EN BANC HEARING ON AMERICAN ONLINE, INC.,

AND TIME WARNER, INC.

APPLICATIONS FOR TRANSFER OF CONTROL

CS DOCKET NO. 00-30

Pages: 1 through 202

Place: Washington, DC

Date: July 27, 2000

EN BANC HEARING ON AMERICAN ONLINE, INC.,

AND TIME WARNER, INC.

APPLICATIONS FOR TRANSFER OF CONTROL

CS DOCKET NO. 00-30

FCC

445 12th Street, S.W.

Washington, D.C.

Thursday,

July 27, 2000

The parties met, pursuant to notice, at

1:09 p.m.

[APPEARANCES:]{.underline}

[COMMISSION]{.underline}

Chairman William E. Kennard

Commissioner Susan Ness

Commissioner Harold Furchtgott-Roth

Commissioner Michael K. Powell

Commissioner Gloria Tristani

[PANEL]{.underline}

Mr. Steve Case,

Chairman and CEO, America Online, Inc.

Mr. Gerald Levin,

Chairman and CEO, Time Warner, Inc.

Esther Dyson,

Chairman, EDventure Holdings

Barry Nelabuff,

Professor, Yale University

Barry Orton,

Professor, University of Wisconsin

Mark Cooper,

Director of Research,

Consumer Federation of America

Manuel Mirabal,

Chair, Hispanic Association on Corporate

Responsibility and

Chair, National Hispanic Leadership Agenda

James Love,

Director, Consumer Project on Technology

Cathy Cunningham,

City Attorney, Irving, Texas

Richard D. Parsons,

President, Time Warner, Inc.

Barry Schuler,

President, AOL Interactive Services Group

William F. Reddersen,

Executive Vice President,

BellSouth Corporation

Preston Padden,

Executive Vice President, Disney/ABC

Steven Weed,

Vice-Chairman, American Cable Association

Ross Bagully,

CEO, Tribal Voice, Inc.

Christopher Melcher,

Vice President and General Counsel, RMI.NET

[AUDIENCE]{.underline}

Ms. Nancy Block,

Executive Director,

National Assocation of the Deaf

Mr. Barry Steinhorn,

Attorney, American Civil Liberties Union

Mr. Jeff Shester,

Consumer Group Advocate

P R O C E E D I N G S

(1:09 p.m.)

CHAIRMAN KENNARD: Good afternoon and welcome to this *en banc* hearing
on the proposed merger between AOL and Time Warner. I\'m very pleased to
see you all here this afternoon, and we\'re very much looking forward to
hearing the presentations of all of our distinguished panelists today. I
want to thank all of them for taking the time to appear before us today
on this very important matter.

I think more than any other potential acquisition or consolidation in
recent memory, the proposed merger of these two companies, AOL and Time
Warner, has really captured national attention. And there\'s good reason
for this, because ultimately, this merger could ordain the essential
nature of America\'s broadband services. There are a lot of important
questions that we\'re seeking answers for here today.

Will the merger deliver on promises, including accelerated broadband
deployment, more innovative services and continued commitment to
multiple broadband platforms? Or will it, instead, impair the
competitive, consumer‑driven evolution of these technologies and stymie
growth in new markets such as interactive television and instant
messaging? I very much look forward to listening to all of the panelists
today and hearing the answers to these important questions.

Before we do that, I\'d like to take just a moment to discuss my
perspective on reviewing mergers of this kind. We are here today because
Congress has mandated that this Commission investigate whether approval
of transactions like this one are in the public interest. As in all such
cases, we have a statutory duty to verify whether this merger would
violate either the implementation or enforcement of the Communications
Act in our rules and, most importantly, whether it might interfere with
the progress towards any of our statutory objectives as we try to bring
more competition and more services to the American public.

It is the burden of the merging parties to persuade us that the merger
is in the public interest and will yield clear public interest benefits.
I wanted to say a brief word about the issue of cable access. Some
people call it open access, other people call it forced access. I will
just call it cable access. I believe that the promise of the Internet is
in its remarkable openness, and I hope that this merger would only
expand on this openness.

I\'m very concerned about this issue of access to the cable broadband
platform, so much so that I will ask my colleagues shortly to open a
separate proceeding on this particular issue. But I very much want to
hear about that issue in the context of this particular transaction
today. But I want to emphasize that this discussion on cable access
should be a debate about means and not ends.

I think everybody agrees that the broadband platform should be an open
platform. So this is a question of how we get there. Whether we get
there through regulation and government intervention or whether there
are market forces that will drive to an open platform. Finally, I want
to note that this is a public proceeding, and since my tenure here at
the Commission, I have worked very, very hard to make sure that the
debate over transactions like this is open and transparent and in full
public view. I believe it\'s imperative that the public get this chance
to view our decisionmaking process, the kind of questions that we ask
and to get all the details and implications of this particular
transaction and to voice their own hopes and concerns about it.

Well, I look forward to today\'s proceedings, and I trust that all of
the parties involved will do their best to assist us at the FCC in doing
our job to make sure that the American consumer is well served.
Commissioner Ness?

COMMISSIONER NESS: Thank you very much. We\'re on the threshold of an
extraordinary era. Today\'s hearing provides the Commission with an
invaluable opportunity to better comprehend the rapidly converging
communications marketplace and the effect of these changes on the
American public. Mergers such as the one we will discuss today have the
potential of fundamentally reshaping the communications landscape.

Public attention has been brought to this merger due to a couple of
factors. First, it\'s the largest merger before this Commission. Indeed,
one of the largest mergers in history. This combination is significant
in its scale. But the size of the transaction, while historic, need not
itself lead to any intervention by the Commission. Big is not
necessarily bad, unless it leads to anticompetitive behavior harmful to
industry or consumers.

Also, commenters have raised a plethora of intriguing topics related to
the dynamic technologies and services provided by the merging parties.
These range from more traditional communications policy issues, such as
cable carriage of broadcast signals and access to vertically integrated
video programming providers, to relatively new issues such as
interactive television and the inter‑operability of instant messaging. I
believe our biggest challenge today is to maintain a disciplined focus
as we digest the issues before us. Given a marketplace in fundamental
transition, we must exercise our jurisdiction and authority with great
caution.

To that end, just as in any other transaction before us, we must ask the
following questions: Will the proposed transaction violate the
Communications law and regulations, impair the Commission\'s ability to
implement the Act or interfere with the objections ‑‑ objectives,
rather, of statutes, over which Congress gave us stewardship? Also, will
the proposed transaction yield tangible and specific pubic interest
benefits and will such benefits outweigh harms, if any, that are posed
by the transaction?

A number of commenters have alleged that there are potential harms from
the merger that will frustrate the Commission\'s ability to fulfil its
statutory obligations. Among other things, some have identified
potential harms relating to control of conduits, control of content and
applications, and the web of interrelationships between providers or
these infrastructures and services.

Each of these potential harms must be examined through the prism of our
core communications policies, such as fostering competition among
multiple broadband platforms and video providers, deployment of advanced
services to all Americans, diversity of content, and product and service
innovation. And in each instance, we must ask ourselves whether the
potential harms are caused by or exacerbated by the merger of these
parties. An issue does not implicate the fundamental concerns of the
Commission, no matter how timely or interesting it might be, or is not
merger‑specific should not affect our decision whether to grant,
condition or deny the merger application.

So the purpose of this hearing, like the other *en banc* hearings we
have held in the past several years, is to hear directly from the
parties and to provide an immediate opportunity for others to respond.
The decisions we render should be informed by the broadest possible
understanding of the markets and the consumer interests at stake. So I
look forward to a very vigorous debate today, responsive to the issues
by the parties and responsive to the issues of the American public. And
finally, whatever we decide to do in this proceeding, we should do so
expeditiously. We do not serve the public interest by prolonging the
merger review process unnecessarily, thereby casting a pallor of
uncertainty over an entire industry. Thus, I\'d urge us to complete our
deliberations in a thoughtful but punctual manner. Thank you very much.

CHAIRMAN KENNARD: Thank you, Commissioner Ness. Commissioner
Furchtgott‑Roth.

