understand what it is like to be
not part of the continental United States.
When I was growing up, all the television shows came a week
later, and if you had to make a long distance call it was
extremely expensive, and the leadership you provided, and
Senator Inouye and others, on bringing Hawaii and Alaska into
the rest of the United States was appreciated when I was
growing up, but we do recognize it is important to have an
inclusive system.
As we think of this digital divide, the economic divide is
a real concern, but a rural divide is as well, so we will do
what we can to try to bridge that.
Senator Stevens. What about the contributions to a
universal service system? I hear you, Mr. Levin, and I think
you are right, the current law really does not cover some of
the things you are going to develop here. I hope we can work
together and find some way to assure that that pool that is
needed to assure adequate access from the rural areas to
whatever system they choose is properly funded.
I am disturbed a little bit, but I do not know if the
Members here know, but there is some indication the
Administration may want to convert the universal service fund
into the Treasury. It does not belong there. It is not
taxpayers' money, it is ratepayers' money, and it ought to be
preserved, as well as the postal service system preserves
ratepayers' money, but to me, if we have these developing new
communications systems, and rural America is locked into the
old twisted payer telephone lines, we cannot come into the 21st
Century with everyone else.
So I want to work with you, and I am sure the whole
Congress will want to work with you to try to find some way
where we are not accused of taxing the Internet if the Internet
is in fact being used to piggy-back a new communications
system.
But the contribution should be there to assure that there
is a fund similar to the old interstate rate pool that is
really the genesis of the universal service fund, and I do
think that it should be managed by industry, not managed by the
Government, but we should find a way to assure--as we did in
the 1996 Act, we should find some way to assure that as you
develop new communications systems you will proceed to provide
funds of that type.
Now, I do not know how to do it. You will have to tell us
how to do it. I hope you will tell us how to do it. We do not
want Government regulation. We do not want Government ownership
of that fund--at least, I do not--but we want the fund to exist
to assure that people who want access to any one of these
systems can be assured of that if they live in rural American.
Mr. Levin. Senator, this is a perfect example of I think
what is necessary, and that is, if we just went by the previous
law, which established the universal service fund and then
tried to automatically applying to Internet telephony, I could
say to you, well, there is no FCC requirement today for
contributions because of Internet telephony. That would be a
poor statement for me to make.
What we should be doing now is to try and figure out with
respect to a whole range of communications how can we finance,
because this is really another aspect of the digital divide,
but we need to cooperatively think about it not in any
adversarial position where we are trying not to be regulated,
and this is an area that we feel very strongly about, that
there should be some way of preserving the concept that you
have established when all we had was the twisted pair.
Now we have all of this explosion of opportunity, so there
must be some way, and it should not appear as if it is a
taxation of the Internet, so I am simply agreeing with you and
saying, we can work up something. I am not stating that we
would not pay into a universal service fund. I am saying there
is a way of shaping this that could be mutually beneficial, and
we ought to work on it.
Mr. Case. If I could just add quickly two points, one is
that as we think about the rural areas, it is not just about
cable and about the telephone lines. We do think satellite and
wireless is going to become increasingly important,
particularly in rural areas. That is why we made a fairly
large, for us, investment in Hughes, to stimulate the DIRECTV
and direct PC broadband service development, and we continue to
work with them and others. We want to support cable and DSL and
wireless and satellite and give everybody as many choices as
possible, particularly in rural areas that I think ultimately
can only be served through satellite or wireless solutions, at
least some areas.
The second point is, the IP telephony concept is an
interesting one, and having more competition leveraging the
facility-based operations I think is an intriguing one. It is
still, frankly, more of a concept than a reality. There are
still not many people who are really using this, so we should
recognize that. At the same time, we should figure out how to
achieve the same goal, and maybe there is a different way to
come at it as we think about this new medium and think about
these new technologies.
Senator Stevens. Thank you both. We stand ready to work
with you. I hope you agree it should not be Government mandate.
It should come from the industry itself.
Mr. Levin. We can all agree on that.
Senator Burns. Senator Wyden.
Senator Wyden. Gentlemen, a number of us on this Committee
have been heavily involved in the development of privacy
legislation, and it seems to me that earlier in the week, Mr.
Case, you were essentially in your testimony on the precipice
of supporting Federal privacy legislation. I think it is very
sensible for you to stake that ground out.
I mean, my sense is that if there is an EXXON VALDEZ of
privacy, a major, major crisis with respect to personal data
getting out, that would go a long way to destroying your vision
of what interactivity is all about. I think what would be
helpful this morning is to just have you outline for the
Committee what you think the key elements would be of a privacy
bill that we could go forward with.
Mr. Case. I would be happy to. First of all, I should say
that as I have said in the beginning, for us, privacy is about
trust, and trust really is the underpinning of building this
whole medium.
Everybody has some concerns about sort of this big brother
world, and we need to make sure that we put in place policies,
procedures, safeguards, what-have-you, to make sure people's
privacy is protected so they feel comfortable using this
medium, which we think is the right thing to do from a policy
standpoint, but also the right thing to do from a business
standpoint, because if there is a major incident and people do
decide they cannot trust this medium, that would have a very
negative impact, obviously, on the growth of the medium.
Our approach here is to recognize there are different
layers of this. Last year, for example, we did support the
legislation related to children's privacy because we thought
that required a different standard, and you had to be extra
careful as it relates to children.
In the last couple of years, we have been very active in
trying to establish within our own service a clear policy,
where it is really about making sure people understand exactly
what information is being collected and how it is being used.
They have the ability to opt out, and so it really is about
notice and choice and trying to encourage other companies
within the industry through the Online Privacy Alliance and
other initiatives to be on that band wagon.
Actually, I have been pleased with the progress we have
made. I remember one of the reports a year ago that said very
few Web sites had privacy policies. When the study was done a
few months ago, I think it was 65 percent had policies, so that
is real progress, and I would like to believe we could continue
to make progress through these kind of industry initiatives.
At the same time, I do recognize that there are likely to
be some companies on the outskirts, on the fringes, who do not
embrace these policies. I actually think, as Tom Friedman of
the New York Times has written, that the real risk here is not
big brother, the big companies, it actually may be little
brother, the little companies trying to skate by on the edges,
and so it may require some legislation.
Our only concern about legislation is, if it is something
that does deal with this issue in a direct way, and provide
what we think is the core principles which would be about
notice and choice, it is something that in theory we are
supportive of. There always is the fear, when that good idea
gets going, by the time the legislation is actually passed, it
gets to be something well beyond what would be striking the
reasonable balance, and so that is really our fear walking down
that path.
Our hope has been industry initiative would be sufficient.
At the same time, as I said the other day, we do not have an
allergic reaction to any form of privacy legislation. We think
if it is the right legislation, it strikes the right balance,
it gives the consumers notice and choice, it is something that
would be good.
It would be better if the industry could do that on its
own, but because of the fact there may be some companies on the
fringes, and there is always, as you said, the risk of some
EXXON VALDEZ kind of incident, that maybe legislation is
necessary, and we look forward to having a dialog and finding
out where things stand and what we could do to be helpful.
Senator Wyden. Let me tick off, then, some of the elements.
I gather that you will support a notice requirement that there
be a conspicuous policy statement. You will support at a
minimum opt-out, so that consumers are empowered with respect
to being able to make their choices.
With respect to personal data that is very, very sensitive,
financial issues, touching on medical questions, how would you
deal with extremely sensitive personal data?
Mr. Case. Well, I must say I am not an expert on these
privacy issues. I probably should spend a little more time
before I am too precise, but it is not just something we
support in terms of notice and choice. It is something we are
doing and trying to get the rest of the industry's support, so
the only real issue is whether legislation may be necessary to
get everybody to support it, or whether there is a market
solution to achieve that.
In general, we recognize that there are differing kinds of
data, medical data, for example, being one that probably does
require a different kind of approach. Exactly what that is, I
am not smart enough to say, but just as you recognized on the
children's side, there are different classes of information,
some that require different kinds of treatment, but in general
we think the principles should be notice and choice.
Senator Wyden. One other, if I could, just because the
clock is running. What about the question of consumer access,
and the consumer's access to information that is compiled and
sold or transferred? You all are going to have this enormous
amount of personal data, so the position that you all take with
respect to privacy legislation as it relates to consumer access
I think is going to be very key, and I would especially like
your position on that.
Mr. Case. Well, first of all we have a lot of information
to be sure, but may have less than you might think, because our
policy actually does not result in us tracking individual
navigational data, things like that. We do not believe that is
an appropriate thing to do, so there is some information, but
we perhaps have less than people might fear that is being
tracked.
Again, it is a matter of balance. We would be reluctant to
agree to something that requires us to collect data that we are
not presently collecting simply to make it accessible to people
in data bases and things like that, but we recognize that the
fundamental issue here is protecting privacy and building
trust, and from a business standpoint whatever we can do to
stimulate that is something we would be willing to look at.
Mr. Levin. Senator, if I could interrupt just to make a
statement, I do not think it is a question of whether there
should or should not be legislation. We should not overthrow--
there is over 75 years of history in the direct marketing
business offline and online now, where the issue of privacy has
been front and center, and in fact there is a DMA privacy
promise that all of the companies subscribe to that deals with
many of the issues that you are identifying.
And in fact there is something called a global business
dialog that Mr. Case and I are the current cochairs of
companies around the world, because this is a global issue,
trying to deal with some of these issues, most particularly
privacy and trust, because recognizing that this is not an
America-only issue, so that there is some spirit of cooperation
and not just blind self-regulation.
The other thing I would say is that this is again an area
where it is absolutely in the interest of the companies to have
the kind of trust from the consumer. That is why the history is
relevant, because the importance of brands that people will
rely on for information in transactions will fall away if there
is this issue of privacy.
Senator Wyden. I would hope, gentlemen, that you could
furnish the Committee in writing your thoughts with respect to
how we would go forward in this privacy area. I am sympathetic
to the last point, for example. What we did in the Internet tax
area, for example, is make it very clear that we wanted to
coordinate what we do in this country with respect to Internet
taxes with what we do around the world. We really need to have
you flesh out your position on these questions.
We do want to make sure that we have got a realistic
enforcement tool. I happen to share the view that Mr. Case
articulated, that the problem areas are likely to be those
companies that we do not know much about, but they can also do
a great deal of damage. If you would furnish to the Committee,
because of the heavy involvement from Senator Hollings and
Members on both sides of the aisle. We would like to have you
flesh out your privacy positions because I think a merger like
this with the number of people that are going to be involved
gives us a chance to almost walk through, using your merger,
what an appropriate piece of privacy legislation ought to look
like, and we would welcome having that.
Thank you, Mr. Chairman.
Senator Burns. Thank you, Senator Wyden. Senator Bryan.
Senator Bryan. Thank you very much, Mr. Chairman. Let me
just follow on the line of questioning that Senator Wyden has
begun. Mr. Case, as the author of the Child Online Privacy
Protection Act, which is the only piece of legislation that has
been enacted by the Congress to protect privacy over the
Internet, you were extraordinarily helpful, you and AOL, in
providing leadership.
We got a report back from the Federal Trade Commission, as
you may recall, within a matter of 90 days, which is an
extraordinary occurrence in the Congress. We were able to work
with you, the Web sites, and a whole host of consumer and
public interest groups to get a piece of legislation on the
President's desk in about 90 days. Now, I am not suggesting
that to do a privacy piece of legislation in a broader sense
will be as easy, but let me reemphasize the point my colleague
has made.
We are reaching a critical mass in terms of public opinion.
This privacy train is about ready to leave the station. My
preference would be to encourage people like yourself and Mr.
Levin to take a leadership role, not just to simply say we do
not have an objection to it. It may be necessary. It is going
to happen. It is a concept whose time has come, and to make
historical references, with great respect, Mr. Levin, to direct
marketing, we are talking about a potential level of intrusion
in terms of privacy, in the ability to disseminate information.
As the two of you know, it is unprecedented. It is
extraordinary, and the public is beginning to understand that,
and they are apprehensive.
So let me just encourage you to take a leadership role in
that. I think it is in your best interests, and it is clearly
in the public interest, and it will occur. It may not occur in
this Congress because we have a relatively short period of
time, but it is going to happen. If you look at the history of
public response, when the public is demanding action be taken,
the Congress, imperfect as it is, tends to respond, and this
Congress or a future Congress is going to respond, so I think
for you to get on board and to help shape that could be
extraordinarily helpful.
Mr. Levin, let me ask you a question if I may, sir. You
lauded the Committee for its action in passing the 1996
Telecommunications Act, and you and Mr. Case have earlier this
week issued this memorandum of understanding. First, an
observation. As one who practiced law in a previous life, to
get corporate lawyers to draft a memorandum of understanding
for companies of your size in three pages is itself a
considerable achievement, and I congratulate you on that
effort.
But as each of you know, this memorandum of understanding
has no real legal efficacy. I do not impute your good faith in
any way, or impugn your good faith in any way, but it is
subject to all of the corporate vagaries. Six days from now,
six weeks from now, six months from now you could make a
determination to change it.
Now, Mr. Case, when we did the Telecommunications Act of
1996, one of the things we did with respect to telephone
carriers was incorporate a provision that prohibited
discrimination. What is wrong with the Congress enacting a
similar provision as it applies to cable?
Mr. Case. Well, actually, I think Congress has enacted some
provisions as it relates to cable in terms of programming, as I
recall.
Senator Bryan. We are talking about nondiscrimination in
terms of access. In effect, the policy that you have announced
is good, so what is wrong with protecting it and incorporating
it into a legislative act?
Mr. Case. As you may recall, a year ago, when we met in
this very room, I suggested this was a good cause for
legislation. I made an impassioned case about preserving the
openness and competitiveness of the Internet.
Senator Bryan. And you persuaded this Senator, Mr. Case.
Mr. Case. Unfortunately not enough. I also made the case
that Internet regulation is generally not a good thing at this
stage. Sort of what I call the light touch, which would be
nondiscriminatory provisions, would strike me as being
appropriate, and at that particular point in time, since the
cable companies were not doing it voluntarily, maybe the
Government should step in.
Although I appreciate your support, there was not a
cacophony of voices welcoming that. Nothing happened in the
Congress, nothing happened in the FCC, but something did happen
in the marketplace, so maybe it shows Congress and the FCC were
smarter than I, because AT&T did announce the principles a few
months ago, after spending a couple of years explaining why it
was not technically possible or financially feasible. I thought
that was a step in the right direction.
Then when we announced this merger, we committed both
companies to this principle of open access. Six weeks later, we
went beyond our principle and detailed some very specifics in
terms of video streaming and direct billing relationships for
RSP's, and things that went well beyond what had been discussed
in the past. In the weeks and months ahead, we are going to put
that into the marketplace, put that into action, not just
between our companies but hopefully other cable companies will
join us and other ISP's will have agreements with Time Warner,
so we will achieve what I was hoping to achieve a year ago
through this light touch through a marketplace solution.
Senator Bryan. What is wrong, I am not sure I have heard an
answer although I do applaud your effort. I do not impugn your
sincerity, but what is wrong with incorporating this. This is
simply a policy declaration. As you know, you could change it
tomorrow. You could change it this afternoon. It has no sense
of permanence at all in terms of any legal requirement or
efficacy.
If it is good policy, and I believe it is, and I compliment
you for it, then what is wrong with a light touch to simply
incorporate this concept into a piece of legislation?
Mr. Levin. Senator, if I could respond, I think there is
something even higher than a binding memorandum of
understanding, and that is a sense of values. As I indicated in
my opening statement, one of the premises of this merger--there
were several, but one related to a respect for privacy as a
shared value that we would incorporate into the conduct of our
business. The second was nondiscriminatory access for
nonaffiliated ISP's, because that is actually a fundamental
principle as to how we operate.
I think the pragmatics are as follows. You normally need
such legislation when there is a real, perverse need for it,
because the marketplace is not operative. We are talking about
switched digital systems that only within the last year have
even come into operation. There is now at least an
understanding on the digital capacity, what we are now calling
the digital bank account in broadband cable.
There is now flourishing competition from DSL telephones,
DBS, and soon fixed wireless. To me, having grown up in this
industry, it is very similar to what happened in the early
seventies. We had the startup of pay television. There was
limited capacity. You could only get HBO and cable systems that
happened to be owned by HBO's parent.
As soon as the capacity was there, other services started.
The consumer demand was there. You now have a very robust form
of multiple access, and we do not discriminate against any
service that is not owned by the company.
The same thing is now happening today, and in fact to me it
is just like privacy. This is a very smart thing to do. The
consumer really wants more choice, other than an AOL service on
Time Warner cable systems, and that is what we are going to do,
and this statement for a lot of reasons, because of preexisting
obligations, had to be stated in the form of an MOU, but I
guarantee you there will be multiple ISP's on Time Warner
systems with private commercial arrangements that will be
tracked through the industry.
Mr. Case. If I could just add, I think this is an important
issue. It is something that I have been talking about for some
time. I just want to make sure it is very clear that we 2 years
ago in AOL--and I personally was basically making the case that
all of these infrastructures, particularly as you move to
broadband, but wireless, the same thing is true, needed to be
open so consumers had choices and ISP's could compete. My hope
early on was that would happen voluntarily.
Indeed, when AT&T announced this merger with TCI, that day
we put out a statement saying we look forward to working
together on this, and it was only when that marketplace
approach did not appear to be getting momentum that we argued
for Government intervention.
What has happened in the last few months, partly, I think,
through our initiative, is a marketplace solution that now goes
well beyond what I called for in this room a year ago, which
was a light touch, nondiscrimination regarding affiliate ISP's.
We have also talked about direct billing relationships. We
have talked about there being no fixed limit on ISP's. We have
talked about video streaming and other sorts of things, and
this is an MOU that was signed six weeks after announcing a
merger which I think is significant progress, that will be
followed in the months ahead by a definitive agreement between
our companies, and I would expect a definitive agreement
between our company and other cable companies and other ISP's
and the Time Warner system.
If that fails, if this does not turn into a definitive
agreement, it would be perfectly appropriate for you to relook
at this, but at this point a marketplace solution seems to be
working, and I am pleased to report that some of the progress
was not seen a year ago we are seeing today.
Senator Bryan. What a difference a day makes. Thank you
very much, Mr. Chairman.
Senator Burns. Senator Abraham.
STATEMENT OF HON. SPENCER ABRAHAM,
U.S. SENATOR FROM MICHIGAN
Senator Abraham. Thank you very much, Mr. Chairman. I
actually also sit on the Judiciary Committee, so this is the
second time we have had a chance to have a hearing that I have
been part of with respect to this issue, and I want to again
commend Mr. Levin and Mr. Case. I think their expressions of
support for consumers and broadening consumer choice and open
access and so on is in the right direction, and I treat very
seriously what they have said, and I think we should focus on
it as we consider going forward.
I mentioned the other day, and I just want to reiterate, in
this Committee that I think as we evaluate whether it is this
merger or others in the high tech context we really do have to
look at issues, because of the new economy, in a new way,
issues like barriers to entry. Are there barriers to entry?
Does it seem to be the case?
As I mentioned the other day, it appears by the end of this
year there will be something in the vicinity of one billion Web
sites. That strikes me as a lot of diversity. Are there cost
problems for consumers? Well, not much evidence of that in
terms of most computer equipment costs, software costs, access
costs, even now that we have people offering free Internet
service. It seems to me we have a lot of competition, and so it
seems to me just from an innovative point of view, and so on,
that we are doing well.
What I want to do is just ask a couple of questions, one
maybe just to follow on to Senator Bryan, and that is this.
Obviously, the question of deployment of broadband technology
is one that you testified here before on, Mr. Case, and I am
interested in knowing whether there are any legislative
actions, or regulatory changes that you think would be in order
at this time to accomplish the goal that I think you have set
out in your testimony on Tuesday of establishing as quickly as
possible the full deployment of broadband services across this
country.
Whether it is the proposal you had a year ago, or others
that might affect other potential providers, what are your
thoughts, and I would throw that out to both of you.
Mr. Levin. If I could just start, because it follows on
from the 1996 Act. We have the most robust form of competition
taking place right now. It has been a wake-up call for the
cable companies, for the telephone companies, and for the
satellite companies, and now I would add the wireless and fixed
wireless. In fact, there is a real competitive race going on
between, on the wire line side DSL, and high-speed Internet
access on cable. While that is happening, the DBS side,
particularly Hughes, with a very high-speed computer service,
and now we have the fast development of wireless.
So what the marketplace is telling us, and the capital
markets are supporting this, that there has been a wake-up
call, and frankly, the wake-up call came because cable within
the last year started to deploy these cable modems. DSL and
ADSL has been around for a long time, and all of a sudden it is
being heavily marketed, and capital is flowing to four
different communications systems, or infrastructures, to
deliver high-speed Internet access.
So it is not because--I am not speaking as a vested
interest, but I am simply saying that the marketplace is
proceeding in ways that we probably could not have predicted a
couple of years ago, and now with this statement of
nondiscriminatory access, what it will do is encourage not only
the cable industry but the development of services, so you
could have streaming video and move well beyond the text and
pictures where we are, by and large, today.
So I do believe it is working, and I think there would be a
chilling effect if there were some intervention at this point,
because it is working.
Mr. Case. First of all, I would like to followup with a
closing remark on what Senator Bryan made, what a difference a
day makes. I hope he did not intend to suggest that based on
this merger suddenly we have changed our tune. I have been very
consistent on this issue, and I would like to reiterate again
my view.
I have been calling, I think as vigorously as anybody for
open access. I have been stating, as best I can, the importance
of continuing to have consumer choice, and continuing to have
competition in every forum that was available, and always
preferred a marketplace solution from day one, as I have always
preferred on most of these issues a marketplace solution.
It was only when a marketplace solution did not appear to
be possible that I suggested Government involvement was
necessary, and even then suggested a light touch, specifically
related to a nondiscriminatory provision in terms of the
affiliated ISP's, which we have now achieved in the marketplace
through AT&T's effort, and now through Time Warner's effort.
When the No. 1 and No. 2 cable company are on record with
this, and actually go well beyond this light touch I was
talking about, that also put some specificity into play, I
think that is significant progress. I do not think it is what a
day makes. It is really what a year makes. Progress has been
made. I believe progress will continue to be made.
I believe cable companies are likely to get on this band
wagon partly because they think it is good business, partly
because they think it is good policy, partly because they think
there is some real momentum to it, and one thing I have learned
is that they and others tend to want to participate when they
think it is in their interest as opposed to when they are
forced to do it.
So as long as we are successful and continue to build this
band wagon, we will achieve precisely what I and many others
have advocated for some period of time through a marketplace
solution. If that fails, if we turn out to be the only cable
company that really makes this work in the way that we think is
important, then it would be perfectly appropriate for you to
step back in, but right now it is working, and I think people
should take a look at the broadest perspective and not focus so
much on the process, and more on the progress, and on the
progress we have made, and I think we have provided some
leadership on, to make sure consumers do have choice and ISP's
can compete.
Senator Abraham. Are there any other regulatory or
statutory barriers, maybe not related to cable, whether it is
related to other phone companies or to wireless providers,
satellite providers that you think need to be altered to create
the diversity you are talking about?
Mr. Case. The principle is the same, that all these
different communications platforms, satellite, wireless, would
certainly be included. Mobile wireless is becoming a very
popular service all around the world. All those communications
infrastructures we believe should be open so consumers will
have choices, and ISP's and others will be able to compete.
Our hope continues to be that there will be marketplace
solutions, but if any of them try to move to a closed model,
try to be a bottleneck, try to be gatekeeper, I think if the
marketplace is not working then it is appropriate for the
Government to step in, but at this particular juncture I do not
believe any further Government action is necessary.
Senator Abraham. Let me just ask one last question, even
though my light is on, since part of the time was spent
answering Senator Bryan. I would be interested in following up.
On Tuesday you indicated, and I know you have again today, that
you believe maintaining content diversity on the broadband
network is in the best interest of this merger, and I am just
interested if you would perhaps elaborate on why you believe
maintaining that diversity and offering nondiscriminatory
access would be in your self-interest.
Mr. Levin. Well, again, this is a part of the history of
what the consumer wants, and we are ultimately responsive to
consumer choice, whether it is multiple ISP's, because this is
such a dynamic new area, and our consumers are going to want to
have many different perspectives on that.
The same thing applies to programming. If we have a network
called Home Box Office, it does not only play the movies from
Warner Brothers, and similarly, when we have a lot of this
content, we do not just put it on our cable. CNN and TBS are
aggressively active on TBS, any form of distribution and, in
fact, given the breadth of material at Time Warner, it is not
going to appear exclusively on AOL, because AOL is in the
business of providing lots of different information.
So again we have, I think, a profound statement that
diversity of consumer choice, where the consumer is, in fact,
the programmer and it is not some centralized company that is
deciding what you want, when you want it, and then delivers it,
that is the big change. That is what the Internet provides.
But we have had that lesson. As I indicated in my remarks,
starting with HBO, the video cassette, all of these things
taught us that you are better off providing, let the consumer
decide, and now you have the ultimate capability to get what
you want, when you want it, totally customized. That is what
the Internet is.