COMMISSIONER FURCHTGOTT‑ROTH: Thank you, Mr. Chairman. The parties
before us today have submitted license transfer applications to the
Commission. Unlike tens of thousands of other license transfer
applications that this agency reviews each year, this one has been
singled out for heightened scrutiny and now, for the first time ever, a
public *en banc* hearing. I cannot support the Commission\'s review of
the merging parties beyond their license transfers, for three reasons.

First, although the Commission purports to review the merger of AOL and
Time Warner, it is in fact ‑‑ it in fact does not have the statutory
authority to do so. Second, despite the unprecedented public hearing,
the Commission\'s process lacks transparency. And third, today\'s
hearing serves no purpose other than to provide a forum for criticism of
the merger and for the parties in turn to plead for this Commission\'s
approval.

As I have stated before, the FCC does not possess statutory authority
under the Communications Act to review the mergers or acquisitions of
communications companies. Rather, the licensing provisions of the Act
require the Commission to review applications for license transfers.
Specifically, the Act merely directs the FCC to determine whether the
transfer of licenses serves the public interest, convenience and
necessity.

For tens of thousands of license transfers annually, that review is
perfunctory. Nothing in the Act grants the Commission jurisdiction to
approve or disapprove mergers that consequently involve the transfer of
licenses. To be sure, the transfer of licenses is an important part of
any merger, but it is simply not the same thing.

A merger is a much larger and more complicated set of events than the
transfer of FCC permits. It includes, to name but a few, the passage of
legal title for many assets, corporate restructuring, stock swaps and
the consolidation of corporate headquarters and personnel. Clearly,
then, asking whether a particular license transfer would serve the
public interest, convenience and necessity entails a significantly more
limited focus than contemplating the industrywide effects of a merger
between the transferee and the transferor.

Our inquiry should be limited to whether the proposed transferee has and
will comply with applicable Commission regulations. Our inquiry should
not consider, for example, how the combination of the two companies
might affect other competitors in the industry. That is the
responsibility of the federal antitrust agencies, the Department of
Justice and the Federal Trade Commission.

Yet, as with past prominent companies who have filed for license
transfers as a consequence of a merger, this Commission has used the
highly visible nature of the parties here today as an excuse to expand
the agency\'s jurisdiction to include merger review. The Commission
seems to believe that any matter or practice that occurs as a result of
the merger is within its jurisdiction. While many seem to accept this
theory without much question, its logic leads to absurd results.

Surely not even the staunchest advocate of the Commission\'s authority
would claim power to review AOL Time Warner\'s plans for new corporate
headquarters at Columbus Circle, but this event is as important ‑‑ is an
important part of the merger and is no more related to the use of the
radio licenses at issue as the other issues that the Commission seems
intent on reviewing. At least I have not heard anyone draw a principled
distinction among aspects of the merger if this is the subject of
review, not the license transfers. That would avoid this sort of
ridiculous outcome.

The Commission\'s review of license transfers and, in conjunction, its
unauthorized review of mergers, lacks transparency and consistency. The
Commission annually approves thousands of license transfers without any
scrutiny or comment while others receive minimal review, and a select
few are subjected to intense regulatory scrutiny. Today, unfortunately
for AOL and Time Warner, they are the first applicants required to
expend time and money preparing for a public hearing before the full
Commission.

This hearing illustrates the highly disparate level of review given to
applicants that arise under identical statutory provisions. This is
problematic, because merging parties have no way of anticipating the
scale of FCC review that will apply to them. Regulated entities have
little basis for knowing *ex ante*, how their applications will be
treated, either procedurally or substantively. The Commission\'s review
of license transfers should not be arbitrary and discriminatory but,
rather, uniform and predictably ‑‑ predictable.

Finally, I would like to emphasize that today\'s hearing is an entirely
novel and unprecedented approach to the review of license transfers. As
far as I can tell, there is no justification for this event other than
the fact that AOL and Time Warner are large and highly visible companies
in the communications industry. In all proceedings, the Commission
notifies the public and receives written comments. This proceeding has
been no different. We have received abundant comments from the public,
including from most of the witness\' today.

And this proceeding has dragged on for six months, far too long. Mr.
Chairman, you could end this at our next public meeting next week. You
can invoke Section 5.D of the Communications Act, with the objective of
rendering the final decision within three months ‑‑ it would only be
three months late ‑‑ from the date of filing in all original application
renewal and transfer cases. This hearing does not add to our knowledge.
It is a public spectacle. I hope that the witnesses and their comments
today will answer the following four questions:

What specific authority does this Commission have to consider the issues
you raise? Second, if the answer is the public interest standard under
Title III, how can this Commission apply a different public interest
standard for AOL and Time Warner than it applies for any of the tens of
thousands of other identical license transfer cases?

Third, if your issue is not the public interest standard, such as cable
access, as the Chairman mentioned, why should the issue not be addressed
through general rulemaking that would apply to the entire industry,
rather than to just one firm within the industry? And fourth, are the
issues raised, such as anticompetitive behavior, being reviewed by
another federal agency with clear statutory authority? Thank you, Mr.
Chairman. I look forward to the testimony of the witnesses.

CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Powell.

COMMISSIONER POWELL: Thank you, Mr. Chairman, and let me be the first
also to welcome Mr. Case and Mr. Levin and all our other distinguished
visitors and panelists from whom we will hear today, as well as members
of the public a discussion and a debate about a matter of clear pubic
importance.

Since its announcements, the proposed merger of America Online and Time
Warner has assumed almost mythical proportions among regulatory,
legislative and business circles, particularly here in Washington, and
as a policy and analytical exercise, this transaction has proven to be
irresistible both to those who applaud its promise and to those who fear
the merged entity\'s potential power. By seeking to combine some of the
most unique and valuable assets in both the communications and content
worlds, the parties have spread before policymakers, advocates,
competitors and pundits a smorgasbord of tasty issues for us to sample
or devour as we choose.

This merger is particularly challenging to review, not so much because
of its formidable size but because of its novelty. Normally, when the
government reviews a merger, it focuses principally on existing
products, services and markets. It takes a snapshot, if you will. But
here, we are faced with a merger that is born from a revolution that is
in its infancy, and the merger\'s great promise and possible dangers
rest principally in the future, a future that changes rapidly and often
unpredictably.

It is very difficult to grasp the effect of this combination on
consumers in markets that have barely emerged or have yet to be created
at all. Thus, the Commission will struggle mightily with how to deal
with necessarily abstract issues and will face tough questions, as when
to yield to the market\'s judgment and when to embark on a
government‑crafted solution. In this vein, I would caution that
identifying possible problems that result from this merger is not the
same thing as having a workable regulatory solution.

We should keep squarely in mind that regulation imposes significant
costs on producers and consumers. Valid rules require valid and stable
economized and technological assumptions that may be difficult to come
by in this innovating space. The hurdles of enforcement are substantial.
Additionally, we should recognize that regulatory intervention
necessarily directs the course of a market and may distort it by
diverting capital away from certain enterprises and towards others.
Whether this is wise in a burgeoning, rapidly changing,
innovation‑driven market is subject to debate and some questions.

Finally, I think it\'s important to say a word about who we are and what
we do. It is important to emphasize that many of the interesting
challenges, questions and concerns that might arise from this
combination are not within the scope of our review, nor are we
necessarily empowered to address any and all such questions. Along these
lines, I would repeat the caution of the Chairman and many of my
colleagues in public statements that we do not regulate the Internet.

While our authority does extend to much of the infrastructure that
affects Internet service, we must react cautiously and perhaps even
skeptically to invitations to intervene in matters that involve Internet
content, products and services. It is extremely important, then, that we
focus on the matters that will inform our decision and not dawdle too
long with issues that do not lend themselves to an FCC regulatory
solution. With that, I look forward to hearing from the panelists, and
thank you for convening the hearing, Mr. Chairman.

CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Tristani.

COMMISSIONER TRISTANI: Before I go to the brunt of my remarks, I would
like to thank you for holding this hearing. I, for one, was an advocate
of having an *en banc* hearing, because this merger has not only caught
the attention of Washington, it has caught the attention of many, many
citizens across this country. It\'s something that I know we\'re all
getting an unprecedented amount of e-mail on, letters on, questions on,
and this is one small way that Americans, that the public can have a
sense of what happens in the halls of the FCC in Washington when these
issues are concerned.

I\'m delighted that the press is here, because I know this is getting
good coverage, and I\'m hoping that, in a future hearing, we\'ll have
some kind of an interactive dialogue with the public. We should have
thought of that before. Having said all of that, there is a procedural
concern that I have, and that\'s that yesterday, this Commission
announced over our Web page that in order to get into this room or to
view this hearing at Commission, citizens would have to come at 8:00 in
the morning, starting at 8:00 to get a ticket.

Now I know that was well‑intentioned, because there were security
concerns, there were concerns about we\'d have overflow, but I think in
the future, Mr. Chairman, that if we\'re going to limit or have
different procedures in place, we need to let the public know with
sufficient notice ‑‑ at least a week\'s advance ‑‑ because I have no
clue if there are people that might have wanted to attend this hearing
‑‑ and I\'m talking about American people, not our usual crowd of
friends and lobbyists and attorneys ‑‑ that weren\'t able to come here
because they had no clue that you had to use these special procedures
that, frankly, Mr. Chairman, I didn\'t learn about till someone from the
public called me and then brought them to my attention.

With that, today we will be hearing from the proponents and opponents of
the AOL Time Warner merger. This proposed merger is not only one of the
largest in United States history but combines the control of conduit and
content in an unprecedented fashion, implicating issues that are at the
core of our democracy. It raises the specter of barriers to the free
flow of information and the marketplace of ideas.

If the shelves in the marketplace of ideas are stocked by too few hands,
a kind of digital imperialism may replace a well‑informed citizenry. In
the face of this, the Commission\'s statutory authority and obligation
is abundantly clear. The public\'s interest must be advanced if this
merger is to be approved. When the proposal before us is viewed through
the public interest lens, several significant concerns and questions
arise. I will highlight only a few here.

I am particularly concerned about the impact of this proposal on the
diversity of voices and ideas. I am also concerned that this merger may
limit a consumer\'s choice regarding Internet service providers and/or
cable delivery services. One question is repeatedly raised. Does the
dominance over instant messaging by one corporation create impermissible
barriers to competition and to the free exchange of ideas. If the extent
to which instant messaging has penetrated the online world is as great
as the record indicates, can America afford to leave its ownership in
the hands of a single entity whose fiduciary duty is to its shareholders
and not to the public?

Another persistent question is whether the Commission should address the
issue of open access or wait for an industrywide proceeding. These and
other pressing questions will not be answered today, but we must answer
them before we complete this merger review.

In closing, I am reminded of Winston Churchill\'s remarks during the
battle of Britain. When asked if Britain\'s goose was cooked, he
remarked, \"This isn\'t the end, this isn\'t even the beginning of the
end. It is perhaps the end of the beginning.\" If parties are right, we
are entering the digital century. Maybe so.

Specious limitations on this Commission\'s authority to protect and
advance the public interest belong in the last century. Today marks a
new beginning in our duty to protect the public interest through a
review of mergers such as this one.

CHAIRMAN KENNARD: Thank you, Commissioner Tristani. Commissioner
Tristani is right. We have a legal obligation to make a public interest
determination as to whether this particular transaction will serve the
public interest, and that is why we\'re holding a public hearing ‑‑ so
that the public can be involved in that determination. And I just wanted
to note for the record that this hearing is not unprecedented. Every
major merger that\'s come before this agency, at least during my tenure,
we\'ve had an *en banc*, Commission level hearing like this, including
Bell Atlantic, GTE, SBC Ameritech and AT&T TCI.

With that, I wanted to outline just a few of the housekeeping matters
that we\'ll be addressing today ‑‑

COMMISSIONER FURCHTGOTT‑ROTH: Mr. Chairman, I ‑‑

CHAIRMAN KENNARD: Certainly.

COMMISSIONER FURCHTGOTT‑ROTH: I just, I can\'t let that remark go
without some clarification. I\'d be very grateful if you could submit
for the record the dates and the minutes of those hearings that were
held at the Commission level. I don\'t recall being present at them.
Perhaps others were.

CHAIRMAN KENNARD: Well, I do recall you being present at them and asking
some questions. In fact, I remember your opening statement was very much
like the opening statement that you just made, so, but I\'d be happy to
give you a tape of that meeting, in fact.

COMMISSIONER FURCHTGOTT‑ROTH: Meeting? Was it singular? Or were there
one for each of these other major mergers, Mr. Chairman?

CHAIRMAN KENNARD: As I recall, there was an *en banc* hearing that
considered each of those mergers. I don\'t think we need to belabor this
point, but I would be happy to submit the record, not, the tape to you,
not for the record in this proceeding but just for the record of, for
the purpose of clarifying the point.

Are there any other remarks from the bench before we move on? Hearing
none, I just wanted to clarify some housekeeping matters before we go on
so that everyone will know what to expect this afternoon. We will have
opening statements from representatives of the two applicants, who are
seated here at the table now.

Then, we will have three other panels. One will be a panel that will
broadly put the merger in context, with two panelists. And then, we will
have two larger panels. One will address consumer perspectives, and the
other will address industry perspectives on the transaction. I\'ll ask
all of our panelists to confine their remarks to five minutes, and we
want to reserve some time for questioning from the bench after the
panelists have had an opportunity to speak.

We have a very crowded agenda today, so we\'re going to have to be very,
very disciplined about keeping this moving. We have a timekeeper. I\'ll
ask all of our panelists to keep an eye on our timekeeper, who is our
secretary, Magolly Sollis here at the Commission. And please work with
us here to that we can get through this, and everyone will have an
opportunity to state their case.

With that, let\'s begin with our first panel. It is the opening
statements of the applicants before us, beginning with Steve Case, the
chairman and CEO of America Online.

MR. CASE: Good afternoon, Mr. Chairman and Commissioners and thank you
for this opportunity to talk about the proposed merger of AOL and Time
Warner. As you all know, there has been a fair amount of discussion
about what this merger will mean and a fair amount of misinformation. So
both Gerry and I have been look forward to coming here today to explain
what we believe the merger will mean, not only for our companies but
also for consumers.

We think, when you look at all the facts, you will conclude that the
merger of AOL and Time Warner will benefit consumers and serve the
public interest. We are confident that together AOL and Time Warner will
build a company that helps to take the Internet to the next level,
connecting, informing and entertaining people around the world as never
before and benefiting consumers in valuable new ways.

Just as important, we want to make clear that our commitments to
consumer choice and competition will help lead our industries into the
Internet century in a way we can all be proud of. That\'s what the
merger of AOL and Time Warner is really all about. Helping to lead a
second Internet revolution that reaches as many people as possible as
quickly as possible and serves the public interest. There are three key
reasons why we believe this.

One, we are confident that the proposed merger of AOL and Time Warner
will drive the Internet\'s development, helping to spur a new era of
innovation and robust competition. Two, we are confident that our merger
will help consumers make the most of that innovation, increasing their
choices and enriching their lives. And three, we are confident that our
merger will help to build a truly global medium, leaving no community
behind. So let me go through each of these points and the principles
that underlie them.

First, our merger would help to drive the development of the Internet. I
don\'t think I have to tell anybody in this room that the Internet is
transforming the landscape of communications and media. This
transformation is evident in everything from the time people now spend
online, the way it\'s really embedded now in their lives, to the way
it\'s shaping our expectations of what media can and should be able to
do.

And this is just the beginning. Broadband and wireless connections, an
ever‑increasing array of devices to conveniently access the Internet
anytime and anywhere, and the intersection of traditional and digital
mediums are fueling a powerful new era of innovation. It\'s consumers,
not technology, that are driving these developments, and that\'s the way
it should be, indeed, it has to be. In this new environment, companies
of every size will compete to bring consumers what they want when they
want it at prices they can afford, and in ever more useful, convenient
ways.