Senator Abraham. Thank you.
Senator Burns. Senator Rockefeller.
Senator Rockefeller. Thank you, Mr. Chairman.
Steve Case, you and I have had some conversations about the
so-called last mile. That was a different conversation then.
Now, because you have a merger, that problem has been resolved
from your point of view.
We have had a very interesting situation. I remember going
to the Bell Atlantic facility near here, and they have these
cages downstairs which are highly protected for which we are
greatly overcharged, and almost inaccessible for those who want
to disburse out from the Bell Atlantic basement using their
lines. It is sort of a hostile, tense situation, which is
amusing in a sense.
What I want to be sure of is that--and I guess, Gerry
Levin, this would be partly to you, that in the case of Time
Warner that others who want to be able to interconnect and get
into broadband services, that they are not going to have those
same kinds of problems in your, quote, basement. They will not
have to buy cages with security, or electrify the cages. In
other words, that you are going to have a different approach to
that than the FCC has had to battle out with the telecoms.
Mr. Levin. Let me just start. Part of the principles we
established in the MOU do really relate to a form of
interconnection by ISP's, which we would welcome, and again it
is built into our DMA, because we welcome the interconnection
now from hundreds of program services that deliver by satellite
or microwave, or whatever way they can. They come into what is
called our head end, or our central switching.
And so this has been our history, and now we welcome not in
any closed cage, but we welcome that interconnection, and in
fact the cable industry has been trying to continue to
establish standards of interoperability, particularly now with
packet switching, as we have moved away from analogue video, so
that everything is transparent in terms of the interconnection.
Senator Rockefeller. I want to ask one more question, one
more point, and thank you for that.
On the privacy issue, AOL would store, let us say, an
enormous amount of information, and that is as the world works.
I think the critical question is, and I hope your answer to
this is no, is, will you, either of you, take that information
and sell it to a third party?
Mr. Levin. Well, first of all, again, I do think the
history even offline is relevant in terms of never doing that
unless the consumer is aware, there has been notice, and the
consumer has had the opportunity to opt out.
These principles are built into our business, because we
have had at Time Warner a data base for over 75 years, so we do
not do that. We do not practice that. That is a value that I
think is embedded now, and will be at AOL Time Warner, in the
practices of AOL.
Senator Rockefeller. When you say, when the customer is
given notice, and customers we all are, are often in a hurry to
transact what it is we are doing and do not read all the
notices. If we do, we do not know exactly what their full
implications might be, so is that a conditional no about
selling to third parties?
Once you start selling to third parties, that is where
people up here start to get very nervous, and that is why sort
of a declarative no would be a lot simpler.
Mr. Levin. Well, in fact, let me turn it around. Of course,
in principle it is no, but on the other hand there are certain
areas, assuming the consumer is aware, where in fact it is a
benefit because of the ability to receive what I will call
customized services, and that does take place.
We are not in the business of selling consumer information.
That is not what we are about.
Senator Rockefeller. What we need to know more about, and
not now, is how that consumer gets informed, and does that
consumer have a chance to opt out.
Mr. Levin. Again, I should indicate it is over a course of
many years where all of this has been worked out, not only in
the private sense through the various associations, and I
mentioned the DMA's privacy promise, but we have also been
working with the FTC for many years now to make sure that all
these things--and doing that as an industry, not just as Time
Warner in this case, and so I am satisfied that we could
present to you the form of practice here that does not violate
or invade the consumer's privacy.
Mr. Case. Let me just clarify that. We do not sell
information based on what people are doing, so for example, if
people are going to some service about cancer, for example, we
do not then aggregate that cancer target list, then sell it to
people who want to sell to that audience. We just do not think
that is appropriate.
At the same time, we do make our overall list available for
rent, but not based on what people are doing, so the privacy
concern--and people can opt out of that if they would like to.
The privacy concern I think really relates to what information
are you collecting and how are you aggregating it, and then how
are you using it. Our decision is to make sure that we do not--
essentially, a lot of people target people based on specifics
that really are not their business.
Senator Rockefeller. Mr. Case, I have one other point I
have to make. The word opt out also means that we have some
clarification, because opting out is a positive act, and a
knowledgeable act on the part of the consumer, and if you do
not opt out, then you are in, so the question of how does one
opt out, how easy is that, and the dynamics of all of that,
becomes important. That can be discussed.
I just want to make a final point. I think that Ted
Stevens made this point. You grew up in Hawaii. My life is
defined by going to West Virginia as a VISTA volunteer.
Nineteen percent of our households have access to Internet.
Twenty-one percent of our households have computers.
So I think the whole digital divide thing as we discussed
it, you at the Potomac Conference, where I think you had some
frustrations about some of the results, we generally in public
policy and private conversations, we talk about the digital
divide. It comes out of our mouths easily. It comes out of our
souls easily. But the solution to it is infinitely larger and
more complicated than any of us can possibly imagine.
Shareholders have their requirements, and I am not
attacking that, but that means that companies have to go to
certain places before they go to others.
On the other hand, Gerry Levin knows that my daughter until
recently was teaching at Jackie Robinson Junior High School at
106th Street in New York, in Harlem, and the equipment there
was not suitable. She was only 27 at the time, highly computer
literate, but it had nothing to do with the fact that she was
able to teach sociology or mathematics at a level that a
teacher should be able to, beyond that, but she did have
access, and then there are board of education problems in New
York.
When you get into rural parts of the country, it becomes
really enormously difficult. There are vast swaths of people
that simply have no possibility at the present time, so the
digital divide is something that we in the Government cannot
do. The e-rate does not cover all of these issues because it is
just the discount for the phone line and the wiring up, and
that is it. We don't have computers software, much less teacher
training, nor the dispersion, except after another 10 or 12
years.
So I think the whole question is of the private sector, not
just individual companies operating on their own, or as
responsible corporate entities. My sense of both of you is that
you are genuinely responsive socially on these issues, as you
individually seek to do things. I think it is going to take a
much larger effort on the part of the industry as a whole. I
worry deeply about the digital divide and the cost to America
on that. I think it is very much, in fact, the new civil rights
movement.
Mr. Case. If I could just quickly respond, first on the
opt-in, opt-out, we look forward to talking to you further
about these issues, but it should be noted that when you
subscribe to AOL there is a lot of things we tell you. You set
up your screen and so forth, you are essentially opting in by
deciding to subscribe to AOL and set up certain preferences.
It is a little bit different for some Web sites where you
may not even know it, but somebody is dropping a cookie and
keeping track of what you are doing, and you never even knew
somebody was watching, so I think there are a little bit
different approaches, but the bottom line is, we all recognize
that we need to build trust and security and privacy to build
the medium.
I agree on the digital divide issue. I think it is
something that individuals and companies need to do working in
conjunction with Government and nonprofits. Part of what we are
trying to do through this PowerUP initiative is build a public-
private partnership. Companies like AOL have made commitments.
Gateway, for example, has donated 50,000 computers to it.
We are working with the Boys and Girls Clubs, and the YMCA,
and Americorps VISTA is providing the volunteers, and America's
Promise is a partner, the Department of Education is a partner,
so it really is trying to work together to deal with this, and
there actually is a role for Government and leaders of
legislation that Senators Biden and Specter have introduced
related to this, and I urge you to support that.
Mr. Levin. Obviously the issue goes beyond the technology
and really relates to the state of our schools, the respect and
dignity we give the teachers. We started this conversation
about instant messaging; if we could ever plant enough of this
capability in homes so that there can be communication between
teachers and parents or surrogates, whoever is home, and take
advantage of that technology for a form of influence and
motivation, we could transform the educational system.
So that is why there is so much promise in this technology,
if we can work together to make it more accessible.
Senator Burns. Senator Breaux.
Senator Breaux. Thank you, Mr. Chairman.
Mr. Levin, Mr. Case, welcome. Thank you for your being with
us to discuss this very important issue. I wear another hat, as
we all wear in this business, in different committees. And the
other committee I serve on is the Senate Finance Committee, so
I would like to ask you a tax-related question.
In Louisiana, if I have a constituent, Mr. Boudreaux, who
goes down to the local boot store and buys a pair of boots, he
pays a local sales tax, a county, or parish, tax in Louisiana,
and the city sales tax. When he buys that same pair of boots
over the Internet from a seller who has no presence in the
State of Louisiana, he does not pay the city tax. He does not
pay the county tax, and he does not pay the State tax.
I am not suggesting that if we do not do anything in that
area that grass will grow in the streets of downtown America,
but I am concerned that local services, like police and fire
protection, schools, roads, and other local services that are
principally financed through a State sales tax will
dramatically suffer. And it seems to me that by not requiring
both sellers of the same product to pay the same legally
established sales tax that we are in effect giving a tax
subsidy to one seller and not to the other.
Do you think Congress should do anything to correct it?
Mr. Case. Well, I think we actually have representatives,
both Dick Parsons of Time Warner, and Bob Pittman of AOL, on
this tax commission, and it sounds like they are having very
vigorous debates from what I hear.
Senator Breaux. They are having a lot of fun.
Mr. Case. Our view is we do not want or expect or need the
Internet to be some kind of tax haven. At the same time, we
think it would be a mistake to band-aid the sales tax system
yet again and deal with this as an Internet issue. It seems to
us that there is an opportunity here for a fresh look and
particularly an opportunity for simplification. So whether you
buy it from Main Street or buy it from a catalog or buy it on
the Internet, there is a consistent approach.
So we will really argued for viewing this through the prism
of it is a new opportunity to do this overall sales tax issue
in a better way, and let us take the time to do it right. And
if we need to extent the moratorium to do it right, fine; but
we are not trying to stall the resolution. If smart people can
get together and figure out how to simplify things now so it
really, truly is neutral, then that is something we would be
supportive of.
Mr. Levin. Senator, may I just add one thing?
Senator Breaux. Mr. Levin.
Mr. Levin. This is a real opportunity. So any moratorium is
not designed to be permanent. But it really suggests that we
have a hodgepodge today, even before the Internet, in terms of
catalog sales and the way different things have been treated.
And now, you put in e-commerce, it is a global issue, because
where this originates and who is really buying gets to be
something--and that is why, if we can think this through in a
way that provides some kind of justice in the system, if I
could use that word, then we should do that. But certainly not
to disparage the requirement for local government to have its
revenue base hampered.
Senator Breaux. I appreciate that. I get the gist of it,
that you are both talking about tax equity and a level playing
field and you can compete and your sellers can compete over the
Internet. I appreciate that. Let me ask one other question.
The FCC, when it testified before this Committee on
telecommunications issues, talked about voice telephone
service, transmission, and high-speed broadband services over
the telephone service operations are what they have called
operationally and technological distinct types of services and
need to be regulated differently.
My question is, would you agree that that same distinction
applies between the traditional cable video programming
services and the high-speed broadband services delivered over
cable? Do you think that the FCC's determining that they are a
distinctly different services would apply both to cable
delivering broadband the same as it is with telephone lines
delivering broadband services?
Mr. Levin. Certainly, with respect to telephony, Internet
telephony is very different from your classic circuit-switched
telephony. The whole packet switching technology means it runs
through a very different technology. And the opportunity for
many people to provide it is so vastly different from the in
place local exchange carriers.
Similarly, with respect to video streaming, that is, the
opportunity to deliver video through the Internet as opposed to
the normal analog system, creates a whole new opportunity. And
this is another case of rapid innovation. Almost every day
there are new sources of, right now, because of limitations,
usually, what we call short attention span theater, it is
rather snippets of video. But, over time, the Internet will
enable people to publish video just as they now can public text
and words.
And so, without taking a position on what the FCC should or
should not do, this is the most creative area I have ever seen.
Senator Breaux. It is a huge question, though. You are
going to have to start taking positions on it. Because, No. 1,
when you deliver it over the telephone wires, they have a whole
set of rules and regulations that the FCC requires, that are
pages. Whereas if you are delivering it over your cable system,
the same broadband Internet services, the regulatory
requirements are vastly different, I mean vastly insignificant
compared to if you are doing it over telephone lines. And the
FCC says, well, they are distinctly different services, that is
why.
Mr. Levin. Well, certainly, what is different is everything
that an ISP happens to be delivering, which is essentially what
is out on the Internet. And by talking about video, remember,
these are all the same. The routers that take this material and
send it around the world, they do not whether it is text, an E-
mail, an instant message, a nice picture that some journalist
has taken, or music, or video. It is all being digitally
routed. So the system is totally different. It is all done
through packets that have little addresses on it. It has
nothing to do with the old analog cable system or the old
twisted pair telephone system.
I guess all I am suggesting is I do not see right at the
moment what regulatory regime is really necessary at this
point, because it is totally democratic. There is no
centralized control. And I think that is one of the elegant
benefits of this network.
Senator Breaux. Just a final point. You are making the
point, Gerry, I take it, that delivering the broadband Internet
services over your cable network is different from delivering
those same type of services over a telephone line?
Mr. Levin. No. In fact, I think to the extent that over a
telephone line you can deliver broadband ISP's, it is
essentially the same.
Mr. Case. Let me just add something here, a couple of
things. First of all, there are some distinctions between
technologies and markets that exist today that do merit
different kinds of approaches. For example, a concern in cable
television has always been there is really only one cable
provider, there is no real competition. There is now some
competition from satellite, so that is an improvement. And then
there is limited cable capacity, so there is an issue of making
sure content diversity exists.
In the Internet space, there are thousands of Internet
service providers people can choose from, including free ones,
and unlimited choice in terms of content, because essentially
there is an aspect of universal carriage. So those are
different and should be treated differently.
At the same time, I think it is the point that Gerry is
making, we are moving into a world that is converging. And it
is a little bit like the tax issue. Looking at these as
Internet issues I think is not the right approach. Looking at
these as a new opportunity to re-look at what we are doing and
what is the best way to do it going forward is going to be
necessary at some point, no matter how complicated that might
be to break down some of these walls and kind at it from a
clean slate.
I think there will be a need for that in the years to come.
In the meantime, there are some clear differences between some
of these markets and technologies.
Senator Breaux. Thank you, gentlemen.
Senator Burns. Senator Cleland.
Senator Cleland. Thank you very much, Mr. Chairman.
This has been a fascinating day for me. But hearing the
jargon of the Internet century makes me feel like the train has
already pulled out of the station, and I am sitting there
eating popcorn and that I am on the wrong side of the digital
divide here. So I will say, Mr. Levin, that one of the things I
have strongly identified with is what I think is transferable
from the 20th century to the 21st century that people can
understand. And that is your commitment to what you might call
shared values. And that is one of the things I am searching
for.
I may not understand all the technology, and I may not be
able to track all the mergers and acquisitions and changes in
this quicksilver business that you all are engaged in, but what
I am looking for is some, shall we say, first principles by
which this kind of business, this world of communications, is
run. What are the first principles? What are the bedrock
concepts out there that we can build on, that maintain not only
our economy but the trust of people in our businesses?
I really appreciate your ticking some of these off, Mr.
Levin, that your company is committed to the public interest.
We all here are. And that is what we are here today to explore.
What is in the public interest?
Secondly, journalistic independence, a powerful shared
value that I can certainly identify with. Nondiscriminatory
access. Opening up your shopping center and say, come one, come
all, to the fair. Privacy, rooted in respect for human dignity.
That is something I think people can really understand. And, in
many ways, that is the business we are all in. If people do not
trust me, I do not get elected. If they do not trust you, you
are not in business. Whatever it is we are selling, however, we
are selling it.
The whole concept about the digital divide, this new world,
that we do not want to create an information aristocracy, as
you pointed out. Which is your wonderful emphasis on education.
The more people, the more citizens that we can get well through
education in our country, the more consumers you have, the
better our country is going to be. Which is one of the real
powerful, positive parts of this Internet world, that it
challenges us all to get better and smarter, and put an
emphasis on education.
Universal service, the fact that we do not leave any
community behind, is powerful as we move forward in the 21st
century, as we move across the digital divide. So I really
appreciate you are helping to kind of clarify for me some of
the first principles that you operate on.
And I think what you all have done here is acted as
precursors of other companies so that other entities follow.
And you all laying down some solid first principles I think
will be in the public interest as we move forward.
I am fascinated, too, Mr. Case, about your understanding of
how government can ebb and flow in its actions. Sometimes it is
required to be involved. Sometimes it is not required to be
involved. One of the things that I have been struggling with
is, when is a government action triggered? In other words, I
understand from my Internet friends that the Hippocratic Oath
should be taken first, that government should do no harm. In
other words, this is a good thing; let us not screw it up. Let
us not mess this thing up here by a chilling effect of the
heavy hand of the bureaucracy of government on this incredible
part of our commerce.
But at the same time, your understanding that from time to
time, a light touch might be needed is important. I will look
forward to your recommendations as we go along. And, finally,
Mr. Case, we are both a fan of Tom Friedman, who has written
that great book, ``Alexis and the Olive Tree.'' His
understanding of the difference between big brother and little
brother--sometimes government, acting as big brother, may come
in and protect the public interest from rogue little brothers.
We will be looking, and I will be looking, for your guidance on
these issues.
I just wanted to say that your articulation of first
principles here has helped me immensely deal with this whole
world of e-commerce, as we take commerce, this being the
Commerce Committee, as we come out of the industrial age into
the information age, that there is a new technology out there,
new words, and new acronyms. But some things transfer, in doing
business in America, that we all support. And your articulation
today of your values of your company and the values you bring
to the merger have been very helpful to me.
Mr. Levin, any comment on that?
Mr. Levin. Yes.
Senator Cleland. You articulated the shared values concept.
Mr. Levin. Obviously I am deeply appreciative, Senator,
because, as you have articulated, our deeply felt sense of
values, that obviously resonates. And let me just put it
briefly in historical perspective, because I do think we have
an opportunity. Every time there has been an advance in this
country--I will go back to radio--radio was originally going to
be a place where we could deliver classical music to Americans,
and then it evolved in a slightly different way.
When television began, this was a hope that it would
basically be an educational medium. It has not exactly turned
out that way.
So being somewhat of a student of history, my excitement
about where we are and this kind of merger, and the emphasis on
values, is I do think we have an opportunity. Because, for the
first time, this technology does interconnect everyone, if we
can just make it happen. It is a fact that most of the people
in this world never even made a telephone call. And half the
world lives on $3 a day. So it is not the technology per se,
but the fact that it represents a form of community and
interconnectedness, that we have just never had that at our
disposal before.
So the second thing I would say is that maybe this is also
an opportunity--and a lot of that has come in the interchange
here--to redefine the role of government and the role of the
private sector in some new way, which, I admit, it sounds
fuzzy, but to try and get away from the traditional rhetoric
and also the assumption that there is an adversarial position
of vested interests to make money and government interest to
protect the public good. That is what we are trying to get at.
There are some cynics who challenge that. But I guarantee
you, we are sincere about it. But it all proceeds from one
thing: we have at our disposal a technology like no other
generation has had available to it.
Mr. Case. If I could just add. I certainly agree with
everything you have said and everything Gerry has said. I think
it is very important to recognize, as we move into this new
century, that some things are going to be different and some
things can be different if we try to make them different. This
notion of more of a partnership between government and business
I think is an important notion.
I do think it is unfortunate, as Gerry just said, that the
sense is that if you go into business, you are there to make
money and take advantage of consumers and get away with as much
as you can. If you go into government, you are there to protect
consumers and try to rein in those robber barons, who are going
to certainly do bad things if not reined in.
Our goal is to try to create this new medium and change the
way people get information and communicate and buy products and
learn things. And if we are successful, hopefully build the
most valuable company, but also build the most respected
company, and shaping this in a positive way is key to that. And
trust, as you say, is key to that. We certainly have a
responsibility to our shareholders, just as you have a
responsibility to voters in Georgia. But we both have a greater
responsibility to try to do what we can to build a better
world.
And I would support more, and I think others would too,
light touch sorts of things, as long as there is some
confidence that they would indeed be light touches. The fear of
business always is that--at least some people in business--is
that what seems like a good idea and starts out with a light
touch somehow ends up being unwieldy and a heavy touch. And so
maybe it is better not to support anything because then you do
not have to worry about that, at the finish line, something bad
happening.
I think that is a mistake. And I would hope that there is
more of a dialog, there is more of a partnership, and that we
can deal with issues, privacy being a good example, in a
responsible, balanced way.
Mr. Levin. Senator, if I could just add. There is one thing
I think we can take from the past century into this century,
and for the citizens of Atlanta, and that is to deliver a World
Series to Turner Field.
[Laughter.]
Senator Cleland. And that is a good note on which to close,
Mr. Chairman. Thank you very much.
Senator Burns. I thank Senator Cleland.
I only have one followup question. I was noting in your
memorandum of understanding, you state that the new corporation
will negotiate commercial agreements with unaffiliated Internet
service providers. However, it further states, and I quote:
``Pursuant to such commercial agreements, AOL-Time Warner will
partner with ISP's to offer consumers a choice.''
Now, I come from Montana. And sometimes we get in trouble
because we do not define terms and we do not operate. How do
you define ``partner''?
Mr. Levin. Well, the word is actually used to indicate that
there are many different kinds of ISP's who play a very
different role from what AOL does or EarthLink does. There are
some who are national. There are some who are regional. There
are some who are local. So it is simply meant to communicate
that we want to work with several different kinds, that there
is not one template. And we want it to be in the form of a
partnership.
For example, there are certain ISP's who have the
capability of marketing and billing. And so we say in the
memorandum that they should have access to the Time Warner
cable customer to be able to do that.
There are others who cannot do that. So, in a partnership
way, we would offer to do the billing if they require that.
That is simply what the word is meant to communicate.
Senator Burns. I just wondered, because every time we have
disputes it sometimes boils down to definitions more than it
does anything else.
I want to thank Mr. Case and Mr. Levin today for coming
before this Committee. And I have been reminded that there are
some Senators who have further questions. We will forward those
questions to you. If you could respond both to the Committee
and the individual Senators, I would appreciate that very much.
And I thank you for coming today and spending this 2 hours with
us. We did set a record today, by the way. And I think it is a
credit to you that the opening statements of 10 Senators on the
Commerce Committee, we got through them in 25 minutes. That is
a new record.
Thank you for coming today, and we appreciate your
attendance here.
Now we will move to the next panel.
Mr. Case. Thank you.
Mr. Levin. Thank you.
Senator Burns. Thank you.
We move now to Mr. Jerry Berman, who is Executive Director,
Center for Democracy and Technology; Mr. Gene Kimmelman, Co-
Director of the Consumers Union; and Robert Lande, Senior
Research Scholar, American Antitrust Institute, for the
testimony and questions today.
Usually, when it gets down to this time of day, your
competition is usually a bowl of soup. And it looks like the
soup won again.
[Laughter.]
Thank you, gentlemen, for agreeing to come today. We are
interested in your comments. And understanding the testimony
you have heard preceding your panel, your comments are very,
very important to this Committee, I want to tell you that.
And we will start with Mr. Berman, who is Executive
Director, Center for Democracy and Technology.
Mr. Berman.
STATEMENT OF JERRY BERMAN, EXECUTIVE DIRECTOR, CENTER FOR
DEMOCRACY AND TECHNOLOGY
Mr. Berman. Senator Burns, thank you for this opportunity
to testify today on what I think are critical issues facing the
future of the Internet.
CDT is a civil liberties organization and an Internet
policy organization. We work tirelessly, or we try to work
tirelessly, to protect free speech on the Internet and privacy
for consumers. And we think those issues are gravely involved
and affected by the AOL-Time Warner merger. It is absolutely
important to understand why I am going to emphasize first the
first amendment and then privacy.
We have had an open narrow-band Internet. Anyone can
connect to it. Anyone can be a publisher. The Internet Caucus
that you head has spearheaded the education people about the
ability of unaffiliated ISP's to set up low barriers to access.
And when the Supreme Court decided the Reno case, which we
helped to wire the Court and educate the Court about the
Internet, they said this is the most free and open
communications media of all time, and it is entitled to the
highest first amendment protections because anyone can be a
publisher.
We want to make sure that the ability to publish, to be a
consumer, to reach content, to speak, translates into the
developing broadband Internet. There are two things--the
Internet is a network of networks with no gatekeepers. It has
been working off a facility, the telephone network, which is a
common carriage network, which makes the ability to connect and
access and to become part of the Internet easy. We are now
moving to broadband platforms. Hopefully, in time--and we have
been studying this through a broadband access project--we will
have not only cable broadband, but we have DSL in parts of the
country but not everywhere, wireless, and so forth.
But, for the foreseeable future, the major deliverer of
broadband is going to be the cable facilities. And that is why
it is absolutely critical that openness principles be brought
to the cable network. That is not there the way their
architecture is designed. It has been channeled. It is a
gatekeeper network traditionally.
And so, first of all, the announcement by AT&T-MindSpring,
and then the MOU announced by AOL and Time Warner, are
absolutely critical, because they are committing their
companies to the Internet paradigm. Which is that to the extent
feasible, they are going to open up their network to
unaffiliated ISP's who can carry their own content and do not
have to seek permission from the cable network to run on that
network and to do the applications that they want to do.
There is great devil in the details. Because unlike the
telephone network, which we hope will keep going and be out
there as a common carrier, there is limited capacity on a cable
network. It can only carry so many ISP's. It cannot just
connect up everyone. It would degrade the signal.
It has problems. But the feasibility of multiple ISP's is
there. But nondiscriminatory access by unrelated ISP's, the
ability to do streaming video, those principles which are at
the core of the MOU, and most of them incorporated, at least by
implication, in the AT&T-MindSpring, signal that the intent is
to open up and to be nondiscriminatory. The implementation will
be critical. A lot of the details have to be spelled out.
And there are two ways of going. One is you bring in the
government and say, let us write these rules and make sure that
nondiscrimination occurs. I think, in this area, that is
premature. First of all, I watched the legislative fight last
year, which pitted giants against giants. There is gridlock. It
puts everyone into a bunker. They start a war.
It does not create the open standards dialog that we need.
The Internet has developed mostly by the industry, the
community, coming together and figuring out how to do a
standard. And there is a real opportunity here for the cable
industry, the public interest community, policymakers, and the
computer industry to work out the details of this MOU and to
make sure that it is open.
And if that does not work, there is always the role of
government. A couple of words about this, and it is critical.
So there are forums that we would like to see facilitated by
congressional oversight to make sure that the industry works
toward openness and that, if legislation becomes necessary and
it fails, that will become clear.
The privacy issue, AOL-Time Warner does not change the
equation. Privacy, we all know, is a major issue on the
Internet. I think we should view it as an opportunity. It does
not qualitatively change it. AOL already has a lot of
information. Time Warner already has a lot of information. They
have both been leaders in the self-regulatory effort on the
Internet, trying to build best practices and track onto the
Internet.
That self-regulation will be the cornerstone of any
legislation, because it will establish what the best practices
are. I think that the recognition by Mr. Case that legislation
is necessary because of bad actors, little brothers, is
something to build on. Because it says there is possible
ground-floor notice, consent, opt out, and then we can cover
the bad actors. That is the basis for, I think, your
legislation and other legislation. So there is room for
reaching a consensus there.
The Internet is also driving consumers to ask for privacy.
There are also technologies that facilitate privacy, that make
it possible for Web browsers and consumers to read the fine
print of every Web site about their privacy policies and
negotiate consent. And AOL and Time Warner have been active in
trying to facilitate the bringing of that technology to the
market.
So I think that there is a chance here to work together
across lines, bring everyone together, and try and achieve a
new social contract for the broadband age that will protect
both free speech and privacy. Thank you.
[The prepared statement of Mr. Berman follows:]
Prepared Statement of Jerry Berman, Executive Director,
Center for Democracy and Technology
Mr. Chairman and Members of the Committee, the Center for Democracy
& Technology (CDT) is pleased to have this opportunity to speak to you
on the short and long-term implications of the AOL-Time Warner merger
on consumers, and on the Internet itself. CDT is a non-profit, public
interest organization that is dedicated to developing and implementing
public policies to protect civil liberties and democratic values on the
Internet. CDT has been at the forefront of efforts to establish and
protect the very high level of constitutional protection that speech on
the Internet has been afforded by the United States Supreme Court in
the Reno v. ACLU decision. CDT led the coalition that wired the trial
court in Philadelphia in that case, and CDT has undertaken a major
project to ensure that the open and democratic characteristics of the
narrowband Internet--so central to the Reno decision--are carried over
into the emerging broadband world.
Mr. Chairman, the Internet is at a critical junction in its
evolution. Although as a popular mass medium the Internet is less than
ten years old, it is already entering into a period of significant
transformations. These transformations are threatening to undermine the
fundamental characteristics that make the Internet such a unique and
dynamic means of communication. We would like to address two different
threats to the Internet--threats to openness and threats to privacy--
and the implications of the AOL-Time Warner merger on those issues. For
both of these issues, the critical starting point is to look at the
vital characteristics that make the Internet what it is today.
i. open access
A. ``Open'' Characteristics of the Narrowband Internet
In the first comprehensive assessment of the Internet by an
American court, the trial court in the Reno case in 1996 found what it
termed ``a unique and wholly new medium of worldwide human
communication.'' \1\ The narrowband Internet developed into this
dynamic medium in large part because it has been ``open'' at virtually
all levels of its existence. The ``network of networks'' operates using
open and freely available technical standards, allowing literally
millions of different (and often incompatible) computers to communicate
seamlessly. The open protocols used for Internet traffic allow startup
companies and individual software designers to create and distribute
new modes of communication over the Internet. Speakers, large and
small, rely on the openness of the Internet to speak easily,
inexpensively, and without significant restriction or limitations on
the form or content of the speech.
---------------------------------------------------------------------------
\1\ American Civil Liberties Union v. Reno, 929 F. Supp. 824, 844
(E.D. Pa. 1996), aff'd, Reno v. American Civil Liberties Union, 521
U.S. 844 (1997).
---------------------------------------------------------------------------
As one judge put it, the ``Internet is a far more speech-enhancing
medium than print, the village green, or the mails.'' \2\ That judge
concluded that ``[f]our related characteristics of Internet
communication have a transcendent importance'' to the conclusion that
the Internet deserves the highest levels of constitutional protection:
---------------------------------------------------------------------------
\2\ Id. at 882 (Dalzell concurring).
First, the Internet presents very low barriers to entry.
Second, these barriers to entry are identical for both speakers
and listeners. Third, as a result of these low barriers,
astoundingly diverse content is available on the Internet.
Fourth, the Internet provides significant access to all who
wish to speak in the medium, and even creates a relative parity
among speakers.\3\
---------------------------------------------------------------------------
\3\ Id. at 877 (Dalzell concurring).
The ``openness'' of the narrowband Internet translates into an
unprecedented ability of speakers to speak and listeners to receive
content, free from governmental or private interference. Internet users
have a wide range of choices as to how to access the Internet and what
to do with the communications medium once online. Users can speak to
the entire world with little or no investment. Listeners can access a
vast wealth of content quickly and easily, without significant
governmentally- or privately-imposed limitations. In short, the
Internet offers individuals, communities, non-profit organizations,
companies, and governments an unprecedented ability to speak and be
heard.
The infrastructure in which this open, narrowband Internet exists
is the telephone system, which operates with full common carrier
obligations. Thus, Internet Service Providers (ISPs), with very little
investment, could offer services within a community, free from
interference by the telephone company providing the ``last mile''
connection to the ISP's customers. Internet users, in turn, could
easily reach any of the often hundreds of ISPs in any given community,
and could do so without facing any telephone-company-imposed
restrictions (other than bandwidth limitations inherent in an analog
telephone line). The common carrier requirements in the telephone
system have led to a great diversity of ISPs, and to a great deal of
competition and innovation in the provision of Internet service.
As the Internet moves into the broadband world, it moves away from
the mandated openness of common carriage. It is now clear that
broadband service over the telephone network--in the form of Digital
Subscriber Line, or DSL, service--will be a significant avenue for
users to obtain broadband access to the Internet. It is also clear,
however, that broadband service over cable networks will for the
foreseeable future be the leading method to deliver broadband Internet
access. Cable operators are not subject to common carriage
requirements, and are thus not required to allow multiple ISPs to offer
a diversity of Internet service options to cable Internet users. This
difference has raised the very real possibility that the open, dynamic,
and democratic Internet might come to be dominated and in part
controlled by a small number of private companies that own the critical
``last mile'' cable connection into users' homes.
B. CDT's Broadband Access Project
As this Committee is well aware, these concerns have led to the
often bitter--and often loud--debate over the past eighteen months over
whether cable systems should be forced to permit unaffiliated ISPs to
offer broadband services over the cable systems. When confronted with
the competing arguments and claims in early 1999, the Center for
Democracy & Technology decided that it simply did not know enough about
the issues to be able to take a position. Instead, CDT undertook its
Broadband Access Project to conduct a neutral, balanced assessment of
the factual and policy issues surrounding the emergence of broadband
technology.
CDT sought and obtained support for the Broadband Access Project
from a broad cross section of the emerging broadband industry. The
Project's participants include cable operators AT&T and Time Warner,
ISPs America Online and MindSpring, local exchange carriers Bell
Atlantic and SBC Communications, interexchange carrier MCI WorldCom,
and technology companies such as Microsoft. Although these broadband
companies were fiercely fighting in the marketplace, on Capitol Hill,
and elsewhere, they decided that it would also be worthwhile to
participate in a dialogue to discuss the issues raised by broadband
technology. In addition to these and other companies, the Project has
also included working closely with the public interest advocacy groups
that have been at the forefront of the open access debate.
Our consultations and analysis are continuing, and we expect to be
able to release the results of the project within the coming months.
But two very significant developments in the broadband world have led
us to conclude that it is appropriate now to share with this Committee
the current draft (as of late February, 2000) of one of the documents
our Project is preparing--a clear and careful statement of openness
principles that we believe should be applicable to the provision of
broadband services over the Internet.
These principles--attached as Attachment A--do not represent any
agreement by any company or public interest participant in CDT's
Broadband Access Project, but instead reflect CDT's efforts to craft a
set of principles that respond to the concerns and views raised by the
project participants. These principles are expressly silent on the
critical question of whether any governmental action should be taken to
enforce the principles--our initial intent was to attempt to articulate
what our common goal is, before addressing how to reach that goal.
Moreover, these principles are continuing to evolve as we continue to
work with the project participants.
The two developments that have led us to release the draft
principles at this time are both statements by leading cable operators
of their own sets of principles to govern open access on their cable
systems. First, in December of 1999, AT&T and the ISP MindSpring sent a
joint letter to Chairman William Kennard of the Federal Communications
Commission, outlining a set of principles that AT&T stated would guide
its dealings with unaffiliated ISPs seeking to provide broadband
service over AT&T's cable networks (Attachment B). Second, and what of
course prompts this hearing, is the announced merger of AOL and Time
Warner, and the ``Memorandum of Understanding'' that those two
companies released earlier this week (Attachment C).
Both of these corporate statements of principles represent very
significant and positive steps towards open access. CDT offers its
draft principles in the hope that they may assist this Committee and
other policymakers in assessing AOL Time Warner's Memorandum of
Understanding, as well as the AT&T/MindSpring statement of principles.
A summary and side-by-side comparison of the three sets of principles
are offered below. Although the sets of principles use different words,
many of the points are common to all three sets.
----------------------------------------------------------------------------------------------------------------
AOL Time Warner 2/29/00 AT&T/MindSpring 12/6/99 Letter
CDT's Draft Openness Principles Memorandum (the ``MOU'') to FCC (the ``Letter'')
----------------------------------------------------------------------------------------------------------------
Choice Among Competing Internet Service Providers (ISPs)
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should permit Yes. (See MOU Paragraph 2) Yes. (See Letter first and
both affiliated and unaffiliated ISPs to seventh bullet points)
offer broadband service. (See CDT
Principle L)
----------------------------------------------------------------------------------------------------------------
A broadband user should be able to obtain Yes. (MOU Paragraph 2) Yes. (Letter second bullet
service from an unaffiliated ISP without point)
having to also pay anything to an
affiliated ISP. (CDT O)
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should permit Unclear. The MOU only states that Unclear. The Letter only states
any qualified ISP to offer service, AOL Time Warner will support that AT&T will support
constrained only by legitimate technical ``multiple'' ISPs, and that ``multiple'' ISPs. (Letter page
limitations on the number of ISPs users will have a ``broad 1)
supported. (CDT M) choice'' of both national and
local ISPs. (MOU Paragraphs 2,
4, 8)
----------------------------------------------------------------------------------------------------------------
If the number of ISPs supported is subject Unclear. The MOU is silent on Unclear. The Letter is silent on
to technical limitation, facility owners this point. this point.
and the industry should work to maximize
the ISPs that can be supported. (CDT M)
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should offer Generally yes. The MOU states Generally yes. The Letter states
service to unaffiliated ISPs on a that financial terms and that financial terms and
nondiscriminatory basis with regard to (at functionality will not be functionality will be
a minimum) (a) financial terms, (b) discriminatory (MOU Paragraph reasonably ``comparable''
technical functionality, and (c) 5), but is silent on support (Letter sixth and seventh
operational support systems. (CDT N) systems. bullet points), but is silent
on support systems.
----------------------------------------------------------------------------------------------------------------
An unaffiliated ISP should not be required Yes. (MOU Paragraph 7) Yes. The Letter indicates that
to utilize the Internet backbone services any connections directly into
of the facility owner. (CDT P) AT&T's facilities shall be
provided by AT&T (Letter eighth
bullet point), but in
subsequent discussions AT&T has
clarified that this paragraph
does not require the use of
AT&T backbone services.
----------------------------------------------------------------------------------------------------------------
A facility owner should not permit an ISP Yes. (MOU Paragraph 8) Unclear. The Letter is silent on
to offer service only to select portions this point, but to our
of a community served by the facility. (A knowledge this issue has not
desirable point that is not included in yet been raised to AT&T for any
principles prepared by CDT) reaction.
----------------------------------------------------------------------------------------------------------------
A facility owner should allow an ISP to Yes. (MOU Paragraph 9) No. The Letter indicates that
control the billing relationship for all AT&T intends to bill users for
Internet services (``last mile'' access the ``last mile'' access
and ISP services). (A desirable point that services that it provides.
is not included in principles prepared by (Letter tenth bullet point)
CDT)
----------------------------------------------------------------------------------------------------------------
A facility owner should attempt to modify Yes. (MOU Paragraph 11) No. The Letter indicates that
existing exclusive contractual AT&T intends to provide open
relationships to permit open access as access after its current
soon as possible. (A desirable point that exclusive contractual
is not included in principles prepared by arrangements expire. (Letter
CDT) page 1)
----------------------------------------------------------------------------------------------------------------
Access to Internet Content
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should not Probably yes. The MOU is silent Yes. (Letter fourth bullet
restrict users' ability to access on this point, but in other point)
constitutionally protected content on the contexts AOL Time Warner has
Internet. (CDT C, D) made clear commitments that
access to content should not be
restricted by a service
provider.
----------------------------------------------------------------------------------------------------------------
The Internet industry should maximize the Unclear. The MOU is silent on Unclear. The Letter is silent on
ability of users to access a diverse range this point. this point.
of broadband content. (CDT E, F)
----------------------------------------------------------------------------------------------------------------
Ability to Speak on the Internet
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should not Probably yes. The MOU is silent Probably yes. The Letter is
restrict users' ability to speak or post on this point, but AOL Time silent on this point, but AT&T
constitutionally protected content on the Warner have in the past has in the past supported
Internet. (CDT G, H) supported users' ability to users' ability to speak on the
speak on the Internet. Internet.
----------------------------------------------------------------------------------------------------------------
The Internet industry should maximize the Unclear. The MOU is silent on Unclear. The Letter is silent on
ability of a diverse range of broadband this point. this point.
speakers to distribute broadband content
widely and at reasonable cost. (CDT I, J).
----------------------------------------------------------------------------------------------------------------
Ability to Use the Internet to its Fullest
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should not Unclear. The MOU commits to non- Unclear. The Letter (Letter
impose any limits on the functionality discrimination on this point, sixth bullet point) commits to
that an ISP can offer to its users, unless and to allow streaming video non-discrimination on this
technically required and equally applied (MOU Paragraphs 5, 6). In point, but is silent on
to all ISPs. (CDT A) testimony before the Senate possible restrictions on the
Judiciary Committee, AOL Time use of the facility. The Letter
Warner committed to allowing does commit to allow
ISPs to offer IP telephony over unaffiliated ISPs to offer
the broadband facility. ``advanced applications'' over
the facility. (Letter eleventh
bullet point)
----------------------------------------------------------------------------------------------------------------
The industry should work to remove any Unclear. The MOU is silent on Unclear. The Letter is silent on
current technical limitations on broadband this point. this point.
users' ability to use the Internet. (CDT
B)
----------------------------------------------------------------------------------------------------------------
C. Moving Forward on Open Access: The Next Steps
As the above comparison suggests, the AOL Time Warner Memorandum of
Understanding represents a very positive step towards open access. AOL
Time Warner has made a positive commitment on many, but not all, of the
points articulated in CDT's draft principles. A number of key points
remain unclear, including, for example, the number of ISPs that will be
supportable on a typical Time Warner cable system. As AOL Time Warner
acknowledges, the Memorandum of Understanding is only the first step
toward open access. Looking at both AOL Time Warner and the broadband
industry more broadly, there are at least three critical and
independent steps toward open access that policymakers must consider:
1. A set of open access principles and goals must be refined and
further articulated. No matter which set of principles serves as the
starting point (CDT's, AOL Time Warner's, AT&T's, or another set),
there must be further discussions and, hopefully, consensus on what
exactly will be necessary for a broadband facility to be considered
``open.'' Consensus on these key threshold principles and goals must
include policymakers, the public interest community, and the Internet
industry.
2. The entire U.S. cable industry (beyond AT&T and Time Warner)
must be brought into these discussions about open access principles,
and ultimately must undertake to implement open access on their
systems. Even if all currently pending mergers are approved and AOL
Time Warner and AT&T both implement open access on their systems, there
are many major cable systems that have not yet made a commitment to
open their cable systems.
3. Finally, any set of open access principles must be fully and
effectively implemented. As is often the case with policy and
technology, the devil will be in the details. This is all the more true
given the significant technical complexity that will be inherent in any
implementation of open access on a cable system. Open access
commitments by AOL Time Warner and AT&T are certainly positive
developments, but until actual contracts are signed with unaffiliated
ISPs and open access is actually implemented, there will unavoidably be
uncertainty and concern about the true prospects for open access.
Remaining is the critical question of how these next steps are
implemented. The traditional pre-Internet approach to this type of
policy situation has called for governmental action to require and
oversee these and other steps toward open access. In the context of the
Internet, however, a variety of policy issues have been addressed in
the first instance not by governmental action but by private self-
regulatory efforts. Public interest organizations fighting for open
access have strongly argued that there must be a federal government
policy, and federal oversight, to ensure that AOL Time Warner, AT&T,
and other private companies in fact implement true open access. These
public interest advocates assert that the democracy and free speech on
the Internet are so fundamentally important that they cannot be left to
private negotiations between Internet companies.\4\
---------------------------------------------------------------------------
\4\ Until the announcement of its proposed merger with Time Warner,
America Online also advocated government action. Since the merger
announcement, however, AOL and Time Warner have adopted the approach
taken by AT&T in December, by effectively asking everyone to trust them
and allow them to implement open access voluntarily, without government
fiat.
---------------------------------------------------------------------------
From CDT's perspective, the most significant problem with the idea
of a government mandate of open access is that such action would lead
(and in some cases already has led) to extensive litigation and,
ultimately, prolonged delay. With the recent movement toward open
access by AT&T and Time Warner, it appears possible that the cable
industry as a whole is in fact moving on its own towards open access.
CDT believes that these efforts toward consensus and voluntary
implementation of open access should be given an opportunity to
succeed.
Critically, however, the details of open access cannot be
determined and implemented without direct and continuing public
interest involvement in the decisions. The public interest advocates
are correct in concluding that free speech and democracy on the
Internet are critically important, and require public participation in
the development and evolution of the Internet. The Internet industry
has frequently sought to keep government out and allow the industry to
solve problems without governmental mandate. In most situations, this
voluntary approach is desirable, but for it to succeed when free speech
and the First Amendment are at stake, there must be a way for public
interest voices to take part in the network and infrastructure design
decisions that will be necessary to implement open access in the
broadband Internet.
There may also be a role short of legislation that Congress can and
should play. Hearings of this type serve to focus attention--attention
of the industry, the media, and the public--on the issues raised here.
If the industry is going to succeed in addressing the critical issues
of open access, it should do so with the participation and input of
policymakers at all levels of government. Ultimately, however, if this
effort fails to address these critical issues and fails to implement
meaningful open access, the government may at that time need to take
action.
ii. privacy
As with the open access issue, the critical starting point on the
privacy questions is the current state of privacy (and citizens'
expectations of privacy) and the ways in which the evolution of the
Internet may threaten privacy principles. As many of you know, the
Center for Democracy & Technology has long been an advocate for
protecting privacy on the Internet, and we have previously had the
privilege of addressing this Subcommittee on privacy issues.\5\ We will
only briefly summarize our analysis of privacy issues on the Internet,
and then consider how the proposed AOL Time Warner merger might impact
the privacy issue.
---------------------------------------------------------------------------
\5\ See, e.g., Testimony of Deirdre Mulligan, Staff Counsel of the
Center For Democracy & Technology, Before the Subcommittee on
Communications of the Senate Committee on Commerce, Science, and
Transportation, July 27, 1999.
---------------------------------------------------------------------------
CDT believes that a key privacy consideration should be
individuals' long-held expectations of autonomy, fairness, and
confidentiality, and policy efforts should ensure that those
expectations are respected online as well as offline. These
expectations exist vis-a-vis both the public and the private sectors.
By autonomy, we mean the individual's ability to browse, seek out
information, and engage in a range of activities without being
monitored and identified. Fairness requires policies that provide
individuals with control over information that they provide to the
government and the private sector. In terms of confidentiality, we need
to continue to ensure strong protection for e-mail and other electronic
communications.
As it is evolving, the Internet poses both challenges and
opportunities to protecting privacy. The Internet accelerates the trend
toward increased information collection that is already evident in our
offline world. The trail of transactional data left behind as
individuals use the Internet is a rich source of information about
their habits of association, speech, and commerce. When aggregated,
these digital fingerprints could reveal a great deal about an
individual's life. The global flow of personal communications and
information coupled with the Internet's distributed architecture
presents challenges for the protection of privacy.
The proposed merger of AOL and Time Warner does highlight both the
increased risks for privacy problems as the Internet evolves, and the
great potential for self-regulatory efforts to enhance privacy
protection. Both AOL and Time Warner have access to significant amounts
of personal data about their subscribers. For AOL, this includes for
example, information about online service subscribers, AOL.COM portal
users, and ICQ and instant messaging users. Time Warner has access to
information about ranging from cable subscriber usage to magazine
subscriptions. The specter of the merged companies pooling all of their
information resources, and then mining those resources for marketing
and other purposes, should be cause for concern.
Fundamentally, however, the AOL Time Warner merger does not alter
the equation for a privacy solution. Protecting privacy on the Internet
requires a multi-pronged approach that involves self-regulation,
technology, and legislation.
On self-regulation, we must continue to press the Internet industry
to adopt privacy policies and practices, such as notice, consent
mechanisms, and auditing and self-enforcement infrastructures. We must
realize that the Internet is global and decentralized, and thus relying
on legislation and governmental oversight alone simply will not assure
privacy. Because of extensive public concern about privacy on the
Internet, the Internet is acting as a driver for self-regulation, both
online and offline. Businesses are revising and adopting company-wide
practices when writing a privacy policy for the Internet. Efforts that
continue this greater internal focus on privacy must be encouraged.
On the technology front, while the Internet presents new threats to
privacy, the move to the Internet also presents new opportunities for
enhancing privacy. Just as the Internet has given individuals greater
ability to speak and publish, it also has the potential to give
individuals greater control over their personal information. We must
continue to promote the development of privacy-enhancing and empowering
technology, such as the World Wide Web Consortium's Platform for
Privacy Preferences (``P3P''), which will enable individuals to more
easily read privacy policies of companies on the Web, and could help to
facilitate choice and consent negotiations between individuals and Web
operators.
Finally, we must adopt legislation that incorporates into law Fair
Information Practices--long-accepted principles specifying that
individuals should be able to ``determine for themselves when, how, and
to what extent information about them is shared.'' \6\ Legislation is
necessary to guarantee a baseline of privacy on the Internet, but it is
not one-size-fits-all legislation. Privacy legislation must be enacted
in key sectors such as privacy of medical records. For consumer
privacy, there needs to be baseline standards and fair information
practices to augment the self-regulatory efforts of leading Internet
companies, and to address the problems of bad actors and uninformed
companies. Finally, there is no way other than legislation to raise the
standards for government access to citizens' personal information
increasingly stored across the Internet, ensuring that the 4th
Amendment continues to protect Americans in the digital age.
---------------------------------------------------------------------------
\6\ Alan Westin. Privacy and Freedom (New York: Atheneum, 1967) 7.
The Code of Fair Information Practices as stated in the Secretary's
Advisory Comm. on Automated Personal Data Systems, Records, Computers,
and the Rights of Citizens, U.S. Dept. of Health, Education and
Welfare, July 1973:
There must be no personal data record-keeping systems whose very
existence is secret.
There must be a way for an individual to find out what information
about him is in a record and how it is used.
There must be a way for an individual to prevent information about
him that was obtained for one purpose from being used or made available
for other purposes without his consent.
There must be a way for the individual to correct or amend a record
of identifiable information about him.