This cycle of competition and innovation has brought the Internet and
both of our companies to where they are today. And it\'s always
benefitted consumers. The next HBO, the next CNN, the next AOL, these
are the kind of remarkable breakthrough innovations AOL Time Warner
could create for consumers across a whole variety of platforms. And we
have no doubt that our commitment to innovation would prompt our
competitors to develop new and better offerings of their own.

One of our most recent innovations, AOL TV, is a good case in point. By
using open standards, this new interactive television service actually
enables interactivity provided by any broadcaster. AOL TV will be an
enabling platform for broadcasters and programmers. We have approached
it in a way meant to benefit consumers, benefit content producers and
benefit broadcasters.

As many of the people in this room know, interactive TV has not yet
begun a widely used product. Broadcasters and programmers have little
incentive to develop interactive content, because there\'s not an
audience, and service providers have difficulty creating an audience
without compelling interactive content. The merger of AOL and Time
Warner would go a long way towards ending this chicken and egg problem.
Built on open platforms, AOL TV can help to jump start an entirely new
industry, with many competitors. There are many other areas where we
hope to spur innovation, such as finance, healthcare, telecommunications
and online music.

With music, for example, we believe that AOL\'s experience in making
interactive services easy and secure, combined with Time Warner\'s skill
at providing music attuned to consumer tastes, will speed the advent of
digital downloading that both protects artists and service providers for
the benefit of consumers. So let me be clear. A combined AOL Time Warner
will be able to stimulate even more innovation and competition, and
consumers will be the winners.

The second point. Our merger will further benefit consumers by
increasing their choices. In today\'s competitive environment, consumers
know they have choices ‑‑ over 7,000 ISPs, millions of Web pages, and
new ways of connecting to the Internet ‑‑ and consumers exercise that
power every day. That\'s what our AOL anywhere strategy is all about.
Making AOL available whenever and however consumers want it.

Beyond the Time Warner cable systems, AOL has already formed alliances
with DSL, wireless, and satellite providers from Bell Atlantic and SBC
to Sprint and Hughes. A combined AOL Time Warner could carry on these
agreements and seek new opportunities to distribute our content and
communications services on multiple platforms nationwide. And you can be
assured that if and when other platforms are developed, AOL will want to
be on those as well.

At AOL, we are also deeply committed to delivering access to a broad
array of the best content available, regardless of who produces it. This
will be true in a post- merger world, just as it is true today. It has
been suggested that a combined AOL Time Warner might somehow favor our
content over that of our competitors through caching or some other
technical means. So again, let me be very clear.

AOL has never done anything like that and we never under, because it
would diminish our members\' online experience. For those same reasons,
a combined AOL Time Warner would build on our companies\' demonstrated
commitment to open access. Real progress has been made on this issue in
the past couple years. I have always been a believer in open access, and
I\'m proud of the role AOL has played in getting us, and increasingly
the marketplace at large, to where we are today.

It is gratifying to see that most of the country\'s largest cable
companies, including Time Warner and AT&T, are moving forward with open
access policies and implementation plans. On the day we announced our
merger, we committed to open Time Warner\'s cable network for
competition with multiple ISPs. A month later, we took the next step,
jointly releasing a memorandum of understanding that is the framework
for delivering AOL and other ISPs over Time Warner cable.

As Gerry will talk about in a minute, we are increasingly optimistic
about how soon we will have a multiple ISP environment on the Time
Warner cable systems. We understand that the Commission will be taking
an industrywide look at the open access issue, and we want to assure you
that we will be continuing our own efforts to ensure that there really
is real choice among ISPs as quickly as possible.

So again, let me be clear. The cable systems in a combined AOL Time
Warner will not discriminate against other ISP\'s on the basis of
affiliation with us. We are serious about our commitment to open access,
because we know it is good for our business and good for consumers. The
same pro consumer attitude has guided our business practice on other
products, like instant messaging. This is probably the area where the
most misinformation has been circulating, so I\'d like to take a moment
to set the record straight.

Let me start at the beginning. We developed instant messaging technology
and introduced it as a feature over a decade ago. As our members
realized the value of realtime online communication, they began asking
to reach beyond the community of AOL members, so three years ago we made
instant messaging freely available to all Internet users. Today, we can
clearly see the innovation that our decision helped to spur. There are
now more than 40 companies, including Microsoft, Yahoo and AT&T that are
providing their customers with similar features.

CHAIRMAN KENNARD: Mr. Case, could you please wrap it up.

MR. CASE: I don\'t have to tell anyone in this room that the challenge
we all face now is to create server- to-server interoperability that
allows users of all these different services to talk to each other
seamlessly. To that end, AOL has taken several steps forward. Indeed,
we\'ve recently submitted to the IETF the only architectural plan for
true interoperability, and we are committed to moving forward with
interoperability.

It\'s a problem the industry has faced together before when standards
for e-mail interoperability were devised, and we weren\'t even dealing
then with the challenge of realtime communications, but we learned from
that process that interoperability alone isn\'t enough. We must also
take steps to protect people\'s privacy and security. This is especially
true for AOL, where so many of our users are families and young people
and, therefore, where the risk of privacy breaches and inappropriate
spam are the greatest.

Let me again be very clear. We are fully committed to working within our
industry to create true server-to-server interoperability, but we are
equally committed to protecting consumer privacy and security. We have
an opportunity to get it right this time, and we intend to make the most
of that opportunity.

Finally ‑‑ and I\'ll wrap up ‑‑

CHAIRMAN KENNARD: I hope so.

MR. CASE: Because this is an important one. I think it\'s particularly
important to you, Chairman. We believe our merger gives us the
opportunity and the responsibility to help extend the benefits of the
Internet to every community around the world. We all know that the
future is about more than bytes or bandwidth. It is about how we use new
technology to improve people\'s lives.

In fact, nothing has been more crucial to this effort in terms of
integrating our companies than our shared commitment to be a catalyst
for meaningful change, not only in our companies and our industries but
also in our communities locally and globally. And there\'s no more
urgent task before us than bridging the digital divide. One of the
things Gerry and I are most looking forward to do is joining our
resources and sharing our ideas to expand digital opportunity to all
communities.

We take this challenge seriously, not only as a company but also as
individuals with a shared personal conviction that we must use our
leadership to build a better world. These are commitments that will
drive and the principle that will guide a combined AOL Time Warner. Our
goal is to be able to look back on this time and say we helped create a
medium that had a positive impact on people\'s lives, and that, we
think, will most assuredly serve the public interest we are all
committed to upholding. Thank you.

CHAIRMAN KENNARD: Thank you, Mr. Case. Mr. Levin?

MR. LEVIN: Chairman Kennard, Commissioners, last January when Steve and
I announced this merger, it was with the vision of creating the first
Internet‑powered media and communications company. In the short time
since then, the velocity of technological change has continued to
accelerate and only reinforces our confidence in the promise of this new
venture. From Time Warner\'s perspective, this merger represents a very
logical step in our efforts to increase consumer choice in communication
services and content, which we understand is the Commission\'s bedrock
policy.

Expanding consumer choice is a part of who we are. It\'s as basic to our
corporate DNA as editorial independence and integrity has been to Henry
Luce\'s Time, Inc., and Ted Turner\'s CNN. Since HBO\'s debut 28 years
ago, Time Warner has been a leader in overthrowing the paradigm that
limited the public\'s programming choices to those selected by a
triopoly of broadcast networks. Our leadership in expanding consumer
choice in the television marketplace has proven quite successful. The
new networks we\'ve developed from CNN to TNT to the Cartoon Network
have enriched people\'s options for more programming.

And the billions we\'ve invested in our cable systems have dramatically
enlarged the number of channels, not just from Time Warner but from a
wide variety of sources. This includes MSNBC and FOX, public affairs
from CSPAN, innovative kids\' television from Nickelodeon and Disney,
ethnic and gender‑focused programming from BET and Lifetime. It also
extends to Time Warner Cable\'s successful introduction of 24‑hour local
news services in a number of our systems.