Any organization creating, maintaining, using, or disseminating
records of identifiable personal data must assure the reliability of
the data for their intended use and must take precautions to prevent
misuse of the data.
The Code of Fair Information Practices as stated in the OECD
guidelines on the Protection of Privacy and Transborder Flows of
Personal Data http://www.oecd.org/dsti/sti/ii/secur/prod/PRIV_EN.HTM:
1. Collection Limitation Principle: There should be limits to the
collection of personal data and any such data should be obtained by
lawful and fair means and, where appropriate, with the knowledge or
consent of the data subject.
2. Data quality: Personal data should be relevant to the purposes
for which it is to be used, and, to the extent necessary for those
purposes, should be accurate, complete and kept up-to-date.
3. Purpose specification: The purposes for which personal data is
collected should be specified not later than at the time of data
collection and the subsequent use limited to the fulfillment of those
purposes or such others as are not incompatible with those purposes and
as are specified on each occasion of change of purpose.
4. Use limitation: Personal data should not be disclosed, made
available or otherwise used for purposes other than those specified in
accordance with the ``purpose specification'' except: (a) with the
consent of the data subject; or (b) by the authority of law.
5. Security safeguards: Personal data should be protected by
reasonable security safeguards against such risks as loss or
unauthorized access, destruction, use, modification or disclosure of
data.
6. Openness: There should be a general policy of openness about
developments, practices and policies with respect to personal data.
Means should be readily available of establishing the existence and
nature of personal data, and the main purposes of their use, as well as
the identity and usual residence of the data controller.
7. Individual participation: An individual should have the right:
(a) to obtain from a data controller, or otherwise, confirmation of
whether or not the data controller has data relating to him; (b) to
have communicated to him, data relating to him:
--within a reasonable time;
--at a charge, if any, that is not excessive;
--in a reasonable manner; and,
--in a form that is readily intelligible to him; (c) to be
given reasons if a request made under subparagraphs (a) and (b) is
denied, and to be able to challenge such denial; and, (d) to challenge
data relating to him and, if the challenge is successful to have the
data erased, rectified completed or amended.
8. Accountability: A data controller should be accountable for
complying with measures which give effect to the principles stated
above.
---------------------------------------------------------------------------
In all of these areas, the positions of AOL and Time Warner are and
will be critical to achieving increased privacy protection. Both
America Online and Time Warner have strong privacy policies, have
generally been quick to respond if lapses or violations are
identified,\7\ and have been strong supporters of P3P and other
privacy-enhancing technology. CDT welcomes the acknowledgement by AOL
CEO Steve Case (before the Senate Judiciary Committee earlier this
week) that some legislation will be necessary to incorporate best
privacy practices on the Internet.
---------------------------------------------------------------------------
\7\ See Testimony of Deirdre Mulligan, Staff Counsel of the Center
for Democracy & Technology, before the Subcommittee on Courts and
Intellectual Property of the House Committee on the Judiciary, March
26, 1998, at 11-13 (concerning disclosure of subscriber information to
the U.S. Navy).
---------------------------------------------------------------------------
In evaluating the merger, it will be critical to ensure that the
merged company will continue a strong commitment to privacy. Just as in
the broadband area AOL Time Warner committed to requiring arms length
negotiations between different business units within the merged
company, the business units of the merged company should continue to
maintain their subscriber information separately and in conformance
with clearly stated privacy practices.
* * * * *
The history of the Internet, and the history of telecommunications
reform in general, is that policy regimes are first created by
consensus among a broad cross section of the community. CDT is
committed to participating in any process that helps to build a new
social contract embodying democratic values in the emerging broadband
world.
working draft--defining ``openness''
Open Access Principles for the Broadband Internet, The Center for
Democracy & Technology, February 2000
One of the most prominent--and hard fought--public policy debates
over the last year has been whether cable television systems should be
forced to permit unaffiliated Internet Service Providers (``ISPs'') to
offer high-speed ``broadband'' Internet service over the cable system
wires. As this ``open access'' battle has been waged, many participants
in the debate have used, and laid claim to, the concepts of
``openness'' and ``open access.'' Many ISPs and public interest
advocates have demanded that the cable industry ``open'' their cable
systems, and that the government take action to force such
``openness.'' Some cable companies have in turn asserted that their
systems already are ``open,'' in that their customers can reach any
content on the Internet without restriction. Recently, some leading
companies have stated that they intend to ``open'' their cable networks
voluntarily, by allowing some number of unaffiliated ISPs to offer
service over the networks.
Throughout this entire debate, however, a critical element has been
missing--consensus on what exactly ``openness'' is. The debate has been
about the ``how'' (market forces, Congressional statute, federal
regulatory rule, or other governmental action) without first making
clear the ``what.''
This paper focuses exclusively on the ``what,'' and attempts to
define ``openness'' and ``open access'' in the context of the debate
over broadband access to the Internet. The paper first looks briefly at
the critical and unique characteristics of the low-speed ``narrowband''
Internet, and then maps those characteristics into the broadband world.
Based on the principles established in the narrowband world, the paper
then identifies specific steps that the Internet industry in general,
and broadband providers in particular, must take for the broadband
Internet to remain as ``open'' as the narrowband Internet has been. The
principles and specific steps identified are not focused solely on the
cable industry, but are intended to be principles and actions
applicable to the entire broadband Internet industry.
This paper does not address the ``how''--whether broadband Internet
market should be allowed to try to take the identified steps on its
own, or whether a governmental body should step in and force the
networks to be open. This paper also does not attempt to address every
public policy issue and concern raised by the evolution of the
broadband marketplace today. The paper does not, for example, discuss
whether undue market power arises from the aggregation of simultaneous
ownership of content and access pipes. Nor does the paper address
whether a competitive market is threatened by bundling or other market
actions taken by the owners of access facilities.
``Open'' Characteristics and Principles of the Narrowband Internet
Before defining ``openness'' for the broadband Internet, it is
critical to understand what that term has come to mean in the
narrowband world. In the first comprehensive assessment of the Internet
by an American court, a federal court in Philadelphia in 1996 found
what it termed ``a unique and wholly new medium of worldwide human
communication.'' \1\ The narrowband Internet has been ``open'' at
virtually all levels of its existence. The ``network of networks''
operates using open and freely available technical standards, allowing
literally millions of different (and often incompatible) computers to
communicate seamlessly. The open protocols used for Internet traffic
allow startup companies and individual software designers to create and
distribute new modes of communication over the Internet. Speakers,
large and small, rely on the openness of the Internet to speak easily,
inexpensively, and without significant restriction or limitations on
the form or content of the speech.
---------------------------------------------------------------------------
\1\ American Civil Liberties Union v. Reno, 929 F. Supp. 824, 844
(E.D. Pa. 1996) (available at http://www.ciec.org/victory.shtml).
---------------------------------------------------------------------------
As judge put it, the ``Internet is a far more speech-enhancing
medium than print, the village green, or the mails.'' \2\ That judge
concluded that ``[f]our related characteristics of Internet
communication have a transcendent importance'' to the conclusion that
the Internet deserves the highest levels of constitutional protection:
---------------------------------------------------------------------------
\2\ Id. at 882 (Dalzell concurring).
First, the Internet presents very low barriers to entry.
Second, these barriers to entry are identical for both speakers
and listeners. Third, as a result of these low barriers,
astoundingly diverse content is available on the Internet.
Fourth, the Internet provides significant access to all who
wish to speak in the medium, and even creates a relative parity
among speakers.\3\
---------------------------------------------------------------------------
\3\ Id. at 877 (Dalzell concurring).
The ``openness'' of the narrowband Internet translates into an
unprecedented ability of speakers to speak and listeners to receive
content, free from governmental or private interference. Internet users
have a wide range of choices as to how to access the Internet and what
to do with the communications medium once online. Users can speak to
the entire world with little or no investment. Listeners can access a
vast wealth of content quickly and easily, without significant
governmentally- or privately-imposed limitations. In short, the
Internet offers individuals, communities, non-profit organizations,
companies, and governments an unprecedented ability to speak and be
heard.
Some of the ``open'' characteristics of the narrowband world may be
threatened by the technological and business developments in the
broadband world. This paper seeks to identify the key characteristics
of the narrowband world, and ``map'' them into the developing broadband
Internet. The paper then offers specific steps that companies and the
Internet industry can take to ensure that the openness of the Internet
will continue with broadband technology. In considering the issues
raised by broadband technologies, this paper should help in defining
the goals that any public policy strategy (whether governmentally
imposed or privately implemented) should pursue.
Open Access Principles for the Broadband Internet
Ability to Use the Internet to its Fullest Potential
In the narrowband world, Internet users are generally free to
use their Internet connections to access any part of the
Internet and to run any Internet-related application, so long
as such use does not harm the operations of the network or the
use of the Internet by others. On certain facilities in the
broadband world (those where the ``last mile'' connection to
the user is a shared resource \4\), there is greater potential
that an individual user could harm the ability of other users
to access the Internet, and thus facility owners may (but may
not) need to impose restrictions on use. This increases the
risk that a facility owner might impose restrictions for
anticompetitive reasons.
---------------------------------------------------------------------------
\4\ The term ``last mile'' is commonly used to refer to the
physical connection (e.g., telephone wire for DSL service and fiber and
coax cable for cable service) between an end user's home or business
and the ``central office'' or ``headend'' facilities of the service
provider. In a typical cable facility, the total capacity to carry
Internet data is shared among many customers of the cable system, and a
single customer using an overly large portion of that capacity could
harm the ability of other customers to access the Internet.
Internet users should he able to use their Internet connection
to access any part of the Internet and to run any Internet-
related application, so long as such
use does not harm the operations of the network or the use of
---------------------------------------------------------------------------
the Internet by others.
A. A facility owner should impose no limits on the content,
applications, or functionality that an ISP can make available to its
customers. In situations where the last mile connection to the
individual users is a shared resource, a facility owner may impose
reasonable limitations or restrictions on the data flow rates
(including burst rates and packet sizes or volumes) that can be
provided and supported by an ISP, so long as (a) the limitations arise
out of reasonable technical and engineering concerns, and (b) the
limitations apply equally to all ISPs providing broadband
service.
B. To the extent any technically-required limitations are placed on
users' ability to use the Internet, facility owners and the Internet
industry in general should engage in research and development efforts
to maximize the functionality available to user and thus to minimize
any technically-required limitations.
Access to Speech of Others
In the narrowband world, Internet users can access any publicly
posted constitutionally protected speech on the Internet free
from interference or restrictions imposed by their ISP or
facility owner. In the broadband world, this critical feature
of the Internet should continue.
Internet users should be able to access any publicly posted
speech on the Internet free from interference or restrictions
imposed by their ISP or facility owner.
C. A facility owner should impose no limits on the constitutionally
protected content that an ISP can make available to its customers
(except technically-required limitations, if any, as discussed above),
and should allow ISPs and their customers to reach--or filter--any
Internet content.
D. In contracting with ISPs, facility owners should ensure that all
Internet users on their facilities have access to at least one ISP that
offers unrestricted and unfiltered access to constitutionally protected
content on the Internet.
In the narrowband world, all speech is available to all
Internet users essentially equally, without any particular type
of speech (such as commercial speech) being easier or faster to
access. In the broadband world, selected high-bandwidth content
will be delivered more quickly to users than other content,
creating the risk that types of speech will be favored and
others disfavored.
The broadband Internet infrastructure should not favor
particular types of content over other types.
E. Broadband providers and the Internet industry in general should
maximize the ability of broadband users to access a diverse range of
broadband, high-bandwidth content, including content of individuals,
non-profit organizations, and community entities.
F. Broadband providers within a geographic area should work with,
and interconnect with, each other, so as to maximize the ability of
broadband users to reach broadband content quickly.
Ability to Speak and Be Heard
In the narrowband world, Internet speakers can post essentially
any constitutionally protected speech in any form free from
interference or restrictions imposed by their ISP or facility
owner, and can do so for relatively little expenditure. In the
broadband world, this critical feature of the Internet should
continue.
Internet users should be able to post any constitutionally
protected speech in any form free from interference or
restrictions imposed by their ISP or facility owner.
G. A facility owner should impose no limits on the constitutionally
protected content that an ISP can permit its customers to post to the
Internet (except technically-required limitations, if any, as discussed
above).
H. The Internet industry should strive to maximize the ability of
individual speakers to post speech to the Internet with relatively low
expenditure.
In the narrowband world, all speakers can reach all Internet
users essentially equally, without any particular type of
speaker (such as commercial entities) better able to reach
listeners. In the broadband world, as indicated above, selected
high-bandwidth content will be delivered more quickly to users
than other content, creating the risk that types of speech will
be favored and others disfavored.
The broadband Internet infrastructure should not favor
particular types of speakers over other types.
I. Broadband providers and the Internet industry in general should
strive to maximize the ability of a diverse range of broadband
speakers, including individuals, non-profit organizations, and
community entities, to reach listeners as quickly and efficiently as
can commercial speakers, and to do so at a reasonable cost.
J. Broadband providers within a geographic area should strive to
maximize interconnections among providers, so as to maximize the
ability of broadband speakers to reach broadband listeners.
Choice of Methods and Providers to Access the Internet
In the narrowband world, most Internet users have a wide range
of choices among ISPs offering access to the Internet, and ISPs
are able to operate under a wide variety of business models and
offer a wide variety of services to users. In the broadband
world, users' choices may be much more limited.
Internet users should have choice among broadband facilities
(e.g., cable, DSL, wireless, etc.) and, within each facility,
among broadband service providers, and both facility owners and
the Internet industry should strive to maximize the available
choices.
K. Individuals should be able to obtain broadband service over a
variety of competing ``last mile'' facilities.
L. Within each type of last mile broadband Internet access
facility, broadband users (whether individuals or businesses) should be
able to obtain broadband service from a range of Internet Service
Providers (ISPs), including both affiliated and unaffiliated ISPs. A
last mile broadband facility owner should allow access to such facility
by both affiliated and unaffiliated ISPs.
M. A last mile broadband facility owner should permit third party
access by any qualified ISP, constrained only by legitimate technical
limitations (if any) on the number of ISPs that can reliably be
supported by the facility. To the extent any such limitation exists,
facility owners and the Internet industry in general should engage in
research and development efforts to maximize the number of ISPs that
can be supported over any particular type of facility.
N. A last mile facility owner should permit access by both
affiliated and unaffiliated ISPs on a nondiscriminatory basis,
specifically (but without limitation) with regard to (a) financial
terms, (b) physical access and technical capabilities, and (c)
operational support systems.
O. Broadband users should not be required to pay for service from
an ISP affiliated with the facility owner in order to obtain service
from an unaffiliated ISP.
P. A facility owner should permit unaffiliated ISPs to interconnect
into the communications system at one or more reasonable and efficient
points, and an unaffiliated ISP should be permitted to transport its
customers' Internet traffic from the interconnection point(s) onto the
ISP's facilities for delivery to the requested destinations.
Senator Burns. Thank you, Mr. Berman. And I also want to
thank you for your energy and leadership in the Internet
Caucus. You have put a lot of time and energy into that and I
think it is paying off. There is a lot of interest still in
this. And as these issues evolve, there will always be a place
for that caucus and to freely discuss these kind of issues.
It is my pleasure now to introduce Gene Kimmelman, who is
Co-Director of Consumers Union. Thank you for coming this
morning.
STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, WASHINGTON OFFICE,
CONSUMERS UNION
Mr. Kimmelman. Thank you, Mr. Chairman, on behalf of
Consumers Union, publisher of Consumer Reports. We appreciate
the opportunity to testify on the AOL-Time Warner merger.
Mr. Chairman, as I listened to Mr. Case and Mr. Levin, I am
just wowed. All those new services combined over cable TV, with
Internet, their commitments, open access, worrying about the
digital divide, this sounds like a panacea. And maybe if we
wanted one company to provide everything to us, these would be
the two individuals that we might want to pick to run it. But
usually in our marketplace, we do not choose monopoly or
dictatorship. And even if it is benevolent, we have concerns.
They describe their DNA and their sense of values and their
long history. But I recall, Mr. Levin's company working with
TCI, having leveraged NBC, which testified about this leverage
before this Committee in the eighties. Time Warner and TCI did
not want a news channel from NBC on cable that would compete
with their CNN. And the end result was CNBC. It did create
diversity. CNBC is different from CNN. Levin and Case are all
for diversity. But it was under their control, under their
guidance.
And they talk about open access. Mr. Case says he always
wanted the marketplace. His open access commitment has no
enforcement mechanism. He does not want the government
involved. There is no enforcement even if it is a contract with
an independent Internet service provider. He does not want to
state any commitment, so that if somebody has a complaint there
is no right to a remedy. What is a right without a remedy?
So I urge the Committee to look very carefully at the
substance of these commitments and the details of this merger.
Because the underlying market structure raises some significant
antitrust and competition concerns.
In my testimony, Mr. Chairman, I show the relationship
between AOL-Time Warner and AT&T. AT&T serves more than 40
percent of all cable customers, with its merger with MediaOne,
and through MediaOne, will own more than 10 percent of AOL,
which through Time Warner's cable systems serves another 20
percent approximately of American consumers. Almost two-thirds
of all consumers are within this tight web of companies. More
than half of the most popular cable programming, more than half
of the narrow-band Internet access, more than three-quarters of
today's broadband Internet access market is in this corporate
web, not to mention publishing--more than 33 magazines,
records, books.
Is that a problem? Well, yes, just look at the new services
being developed by AOL-Time Warner. I have appended a USA Today
article to my testimony, about AOL TV, which is fabulous. This
is point and click Internet access. It is channel surfing on
your television with an AOL icon, channel 4, AOL icon, channel
7, just like hitting a channel, you get into AOL, you get into
the Internet, you get anything you want from AOL.
Is that subject to open access? I have not heard them say
anything like that. That is a unique, new set of services,
combining television and broadband Internet, that is not
comparable to anything else in the marketplace or foreseeable.
Can a telephone company do it with digital subscriber line?
No, they cannot do the video quality. They cannot do the speed.
Can MMDS, can satellite do it? No. They might be able to do
one-way video, but they cannot do the feedback loop as quickly.
No one else can offer this kind of service except over the
cable wire. It is unique. It is wonderful. But if it is tied up
with a company controlling lines into almost two-thirds of
homes and no one else can do it, we have an enormous problem.
So we believe there is a significant antitrust problem with
this merger. The concentration of power in transmission and
content mean that everyone else in the programming industry for
television, in the Internet service industry needs to be on
AOL-Time Warner systems, and probably AT&T's systems. Otherwise
they cannot reach the public. They cannot get in front of the
eyeballs that draw investment capital, that draw the advertiser
revenue to make them viable.
You can offer other services. You can go to yesterday's
Internet and you can offer a lot of old-fashioned services that
may be very popular to a smaller market. Businesses that
predominently need data services, can use telephone wires. But
the mass consumer market that likes to just channel surf and
point and click will have a wonderful opportunity from,
unfortunately, possibly only one company. We want that to
change. We want that to be an open system. We want that to be
subject to nondiscrimination and open access.
Now, Mr. Chairman, at the announcement of this merger, the
news reports indicated that there was one major theme that kept
coming from the CEOs and the other top officials at AOL-Time
Warner. And that was that this deal ``was all about shaping
people's lives.'' And we have heard an awful lot about the good
things that they are committed to in terms of their values.
Now, is that what the American people want from even the
best corporation? Do we want a $350 billion company that is
shaping our lives? Is that what a business is supposed to do?
Or is it supposed to be responding to consumer demand,
responding to consumer needs, not shaping them?
We are very concerned, Mr. Chairman. And I will conclude by
saying that this merger involves interlocking relationships in
the cable industry and the Internet community that are very
dangerous to consumers. So we believe this merger should be
substantially restructured under our antitrust laws, and under
the oversight of the Federal Communications Commission. And if
the companies will not allow it to be restructured, if they
will not allow their open access deal to be subject to real
enforcement in the marketplace, their merger should be
rejected.
Thank you.
[The prepared statement of Mr. Kimmelman follows:]
Prepared Statement of Gene Kimmelman, Co-Director, Washington Office,
Consumers Union
To protect consumers' interest in the development of competitive
markets for all communications services, Consumers Union \1\ believes
that the Federal Trade Commission (FTC) and Federal Communications
Commission (FCC) should reject or seek substantial modification of the
AOL-Time Warner merger. Coming on the heels of massive consolidation in
the cable television industry,\2\ the proposed merger of AOL with Time
Warner poses enormous dangers for the preservation of vibrant Internet
competition in a broadband environment, and threatens the emergence of
broad-based competition to the cable TV industry.
---------------------------------------------------------------------------
\1\ Consumers Union is a nonprofit membership organization
chartered in 1936 under the laws of the State of New York to provide
consumers with information, education and counsel about goods,
services, health, and personal finance; and to initiate and cooperate
with individual and group efforts to maintain and enhance the quality
of life for consumers. Consumers Union's income is solely derived from
the sale of Consumer Reports, its other publications and from
noncommercial contributions, grants and fees. In addition to reports on
Consumers Union's own product testing, Consumer Reports with
approximately 4.5 million paid circulation, regularly, carries articles
on health, product safety, marketplace economics and legislative,
judicial and regulatory actions which affect consumer welfare.
Consumers Union's publications carry no advertising and receive no
commercial support.
\2\ Consumers Union, Consumer Federation of America and Media
Access Project, ``Breaking The Rules: AT&T's Attempt to Buy a National
Monopoly in Cable TV and Broadband Internet Services,'' August 17,
1999.
---------------------------------------------------------------------------
This merger should not be viewed in isolation. AT&T has already
purchased all of Telecommunications Inc.'s (TCI) cable properties. If
the proposed merger of AT&T with MediaOne is approved, AT&T would own
about 25 percent of Time Warner Entertainment--most of Time Warner's
cable systems, plus some of its programming and studio properties.\3\
Through Time Warner's previous merger with Turner Broadcasting Systems,
AT&T already owns a nine percent ``passive'' stake in Time Warner.\4\
---------------------------------------------------------------------------
\3\ In the Matter of Applications for Consent to the Transfer of
Control of Licenses, MediaOne Group, Inc., To AT&T Corp., Applications
and Public Interest Statement of AT&T and MediaOne Before the FCC, July
7, 1999; and ``Breaking The Rules,'' op. cit.
\4\ Federal Trade Commission, In the Matter of Time Warner Inc.,
Turner Broadcasting Systems Inc., Telecommunications Inc. and Liberty
Media Corp., Complaint, File No. 961-0004, Sept. 1997.
---------------------------------------------------------------------------
These joint holdings form the basis of a tight-knit cartel that
could dominate and control distribution of the broadband and television
services that the vast majority of consumers want to see and use.
Figure 1 illustrates the AT&T/Time Warner ownership links that, with
AOL, account for:
1. almost two-thirds of all U.S. cable or multichannel video
households;
2. nearly one-half of the most popular cable television
stations/networks; \5\
---------------------------------------------------------------------------
\5\ In the Matter of Annual Assessment of the Status of Competition
in Markets for the delivery of Video Programming, CS Dkt. No. 99-230,
Sixth Annual Report, FCC, Jan. 14, 2000.
---------------------------------------------------------------------------
3. more than one-half of narrowband Internet users; \6\
---------------------------------------------------------------------------
\6\ ``Breaking the Rules,'' op. cit.
---------------------------------------------------------------------------
4. more than three-fourths of broadband users; \7\
---------------------------------------------------------------------------
\7\ Id.
---------------------------------------------------------------------------
5. publishing of more than 10 percent of the nation's books and
33 magazines read by 120 million people; \8\
---------------------------------------------------------------------------
\8\ Saul Hansell, ``AOL Agrees to Buy Time Warner for $165 Billion;
Media Deal is Richest Merger,'' New York Times, Jan. 11, 2000.
---------------------------------------------------------------------------
6. sale of 119 million records last year, about one-sixth of
the market; \9\ and
---------------------------------------------------------------------------
\9\ Id.
---------------------------------------------------------------------------
7. movies produced by Warner Brothers and New Line Cinema,
about one-fifth of the domestic market.\10\
---------------------------------------------------------------------------
\10\ Id.
DESCRIPTIONS OF RELATIONSHIPS AND IDENTIFICATION OF SOURCES:
1 = $1.5 billion breakup fee (10)
2 = Large minority (12); 12% (16)
3 = Minority (6)
4 = QVC Joint venture (16)
5 = Programming joint venture through Liberty (22); Investment
(19)
6 = Joint venture (20)
7 = TCI MSO Joint ventures (4)
8 = Programming joint venture through Liberty (22)
9 = Set top box joint venture (15)
a = 10% Ownership of Time Warner (23)
b = exclusive deal for telephony (6)
c = 25% (6)
d = exclusive deal for telephony (5)
e = 26% (1) (16)
f = 25% (1) (4)
g = 3% ownership (3) (5)
h = up to ten million set tops guaranteed (3)
i = Majority (5); 25% (6)
j = 39% (6)
k = 25% (6)
L = Exchange of systems is likely to be consummated with a stock
swap (2)
m = Microsoft gets to buy MediaOne's European cable systems (9)
n = Windows NT in @Home solutions network (13)
o = Minority (6)
p = 11% ownership (5) (12) (17)
q = Wireless Internet (8)
r = Through Comcast (5) (12); Direct (18); 10% (16) (20)
s = 5% NTL, 30% Telewest, 30% Cable & Wireless (14)
t = Minority (5) (12)
u = small ownership (25)
v = 34% via MediaOne (1)
w = Cable systems are primarily owned in TWE; TBS is owned by Time
Warner; Entertainment is split between Time Warner and TWE
(24)
x = Manager of AT&T owned systems (7) (11)
y = 4% (8)
z = Wireless Internet (8)
SOURCES:
(1) ``AT&T Household Reach to be Issue in MediaOne Merger Review,''
Communications Daily, May 10, 1999.
(2) ``War Ends: AT&T and Comcast Cozy up in Solomon-Like Deal,''
Broadband Daily, May 5, 1999.
(3) ``AT&T Comes Out on Top in Microsoft Deal,'' Broadband Daily,
May 10, 1999.
(4) ``FCC to Scrutinize AT&T MediaOne Deal,'' Broadband Daily, May
10, 1999.
(5) ``AT&T Poised to Regain Long Reach, Via Cable,'' Washington
Post, May 5, 1999.
(6) ``AT&T Goes Cable Crazy,'' Fortune, May 24, 1999.
(7) ``AT&T Chief's $120 Billion Plan Capped by Deal for MediaOne,''
Washington Post, May 6, 1999.
(8) ``Microsoft to Buy A Stake in Nextel,'' Washington Post, May
11, 1999.
(9) Allan Sloan, ``AT&T-MediaOne Soap Opera Has Just About
Everything,'' Washington Post, May 11, 1999.
(10) ``Pact Ends MediaOne Bid War,'' Washington Post, May 6, 1999.
(11) ``Comcast, in AT&T Accord, Abandons MediaOne Bid,'' Wall
Street Journal, May 6, 1999.
(12) ``As Worlds Collide, AT&T Grabs Power Seat,'' Wall Street
Journal, May 6, 1999.
(13) ``Microsoft, @Home Make Broadband Pact,'' ZDNet, May 13, 1999.
(14) ``A Contest Is On In Britain to Revolutionize Cable TV,'' New
York Times, May 13, 1999.
(15) ``Rogers Communications and Microsoft Announce Agreements to
Develop and Deploy Advanced Broadband Television Services in Canada,''
Microsoft Presspass, July 12, 1999.
(16) Schiesel, Seth, ``Concerns Raised as AT&T Pursues a New
Foothold,'' New York Times, May 6, 1999.
(17) Fabrikant, Geraldine and Seth Schiesel, ``AT&T Is Seen Forging
Link to Microsoft,'' New York Times, May 6, 1999.
(18) Markoff, John, ``Microsoft Hunts Its Whale, the Digital Set-
Top Box,'' New York Times, May 10, 1999.
(19) ``ACTV Gets Boost from Liberty Digital,'' Broadband Daily, May
17, 1999.
(20) Wolk, Martin, ``Microsoft Poised for Major Role in New
Industry,'' Reuters, May 6, 1999.
(21) Fabrikant, Geraldine and Laura M. Holson, ``Key to Deal for
MediaOne: Keeping the Losing Bidder Happy,'' New York Times, May 6,
1999.
(22) Federal Communications Commission, In the Matter of Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming, CC Docket No. 98-102, Fifth Report, Table D-6.
(23) Federal Communications Commission, In the Matter of Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming, CC Docket No. 98-102, Fifth Report, Table D-1.
(24) ``Transfer of Control Application,'' Transfer of Control of
FCC Licenses MediaOne Group, Inc. to AT&T Corp., July 7, 1999.
(25) ``Transfer of Control Application,'' Transfer of Control of
Licenses Time Warner Inc. and America Online., to AOL Time Warner Inc.,
February 11, 2000.
Most significantly, AOL and Time Warner are developing AOLTV--a new
generation of easy-to-use, combined television and broadband Internet
access services--that virtually no one else in the market could
challenge in the foreseeable future:
``The service [AOLTV], expected this summer, could be
profoundly important,'' says Merrill Lynch's Internet
specialist Henry Blodget. If the service is a hit, the
company's clout over interactive communications might become
``analogous to Microsoft's control of the PC operating
system.''
``The more ways a subscriber interacts with AOL,'' Blodget
says, ``the less likely the subscriber will be to pull up
stakes and go with a different provider--especially when the
entire family has programmed the service with individual buddy
lists, calendars and e-mail accounts.'' What wows observers is
the proven appeal of the services AOLTV harnesses. AOL
subscribers, now 21 million, wouldn't have to boot up their
computers to access e-mail, instant messaging, chats,
calendars, and online shopping or investment services.
People could use them while watching, say, ``Who Wants to Be a
Millionaire'' by pointing a remote or wireless keyboard at a
set-top decoder that splits the screen to show online content
and the TV show.
Initially, people wanting AOLTV would need a special set-top
box to connect the TV to a phone line.
But the deal with Time Warner, the No. 1 cable operator with
more than 13 million customers, opens the way for AOLTV to
dominate interactive TV. It could become a seamless part of the
cable TV package, eliminating the need for a separate set-top
box and a phone line.\11\
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\11\ See Attachment A, David Lieberman, ``AOL angles for TV
viewers,'' USA Today, Feb. 24, 2000.
Although this particular set of services is not yet available, the
unique ability to offer consumers a ``point-and-click'' TV-based
service, guided by remote control, illustrates the potential danger of
allowing so much distribution capacity and content to be locked up in
one corporate entity.
For example, no companies have been more eloquent than AOL and AT&T
at describing how other distribution technologies--like phone
companies' Digital Subscriber Line (DSL) services, satellite and other
wireless services (e.g., MMDS)--cannot offer comparable television-
quality services or the interactive speed of broadband services offered
over a cable wire. We provide a lengthy presentation of this persuasive
argument and market analysis in Attachment B. And other independent
analyses support the conclusion that these technologies will not be
able to compete effectively, for the foreseeable future, with cable for
mass-market consumer services that combine television with broadband
Internet services.\12\
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\12\ Sanford C. Bernstein & Co., and McKinsey & Co., ``Broadband!''
January 2000; ``The ISP Directory,'' Washington Post, Oct. 29, 1999;
and David Lieberman, ``Bridging the Digital Divide,'' USA Today, Oct.
11, 1999.
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When these technical advantages are added to enormous control of
cable distribution systems in the Time Warner ``family'' and its vast
stockpile of popular television, Internet and other content services,
it is obvious that the AOL-Time Warner merger could substantially harm
consumer choice and drive up prices for a broad variety of cable-based
services. Everyone in the television programming and broadband Internet
service markets will need to reach enough ``eyeballs'' to obtain the
financing and advertiser support necessary to make their services
financially viable. This will require carriage on Time Warner's and
AT&T's cable systems. If AOLTV takes off, the need for open access to
cable lines for traditional online services may be dwarfed by a new
combined service where the AOL brand is the only Internet gateway that
provides TV viewers immediate access by remote control.
Unfortunately, the FCC has failed to require nondiscriminatory open
access to cable systems or effectively limit horizontal ownership of
cable systems, and the Clinton Administration has taken a hands-off
approach to media and communications mergers. This leaves consumers at
risk of losing the market's potential to expand competition to cable TV
monopolies and to preserve Internet competition using new broadband
technologies. AOL's and Time Warner's recently announced ``memorandum
of understanding'' does not alleviate this concern. While we commend
the companies for taking a first step to outline the elements that open
access would entail, their agreement is meaningless unless disputes
about its terms are subject to public oversight and independent third-
party enforcement.
As the quotes from AOL in Attachment B indicate, it was not long
ago that AOL believed that regulation was necessary to make an open
access policy work. Given that the elements of open access described in
the memorandum only make sense if AOL's and AT&T's description of
cable's monopoly power in Attachment B is accurate, it is difficult to
understand why these companies should be trusted to enforce a policy
against their cable monopolies' financial self interest.
Therefore, Consumers Union will ask the FTC and FCC to reject the
AOL-Time Warner deal unless it is significantly restructured. To
prevent horizontal concentration in the cable and broadband markets,
all ownership links and preferential arrangements between Time Warner
and AT&T must be severed. In addition AOL should be required to divest
its holdings in Time Warner's satellite competitor, DIRECTV. Finally, a
nondiscriminatory open access policy with public accountability should
be implemented before this merger is cleared. Such a policy must
include consideration of new services that combine traditional
television with new interactive broadband Internet services, to ensure
that nondiscrimination principles govern an evolving marketplace.
WHO DO YOU TRUST?
AOL AND AT&T . . . WHEN THEY CHALLENGE THE CABLE MONOPOLY
OR
AOL AND AT&T . . . WHEN THEY BECOME THE CABLE MONOPOLY?
February 2000
i. commercial interests and public policy flip-flops
A. Changing Policy Positions
Before they purchased cable TV companies, both AT&T and AOL were
vigorous and prominent advocates for the proposition that governments
need to adopt a public policy to ensure fair competition and open
access to the broadband Internet. Promptly upon the acquisition of
cable wires--the very bottleneck facilities about which they had
complained so loudly--they reversed their policies and ceased
supporting a public obligation to provide open access to cable
facilities. Yet, they continue to demand that open access requirements
be imposed on other types of facilities that they do not own.
While this is certainly not the first policy flip-flop driven by
merger and acquisition, it is unique given what AOL and AT&T are
seeking from policymakers: a trust-me, hands-off approach to open
access. They have made their honesty an issue by claiming that they can
be trusted to do what they previously claimed could only be
accomplished through public policy action. Therefore, we believe it is
appropriate to scrutinize whether these companies can be simply trusted
to open their cable networks to nondiscriminatory, open access for
nonaffiliated internet service providers (ISPs).
If AOL and AT&T were just expressing a self-interested, but
inaccurate, description of cable's monopoly power before they purchased
cable properties, then how can they be ``trusted'' to do anything other
than follow their current self-interest in exercising control over
access to their cable systems? On the other hand, if their previous
policy positions reflected an accurate description of the market
structure and critical steps needed to ensure open access--as we
believe they did--then how is it possible for the ``market,'' as they
described it, to open itself up? This paper offers a detailed
description of the market structure and elements of open access as
presented to the public by AOL and AT&T before they sought to become
cable companies through merger.
Based on AOL and AT&T's past assessment of the market, which we
believe is accurate and coincides with our own past research,\1\ how
can the public trust them to do anything other than exercise the market
power that they claimed cable companies possess? Why should
policymakers entrust open access rules to a cable market dominated by
AOL and AT&T, when those companies provided policymakers with market
analysis demonstrating that openness can only be achieved through
regulatory mandate?
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\1\ Consumer Federation of America, Consumers Union, and Media
Access Project, Breaking the Rules: AT&T's Attempt to Buy a National
Monopoly in Cable TV and Broadband Internet Service, August 17, 1999;
Consumer Federation of America, Transforming the Information Super
Highway into a Private Tool Road: The Case Against Closed Access
Broadband Internet Systems, September 20, 1999.
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B. Increasing Urgency for Public Policy to Require Open Access
The AOL flip-flop resulting from its acquisition of Time Warner,
coming on the heels of the AT&T merger with MediaOne, is a special
source of concern. These transactions push the ongoing trend of
concentration and consolidation in the cable TV and broadband and
Internet industries to alarming new levels. To trust them to
voluntarily refuse to exercise monopoly power that they previously
sought government control over is like relying on a dictator to act
benevolently. Their economic interests will inevitably drive them to
abuse their market power.
We now face the prospect of having two huge, interconnected
companies--AT&T and AOL--completely dominating the broadband landscape.
First, they would own over half of all cable wires in the nation and
half of the most popular cable TV programming. They would have over
half of the narrowband Internet subscribers and at least three-quarters
of all residential broadband Internet subscribers.
Second, the cable industry has never behaved in a competitive
manner and this merger makes competition even less likely.\2\ Major
cable companies never overbuild one-another's facilities. They never
compete head-to-head in the wires business and they are joint ventured
up to their eyeballs in programming.\3\ The AOL-Time Warner merger
creates one, interconnected set of owners of broadband service
providers since AT&T owns more than 10 percent of AOL-Time Warner
through MediaOne's substantial ownership of Time Warner Entertainment.
Indeed, AOL-Time Warner executives trumpeted the fact that the first
call they made after announcing the merger was to AT&T CEO Michael
Armstrong to offer to work together.
---------------------------------------------------------------------------
\2\ Breaking the Rules.
\3\ Breaking the Rules.
---------------------------------------------------------------------------
Third, AOL was being counted on by some to use its strong position
in the narrowband Internet market to propel the telephone industry's
high-speed technology (Digital Subscriber Line or DSL) forward as a
competitor to cable. DSL is behind cable in roll out and subscribers
and has significant technological disadvantages compared to cable,
including geographic coverage and bandwidth. It was hoped that AOL's
marketing and money would make this less attractive alternative a
future competitor for cable, particularly in the residential sector,
where DSL's limitations are greatest. There could be no clearer vote of
no confidence in DSL than AOL's acquisition of Time Warner.
In order to allay fears about the remarkable concentration that is
taking place in the industry, these companies have offered a series of
explanations and claims that actual and potential competition will
alleviate or prevent market power problems. When these arguments fail
to quiet critics and the companies are pressed to provide better
assurances, the companies insist that they can be counted on to
voluntarily negotiate fair arrangements for access to their newly
acquired facilities. These promises stand in sharp contrast to the
statements they made before they secured a favored place on the
information superhighway by purchasing exclusive rights to its most
attractive high-speed lanes.
This paper demonstrates that their statement about open access
before they obtained this advantage should carry special weight in
informing policy makers about the demands that should be placed on them
as facilities owners. The paper relies on official statements made to
governmental entities by these corporations. They loudly demanded a
public policy that imposes open access obligations on broadband
facility owners before their commercial interests in the issue changed.
The purpose of this paper is not to chastise the companies for changing
positions, although it does point out the many ways in which what they
now say contradicts what they said so recently. Rather, the purpose of
the paper is to understand why they were so adamant to secure open
access to cable facilities. There are still thousands of Internet
service providers out there who have not been able to purchase their
own wires, and never will be. They still need the protections that
these two huge corporations demanded.
AT&T made a lengthy filing before the Canadian Radio-Television and
Telecommunications Commission from the perspective of an unaffiliated
content provider owning no wires in Canada.\4\ It argued strongly that
an open access requirement is necessary to promote competition and
ensure that unaffiliated content providers would not be discriminated
against by the owners of broadband access facilities. In the process,
it provided a detailed and point-by-point refutation of every one of
the arguments that AT&T, as a dominant cable operator in the United
States, has made against open access.
---------------------------------------------------------------------------
\4\ AT&T Canada Long Distance Services, ``Comments of AT&T Canada
Long Distance Services Company,'' before the Canadian Radio-television
and Telecommunications Commission, Telecom Public Notice CRTC 96-36:
Regulation of Certain Telecommunications Service Offered by Broadcast
Carriers, February 4, 1997.
---------------------------------------------------------------------------
AOL's advocacy of a public policy requiring open access is well
known and its overnight reversal of position has attracted a great deal
of attention. It argued vigorously for open access at the federal
level.\5\ What is less well known is the detailed description of open
access that AOL offered a couple of months before it acquired Time
Warner.\6\ The City of San Francisco witnessed one of the most
prolonged fights over open access, supporting the concept but requiring
technical, legal and economic analysis to flesh it out before it
imposed a requirement. AOL, which had fought bitterly for open access
in the City, answered the challenge by outlining not only the
justification for open access, but a road map to the light handed
requirements that would keep the broadband Internet open.
---------------------------------------------------------------------------
\5\ At the federal level, AOL's most explicit analysis of the need
for open access can be found in ``Comments of America Online, Inc.,''
In the Matter of Transfer of Control of FCC Licenses of MediaOne Group,
Inc. to AT&T Corporation, Federal Communications Commission, CS Docket
No. 99-251, August 23, 1999 (hereafter, AOL, FCC).
\6\ America Online Inc., ``Open Access Comments of America Online,
Inc.,'' before the Department of Telecommunications and Information
Services, San Francisco, October 27, 1999.
---------------------------------------------------------------------------
Contrast that position to AOL's current stance. When AOL chairman
Steve Case announced the merger with Time Warner, he said, ``We always
hoped [open access] would come through the marketplace, rather than
having to get government involved.'' Time Warner chief executive Gerald
Levin said that the two companies were ``going to take the open access
issue out of Washington, out of city hall, to the marketplace.'' \7\
---------------------------------------------------------------------------
\7\ Press Conference, January 10, 2000.
---------------------------------------------------------------------------
Although the advocacy of AT&T and AOL for open access for cable
modems for broadband Internet service are the central concern in this
paper, it is important to note that these two corporations have also
advocated open access for other technologies. AT&T argues for open
access to telephone networks for advanced services. Its most recent
statements, filed in the U.S. in late-January 2000, make especially
interesting reading in light of the vigorous fight AT&T has put up
against open access requirements for its cable systems.\8\
---------------------------------------------------------------------------
\8\ ``Comments of AT&T Corp. in Opposition to Southwestern Bell
Telephone Company's Section 271 Application for Texas,'' In the Matter
of Application of SBC Communications Inc., Southwestern Bell Telephone
Company, and Southwestern Bell Communications Services, Inc. d/b/a
Southwestern Bell Long Distance for Provision of In-Region InterLATA
Services in Texas, Federal Communications Commission, CC Docket No. 00-
4, January 31, 2000 (hereafter, AT&T SBC Comments).
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The sharp reversal of position underscores the need for binding
public policy, rather than vague private sector promises, to protect
and promote competition in the next generation of Internet development.
To put the matter bluntly, it is patently obvious that important public
policies which will determine the free flow of commerce and information
in the ``Internet Century'' cannot be left to the whims of the
commercial interests of large corporations that change their views with
every merger or acquisition.
C. The Government Role in Ensuring Open Access
Did these companies really advocate a role for government policy to
ensure open access? There is no doubt about it.
1. AOL
While AOL always intended for private parties to implement open
access by negotiating the necessary details to implement an obligation
created by government action, it simply cannot hide from the critical
role it felt government had to play. AOL urged governments to make an
unequivocal commitment to a comprehensive and meaningful policy of open
access that clearly signaled that closed access is not acceptable. It
urged San Francisco to back up that commitment by providing a private
right of action and a threat of government enforcement. AOL stated:
The City's critical and appropriate role is to establish and
firmly embrace a meaningful open access policy, not to manage
the marketplace. We believe that once such a policy is fully in
place, the industry players will negotiate the details to
fairly implement open access. The City thus should not have to
play an active role in enforcing nondiscriminatory pricing or
resolving pricing disputes. Rather, the City should simply
adopt and rely on a rule that a broadband provider must offer
high speed Internet transport services to unaffiliated ISPs on
the same rates as it offers them to itself or its affiliated
ISP(s). The City's unequivocal commitment to this policy and
the resulting public spotlight should offer enforcement enough,
and indeed we expect that cable operators will adjust their
ways readily once they understand that a closed model for
broadband Internet access will not stand. When necessary, the
opportunity to seek injunction or bring a private cause of
action would offer a fallback method of obtaining redress . . .
As stated above, the City's role is to establish a
comprehensive open access policy with an effective enforcement
mechanism. Network management issues are best left to the
industry players, and the City need not play a hands-on role in
this area. The companies involved are in the best position to
work out specific implementation issues. This is not to say,
however, that a reluctant provider would not have the ability
to interfere with the successful implementation of an open
access regime. Accordingly, through its enforcement policy if
necessary, the City should ensure that the necessary degree of
cooperation is achieved. (AOL, pp. 4-5).
AOL did not have to defend the need for open access in its comments
to San Francisco, since the proceeding was to implement open access
requirements. It did, however, pat the city on the back for endorsing
open access. As AOL put it
AOL applauds the City for taking this critical step in the
implementation of the Board of Supervisors' open access
resolution, which wisely supports consumers' freedom to choose
their Internet service provider and to access any content they
desire--unimpeded by the cable operator. (AOL, p. 1).
AOL also offered its arguments for open access in the FCC's
proceeding overseeing the AT&T/MediaOne merger.
What this merger does offer, however, is the means for a newly
``RBOC-icized'' cable industry reinforced by interlocking
ownership relationships to (1) prevent Internet-based challenge
to cable's core video offerings; (2) leverage its control over
essential video facilities into broadband Internet access
services; (3) extends it control over cable Internet access
services into broadband cable Internet content; (4) seek to
establish itself as the ``electronic national gateway'' for the
full and growing range of cable communications services.
To avoid such detrimental results for consumers, the Commission
can act to ensure that broadband develops into a communications
path that is as accessible and diverse as narrowband. Just as
the Commission has often acted to maintain the openness of
other late-mile infrastructure, here too it should adopt open
cable Internet access as a competitive safeguard--a check
against cable's extension of market power over facilities that
were first secured through government protection and now, in
their broadband from, are being leveraged into cable Internet
markets. Affording high-speed Internet subscribers with an
effective means to obtain the full range of data, voice and
video services available in the marketplace, regardless of the
transmission facility used, is a sound and vital policy--both
because of the immediate benefit for consumers and because of
its longer-range spur to broadband investment and deployment.
Here, the Commission need do no more than establish an
obligation on the merged entity to provide non-affiliated ISPs
connectivity to the cable platform on rates, terms and
conditions equal to those accorded to affiliated service
providers. (AOL, FCC,
p. 4).
2. AT&T
AT&T's policy recommendations in Canada were oriented toward a
federal agency. It argued that federal regulatory authorities should
not forbear regulation, which is exactly the opposite of what it now
argues in the U.S.
AT&T Canada LDS submits that the application of the
Commission's forbearance test to the two separate markets for
broadband access and information services supports a finding
that there is insufficient competition in the market for
broadband access services and the market for information
services to warrant forbearance at this time from the
regulation of services when they are provided by broadcast
carriers. As noted above, these carriers have the ability to
exercise market power by controlling access to bottleneck
facilities required by other service providers. It would
appear, therefore, that if these services were deregulated at
this time, it would likely impair the development of
competition in this market as well as in upstream markets for
which such services are essential inputs. (AT&T, p. 15).
AT&T argued that vertically integrated cable and telephone facility
owners possess market power and have to be prevented from engaging in
anticompetitive practices. These are the very same arguments AOL made
in the U.S. over two years later.
The dominant and vertically integrated position of cable
broadcast carriers requires a number of safeguards to protect
against anticompetitive behavior. These carriers have
considerable advantages in the market, particularly with
respect to their ability to make use of their underlying
network facilities for the delivery of new services. To grant
these carriers unconditional forbearance would provide them
with the opportunity to leverage their existing networks to the
detriment of other potential service providers. In particular,
unconditional forbearance of the broadband access services
provided by cable broadcast carriers would create both the
incentive and opportunity for these carriers to lessen
competition and choice in the provision of broadband service
that could be made available to the end customer. Safeguards
such as rate regulation for broadband access services will be
necessary to prevent instances of below cost and/or excessive
pricing, at least in the near-term.
Telephone companies also have sources of market power that
warrant maintaining safeguards against anticompetitive
behavior. For example, telephone companies are still
overwhelmingly dominant in the local telephony market, and
until this dominance is diminished, it would not be appropriate
to forebear unconditionally from rate regulation of broadband
access services (AT&T, p. 15).
In the opinion of AT&T Canada LDS, both the cable companies and
the telephone companies have the incentive and opportunity to
engage in these types of anticompetitive activities as a result
of their vertically integrated structures. For example, cable
companies, as the dominant provider of broadband distribution
services, would be in a position to engage in above cost
pricing in uncontested markets, unless effective constraints
are put in place. On the other hand, the telephone company will
likely be the new entrant in broadband access services in most
areas, and therefore expected to price at or below the level of
cable companies. While this provides some assurances that
telephone companies are unlikely to engage in excessive
pricing, it does not address the incentive and opportunity to
price below cost. Accordingly, floor-pricing tests would be
appropriate for services of both cable and telephone companies.
(AT&T, pp. 16-17)
Furthermore, in the case of both cable and telephone broadcast
carriers, safeguards would also need to be established to prevent other
forms of discriminatory behavior and to ensure that broadband access
services are unbundled. (AT&T,
p. 17).
ii. the need for open access policy: analysis of supply and demand
factors
The recommendation that government requirements for open access are
necessary to promote and protect competition rests on extensive
analysis of market structure. A comprehensive case was laid out by AT&T
in Canada and AOL in the U.S, which rejected each of the major
arguments against open access. AT&T/AOL cited at least five fundamental
supply-side characteristics that support the recommendation for open
access and three demand-side characteristics.