And while we\'re proud of our role in breaking open the television
universe, we also recognize that we\'ve been one of the first to take
advantage of digital technology to present revolutionary new options
like high-speed interactive services, video on demand, telephony and
data delivery. Our early experiments going all the way back to Cube, in
Columbus, Ohio, Quantum, in Queens, New York, presage our effort to
establish the first fully interactive digital network in Orlando,
Florida. And over the past five years, we\'ve invested more than \$6
billion in the development and deployment of broadband architecture.

So whatever the delivery mechanism, whether wired or wireless, cable or
satellite, it\'s obvious that the digital revolution has put the global
economy in general and the global media industry, in particular, on fast
forward. We now see that, while we began with America\'s leadership,
that leadership is already being challenged in Europe, Asia and Latin
America. And it was that shared understanding of the intense global
competition that the Internet is spawning which helped give our initial
conversations the sense of real urgency.

We also recognize the opportunity to create a company specially adapted
to the uncharted terrain. One that can offer consumers an astounding
array of quality content from the widest selection of sources, along
with Web features, services and communities that provide ease,
convenience and personalization. Let me be very particular to the
Commission about the three things that we think you should focus on,
which are the public benefits which flow from this combination.

First, as well as making traditional media more accessible for online
and interactive applications, our company will be a leader in developing
new services, including news and lifestyle information on demand and
interactive television, and this will help accelerate our competitors\'
efforts to innovate.

Second, by actively pursuing our marketplace‑driven multiple ISP
initiative, we\'ll ensure real consumer choice on our cable systems, but
importantly provide a catalyst for other cable companies to follow suit.
And third, as we speed up deployment of broadband capacity, we will
increase the consumers\' appetite for broadband services and clearly
hasten deployment across competing platforms, whether that\'s cable,
DSL, wireless or satellite, which we believe is a critical FCC goal,
pursuant to Section 706 of the \'96 Telecommunications Act.

The merger of Time Warner will be especially beneficial to bring the
public real diversity of Internet service providers, and we are
committed to making our services available on a nonexclusive basis over
a multiplicity of platforms. Our company will promote a competitive
environment, which encourages all broadband platforms. We will also
carry out the initiative articulated in our memorandum of understanding.

This is what we\'ve already done. We\'ve already moved to restructure
our Road Runner partnership, thus enabling us to introduce multiple ISPs
substantially in advance of the 18 months remaining on the Road Runner
exclusivity. In addition, we are negotiating with AOL and, importantly,
with other ISPs, about providing high‑speed Internet service. And
finally, in our Columbus, Ohio system, we have begun technical trials
providing multiple ISP service. And we\'ve, therefore, taken our
commitment from the ideal to the practical.

And by doing this, we\'ve prompted other cable operators to modify their
business plans to provide for multiple ISPs, and you can see already
that in DSL, satellite and wireless, all these providers are
accelerating their own deployment. So, from the consumers\' point of
view, we\'re providing and stimulating more choice, better value and
lower prices.

Finally, no medium in history has surpassed the wildly democratic
potential of the Internet to break down the barriers to human
communication or to overturn the limits on cross‑cultural understanding
and expand the educational and economic prerogatives of people
everywhere, because the Internet, which cannot be controlled by any
company or any government agency, is the technology of human freedom. So
it is our hope that we can bring about and stimulate this revolution, a
hope I believe we hold in common with the Commission. Thank you.

CHAIRMAN KENNARD: Thank you, Mr. Levin. We\'ll now have a period for
questioning from the Commissioners. I had a couple of questions I want
to begin with. My first question is about the cable access issue. It\'s
one that we have been grappling with here at the Commission for about
two years, and we have ‑‑ as I said in my opening remarks, we all
believe in openness. Obviously, it\'s been good for the Internet and
it\'s important for the future of the Internet as we move to broadband,
but thus far, we\'ve heard a lot of good intentions.

We\'ve seen some industry agreements, nonbinding industry agreements, I
might add. We\'ve seen some technical trials. But it\'s my belief that
until we actually see an open access platform in cable broadband
implemented where people can actually see it and touch it and feel it
and the ISP community can actually get confidence that they\'ll have
access to it, that there will continue to be a lot of skepticism on this
issue, for good reason.

I would like to ask you, when can we expect to see this? When can we
expect to see an open access platform in cable broadband that will give
us some confidence that this is really going to happen? That the market
is driving toward this.

MR. LEVIN: Well, first of all, Mr. Chairman, we are trying to roll back
the exclusivity bar to beginning multiple ISPs that was intrinsic in the
Road Runner partnership, and we have begun that restructuring, and I am
confident, although it requires the consent of all the parties, that we
will achieve that so that we don\'t have to wait 18 months before we can
actually begin. And I would hope by the end of the year we will be able
to do that.

Secondly, we are entering into multiple‑affiliation agreements with
third‑party ISPs, and I expect shortly we will make the announcement
about the first third‑party affiliation agreement which, again, will
confirm that marketplace template for the arrangement. And finally, the
trials that I\'ve referred to are actually very important because up
until now the ability to install and service high‑speed Internet access
has had to be proven in the marketplace. And that activity, I think, has
proceeded sufficiently so that we now have confidence.

And we have installed the first, what I\'d call multiple‑ISP router in
Columbus, Ohio. The trials have begun, and I\'m optimistic that by the
end of the year, we will also have in place the sufficient software to
enable the multiple billing of ISPs. The other thing I would say, Mr.
Chairman, is that I do think the understanding that was signed between
Time Warner and AOL is binding on us and, in fact, it made several
breakthroughs that I think are quite significant. And that\'s where our
activity, I think, will lead the industry in several respects. And we
are now embedding those provisions into our affiliation agreements.

MR. CASE: If I could just add, I think, you know, from some of our
previous discussions, that I share your passion about the importance of
open access in terms of preserving the open character of the Internet,
and also would share your skepticism that until it\'s actually
happening, it sounds like a lot of promises. But I would note that a
year ago, when the Commission looked at this, the Commission concluded
at that time that there was a reasonable probability of competition in
broadband. It wasn\'t just about cable. DSL, satellite, wireless would
emerge as alternatives. And there was a reasonable probability that the
marketplace would indeed work.

In the past year, I think there\'s a lot of evidence to suggest both
premises were correct. There is far more competition now in each of
these other broadband technologies, billions of dollars now being
invested to deploy DSL, experiments now being put in place to actually
deliver video over DSL. Just last week, Blockbuster announced an
initiative to do just that with DSL and phone companies. Satellite
companies have done quite a bit, announcing ventures with other ISPs
just in the last few weeks.

And venture capital is pouring into wireless technologies. And also in
the past year, the cable industry overall has gone from a position where
they really weren\'t focused on open access to a position where, now,
the majority of the companies are recognizing that it is something
that\'s going to happen and it\'s better to happen sooner rather than
later and it\'s in their business interest to get ISPs working on their
platform, as opposed to a competing platform.

So in the past year, I think there\'s a lot of evidence to suggest that
there are competing broadband technologies and the cable industry is
moving towards open access. And we recognize that people really are
eager to see some definitive agreements and see some systems in place,
and we\'re confident we\'ll be able to demonstrate that very shortly.

MR. LEVIN: It really is the marketplace at work. I just want to
underscore. This is not to satisfy a regulatory requirement. The intense
activity, particularly in DSL, both from marketing and the provision of
services, is really extraordinary, and for a cable operator not to
energetically move to provide consumer choice, the cable system will
lose out in the marketplace. That\'s very clear.

CHAIRMAN KENNARD: Well, I think that everyone in this room would hope
that we have an environment sooner rather than later where we have
multiple broadband platforms competing in the marketplace. Cable, DSL,
satellite, terrestrial wireless. But what if our hopes aren\'t realized?
What if there are communities in America where their only choice for
broadband will be the cable modem product? Will people in those
communities have confidence that the market will drive to an open access
environment when there are no broadband competitors?

MR. LEVIN: Well, I don\'t think factually that can occur because, first
of all, with respect to the telephone system, which is universally
available, DSL is being activated broadly. And you can just see it in
the marketing activity, so that in almost every community that
certainly, we operate in, there is an intense DSL activity. Secondly,
satellite, which is universal, covers the entire geography of the United
States, is now offering high‑speed service and in fact is using either a
telephone return path or, shortly, a satellite return path.

And finally, I would not underestimate the growth of wireless, because
in fact, the ability to have ‑‑ and we see this happening already in
Europe and in Asia ‑‑ the ability to have Internet access, including
with impending 3‑G, to have broadband access on a portable device, is
probably ‑‑ all you have to do is test the marketplace. The highest
infrastructure valuations today happen to be in the wireless area
because of the opportunity for broadband wireless.

MR. CASE: If I could just add that the ‑‑ we made a big investment in
satellite, partly because it is the only way to ensure ubiquity in terms
of the national footprint. We\'re working with Hughes on that project,
and even with this merger will continue to work with them and others to
develop all these different technologies, so I don\'t think the concern
you have is likely to play out. But if it does, if down the road you
find that there really is only one broadband technology and the industry
isn\'t moving forcefully enough to open it up, it would be appropriate
for the Commissioner or others to look at that issue and put a national
policy in place.

As it relates to this merger, these are the companies that are actually
doing things about open access. I think the steps we\'ve taken should be
applauded, and we really are committed to going from the concept stage
to the reality stage, not just around cable broadband technology but
also deploying other broadband technologies.

CHAIRMAN KENNARD: Okay. Well, it\'s, just so I understand what you\'re
both saying. Absent a competitive dynamic, absent pressure, competitive
pressure from other broadband providers, I understand you to say that
there may not be pressure for a market‑driven incentive for the cable
operator to open their, their broadband platform. Is that right?

MR. LEVIN: No, no, no. I wouldn\'t, I wouldn\'t articulate it that way.
First of all, it is clear that there are going to be multiple broadband
providers. But as a matter of business development for the cable system,
the importance of developing these new revenue streams, given the fact
that the more traditional analog delivery of television signals, or
indeed digital delivery of must‑carry signals, has a certain ceiling on
it in terms of its expansion.

The growth opportunities for the cable company really come about in, in
the deployment of broadband, so I can say to you that our business plan,
with or without the obvious competition, is to make the investment and
actually to accelerate the investment in broadband deployment, and then
the costs that are the variable costs that are necessary to deliver
cable modems. Again, I can\'t underscore enough that this is a business
proposition that grows out of the next development, in this case, the
development of the cable industry, both because of the competition and
it makes intrinsic sense.

MR. CASE: One other point to emphasize is that Time Warner has a
significant cable presence, but only 12 percent of households in the
United States have Time Warner cable access, so 88 percent we need to
reach, the national brand with the AOL service through other means. So
it is in our interest more than probably any company\'s interest to make
sure all broadband technologies are open and competitive, easy to deploy
and affordable. It would be silly for us to focus just on the 12 percent
when we have a national business and need to focus on 100 percent.

So it\'s in our interest as much as yours, maybe more in our interest,
to work as forcefully as we can to establish arrangements with all the
cable companies to deploy cable broadband, as well as all the DSL
companies, satellite companies, wireless companies, so we really have a
national footprint, with a tapestry of broadband solutions.

MR. LEVIN: You know, history is instructive, because on the one hand,
having cable has been very helpful in the creation of all of these
services. On the other hand, the history of our company, whether it\'s
HBO, CNN or pay‑per‑view movies, is to work through cable, satellite and
DSL ‑‑ any delivery system ‑‑ because that\'s in the nature of content,
which should be delivered on every platform.

So there\'s nothing new about this concept of stimulating all of the
delivery mechanisms, including the one that Steve Case referred to in an
announcement of Blockbuster to use the Enron system and then,
ultimately, DSL, to deliver, in effect, video on demand movies into the
home. And you don\'t see any cable mentioned in that release.

CHAIRMAN KENNARD: Thank you both. Other questions from the Bench. Yes?
Certainly.

COMMISSIONER TRISTANI: So what I\'m hearing is it makes wonderful,
eminent business sense to have open access. I\'m hearing that. Can you
tell me what your timetable is again? Is it ‑‑

MR. LEVIN: Well, let me characterize it. We have at our cable company ‑‑
just speaking on behalf of our cable company ‑‑ what\'s known as a
multiple-ISP initiative. And we have been ‑‑ and this has been true in
the industry ‑‑ contractually precluded from beginning to have more than
one ISP, because of an exclusivity provision in a partnership agreement
as a result of a Justice Department mandate. We are trying now to reform
that so that we can remove the exclusivity bar. Once we do that, we then
turn to the technological capability.

So we have now installed the kind of router that\'s necessary and the
software that\'s needed to distinguish among several ISPs for the
consumer. We are now doing that. And finally, you need affiliation
agreements and, as a matter of fact ‑‑ you know, maybe I should give my
e-mail address ‑‑ any ISP that would like to come and negotiate with
Time Warner Cable, we\'re open and ready, willing and able.

COMMISSIONER TRISTANI: But what\'s the timetable?

MR. LEVIN: Well, as I just said, our ‑‑ well ‑‑

CHAIRMAN KENNARD: What\'s the e-mail address?

MR. LEVIN: GML ‑‑

COMMISSIONER TRISTANI: I\'m not being flippant about the timetable. I
just want to have a sense of ‑‑ because I\'ve heard maybe the end of the
year, but could that mean ‑‑

MR. LEVIN: Well, but as I\'ve indicated, there is a contractual bar
right now. I mean if you look at ‑‑ there is an exclusivity provision.

COMMISSIONER TRISTANI: But you said those contracts could be reformed.

MR. LEVIN: Yes, but it requires other parties to agree to do that.

COMMISSIONER TRISTANI: So you can\'t tell me what a timetable is.

MR. LEVIN: No, I, I remain quite confident that we can make that happen
faster than anyone else in the industry, because there\'s another
exclusivity provision that runs longer for Excite@Home. I\'m confident,
but I can\'t warrant it today, but I\'m confident in my ability to make
this happen. We\'ve obviously already begun the process of
restructuring. And so that the first thing that will happen.

Secondly, there will be affiliation agreements. You need an agreement
with an ISP that sets the terms and conditions. It\'s very similar to
the terms we had in our MOU. And I think I said earlier that there will
be an announcement of an affiliation agreement shortly. Finally, this is
a, not a trivial technological activity and, frankly, that\'s the reason
why the industry went slowly to see whether the modems would work, they
could be installed, whether the service would be high speed, whether you
could bill. We now have confidence in that management capacity.

Now you need software, which hasn\'t existed before, with a router that
enables you to address separate ISPs going into separate homes. I\'m
confident that we will build that software. Our company has a history of
doing this. We\'ve done it. We\'ve done it before.

And that\'s why I\'m highly optimistic. But most of all, it is a
business imperative. It\'s built into our business plan. Multiple ISPs
are necessary for the revenue growth. And besides, in every market that
we\'re in, DSL is being marketed competitively to this concept.

MR. CASE: If I could just add. We, as I said in the opening remarks, we
understand, probably better than anybody, the importance of open access
and also understand the importance of demonstrating a real commitment to
open access by having real deals with real unaffiliated ISPs that can be
implemented in a real way, quickly. And we recognize that that\'s an
important issue to you. It\'s also an important issue to us, because our
credibility is on the line.

I have been arguing for open access for years, and I continue to believe
open access is critically important. We just now have the wherewithal,
we believe, to achieve that within Time Warner systems sooner than might
have been thought, because of this restructuring of Road Runner. And we
also are optimistic that we can get other cable companies to embrace it.

So we need to demonstrate this quickly, and we will demonstrate this
quickly. Not just because we think open access is a good policy decision
or that open access is a good business decision, but also because we
recognize we have made a commitment and we\'re going to live up to that
commitment.

COMMISSIONER NESS: Following up on that, to what extent will you be
limiting the number of ISPs that will be able to partake of your system?