A. Supply-Side
1. Vertical Integration
AT&T drove a very hard bargain when it came to the question of
regulation of access to broadband facilities. It viewed one fundamental
problem as leveraging market power from the core business of vertically
integrated facilities owners who have a dominant position in an
adjacent market. Thus, it advocated regulation of access not only
because there was a lack of competition in the new market (broadband
access), but also because there was a lack of competition in the core
markets that the facilities owner dominates (cable TV service for cable
operators and local exchange service for telephone companies).
In terms of the appropriate period in which to apply the
safeguards, AT&T Canada LDS is of the view that safeguards
against anticompetitive behavior would need to be maintained
for cable companies until competition in the provision of
broadband access services has been established in a substantial
portion of the market . . .
In the case of cable companies, there would need to be evidence
that vigorous and effective competition had evolved in a
substantial portion of the market for broadband access services
and in their core businesses (i.e., the distribution of
broadcast programming services). Moreover, in order to protect
against abuse of any residual market power, safeguards should
be in place, including the implementation of an effective price
mechanism for basic and extended basic cable services in order
to prevent instances of cross-subsidization, and provision of
nondiscriminatory and unbundled access to the broadband service
of cable broadcast carriers. (AT&T, pp. 17 . . . 18)
Similar considerations apply to the case of telephone companies
with respect to local telephone services. Until vigorous
competition in local telephone markets exists, some safeguards
. . . will be needed. (AT&T 17).
AOL described the threat of vertically integrated cable companies
in the U.S. in precisely these terms.
At every link in the broadband distribution chain for video/
voice/data services, AT&T would possess the ability and the
incentive to limit consumer choice. Whether through its
exclusive control of the EPG or browser that serve as
consumers' interface; its integration of favored Microsoft
operating systems in set-top boxes; its control of the cable
broadband pipe itself; its exclusive dealing with its own
proprietary cable ISPs; or the required use of its ``backbone''
long distance facilities; AT&T could block or choke off
consumers' ability to choose among the access, Internet
services, and integrated services of their choice. Eliminating
customer choice will diminish innovation, increase prices, and
chill consumer demand, thereby slowing the roll-out of
integrated service. (AOL, FCC, p. 11)
2. Paucity of Alternative Facilities
AT&T maintained that the presence of a number of vertically
integrated facilities owners does not solve the fundamental problem
that nonintegrated content providers will inevitably be at a severe
disadvantage. Since non-integrated content providers will always
outnumber integrated providers, competition can be undermined by
vertical integration. In order to avoid this outcome, even multiple
facilities owners must be required to provide nondiscriminatory access.
Furthermore, as noted above, every carrier that provides local
access services will control bottleneck access to its end
customer. This means that any connecting carriers, such as
IXCs, have no alternatives available to obtain access to the
end customers or the access provider, other than persuade their
customers to switch to another access provider or to become
vertically integrated themselves. In AT&T Canada LDS' view,
neither of these alternatives is practical. Because there are
and will be many more providers of content in the broadband
market than there are providers of carriage, there always will
be more service providers than access providers in the market.
Indeed, even if all of the access providers in the market
integrated themselves vertically with as many service providers
as practically feasible, there would still be a number of
service providers remaining which will require access to the
underlying broadband facilities of broadcast carriers. (AT&T,
p. 12).
AOL also argues that the presence of alternative facilities does
not eliminate the need for open access.
Moreover, an open access requirement would provide choice and
competition of another kind as well. It would allow ISPs to
choose between the first-mile facilities of telephone and cable
operators based on their relative price, performance, and
features. This would spur the loop-to-loop, facilities-based
competition contemplated by the Telecommunications Act of 1996,
thereby offering consumers more widespread availability of
Internet access; increasing affordability due to downward
pressures on prices; and a menu of service options varying in
price, speed, reliability, content and customer service. (AOL,
FCC, p. 14)
Another indication of the fact that the availability of alternative
facilities does not eliminate the need for open access policy can be
found in AOL's conclusion that the policy should apply to both business
and residential customers. In San Francisco, the city asked whether the
policy of open access ``should apply only to residential services?''
The business sector has experienced a great deal more competition for
telephone service and broadband services. DSL, which was originally
intended by telephone companies as a business service, is much better
suited to this market segment and market analysis indicates that cable
and telephone companies are dividing this market more evenly. If ever
there was a segment in which the presence of two facilities competing
might alleviate the need for open access requirement, the business
segment is it. AOL rejected the idea.
Defining ``consumers'' to include only residential customers,
however, would unduly limit the fulfillment of these goals.
There is no indication that the Board intended to exclude
business customers from the benefits flowing from competition
and choice . . . The City should thus ensure nondiscriminatory
open access to broadband Internet access for residential and
business services alike. (AOL, pp. 1-2).
3. Essential Access Functions
AT&T also made a much more profound argument about the nature of
the integration of facilities and programming. AT&T defined access to
the customer as an essential input to the delivery of information
services for both cable and telephone facilities.
AT&T Canada LDS is of the view that broadband access services
are a bottleneck service. These facilities are a necessary
input required by information service providers seeking to
deliver their services to their end-user customers. In fact,
many of these access facilities share the same bottleneck
characteristics as those exhibited by narrowband access
facilities, such as those which are used in the provision of
local and long distance telephone services. (AT&T, p. 10)
Because of the essential nature of access, AT&T attacked the claim
made by cable companies that their lack of market share indicates that
they lack market power. AT&T argued that small market share does not
preclude the existence of market power because of the essential
function of the access input to the production of service.
By contrast, the telephone companies have just begun to
establish a presence in the broadband access market and it will
likely take a number of years before they have extensive
networks in place. This lack of significant market share,
however, is overshadowed by their monopoly position in the
provision of local telephone services.
In any event, even if it could be argued that the telephone
companies are not dominant in the market for broadband access
services because they only occupy a small share of the market,
there are a number of compelling reasons to suggest that
measures of market share are not overly helpful when assessing
the dominance of telecommunications carriers in the access
market . . .
Where the market under consideration involves the provision of
telecommunications access service (such as the market for
broadband access services), it is more important to examine the
supply conditions in the relevant market than the demand
conditions which characterize that particular market. This is
because telecommunications access service represents an
essential input to the production process of other service
providers. Therefore, even if the service provider only
occupies a very small market share of the overall market for
broadband access services, it is dominant in the provision of
its access services because alternate providers must rely on
that access provider in order to deliver their own services to
the end-user subscriber. (AT&T, pp. 8, 9).
AOL also identifies the critical importance of access.
The key, after all, is the ability to use ``first mile''
pipeline control to deny consumers direct access to, and thus a
real choice among, the content and services offered by
independent providers. Open access would provide a targeted and
narrow fix to this problem. AT&T simply would not be allowed to
control consumer's ability to choose service providers other
than those AT&T itself has chosen for them. This would create
an environment where independent, competitive service providers
will have access to the broadband ``first mile'' controlled by
AT&T--the pipe into consumers' homes--in order to provide a
full, expanding range of voice, video, and data services
requested by consumers. The ability to stifle Internet-based
video competition and to restrict access to providers of
broadband content, commerce and other new applications thus
would be directly diminished. (AOL, FCC, p. 13)
AT&T explicitly rejects the claim that nondominant firms in the
access market should be excused from open access regulation.
AT&T Canada LDS does not consider it appropriate to relieve the
telephone companies of the obligation . . . on the grounds that
they are not dominant in the provision of broadband services.
These obligations are not dependent on whether the provider is
dominant. Rather they are necessary in order to prevent the
abuse of market power that can be exercised over bottleneck
functions of the broadband access service. It should be noted
that . . . Stentor [a trade association of local telephone
companies in Canada] was of the view that new entrants in the
local telephony market should be subject to regulation and
imputation test requirements because of their control over
local bottleneck facilities. Based on this logic, the telephone
companies, even as new entrants in the broadband access market,
should be subject to similar regulatory and imputation test
requirements. (AT&T, p. 24, emphasis added)
4. New Markets Need Open Access
As indicated in the above quotes, AT&T argued for open access at an
early stage of development of broadband in Canada. Thus, AT&T's
argument responds directly to the claim that the market is too new to
require an open access obligation. AT&T argued that the requirement is
necessary to ensure that the market develops in a competitive direction
from its early stages in Canada.
AOL argued exactly the same thing in the U.S., when the market was
still new, but much more highly developed. It argued that requiring
open access early in the process of market development would establish
a much stronger structure for a proconsumer, procompetitive market.
Early intervention prevents the architecture of the market from
blocking openness and avoids the difficult task of having to rebuild
the market on an open bases later.
The Commission should proceed while the architecture for cable
broadband is still under construction. To wait any longer would
allow the fundamentally anti-consumer approach of the cable
industry to take root in the Internet and spread its closed
broadband facility model nationwide. Must consumers await an
``MFJ for the 21st Century?''
Obliging AT&T to afford unaffiliated ISPs access on
nondiscriminatory terms and conditions--so that they, in turn,
may offer consumers a choice in broadband Internet Access--
would be a narrow, easy to administer, and effective remedy. It
would safeguard, rather than regulate, the Internet and the new
communications marketplace. The openness it would afford is
critical to a world in which--as boundaries are erased between
communications services and applications--we ensure that
consumers likewise are truly afforded choice without
boundaries. (AOL, FCC, p. 18)
5. Open Access Speeds Deployment
There is a final supply-side argument that these companies have
made that is critically important to the ongoing debate, which involves
the impact of open access requirement on the deployment of facilities.
AOL argues that open access conditions would do little to slow, and
might actually speed, the development and deployment of broadband
facilities, while they ensure a vigorously competitive content market.
Open access will not unduly increase cable operator's financial
risk. A nondiscriminatory transport fee set by the cable
operator would allow AT&T to recover full transport costs plus
profit from each and every interconnecting provider. And AT&T's
affiliated ISP would still be free to compete--based on cost
and quality--with other ISPs. As Forrester Research observed,
``[c]able companies can make money as providers of high-speed
access for other ISPs. Instead of gnashing their teeth, large
cable operators should make their networks the best transport
alternative for providers of all types of telecommunications
services.'' According to AT&T itself, ``the only way to make
money in networks is to have the highest degree of
utilization.'' Open access would allow AT&T to do just that,
fostering a wholesale broadband transport business that would
increase use of the cable operator's platform, fuel innovation,
and attract additional investment. (AOL, pp. 6-7)
B. Demand-Side Fundamentals
AT&T offered a series of observations about the nature of the
demand side of the broadband market that reinforces the conclusion that
an open access requirement is necessary.
1. Narrowband Does Not Compete With Broadband
The most fundamental observation on the demand side offered by AT&T
is the fact that narrowband services are not a substitute for broadband
services.
AT&T Canada LDS notes that narrowband access facilities are not
an adequate service substitute for broadband access facilities.
The low bandwidth associated with these facilities can
substantially degrade the quality of service that is provided
to the end customer to the point where transmission reception
of services is no longer possible. (AT&T, p. 12).
AT&T and the cable industry say exactly the opposite in the U.S.
This is a critical point in the antitrust analysis of the AT&T-MediaOne
merger. If the narrowband market is a separate market from broadband,
as AT&T so clearly argued in Canada, then the concentration of
broadband services that AT&T proposes to accomplish through merger in
the U.S. appears to violate the antitrust laws.
Not only did AT&T reject the notion that competition for narrowband
Internet service is sufficient to discipline the behavior of vertically
integrated broadband Internet companies, it expressed the concern that
leveraging facilities in the broadband market might damage competition
in the whole content market.
As noted above, even though the market for Internet access
service generally demonstrates a high degree of competition
(with the exception of co-axial cable Internet access
services), the potential exists for providers who also control
the underlying access to undermine the continuation of such
competition. Accordingly, AT&T Canada LDS submits that
safeguards against anti-competitive behavior should be applied
to the provision of information service by those broadcast or
telecommunications carriers who own and operate broadband
access networks. (AT&T, p. 17).
AOL raised a parallel concern. It argues that the leverage from
integration could undermine the prospects for increased competition in
the traditional cable industry.
We submit that, to answer this question, the Commission should
examine certain critical ``mega-effects'' of the proposed AT&T/
MediaOne combination. First, the FCC should consider how this
merger's video and Internet access components together would
service to keep consumers from obtaining access to Internet-
delivered video-programming--and thereby shield cable from
competition in the video market. (AOL, FCC, p. 8)
2. Switching Costs
AT&T also made an argument in Canada on the demand-side that
undercuts its claims in the U.S. that the current advantage of cable
over DSL should not be a source of concern. AT&T argued that the
presence of switching costs can impede the ability of consumers to
change technologies, thereby impeding competition.
[T]he cost of switching suppliers is another important factor
which is used to assess demand conditions in the relevant
market. In the case of the broadband access market, the cost of
switching suppliers could be significant, particularly if there
is a need to adopt different technical interfaces or to
purchase new equipment for the home or office. Given the fact
that many of the technologies involved in the provision of
broadband access services are still in the early stages of
development, it is unlikely that we will see customer switching
seamlessly from one service provider to another in the near-
term. (AT&T p. 12)
The equipment (modems) and other front-end costs are still
substantial and unique to each technology. There is very little
competition between cable companies (i.e. overbuilding). Thus,
switching costs remain a substantial barrier to competition.
3. Bundling
A third demand-side problem identified by AT&T in Canada is the
leverage that vertically integrated firms possessing market power in an
adjacent market can bring to bear on a new market. By packaging
together broadband services, particularly those over which integrated
firms exercise market power, non-integrated competitors can be placed
at an unfair advantage.
[T]his dominance in the broadband access market provides cable
broadcast carriers with considerable market power in the
delivery of traditional broadcasting services. This dominant
position in the core market for BDU (cable TV programming]
services can, in turn, be used by the cable companies to
leverage their position in the delivery of non-programming
services, the vast majority of which will be carried over by
their cable network facilities.
As broadcasting and telecommunications technologies converge,
subscribers will seek to simplify their access arrangements by
obtaining all of their information, entertainment and
telecommunications services over a single broadband access
facility. This, in turn, will make it more difficult for
service providers to use alternate access technologies as a
means of delivering service to their customers. (AT&T, pp. 8-
9).
Bundling remains one of the focal points of antitrust and
competitive concern in the U.S. AOL raised the bundling issue in its
comments at the FCC as well.
Second, the agency should reflect upon how this merger would
enable cable to use RBOC-like structure to limit consumer
access to the increasingly integrated video/voice/data
communications services offered over the broadband pipe
controlled by cable. And finally, the agency should recognize
how these two ``mega-effects'' of the merger together reinforce
cable's ability to deny consumers the right to choose: (a)
between a competitive video-enhanced Internet service rather
than a traditional cable service; (b) among competing cable
Internet services; and (c) among competing ``bundles'' of
video/data/voice services that contain multichannel video.
(AOL, FCC, p. 8)
C. Understanding the Present and Looking to the Future: Open Access
Remains Necessary
While AT&T might argue that conditions have changed since it so
vigorously supported open access in 1997, and therefore it should not
be held to those comments, AOL can make no such claim. In fact, AT&T's
analysis of the broadband market is still applicable.
First, many of the arguments it made are unaffected by changes in
the industry. There are fundamental characteristics of the
communications and broadband industry identified by AT&T/AOL that do
not change which require open access to facilities. These are enduring
characteristics of the market--paucity of facilities compared to
content providers, access as an essential input, separate narrowband
and broadband markets, switching costs, bundling--that establish the
need for a public obligation to provide open access.
Second, AT&T's view of the likely development of alternative
technologies expressed in Canada is similar to the view that many take
today. The two wireline technologies that are up and running, although
not fully deployed, are dominant. Cable is ahead of DSL. Wireless is
farther out in the future.
[I]t would appear that there is only a limited number of
broadcast carriers that are capable of offering broadband
access services. Indeed, only the cable and telephone companies
appear to be positioning themselves as hybrid broadcast/
telecommunications carriers at the present time. While this is
not to say that other service providers such as MMDS and LMCS
carriers do not have plans to launch hybrid services of their
own, neither of these service providers currently offer both
broadcasting and telecommunications services on a facilities
basis over their networks.
In the opinion of AT&T Canada LDS, the supply conditions in
broadband access markets are extremely limited. There are
significant barriers to entry in these markets including
lengthy construction periods, high investment requirements and
sunk costs, extensive licensing approval requirements
(including the requirements to obtain municipal rights of way)
. . . Under these circumstances, the ability for new entrants
or existing facilities-based service providers to respond to
nontransitory price increases would be significantly limited,
not to mention severely protracted. (AT&T, pp. 7, 12).
Third, even where there have been positive developments in the
industry to expand alternatives, it is not clear that such changes have
been or will soon be of sufficient magnitude to change the basic
conclusion of AT&T's analysis. Many analysts reach the same conclusion
today about the U.S. that AT&T reached three years ago about the
Canadian market. The changeable characteristics of the market that
might lessen, but not negate, the need for open access, have simply not
moved far enough to create a basis to contradict AT&T's conclusion that
open access is necessary. Ironically, AT&T told Canadian regulators not
to speculate about the development of technologies. They were told to
deal with the facts on the ground, not what might happen in the future.
As noted above and in some of the preceding sections, the
market for broadband access services is subject to rapid
innovation and technological change. Indeed, the recent
advances in wireless broadband delivery systems suggests that
the possibility exists, at least in the long term, for a
breakthrough in technology which could have a significant
impact on the supply conditions affecting broadband access
services. However, since the happening of these events is
difficult to anticipate and the resulting impact on the market
essentially unpredictable, it is appropriate to design policies
and approaches to regulation which address the current market
conditions and a need to supply safeguards in those instances
where market power is present. (AT&T p. 15).
Any claim that the market situation has changed so much that open
access is no longer necessary is totally undermined by AT&T's continued
insistence in the U.S. that telephone companies be required to make
their advanced services networks available to competitors on an open
access basis. AT&T continues to make exactly the same arguments about
the telephone companies in the U.S. in 2000 that they made about the
telephone companies in Canada in 1997.
In opposing the entry of SBC into long distance in Texas, AT&T
complains about bottleneck facilities, vertical integration, bundling
of services. As a result, it demands nondiscriminatory access. It has
simply stopped making the arguments that apply with equal force to
cable companies. Needless to say, AT&T refuses to accept the same
public policy obligation to provide open access to the approximately 2
million cable homes that its cable wires pass in Texas.
Today, SWBT is exploiting its control over essential xDSL-
related inputs, not only to prevent advanced services
competition from AT&T and others, but also to perpetuate its
virtual monopoly over the market for local voice services . . .
SWBT has not, in fact, complied with its statutory duties to
provide nondiscriminatory access to xDSL-capable loops (47
U.S.C. s. 271(c)(2)(B)(ii)&(iv)) and the operational support
systems and processes that are needed to enable Texas consumers
to benefit from a competitive market for xDSL services (47 U.S.
(c)(2)(B)(ii)) . . .
SWBT must also have policies, procedures, and practices in
place that enable AT&T (by itself, or through partners) to
provide consumers with the full range of services they desire,
including advanced data services. Otherwise they will not be
able to purchase some services--and will therefore, be less
inclined to obtain any services--from AT&T. Thus, SWBT's
inability (or unwillingness) to support AT&T's and other new
entrants' xDSL needs not only impairs competition for advanced
services but also jeopardizes competition for voice services as
well.
As both the Commission and Congress have recognized, high-speed
data offerings constitute a crucial element of the market for
telecommunications services, and, because of their importance,
the manner in which they are deployed will also affect the
markets for traditional telecommunications. Many providers have
recognized the growing consumer interest in obtaining
``bundles'' of services from a single provider. Certainly SBC,
with its $6 billion commitment to ``Project Pronto'' has done
so. AT&T is prepared to compete, on the merits, to offer ``one-
stop shopping'' solutions. Competition, however, cannot survive
if only a single carrier is capable of providing consumers with
a full package of local, long distance, and xDSL services.
(AT&T SBC Comments, pp. 9. . . 10. . . 11. . . 12)
Now that AT&T has bought a stake in the majority of cable wires in
the country, it excludes cable programming and cable-based broadband
Internet from the mix of services that must be included in the bundle.
It is willing to compete on the ``merits to offer one-stop shopping''
by demanding open access to other people's wires, but it will not allow
the same terms and conditions for others to compete over its wires.
AOL, however, did not hesitate to point out the powerful
anticompetitive effect that integrating video services in the
communications bundle could have. The video component of the bundle is
certainly one of the most important of the components.
The second ``mega-effect'' of this proposed merger is of even
broader potential consequence. With this merger, AT&T would
take an enormous next step toward its ability to deny consumers
a choice among competing providers of integrated voice/video/
data offerings--a communications marketplace that integrates,
and transcends, an array of communications services and markets
previously viewed as distinct. (AOL, FCC, pp. 9-10).
D. Conclusion
The concept of essential functions in network industries that
provide market power over end user customers even where several access
providers are available is extremely important. These are the new choke
points in the Internet economy. Because of switching costs, convergence
of access, and bundling of products, this is a fundamental observation
about the nature of these industries. These demand side structural
problems interact with the observation that facilities providers will
always be far fewer in number than content providers with the
inevitable result that absent an open access obligation many content
providers will be at a severe disadvantage.
AT&T-AOL were fundamentally correct in concluding that even without
vertical integration and dominance, access is an essential function
that presents a significant problem for public policymakers who are
concerned about preserving the remarkably dynamic innovation and
competition of today's Internet. In the information economy where the
smooth flow of information is so critical, these choke points may call
for even greater commitment to ensure open access than has historically
been the case, because their importance imbues them with even greater
potential for the abuse of market power.
Where a broadband access provider is neither vertically-
integrated nor dominant with respect to telecommunications or
broadcasting service, but is offering broadband access services
then the requirement for third party access tariff, CEI and
other non price safeguards should apply. (AT&T, p. 29)
It was quite clear in the formulation of these two ``unaffiliated''
companies that broadband access services should be available on
nondiscriminatory terms, even where there is an absence of vertical
integration and dominance. Through this analysis, they arrived at an
entirely reasonable public policy formulation that is consistent with
our view that communications and transportation networks have always
been and should always be subject to a requirement to be open because
of the critical role they play.
iii. implementing public policy
A. Overview of Approaches and Goals
AOL's proposed rule for San Francisco typifies its approach to
light handed open access requirements in which the local franchising
authority creates the obligation and then allows private parties to
work out the details with city enforcement as a backstop.
Section 1: Non-discrimination requirements: Franchisee shall
immediately, with respect to this franchise, provide any
requesting Internet Service Provider access to its broadband
Internet transport services (unbundled from the provision of
content) on rates, terms and conditions that are at least as
favorable as those on which it provides such access to itself,
to its affiliates, or to any other person. Such access shall be
provided at any point where the Franchisee offers access to its
affiliate. Franchisee shall not restrict the content of
information that a consumer may receive over the Internet . . .
Section 2: Private Right of Action: Any Internet Service
Provider who has been denied access to a Franchisee's Broadband
Internet Access Transport Services in violation of this
Ordinance has a private cause of action to enforce its rights
to such access.
Section 3: Enforcement Rights of City and County: In addition
to any other penalties, remedies or other enforcement measures
provided by Ordinances or state or federal laws, the City and
County may bring suit to enforce the requirements of this
Ordinance and to seek all appropriate relief including, without
limitation, injunctive relief. (AOL, pp. 2-3.)
AOL made essentially the same recommendation to the FCC.
The essence of an open access policy is thus competition, not
regulation. Open access would create a competitive check on
conduct--a far more preferable option than a behavioral check
requiring constant step-by-step scrutiny of a cable operator's
dealing with every provider of content or new applications to
make sure that the company's conduct doesn't skew its network
in favor of affiliated service providers.
This approach does not require imposition of legacy common
carrier regulation. The model for such early, targeted
safeguarding is drawn directly from the existing cable
regulatory framework, but its policy foundation cuts across all
FCC regulation. Any cable television system operator that
provides any Internet service provider access to its broadband
cable facilities would have to provide a requesting ISP
comparable access to its facilities on rates, terms, and
conditions equal to those under which it provides access to its
affiliate or to any other person. (AOL, FCC, p. 14).
Commenting before a federal body with much broader regulatory
powers, AT&T proposed a much more vigorous regime of regulation.
Given the incentives and opportunities available to broadcast
carriers to abuse their market power and control over
bottleneck facilities, AT&T Canada LDS has recommended the
adoption of a number of safeguards in order to prevent
instances of anti-competitive behavior . . .
1) implementation of a cost-based price floor to protect
against below cost pricing of broadband access services;
2) implementation of a cost-based price ceiling with a
limited mark-up to prevent excessive pricing of access services
in uncontested markets;
3) implementation of a third party access tariff, allowing
for nondiscriminatory and unbundled access to broadband
bottleneck facilities, as well as comparably efficient
interconnection and associated non-price safeguards;
4) implementation of price caps, accounting separations and
other safeguards against anti-competitive cross-subsidization;
and
5) imputation of appropriate third party access tariffs to
value added information services providers by broadcast
carriers. (AT&T, p. iii)
It is interesting to note that the provisions of the
Telecommunications Act of 1996 to which AT&T points when it demands
open access to xDSL in the U.S. are almost identical to the provisions
that AOL proposed in the San Francisco proceeding. This makes it quite
clear what entities that do not own essential access wires need to
enter markets.
s. 271 (c)(B) COMPETITIVE CHECKLIST--Access or interconnection
provided or generally offered by a Bell operating company to
other telecommunications carriers meets the requirements of
this subparagraph if such access and interconnection includes
each of the following:
(ii) Nondiscriminatory access to network elements in accordance
with the requirements of sections 251 (c)(3) and 252 (d)(2) . .
.
(iv) Local loop transmission from the central office to the
customer's premises, unbundled from switching or other
services.
s. 251 (c)(3) UNBUNDLED ACCESS--the duty to provide, to any
requesting telecommunications carrier for the provision of a
telecommunications service, nondiscriminatory access to network
elements on an unbundled basis at any technically feasible
point on rates, terms, and conditions that are just, reasonable
and nondiscriminatory in accordance with the terms and
conditions of the agreement and the requirements of this
section and section 252. An incumbent local exchange carrier
shall provide such unbundled network elements in a manner that
allows requesting carriers to combine such elements in order to
provide such telecommunications service. (Telecommunications
Act of 1996)
It is also interesting to note that AT&T embeds the obligation to
provide nondiscriminatory access and unbundling into the permanent
conditions in the industry structure. That is, it recommends the
relaxation of detailed regulation only after vigorous competition
develops in both the access market and the adjacent core markets where
facilities owners have market power. However, even after this
deregulation, AT&T recommends the continuance of ``safeguards to ensure
that broadband access services continue to remain available from the
telephone [and] cable companies on a nondiscriminatory and unbundled
basis.'' (AT&T, p. iii)
While AT&T Canada LDS considers that forbearance from the
regulation of broadcast carrier access and value-added
information services is not warranted at this stage in the
development of the broadband market, conditional forbearance
may be warranted when certain barriers to entry are removed in
the cable distribution and local telephony markets. With
respect to the broadband services provided by telecom broadcast
carriers, the following safeguards should be treated as
preconditions to any relaxation of the rules applicable to
these carriers:
1) local competition issues are resolved and the terms and
conditions for local entry have been successfully implemented
such that practical alternatives to the supply of local
services exist in the local market;
2) the broadband tracking requirements established in
Decision 95-21 have been implemented and reports from the
telephone companies satisfy the Commission that treatment of
broadband investment and expenses are appropriate;
3) price cap regulation has been implemented in such a manner
as to preclude telephone companies from recouping broadband
investment costs from utility services: and
4) the establishment of safeguards to ensure that broadband
access services continue to remain available from the telephone
companies on a nondiscriminatory and unbundled basis.
With respect to the broadband services provided by cable
broadcast carriers, the following safeguards should be treated
as pre-conditions to any relaxation of the rules applicable to
these carriers:
1) a demonstration that vigorous and effective competition
has evolved in a substantial portion of the market for
broadband access services and in the market for BDU services:
2) the implementation of an effective price cap mechanism for
basic and extended basic services in order to prevent instances
of cross-subsidization; and
3) the establishment of safeguards to ensure that broadband
access services continue to remain available from the cable
companies on a nondiscriminatory and unbundled basis. (AT&T, p.
ii, emphasis added)
AT&T's regulatory proposal goes far beyond anything being
considered for cable operators in the U.S., although wireline telephone
companies are subject to exactly this type of regulation in their high
speed services. Indeed, as noted, AT&T continues to push for regulation
of telephone companies, including their advanced DSL services. In fact,
one of the more important implications of the AT&T analysis in Canada
is that the cable and telephone industries should be subject to similar
obligations. In the U.S. it vigorously defends asymmetric regulation,
with its property being unregulated.
Whether through AOL's private negotiations backed up by a public
obligation or AT&T's direct regulation, the objectives of both
companies were generally the same. The standards by which we should
measure the quality of open access are the conditions that AOL and AT&T
stipulated that facilities owners should grant to non-affiliated ISPs
when they were non-affiliated ISPs themselves.
B. Specification of Nondiscriminatory Access Conditions
In order to analyze the complex issue of nondiscriminatory access
to the broadband facilities, CFA has adopted the analytic approach
presented in Table 1.\9\ It identifies three broad areas of concern and
about two dozen specific practices. AT&T and AOL provided extensive
concrete discussions of these potential problems.
---------------------------------------------------------------------------
\9\ The framework for analysis is based on the paradigm presented
by Larry Lessig, Code and Other Laws of Cyberspace (New York, Basic
Books, 1999) as described in Mark Cooper, ``Creating Open Access to the
Broadband Internet,'' Briefing: Can We Preserve the Internet as We Know
It? Challenges to Online Access, Innovation, Freedom and Diversity in
the Broadband Era (Dec. 20, 1999) and ``Open Access to the Broadband
Internet: Overcoming Technological and Economic Discrimination in
Proprietary Networks,'' University of Colorado Law Review, forthcoming.
---------------------------------------------------------------------------
In addition to pricing safeguards, AT&T advocated a number of non-
price safeguards to accomplish three general goals of open access.
Such safeguards are necessary to ensure that competing service
providers:
(1) are able to gain comparable access to network bottlenecks;
(2) are protected against abuse of confidential information
which is provided to the bottleneck access provider; and (3)
are not otherwise disadvantaged in the market by the bottleneck
access provider through, for example, the negotiation of
exclusive or preferential agreements with other service
providers. (AT&T, p. 22)
C. Architecture: Technology Bias
The first source of potential discrimination lies in the
architecture of the network. It involves the technical capabilities of
the network that could disadvantage independent ISPs in the activities
that they are allowed to conduct. The architecture of the network,
controlled by the proprietor, can be configured and operated to
restrict the ability of the independent ISP, while it does not restrict
the ability of an affiliated ISP. Technology bias can take several
forms, including interconnection, structure, and flow control. We have
already noted that AOL urged the FCC to act early in the development of
the industry to prevent it from embedding anti-consumer characteristics
into its architecture.
Table 1. Technical and Economic Sources of Discrimination in Proprietary Broadband Networks
Architecture: Technology Bias The Market: Business Leverage
----------------------------------------------------------------------------------------------------------------
INTERCONNECTION
Physical connection
Compatibility
FILTERING
Committed Access Rate
Preferential Queuing
INFORMATION GATHERING
STRUCTURE PRICING
Restricted backbone choice Price Squeeze
Precedence Cross-subsidy
Collocation Pricing Options
Replication
Norms: Service Restrictions
----------------------------------------------------------------------------------------------------------------
PROVIDERS
Speed of service
Time of downstream video
CONSUMERS
Limits on upstream traffic
Prohibitions on server set-up
Prohibitions on local area networking
----------------------------------------------------------------------------------------------------------------
1. Interconnection
Interconnection involves allowing ISPs to establish a connection
between networks. These connections must be compatible if they are to
be meaningful. The cable industry's existing exclusive contracts do not
allow independent ISPs to connect directly to the consumer. AT&T Canada
was very concerned about exclusive and preferential deals.
A prohibition on preferred agency or exclusive arrangements
between vertically-integrated broadband access providers and
integrated or affiliated information service providers which
contain discriminatory access provision, either in terms of
price or quality of access. (AT&T, p. 23)
It is important to recognize that mere physical interconnection and
protocol support are only very minimum conditions that must be met to
ensure access to customers. They are necessary, but not sufficient,
conditions. AOL described interconnection in some detail.
Access: The term ``access'' means the ability to make a
physical connection to cable company facilities, at any place
where a cable company exchanges consumer data with any Internet
service provider, or at any other technically feasible point
selected by the requesting Internet service provider, so as to
enable consumers to exchange data over such facilities with
their chosen Internet service provider. (AOL, p. 2)
There are at least three possible network designs that allow
for open access. These include:
policy-based routing, which routes packets to the
appropriate ISP using the source IP address as the unique
identifier;
virtual private networks (VPNs) and IP tunnels, which
create virtual dedicated connections over the HFC network
between the customer and the ISP (a solution appropriate to
routed (layer 3); and
Point-to-Point Protocol over Ethernet (PPPoE)
encapsulation, which is a protocol analogous to commonly
employed designs for dial-up (a solution appropriate to bridged
(layer 2) access networks).
Each of these options has its own unique set of advantages and
disadvantages. The appropriateness of each option varies
depending on the type of cable system (i.e. large or small,
multiple nodes vs. single node) and the networking architecture
being addressed. (AOL, p. 7-8)
AT&T uses the term Comparably Efficient Interconnection (CEI) to
describe interconnection in the broadband market.
More specifically, in order to effectively compete with
broadcast carriers in the provision of non-programming
services, competitors must be able to provide end users with
equivalent services at equal or lower prices. Therefore, in
providing nondiscriminatory access to their broadband networks,
broadcast carriers must allow competitors to access their
broadband distribution network in the most efficient manner
possible. For example, competitors must have the option to
specify the point of interconnection as either the headend, the
drop, inside wire, or any combination thereof. This concept is
known as Comparably Efficient Interconnection (CEI) and refers
to the principle of providing competitors with access to the
broadband network on terms that are technically and
economically equivalent to those provided by the broadcast
carrier to itself. Under CEI, the interconnection provided must
be equivalent in terms of scope, quality and price but may vary
by type of competitive entity. (AT&T, pp. 25-26)
AT&T also expressed a concern about standards and their management.
To the extent that standards are developed for interfacing with
broadband access services, the carriers who provide these
services should not be permitted to implement any non-standard,
proprietary interfaces, as this would be contrary to the
development of an open network of networks. In addition, any
new network or operational interface that is implemented by a
broadband access provider should be made available on a
nondiscriminatory basis. (AT&T, p. 23)
2. Structure
Structure involves the deployment of physical facilities in the
network. The proprietary network owner can seriously impair the ability
of independent ISPs to deliver service by restricting their ability to
deploy and utilize key technologies that dictate the quality of
service. Structure determines how facilities are deployed and the
effect that deployment has on the quality of service. Substantial
discrimination can result from forcing independent ISPs to connect to
the proprietary network in inefficient or ineffective ways or giving
affiliated ISPs preferential location and interconnection. The quality
of service of independent ISPs can be degraded.
The ability to deploy facilities to ensure and enhance the quality
of service will be particularly important in the third generation of
Internet service development. The multimedia, interactive applications
that will distinguish the next phase of the Internet are particularly
sensitive to these aspects of quality, much more so than previous
applications.
Of course, allowing a single entity to abuse its control over
the development of technical solutions--particularly when it
may have interests inconsistent with the successful
implementation of open access--could indeed undermine the
City's policy. It is therefore vital to ensure that
unaffiliated ISPs can gain access comparable to that which the
cable operators choose to afford to its cable-affiliated ISP.
(AOL, p. 8)
3. Flow
Flow control involves the filtering of the flow of information.
Even though networks are interconnected, there is still the possibility
of discriminating against some of the data that flows through the
Internet. Simply put, the technology allows pervasive discrimination
against external, unaffiliated service providers.
Of course, it is implicit in the open access resolution that
nondiscriminatory access for multiple ISPs extends to all
relevant aspects of the technical and operational
infrastructure, so that all business system interfaces will be
open to all ISPs and performance levels will not favor the
affiliated ISP. (AOL, p. 7)
It is important to confirm that the cable operator must provide
equal treatment for local content serving (caching or
replication) that the affiliated and nonaffiliated ISPs can
provide, specifically, no firewalls, protocol masking, extra
routing delays or bandwidth restrictions may be imposed in a
discriminatory manner. (AOL, p. 9)
D. Norms: Service Restrictions
The second source of potential discrimination involves behavioral
norms. The network owner can place restrictions on how nonaffiliated
service providers can use the network. As long as the network owner is
also a direct competitor of the independent ISP, concerns about
restriction being imposed to gain competitive advantage will persist.
Restrictions that are explained as necessary for network management may
be viewed as driven by business motives, rather than technical
considerations, by independent ISPs. These limitations can be applied
to either service providers or consumers.
In a last mile shared environment, proper network and bandwidth
management might possibly require certain limitations on data
transmission. However, content- or service-specific
restrictions can be both over- and under-inclusive--and most of
all, anticonsumer. Limitations on video streaming, for example,
protect cable's traditional video programming distribution
business. TCI admitted early on, its 10-minute cap is a
``restriction which we imposed on @Home so that we were the
determiner of how stream video works in our world . . . [and]
so that [we] determined [our] future in the area of streaming
video. Any legitimate network management policies must be free
of such anticompetitive intent and effect. (AOL, p. 10)
E. Business Leverage
Open access cannot ignore business reality. If the network owner
inserts himself in the relationship between the customer and the
independent ISP in such a way as to ensure that its affiliated ISP has
a price, product or customer care advantage, then competition between
ISPs will be undermined. This gives rise to the third category of
discrimination issues, which involves the market. The potential
anticompetitive problem is the abuse of business leverage.
1. Information
In order to manage the network and effectuate the service
prohibitions discussed above, the network owner must engage in
intensive monitoring of individual activity and gathering of
information. The proprietary network owner must identify flows of data.
Needless to say, this raises business and competitive concerns. The
gathering of all that information places the network owner in a
powerful position vis-a-vis competitors and consumers. The detailed
control of the network confers an immense information advantage on the
system operator. Because of the conflict of interest created by the
vertical integration of facilities and content, the potential for
competitive abuse of information is substantial. It is an advantage
that is evident to those in the industry
Confidential treatment of information provided by service
providers to broadband access carriers that are vertically-
integrated . . . Broadband access providers that are affiliated
with or have joint marketing arrangements with broadband
service providers should also be required to enter into non-
disclosure agreements affording these latter parties the same
level of confidential treatment . . . (AT&T, p. 23)
2. Pricing
The most critical business issue is a potential price squeeze that
can be placed on independent programmers and service providers by the
closed business model. By controlling a bottleneck, network owners can
place price conditions on independent content providers that undermine
their ability to compete. Both AOL and AT&T appear to want a separate,
wholesale transport service to be made available.
Broadband Internet Transport Services--The term ``broadband
Internet access transport services'' means broadband
transmission of data between a user and his Internet service
provider's point of interconnection with the broadband Internet
access transport provider's facilities. (AOL, p. 3)
In Canada, AT&T insisted that tariffs be set subject to clear
conditions and filed. The central goal was to avoid the problem of
cross-subsidy.
Accordingly, the cable companies and telephone companies should
be required to file tariffs for approval of their broadband
access services and to include in such applications evidence
that the rate is compensatory.
Cross-subsidization is an issue for vertically integrated
carriers particularly where the broadband service (including
access) is not provided on an arm's length basis. The
Commission has required telephone companies to maintain an
accounting separation for their broadband activities and to
provide adequate tracking reports. (AT&T, pp. 19, 22)
In the U.S., AT&T has now offered to make transport services
available at a price that is, presumably, less than it charges its
customers for transport and content. That price remains to be
negotiated, however, and the principles for arriving at a reasonable
price are not stated. The potential for cross-subsidy and
discrimination is shifted, not eliminated, by this concession. In the
context of the more regulatory model advocated by AT&T in Canada, it
was able to specify what would constitute reasonable rates.
1) cost-based rates to prevent vertically-integrated access
providers from engaging in predatory pricing;
2) limits on the level of mark-up over cost with respect to
cable companies' broadband access services;
3) unbundling and nondiscriminatory access in the price of
information services of all broadcast carriers.
4) imputation of the tariffed rates for broadband access in
the price of information services provided by vertically-
integrated broadcast carriers;
5) price caps in core markets where vertically-integrated
carriers are dominant; and
6) investment and expense tracking as a further check against
cross-subsidization. (AT&T, p. 21)
In the case of cable companies, the implementation of an
appropriately designed price cap regime could provide some
protection against cross-subsidization . . . Furthermore, if in
addition to price caps, the Commission considers it necessary
to insulate basic cable subscribers from cross-subsidizing
cable companies' other broadband activities as common carriers,
it could implement accounting separation and tracking
requirements for cable companies. (AT&T, p. 22)
AOL worries about AT&T in the U.S. offering ``one click access'' to
the Internet without a price difference. This forces independent
service providers to subsidize the content of the affiliated ISP.
Provided that the City establishes the right policy--allowing
the consumer to choose any ISP they want without being required
to pay for or go through the cable-affiliated ISP--then there
are many technical solutions available to broadband providers
and no need for the City to mandate any particular approach.
(AOL, p. 7)
Beyond the cross-subsidy question, in the U.S. the whole idea of a
wholesale transport tariff remains up in the air. AT&T has steadfastly
resisted the basic idea of entering into commercial relationships with
ISPs and allowing the ISP to have the only relationship to the
customer.
However, the pricing standards to which AT&T points in its efforts
to obtain nondiscriminatory access to xDSL technology from local
telephone companies in the U.S. embody these fundamental principles of
cost-based, nondiscriminatory prices for unbundled services.
s. 252 (d) Pricing Standards.--
(1) INTERCONNECTION AND NETWORK ELEMENT CHARGES.--
Determinations by a State commission of the just and reasonable
rate for the interconnection of facilities and equipment for
purposes of subsection (c)(2) of section 251 and the just and
reasonable rate for network elements for purposes of subsection
(c)(3) of such section--
(A) shall be--
(i) based on the cost (determine without reference to a rate
of return or other rate-based proceeding) of providing the
interconnection or network elements (whichever is applicable),
and
(ii) nondiscriminatory, and
(B) many include a reasonable profit.
(2) [A] State commission shall not consider the terms and
conditions for reciprocal compensation to be just and
reasonable unless--
(i) such terms and conditions for the mutual and reciprocal
recovery by each carrier of costs associated with the transport
and termination on each carriers network facilities of calls
that originate on the network facilities of another carrier;
and
(ii) such terms and conditions determine such costs on the
basis of a reasonable approximation of the additional costs of
terminating such calls. (Telecommunications Act of 1996)
3. Bundling
As noted above, in Canada AT&T expressed concerns about an
incumbent monopolist selling video ``broadcast'' services or local
telephone services and planning to sell bundles of ``broadband
services.'' In this regard a fundamental issue arises over what
independent ISPs will be allowed to sell and how consumers will be
allowed to buy services. Cable TV's bundling of programming has long
been a source of concern. If cable owners leverage bundles with
Internet and cable service, independent ISPs will be at a severe
disadvantage.
AT&T proposed principles to govern bundling raise concerns in two
regards. On the one hand, it recommended unbundling of service
elements. On the other hand, it recommended that the unaffiliated
content provider be allowed to resell (and therefore bundle) the cable
programming--i.e., to create a complete bundle.
Because broadcast carriers exercise control over bottleneck
facilities, they have both the incentive and the opportunity to
bundle these facilities with their other services and offer the
entire package to their customers for a single price . . .
[T]he Commission concluded that the bundling of monopoly
service elements with competitive service elements is generally
appropriate subject to three conditions:
1) the bundled service must cover its cost, where the cost
for the bundled service includes:
a) the bottleneck component(s) ``costed'' at the tariffed
rate(s) (including, as applicable, start-up cost recovery and
contribution charges); and
b) the Phase II causal costs for components not cover in a)
above;
2) competitors are able to offer their own bundled service
through the use of stand-alone tariffed bottleneck components
in combination with their own competitive elements;
3) resale of the bundled service permitted . . .
In the absence of such a requirement, broadcast carriers will
be able to engage in strategic and anti-competitive pricing
behavior arising directly out of their dominant position in the
access market. (AT&T, pp. 27-28)
What AT&T had identified as a powerful lever in the marketplace,
control over the core product, it sought to neutralize by requiring
unbundling and resale.
AT&T Canada LDS submits that broadcast carriers should not be
permitted to bundle their broadcast and telecommunications
service until the Commission has established rules which permit
the unbundling and resale of BDU services. Furthermore, to the
extent that the unbundling and resale of BDU services is tied
to entry of the telephone companies into the BDU market, no
telephone company should be permitted to bundle BDU service
with its local telephone service until all of the issues
relating to unbundling and resale of these service have been
resolved by the Commission. (AT&T, p. 28)
The question of how and what independent ISPs will be able to
market to customers remains a bone of contention between AT&T in the
U.S. and the unaffiliated ISPs.
iv. conclusion
The ``unaffiliated'' AT&T/AOL indictment of a vertically
integrated, highly concentrated market clearly applies to the current
situation in the U.S. and will likely continue to for the foreseeable
future. The discussion of demand-side problems points to issues that
are long term in nature. The insightful discussion of network access as
an essential function for communications technologies establishes the
need for open access on an enduring footing. The recommendation by AT&T
that the federal governments in Canada not forbear from regulation was
correct in 1997, as it was in 1999, when AOL made a similar
recommendation in the U.S. That conclusion applies to the U.S. today as
a matter of public policy.
What AT&T and AOL said as ``unaffiliated'' companies has even
greater importance for other ``unaffiliated entities.'' Even as non-
facilities owners, AT&T and AOL were still very large and powerful
corporations. Their analysis makes a strong case that the problems
facing unaffiliated ISPs are large and real. Their frank discussion of
the potential problems and the specificity with which they offered
solutions should be a wake up call to policy makers. All but the most
powerful ISP are likely to fare very badly in a commercial setting
where discriminatory access is not firmly rejected.
It is obvious, however, that in the terms of the U.S. debate over
open access, the remedies that AT&T proposed in Canada are well beyond
what is being considered in the U.S. for cable TV. Telephone companies
in the U.S. are under legal obligations that match the array of
regulations AT&T advocated for cable TV and telephone companies in
Canada. No one in the U.S. is advocating or contemplating such a heavy-
handed regulatory approach for cable. AOL's light-handed approach, with
government triggering private negotiations and backstopping the
process, has received considerable attention. It has been adopted in a
number of communities.
Combining the defense of open access with AOL's description of the
necessary policy elements to ensure nondiscrimination through light-
handed regulation presents a complete and compelling package. Public
policy makers can readily adopt AOL's recommendations of a few months
ago to ensure that unaffiliated ISPs, who are unable to buy broadband
wires, will have a reasonable chance of competing in the broadband
marketplace that AOL believes will be the dominant form of
communication in the century ahead.
AT&T's much more detailed road map to nondiscriminatory access
could be useful, however, in providing guidelines and benchmarks as
private negotiators and the courts develop a means to understand the
issues they need to be on the lookout for as negotiations proceed. The
long debate over open access has produced some key barometers of open
access.
1) Comparably efficient interconnection, with the
identification of several options for physical and virtual
interconnection, a list that can hopefully be expanded.
2) Open standards with change management.
3) ISP neutral network management.
4) Minimum content and service restriction, consistent with
neutral network management.
5) Performance parameters, including a list of services to be
made available and practices to be avoided.
6) Confidentiality of competitively sensitive information and
protection against abuse of such information by vertically
integrated broadband service providers.
7) A wholesale relationship between unaffiliated ISPs and
vertically integrated service providers from whom the
independents wish to purchase facilities.
8) Rates for transport service that are subsidy free and not
anticompetitive.
9) Bundling and marketing provisions that prevent the abuse
of leverage over monopoly services.
At the same time, AOL's desire to make open access as efficient as
possible by using a public obligation to trigger private negotiations
over the details of open access is a valid process. Ironically, the
Telecommunications Act of 1996, to which AT&T points in its demand for
open access to telephone company xDSL services, had a negotiation and
arbitration procedure in place to attempt to have private parties
implement. AT&T's complaints about the Baby Bells reluctance to open
their markets only makes it clear that obstinate corporations can make
the process difficult, but that does not obviate the need for the
process. The obligation to negotiate and recourse to legal authority
for redress drives the process forward. Without the public obligation,
there is little chance that open access will be provided for those who
need it most, the smaller niche players and innovative start ups, who
have defined the special nature of the Internet.
Early in the twentieth century, as the telephone was just starting
its evolution to the dominant means for people and businesses to
communicate at a distance, AT&T first articulated the concept of
universal service.\10\ While the motivation for and impact of that
commitment have been hotly debated, there is no doubt that it deeply
affected the development of public policy throughout the entire
century.
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\10\ Consumer Federation of America, A Historical Perspective and
Policies for the Twenty-First Century (Washington, D.C., 1997).
---------------------------------------------------------------------------
As we begin the ``Internet Century,'' there is clearly a need for a
new balance between the public and private roles in the network of
networks that is the Internet. It is unfortunate that as the remarkable
potential of a broadband Internet began to emerge, the dominant
technology appears to be one that had excused from an open access
obligation by Congress for its core service. It would have been
encouraging if, in the initial commercial convergence of the Internet
and the cable TV industry, the open values of the Internet had proven
dominant.\11\ Unfortunately, it appears that the two new giants of the
broadband industry have yet to overcome the closed business model and
antigovernment rhetoric of ``one of America's most enduring
monopolies.'' \12\ What they said before they bought their own wires
should carry special weight with policy makers who are concerned about
keeping the Internet open.
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\11\ Lessig's argument in Code raises a broader set of concerns
about the threats to the openness of the Internet and clearly believes
a new balance must be struck to preserve that openness.