MR. LEVIN: Again, I\'ll repeat my invitation. As we said in our
agreement, we\'re not providing any limitation on either the number of
ISPs or whether they are national, regional or local.

COMMISSIONER NESS: And to what extent will you be making the technology
available to other cable systems so that others will be able to also
open up their systems?

MR. LEVIN: Well, we\'re ‑‑ we are not a technology company, in the sense
that we make and sell technology, but anything that we\'ve developed ‑‑
for example, the paradigm, the hybrid fiber coax architecture that is
currently the industry standard was developed by the engineers at Time
Warner Cable. We actually won an Emmy for it. And that template, that
architecture has been made freely available. If ‑‑ the software that
we\'ll be created ‑‑ what\'s necessary here is not the router, because
the routers do exist.

What\'s necessary is software that hasn\'t been written, to distinguish
that the traffic going through belongs to one ISP and not another and
make sure that the bill goes to the proper place. That software we will
acquire from somebody, who will then be able to sell that software. See,
that\'s my point, that this innovation, it hasn\'t existed before, so
we\'re the first ones to do it.

By making it happen, it then travels to other systems and, again, if it
doesn\'t happen, you have, you know, the telephone companies constantly
spending much more money on marketing in the marketplace. So I think the
short answer to your question is if it\'s developed for Time Warner
Cable, then others would be able to use it.

COMMISSIONER POWELL: Let me just ask more pointedly. By the terms of the
Road Runner contract, does it have a natural expiration date and, if so,
what is it?

MR. LEVIN: It\'s the end of 2001. December 31st, 2001.

COMMISSIONER POWELL: Okay. So at the latest, pursuant to the Justice
Department decree, is there a timetable that shortens that?

MR. LEVIN: No. I\'m trying to be helpful and opportunistic. No. But what
the Justice Department has said is that AT&T must divest its interest in
Road Runner so that it isn\'t in both Excite@Home and Road Runner. And
frankly, what I\'m saying to you is that I\'m trying to take that
mandate and turn it around so that that event becomes an event to
restructure the ownership of the partnership, and while we are doing
that, also remove exclusivity.

You know, it\'s something that is another indication of, you know, our
commitment to want to make this happen. Because the exclusivity on
Excite@Home, I think, extends until the end of 2002. So that\'s why,
maybe, people have not been rushing to enter into affiliation
agreements. So that\'s why I\'m trying to do that and, as I say, once we
get an announcement out of a third‑party affiliation agreement, I think
that will encourage others also.

MR. CASE: One other point in terms of the timing. The Road Runner and
\@Home exclusivities also would impact AOL. So, unless the Road Runner
date is moved up, AOL will not be able to provide access over Time
Warner Cable systems or any other systems, so clearly we have an
interest in trying to restructure this, to accelerate the date that all
ISPs ‑‑ AOL and other ISPs ‑‑ would have access.

MR. LEVIN: I should ‑‑ it\'s fortunate that I\'m accompanied by those
who know better than I do ‑‑ the Justice Department decree does push for
an earlier restructuring if that\'s possible, so there is an incentive
there.

COMMISSIONER FURCHTGOTT‑ROTH: Would it place Time Warner systems at a
competitive disadvantage is this Commission were to condition the
license transfers in such a way that Time Warner systems had a different
federal mandate for open access than other cable operators had?

MR. LEVIN: Yes. Certainly the answer to that is yes.

CHAIRMAN KENNARD: Commissioner Powell, did you have something?

COMMISSIONER POWELL: It was going to be a question, but I\'m going to
make a comment, in the interest of time. I\'ve read through many, many
of your testimonies and your presentations, and on many of these issues
that are of some concern by other commentators ‑‑ commitments to
multiple platforms, open access to ISPs, the commitment not to leverage
content distribution systems, not to favor your own content through
caching and primary screens, no attempt to leverage the AOL‑AT&T linkage
‑‑ often conclude with, \"Trust me, we won\'t.\"

And one of the central criticisms of the opponents is that, why should
you? And I would concede that in a market in which we don\'t necessarily
know how things will evolve, there may be room for \"trusting you,\" but
I thought I would represent some things that concern me. One of the best
indicators of that is historical performance.

And it seems to me that ‑‑ I look at things like the high-profile case
in which time Warner was stripping the vertical blinking interval for an
EPG. I look at the fact that some fairly heavy-handed tactics by local
franchising authorities of Time Warner\'s and SBC\'s region on DSL. I
look at over a year ago some of AOL\'s public promises on open Internet
messaging services that have still yet to be fulfilled. I\'m not
personally criticizing those choices. There may be rationales for them,
and they both all may be things not even within the scope of our
authority but, nonetheless, they are historical backgrounds of
credibility on the trust point.

And what I would like to emphasize is that I think it\'s very, very
important that the companies, in proving their case, show why there are
very powerful economic reasons, not just behavioral reasons, to pursue
open models and not leverage content. And Mr. Case, I think you made a
good point about, you have to get on systems elsewhere, and I think
that\'s the kind of argument we need to hear. But I would add one
refinement. The key is, at what terms and conditions and prices?

And I think one of the concerns, or the anxieties raised are that the
extreme ability you will have as a content provider may be able to allow
you to trade off and dictate terms and conditions that are more
favorable to you than others. And I don\'t need a voluminous response to
that. But I just wanted to guide responses to the idea of demonstrating
why, as a business matter and economic matter, these are the things we
can expect to happen, as opposed to trust.

MR. LEVIN: Well, the short answer is really that the, it\'s the consumer
who makes these choices, and if we were ever to exclude, you know,
whether it relates to EPG which is a subject that the Commission has
under advisement, and we will carry ‑‑ whatever line the Commission
draws, that\'s exactly what we will do. But we\'ll carry anything and
everything, because it\'s the consumer that is making the choice for
navigation.

And the same thing applies to programming. And that\'s really the
history. If you\'re not providing the programming or the material or the
convenience that the consumer wants, it\'s very clear that the consumer
can go elsewhere and, in fact, now that we\'re talking about the
opportunity to go elsewhere on the Internet, there are all these
distribution systems. So the economic compulsion is really overwhelming
to service the consumer.

Having said that, I have to also comment that I think that this company,
these two companies and this new company is distinctive, not only
because of its history, but the desire to want to serve the consumer,
the public interest with a set of values that really count. I think
that\'s very important to us. So that, yes, we are responsive to
shareholders, but we\'re also responsive to the public interest. Indeed,
it\'s built into our charter. That was the charter at Time, Inc., and it
is at AOL, and it will be at the new company.

So, we have the best of all possible worlds. We have the recognition
that the consumer is making a choice, and you have a company that values
its social commitment.

MR. CASE: Let me just add that as I said in my opening remarks, there\'s
a lot of misinformation flying around, and I think some of it was
embedded in one of your premises regarding instant messaging in
particular. And I certainly take issue with that characterization. I
actually think our company has been a model for how to take a technology
and open it up.

But as I said in my opening remarks, we invented this, actually 15 years
ago. Three years ago, we made it free so anybody could download the
software for free or use it for free. And then in the past year we\'ve
licensed it to more than a dozen companies on a royalty‑free basis.
That\'s not something that Microsoft, for example, has done with
Windows.

If the Justice Department, as their remedy in this, suggested that
Windows should be put on the Web so anybody could download and use for
free and license on a royalty‑free basis to a dozen other companies,
they would have been laughed out of Washington as a much too stringent
remedy. We did both of those things voluntarily and, additionally, have
indicated our commitment to interoperability proposed to the IETF in
architecture for server-to-server interoperability.

So I think we\'ve done a lot to make sure that anybody can talk to
anybody, nobody has to subscribe to AOL, you can use it for free if they
want, if companies want to create their own interface, they\'re free to
do that. And if we can get agreement with these companies about
server-to- server interoperability, we\'re ready, willing and able to do
that.

CHAIRMAN KENNARD: Commissioner Ness and then Commissioner Tristani.