\12\ Press Statement, U.S. Department of Justice, Primestar Merger.
Senator Burns. Thank you, Mr. Kimmelman.
Now we have Robert Lande, who is Senior Research Scholar,
American Antitrust Institute. Thank you for coming.
STATEMENT OF ROBERT H. LANDE, SENIOR RESEARCH SCHOLAR, AMERICAN
ANTITRUST INSTITUTE
Mr. Lande. Thank you very much.
If this merger goes through, we can expect to see a lot
more major media mergers. There is even the possibility of the
scenario that Senator Gorton referred to earlier, that our
country could be left with only a handful of major media
companies, and then a fringe of much, much smaller players.
I ask the Committee, is this the situation that we would
like the country to be in a decade from now? And if not, can
the antitrust laws do anything about it?
Well, I submit the answer to the first question is no. And
as to whether the antitrust laws can do anything about it, the
answer is unclear.
Why should we fear being left with only a handful of major
media conglomerates? Frankly, it would represent too much
control in the hands of too few people. They would not
necessarily have to exercise this control in the form of higher
prices for newspapers. They might exercise their control in
terms of a lack of editorial diversity, a lack of a decision as
to which news stories are noteworthy and which are not, the
biasing of certain links to certain Web sites.
Now can the antitrust laws prevent this kind of a problem?
The problem is that mostly the antitrust laws are concerned
with price. And normally, if you have about half a dozen
companies, you are going to get price competition. But, Mr.
Chairman, would you feel comfortable if there were only half a
dozen major media companies left in this country?
Let me go further. What if those half a dozen companies had
the political philosophy the exact opposite of yours? Would you
be reassured if they said we will price our Internet access and
our newspapers at the competitive level? Would that be your
only concern?
Well, antitrust is about a lot more than price,
fortunately. It is about consumer choice, about maximizing
consumer choice. Usually price competition and choice
competition go hand in hand. Not necessarily. Not in an area
like the communications media. Because communications firms
compete in part by offering a different gatekeeper function,
different editorial functions.
And one media conglomerate cannot effectively meet consumer
demand for a different variety of viewpoints by extending its
product line. Because those new products will inevitably bear
to some degree the stamp of their corporate owner. In other
words, you need a lot more diversity, you need a lot more
players in the media business than you do in a business where
the only thing that counts is price.
And these issues are especially complicated by the web of
interrelationships that Mr. Kimmelman was talking about. These
are not free, independent companies making these decisions. And
we have to bear that in mind.
I am not at all sure, to be frank, that the antitrust laws
could prevent what I call the nightmare scenario. That is, our
country is left with only a handful of major media companies
and a fringe of smaller players. So what should we do?
Well, I urge this Committee and this Congress to establish
a temporary committee to study media mergers and media
convergence. This independent organization could try and find
out what might happen if there is this tidal wave of media
mergers that so many people are expecting to happen in light of
the AOL-Time Warner merger. Which of the possibilities that I
have outlined could come to pass? And can the antitrust laws do
anything about them?
If the answer is no, then this Committee might wish to
recommend to your Committee additional legislation to stop this
potential nightmare scenario.
Thank you very much.
[The prepared statement of Mr. Lande follows:]
Prepared Statement of Robert H. Lande, Senior Research Scholar,
American Antitrust Institute
I am Robert H. Lande, the Venable Professor of Law at the
University of Baltimore School of Law, currently on leave as the Senior
Research Scholar at the American Antitrust Institute.\1\ Thank you very
much for allowing me to present the views of the American Antitrust
Institute on the America Online (AOL)/Time Warner merger.
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\1\ The American Antitrust Institute is an independent educational,
research and advocacy organization. See www.antitrustinstitute.org.
---------------------------------------------------------------------------
Media mergers have long been front-page news, particularly since
AOL and Time Warner announced their intention to combine. Even more
significant, however, has been the speculation that this merger has
caused: if the AOL-Time Warner, and now the Time Warner/EMI,
transactions are consummated, similar media mergers can be expected.
There is even a possibility that this merger will cause a wave of media
mergers so large that, within a decade, most of our information may be
supplied by perhaps six of these huge media conglomerates and a fringe
of smaller firms.
Today, before this has come to pass, is the time to pause and ask
two critical questions. Is this kind of media oligopoly the place where
we, as a society, want to end up? And if not, can the antitrust laws
effectively prevent the threatened wave of mergers? The answers to the
first question is clear. We do not want to permit mergers until there
is only a handful of large media firms left. The answer to the second
question, however, is far less certain. But I optimistically believe
that the antitrust laws, if they are enforced vigorously and
interpreted properly, can prevent this from happening.
We should distrust a media oligopoly because it is an undue
concentration of control in the hands of a few individuals. It should
be stressed that this control need not manifest itself as a price rise
for the daily newspaper or in AOL's monthly fee. Rather, it could
consist of a change in editorial viewpoints, a shift in the relative
prominence of links to certain websites, a bias against certain forms
of entertainment, or a decision not to cover certain topics because
they are not ``newsworthy.'' In each of these ways mergers could
significantly undermine diversity of offerings and, ultimately,
consumer choice.\2\
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\2\ The kinds of bias that could arise in this area could be
especially troublesome because consumers might never know that the
biasing has occurred. When a reader or viewer never learns about news
events or particular editorial perspectives, he or she might not look
to other sources for them. The readers or viewers often would have no
reason to suspect that they have been deprived of a diversity of
choices.
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All of these problems can exist without any improper intent on the
part of the media barons. Even if they try to be fair and objective
they will necessarily bring their own worldview to the job. And in time
some of these media conglomerates surely will come into the hands of
people who are not interested in being fair or objective.
Which brings us to the antitrust laws.
At first it might appear that the antitrust laws can be of little
help in grappling with the issues presented by AOL-Time Warner/EMI. The
antimerger laws are today commonly understood as protecting price
competition, and a relatively small number of firms--to greatly
oversimplify, let's say at most half a dozen--are normally thought to
be enough to keep a market price-competitive.\3\ Six firms (or even
four) may be sufficient to make and sell pig iron or aspirin
competitively because these products are relatively homogeneous and
much of what we care about is related to product price.
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\3\ In industry after industry firms merge until there is only a
handful left, the antitrust authorities often are unable to do anything
about it. In these industries the merging parties usually assert that
the government is unable to demonstrate that there will be any likely
price effects from the merger at issue. On this basis the merger often
is permitted. In former years mergers were governed by an
``incipiency'' standard, where mergers were prevented well before they
would lead to the point where anticompetitive problems were likely.
This concept, however, has faded in recent years.
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But a handful of media firms would not be sufficient for the
diversity of viewpoints in a democracy. Would any Member of this
Committee feel comfortable if there were only six media viewpoints left
in this nation? Would you be reassured if I guaranteed you that these
remaining media conglomerates would sell their newspapers and Internet
advertisements at competitive price levels? Of course not.
But the key question is: are these considerations too nuanced for
antitrust to consider? Would this be a wrong without a remedy? The
answer to this question is unclear. I believe, however, that the
antitrust laws, if correctly and vigorously interpreted, should be
adaptable enough to meet this challenge.
Antitrust is not exclusively about price. It is essentially about
choice--about giving consumers a competitive range of options in the
marketplace so consumers can make their own, effective selection from
the market's offerings.\4\ A number of Supreme Court decisions have
made it clear that under the antitrust laws consumer welfare consists
of much more than low prices.\5\ The purpose of the antitrust laws is
to give consumers the ability to choose freely from among the options
that the free market would provide to them.\6\ Consumers should be able
to make their choices along any dimension that is important to them--
including price, quality, and editorial viewpoint.
---------------------------------------------------------------------------
\4\ See, e.g., FTC v. Indiana Fed'n. of Dentists, 476 U.S. 447, 459
(1986) (``an agreement limiting consumer choice . . . cannot be
sustained . . .''); Allied Tube & Conduit Corp. v. Indian Head, Inc.,
486 U.S. 492, 499 n.5 (1988) (observing that the challenged activity
``might deprive some consumers of a desired product . . .''); Bates v.
State Bar of Arizona, 433 U.S. 370 n.20 (1977) (``The public is
entitled to know the . . . useful information that will enable people
to make a more informed choice. . . .''); United States v. Continental
Can Co., 379 U.S. 441, 455 (1964) (``price is only one factor in a
user's choice. . . .''). Many lower courts also make this point. See,
e.g., United States v. Brown Univ., 5 F.3d 658, 676 (3rd Cir. 1993)
(characterizing the crucial issue as whether the challenged practice
``actually enhances consumer choice.''; Berkey Photo v. Eastman Kodak,
603 F.2d 263 (2nd Cir. 1979) (crucial issue is whether ``the free
choice of consumers is preserved. . . .''); Butler Aviation Co. v.
Civil Aeronautics Board, 389 F.2d 517, 520 (2nd Cir. 1968) (analyzing
effect of corporate acquisition on consumer choice).
\5\ See supra note 4.
\6\ Id. For a more thorough discussion see Neil W. Averitt and
Robert H. Lande, ``Consumer Choice: The Practical Reason For Both
Antitrust and Consumer Protection Law,'' 10 Loyola Consumer L. Rev. 44
(1998); Neil W. Averitt and Robert H. Lande, ``Consumer Sovereignty: A
Unified Theory of Antitrust And Consumer Protection Law,'' 65 Antitrust
L.J. 713 (1997).
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In most cases price competition is a reasonable surrogate for
effective consumer choice and diversity. If a market is price-
competitive but consumers want a wider range of models or options, the
competing manufacturers normally will extend their product lines. Soft
drink consumers who want orange soda will get it, and it does not
matter whether the orange soda is made by a firm that also makes colas,
or even by an orange juice or beer company. No harm, no foul. A series
of mergers that would leave only a handful of significant beverage
manufacturers might well not offend the antitrust laws.\7\
---------------------------------------------------------------------------
\7\ This is, of course, a greatly oversimplified analysis. The
anti-merger statute is worded in terms of preventing mergers the effect
of which ``may be substantially to lessen competition, or to tend to
create a monopoly.'' 15 U.S.C. Sec. 18 (1999). To perform the analysis
correctly many factors would have to be examined, including the
relevant market shares, industry concentration trends, and the
innovative potential of the remaining firms.
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But some types of consumer choice and some types of nonprice
competition cannot be satisfied this way. Communications media compete
in part by offering independent editorial viewpoints and an independent
gatekeeper function. Six media firms cannot effectively respond to a
demand for choice or diversity competition by extending their product
lines because the new media products will inevitably bear, to some
degree, the perspective of their common corporate parent.\8\ For these
reasons competition in terms of editorial viewpoint or gatekeeping can
be guaranteed only by ensuring that a media market contains a larger
number of firms than may be required in other, more conventional
markets. The number of media firms necessary to ensure effective
variety, diversity or choice competition is significantly larger than
that required to preserve price competition.\9\
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\8\ An important but subsidiary question is, ``who is the real or
effective gatekeeper'' concerning particular issues? Even an
independently owned newspaper has several potential gatekeepers or
viewpoint promulgators--its writers, editors, and publisher. A large
conglomerate like AOL-Time Warner would have its CEO as its ultimate
gatekeeper. Nevertheless, on particular issues different people within
the organization would, as a practical matter, have gatekeeping or
viewpoint functions. Despite this possibility of decentralized
decisionmaking, however, for merger evaluation purposes there should be
a presumption that a media firm's CEO is the gatekeeper for every part
of that firm.
\9\ This interpretation of the antitrust laws is, moreover,
consistent with fundamental First Amendment principles.
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Of course, how this general principle affects the legality of any
specific transaction depends upon the facts of the case. The AOL-Time
Warner merger is the first major merger between the ``old'' and ``new''
media genres. Before this merger the ``new'' media--of which AOL is
probably the premier example--had started to provide more and more
competition for the ``old'' media as people increasingly obtain their
news and editorial viewpoints over the Internet. In many respects this
is a merger of converging types of media since AOL is in the Internet
access business and Time Warner owns cable systems, and cable
increasingly is being used for Internet access.
This merger raises antitrust issues that I lack the factual basis
to answer at this time. For example, does AOL compete in a relevant
market that can best be defined as ``access to the Internet''? Or
should its market be defined more narrowly, as a market consisting of
access to the Internet and also the network of chat rooms and other
proprietary content that AOL provides? Should ``high speed access to
the Internet'' be considered a separate relevant market?
If the relevant market for merger purposes is ``all forms of access
to the Internet,'' then AOL's market share is not unduly large (a
reported 25%) and entry is relatively easy. Even if the postmerger AOL-
Time Warner firm would attempt to steer AOL users towards Time Warner
publications, in light of AOL's non-dominant market share and easy
entry it is unlikely that this would detrimentally affect consumers. If
the market consisting of chat rooms, etc. is the more meaningful one,
however, then the possibility of anticompetitive effects from this
merger increases because AOL might well have significant power within
this market. AOL might be able to use its market power to distort
consumer choice in a manner that favors Time Warner publications
anticompetitively.\10\ Other antitrust issues could arise in a relevant
market consisting of ``high speed access to the Internet.'' If, in a
few years, Time Warner will have a very large share of this market in
certain areas of the country through its cable systems, and if AOL is
regarded as one of the most likely potential entrants into this market,
then the AOL-Time Warner merger could serve to forestall this entry.
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\10\ AOL could bias its links or screens analogous to the manner in
which the some airline reservations systems allegedly were biased
during the 1980s.
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The FTC is currently collecting the information that will enable it
to make these crucial determinations. Nevertheless, there are some
things that are already clear. An antitrust analysis of the AOL-Time
Warner merger must stress two issues in addition to the crucial choice
and diversity issues discussed above: the possibility that this merger
will spark a trend to similar mergers, and the effects of the web of
interrelationships that already exist in this industry.
The January 24, 2000 issue of Business Week has a insightful
article titled ``So Who's Next: They're all looking at each
other.''\11\ This piece provides an overview of how, due largely to the
AOL-Time Warner merger, a virtual tidal wave of mergers between ``old''
and ``new'' media could occur. Among the firms rumored to be interested
in large mergers (although not necessarily with each other) are AT&T,
Yahoo, Microsoft, Disney, Viacom, News Corp. (owner of Fox)--in fact,
just about every media conglomerate is wondering whether they are going
to be left behind by the AOL-Time Warner merger.\12\ Look at the
January 11, 2000 Wall Street Journal--or, it seems, almost any other
day's edition--for other rumors or possibilities.
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\11\ See Steve Hamm and Steve Rosenbush, ``So Who's Next? They're
All Looking at Each Other.'' Business Week, Jan. 24, 2000 at 46.
\12\ Id.
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If AOL-Time Warner goes through, copycat media mergers are
certainly likely. A traditional concern of merger enforcement is
whether the merger being evaluated is likely to spark a trend to
concentration in the affected industry.\13\ This concern should be
taken very seriously by the FTC and the courts when they evaluate the
legality of the AOL-Time Warner merger.\14\
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\13\ See Robert Pitofsky, Chairman, Federal Trade Commission, ``The
Nature and Limits of Restructuring in Merger Review,'' Cutting Edge
Antitrust Conference, Law Seminars International, Feb. 17, 2000, Empire
Hotel, New York, N.Y., at 6-7 (discussing how the possibility that a
merger will causing a merger wave can effect the analysis of that
merger).
\14\ How many mergers constitute a merger wave? There is no magic
answer to this question, or to the question of when the enforcers and
the courts should block a merger because it is likely to be
anticompetitive. The enforcers and the reviewing courts will have to
analyze the facts of each merger carefully and at some point they may
decide that a particular merger is likely to be harmful.
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Moreover, the only way to accurately assess the effects of this
merger on the firms' independent editorial and gatekeeper functions is
to evaluate the AOL-Time Warner merger in light of the large number of
important media joint ventures that already exist.\15\ Firms often
behave differently towards firms with whom they have important joint
ventures. Their incentives to engage in hard competition with these
firms can diminish. A complex merger like AOL-Time Warner cannot be
properly evaluated unless this preexisting web of interrelationships
throughout the industry is taken into account.
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\15\ For example, AOL has major ongoing projects with Nokia,
Hoover, DME Interactive, Onvia.com, Sprint PCS, Motorola, BellSouth,
Kinko's and MarketWatch.com.
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Am I convinced that the interpretation of the antitrust laws
described above is the one that will be applied by the enforcement
agencies and the courts, and that it will prevent all the important
problems that could arise from media mergers? Frankly, I am not
entirely optimistic. What is needed at this point is a much more
thorough look at the challenges that will be raised by future media
mergers. This is particularly true for mergers like AOL-Time Warner
which involve different types of media that are in the process of
converging.\16\
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\16\ Many different types of media are in the process of
converging. For example, Internet access (one of AOL's market) and
Cable T.V. (part of Time Warner's domain) are likely to converge soon.
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I therefore urge Congress to create a Temporary Committee to Study
Media Mergers and Media Convergence. This Committee could include
Members of the Senate and the House who have relevant expertise, the
heads of the FTC, FCC, and DOJ Antitrust Division, heads of companies
engaged in the affected sectors, and representatives of consumer groups
and other public interests most affected by media mergers. The
Committee's purpose should be to identify problems that may be caused
by large media mergers and by media convergence, and to propose
appropriate remedies. If the Committee concludes that the existing laws
cannot prevent the problems that plausibly could arise, then it should
recommend to the Congress that new legislation should be enacted.\17\
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\17\ The Committee should be directed to complete its work within a
short period--a year or two--to ensure that possible problems could be
prevented.
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In conclusion, I would like to reiterate the concern that the AOL-
Time Warner mergers could lead to a wave of media mergers that could
cause an unhealthy level of concentration in this crucial industry. It
is uncertain, however, whether the antitrust laws could be used to stop
this trend before it becomes anticompetitive. I have outlined the ways
in which the antitrust laws could be enforced and interpreted so they
are likely to stop some or many of the most dangerous large media
mergers. I am not suggesting that under today's antitrust laws there is
or should be a higher bar or a special rule for media mergers. I am
only suggesting the careful yet aggressive application, to special
circumstances, of the single universal rule of antitrust. And that rule
is to preserve for consumers a truly competitive range of choices in
the marketplace.
However, it is far from certain whether the courts would interpret
these laws in the vigorous manner I have described. For this reason
Congress should establish a temporary Commission to study the potential
problems that could arise from media mergers.
I greatly appreciate the Committee's invitation to present these
views here today.
Senator Burns. Thank you. I am going to ask just a couple
of questions here and then try to get comments from all three
of you if I could.
I think you have already covered the area of your
assessment of the instant messaging debate. I noticed that
area. I am concerned about that because of the implications
coming off of the 1996 Act. Now, nobody else I heard drew a
parallel like that, but I do not want to get into the same
situation or create a situation that Congress and the consumer
is going to have to deal with 10-15 years from now. And, of
course, the way the technologies are moving, they may have to
deal with it a lot quicker than we did the old one.
I want just your take on, in the memorandum of
understanding, I like that first step. I would agree with you
there is no enforcement trigger in that area. Maybe we would
have to take a look at that. But basically, I like to give
every citizen in this country--businessmen or corporation--the
benefit of the doubt until they really display to us that they
are not a very good neighbor with the American way.
Would you want to comment on that, Mr. Berman?
Mr. Berman. Thank you, Senator.
If there was not the MOU and the commitment to openness
made--and there is no reason that AOL-Time Warner had to make
that commitment; it is not required by law and there is no
consensus on the Hill to pass any statute that does that, so
they are doing something which is contrary to conglomerate
building because it is opening their network to unaffiliated
people who can provide similar services to theirs even over
their network--that has to be taken into account. And I think
that that is a major step.
It cannot succeed without other cooperation by other cable
companies buying into that paradigm. They have not yet. Time
Warner and AT&T are not the only cable companies. There needs
to be experimentation. There needs to be fleshing out of this.
There needs to be an opportunity to see how this is going to
work over their facilities.
And that is why I think that the open standards and a race
to legislation is contrary, even though I share the same
concerns as the two gentlemen here, and have worked with them,
that it is not going to work that way, that we have to try
another way, another paradigm of not trust, but working
together and trying to spell out the details here, to bring it
before the Congress, to have forums to document and to build a
record until the FCC--by the way, which does not want to get
into this--may be able to act or until Congress has the will.
That is a long answer, but I think that we are going to
have to not trust the market, but involve ourselves in the
market and be part of that market of persuasion.
Senator Burns. Mr. Kimmelman?
Mr. Kimmelman. Mr. Chairman, I am not suggesting that we
need legislation. I just suggest you scrutinize this carefully.
Because, with all due respect to Mr. Case, he was out around
the country and here saying that we needed open access rules
enshrined in public policy before. And now he is in a different
situation, and I understand that, but Congress must reconcile
these differences.
How do we know, if there is a dispute, it will be resolved
fairly under this voluntary memorandum? Even if you read it in
the most positive light, the companies are subject to a merger
review and so they may have some reason to be on good behavior
before Congress until their merger is approved.
I think policymakers need to resolve concerns now to make
sure that we do not have to undo an enormous problem later. Why
not have this be binding by contract? And why not have these
terms, with clarification as to what they mean, be subject to
reciprocity requirements? If anyone who has content and takes
advantage of this on an AOL-Time Warner system, they have to do
so on any system they own.
And you can use market mechanisms, as Mr. Case suggests, to
make this meaningful and useful in the marketplace. My concern
is, as I understood him to say, he said, we are presenting
this, we want to try to do this, we hope everyone else in the
cable industry will do it--although they have all opposed it
tooth and nail up to now. And then he said, if that does not
work we will come back.
Well, does that mean if it does not work, AOL-Time Warner
will quit doing it? Because they should not be disadvantaged in
the marketplace. If he really wants everyone to do it in the
marketplace, Mr. Case and AOL-Time Warner are better off if
they are all subject to the same standards--accountability to
the public for nondiscrimination. It should not be just one
company. It should be everyone.
So I am a little suspicious about the vagueness and the
recalcitrance here on something enforceable.
Senator Burns. Mr. Lande?
Mr. Lande. I am afraid if we wait, we will be shutting the
barn door after the horse has already left.
Senator Burns. They very seldom ever leave on their own, by
the way, those horses.
[Laughter.]
Mr. Lande. But companies do change their mind on their own.
And Mr. Levin and Mr. Case are good people, but we do not know
who their successors are going to be. And what if their
successors are more like some of the folks at Microsoft, who
have been known to allegedly discriminate? And we have a case
that takes years, and that case still is not over.
I think the best way to do it is to make it binding as part
of a consent order with the Federal Trade Commission. If they
agree to that as part of their consent order, then it is
binding and then we will not have to worry about barn doors
being opened or closed.
Senator Burns. Mr. Berman?
Mr. Berman. One last comment. I am tying it back to the
privacy debate. It is like the tax moratorium debate. Congress
is giving the industry a lot of time to try and figure out a
self-regulatory regime. And they say, the market will solve it.
Well, the market has not solved it. And Mr. Case I think
has said that today. But it has given a number of companies a
chance to try and develop best practices and some technologies
and things that may improve privacy on the Net, which can now
be put into regulation. And we maybe have the basis for
experimentation on how to map privacy onto the Internet.
I think that the same period of time has to occur in this
open access so that we know what rules and what contracts to
make enforceable. Otherwise, I think we slow down technology,
we push them backward. And instead of moving forward, we may
end up with a closed open Net before we even know it because
the Internet is changing so rapidly while we sit here and
debate these issues.
Mr. Kimmelman. It seems to me if it is good enough for AOL,
it ought to be good enough for everybody.
[Laughter.]
Senator Burns. I can see right now that as we are going
into the closing moments of this hearing, and I think there
will probably be hearings to follow, that this Senator has
structured this hearing the wrong way. I think we should turn
around the panels maybe, and we would probably learn a lot
more. Because I structure my hearings a little bit different.
I like robust debate at that table rather than this table,
and we listen. And then we make up our own minds. Some of us
are incapable of doing that sometimes. Nonetheless, I can see
we probably made a mistake in structuring it this way, and I
will be careful of that in the future.
I want to thank you for coming today and offering your
testimony. And your full testimony will be made part of the
record. And we will be visiting with you in the future, I will
guarantee you. Because your dialog is very, very important to
this Committee.
Yes, Jerry?
Mr. Berman. I have one more comment. AOL and Time Warner
and AT&T and all of the companies that are involved with this
together have committed themselves to participating in an open
forum to discuss the MOU and what it means in an ongoing set of
forums which the consumer groups have been participating in and
they are welcome to. And I think that we would like your
participation and we would like to get the results of that so
that we can watch this thing develop together.
Senator Burns. Jerry, I am going to make one other
suggestion, and I am going to make the suggestion to Mr.
Kimmelman and Mr. Lande. I am not real sure that this is not a
project of the Internet Caucus, that we get Room 902 and all
the principals involved and lay out those arguments and let
America make up its mind. I think that is true democracy in its
truest form. And I would not mind pursuing that avenue.
Thank you very much. This hearing is closed.
[Whereupon, at 1:10 p.m., the hearing was adjourned.]