COMMISSIONER NESS: A number of commenters have been very concerned about
your ability, not just to discriminate in favor of your own product but,
rather, potentially, to discriminate in favor of the product of other
major players in exchange for benefits that you might receive from such
relationships. And it\'s been described as a colony of two 800‑pound
gorillas dancing, and thereby stomping a number of other smaller players
who might want to be able to play in the marketplace. Can you comment a
little bit about these concerns that have been raised? And I\'m sure
we\'ll be hearing them as the panels proceed.

MR. CASE: Want me to start on that one? I think people who make that
claim do not understand what\'s happened on the Internet. What\'s
happened on the Internet is the blowing up of traditional barriers to
entry, which is resulting in an unprecedented flood of competition and
choice. When I was growing up, the only thing I could watch on
television and ABC, CBC, NBC and PBS. Now, you\'ve got dozens of
stations in some markets, hundreds of stations in other markets, and
millions of Web sites to choose from.

So this notion that people are constrained in choice is a little silly.
What\'s happening is unprecedented choice, and we\'re trying to
stimulate more choice on television. We, you know, some say, well, you
should worry about these guys because they\'re potential monopolists.

Actually, if those companies are worried about us, it\'s because we\'re
populists, trying to take the Internet model to television, and instead
of consumers going home and turning on the television and watching what
the networks want when they want, they want to work like the Internet
where they choose to go where they want, do what they want, when they
want. So we want to take that Internet model, which is a model of
competition and choice, and bring it to television. It\'s not surprising
to me that some companies would rather protect the status quo. Consumers
want the Internet model on top of television.

COMMISSIONER NESS: The expectation, however, is, for example, you\'d
have major cable companies exchanging benefits with each other to the
detriment of others who do not have cable facilities. Cable still
remains, in most areas of the country, as a major bottleneck provider.
Can you comment further on that?

MR. LEVIN: I don\'t think that the cable companies are working together
with other cable companies in any way. As a matter of fact, I think the
history of the cable industry is in fact what Steve Case has just
indicated is now being carried out on the Internet. And that\'s
deconstructing the establishment. That\'s really always been the
history, providing more services that were not otherwise available.

We used to have this very narrow aperture through which programming can
pass. And in fact, each, as each day goes by, there are more services
that are being created. And frankly, when we, when I look at the
conventions coming up, the political conventions, I think it\'s time to
recognize that the public interest, convenience and necessity has now
shifted from broadcast licensees to the cable industry and the Internet
industry, because who\'s going to carry, on a 24‑hour basis, everything
that\'s happening in, you know, two of the most important political
events so it\'s available on an interactive basis to all Americans?
It\'s coming from all the cable networks, it\'s coming from CSPAN, it\'s
coming from local cable news services, it\'s coming from all the
Internet services. It\'s the most exciting thing to happen. It\'s not
coming from the broadcast licensees.

So in fact, I think it\'s time to recognize that in fact the net effect
of creating more capacity, which is what cable has done and what the
Internet now explodes on an infinite basis, is providing more choice and
more opportunity for independent programmers. The last thing I would say
is a lot of the comments we\'re hearing seem to belie the other
proceeding that we\'re involved in, which is at the FTC, examining the
antitrust issues. The issue here is not to protect competitors but to
stimulate competition. And I think that\'s what all this technology is
designed to do.

MR. CASE: I also would add that there\'s a big distinction between
television of the past and how you think about it and limited channel
capacity and whose gets carriage, essentially, and the Internet model,
which, essentially, everybody gets access, everybody gets carriage. And
certainly on AOL, people can go wherever they want whenever they want,
and this notion that we would somehow block the Yahoo domain or somehow
slow it down is ridiculous. We, we\'ve never done that, we never would
do that.

The reason is if we did that, our members would quit, because they
don\'t want a constrained Internet. They want an open Internet, and
that\'s what they get from AOL. If we tried to do some of the things
that some of the people are suggesting, it would be harmful to our
business.

MR. LEVIN: If I could just go back to, again, the difference between the
marketplace and a regulatory requirement. The concept of high-definition
television, which we\'ve been working on for many, many years. There\'s
more activity taking place by Home Box Office, which is not a regulated
licensee in that sense, than by any broadcaster. And the reason for that
is the picture quality is exquisite, and it makes a lot of sense from a
kind of a competitive advantage.

So that\'s a marketplace desire. It\'s part of the history of
innovation, and I think that needs to be acknowledged, because that\'s
what\'s driving so much of all of these new services.

CHAIRMAN KENNARD: Commissioner Tristani, and then we\'re going to have
to wrap up this first panel.

COMMISSIONER TRISTANI: I have here a four‑page e-mail that I received
from a Joel Payne from Massachusetts. And I told you I got lots of
e-mails about this merger, and most of them are, like, two paragraphs,
garden variety, deny the merger, they\'re too big, danger to democracy.
Mr. Payne goes into a bit more detail, but his main concern is instant
messaging, and you must love the service, and I commend you. If you
invented it, it sounds marvelous, and I\'m going to check it out.

But his concern ‑‑ well, first of all, he wants, wants us to deny the
merger, but he said, if you do allow it, make sure instant messaging is
interoperable and that everybody can have it. I hear you saying that
you\'re already taking a lot of steps to do that but, aside from Mr.
Payne\'s e-mail, a lot of our commenters have said that for about 18
months, AOL has said a lot but done too little in this area.

And I hear that you\'re committed to doing this, but how strong can your
commitment be? I mean, can you say this is something that absolutely
must be done? And I\'ll tell you what drives his concern. I didn\'t know
much about instant messaging until I got this e-mail and started
thinking about it, but if it\'s as good as it sounds, I can see a lot of
people who are going to say, I\'m not going to get any other system that
can\'t use it, and we may end with the one system that has it, and ‑‑

MR. CASE: Well, I understand the concern. Again, I\'ll just try to
reiterate some of the facts, that we did open it up and make it freely
available, that issue three years ago.

COMMISSIONER TRISTANI: Well, but let me ask you, does that mean that
everybody that\'s on the Internet can have it?

MR. CASE: Yes. Yes. For free. That three years ‑‑ up until three years
ago ‑‑

COMMISSIONER TRISTANI: So I can have it?

MR. CASE: The only way to get instant messaging was to pay us a monthly
fee, because it was part of our service. And we said, well, that\'s a
benefit and, indeed, may attract and keep members. Wouldn\'t it be
better for us to open it up for anybody ‑‑

COMMISSIONER TRISTANI: So how would I go about getting it for my
provider?

MR. CASE: Go to AOL.com and you can download AOL instant messenger for
free, whether you\'re using Mindspring or Earthlink or the Microsoft
Network or any provider. It doesn\'t cost you anything to download. It
doesn\'t cost you anything to use it.

COMMISSIONER TRISTANI: And I can, I can put it in my system?

MR. CASE: Yeah, absolutely. Or you can download it from many other
companies like Lycos and Apple and Novel and Lotus, their own customized
versions using the same technology.

COMMISSIONER TRISTANI: So how come there\'s been so much e-mail like
this?

MR. CASE: Because there\'s a merger pending and there\'s an opportunity,
and people like to focus on issues.

COMMISSIONER TRISTANI: It is as easy and simple as doing that? You know,
I don\'t really know ‑‑

MR. CASE: Well, I welcome you to download it tonight and see it for
yourself. I would also add, I would also add that what\'s happened in
instant messaging is competition. There are some pretty big companies,
including Microsoft, who have entered the market. Microsoft launched
their messenger services less than a year ago. Last week, announced they
18 million users of it. So this is a market that we\'re hardly
monopolizing. There are many, many, companies ‑‑

COMMISSIONER TRISTANI: But let me ask you something. If, let me get
back, because you\'ve gone into another issue. But if I don\'t want to
go through the trouble ‑‑ and you say it\'s real easy, but I\'m not
technology-savvy, and I\'d suspect a lot of Americans my age are not
either ‑‑ if I don\'t want to go through the trouble of having to do
that, what\'s wrong with there being an open system, where I don\'t have
to do that?

MR. CASE: There is nothing wrong with it. That\'s what we\'re working
toward.

COMMISSIONER TRISTANI: Particularly when there are 23 million
subscribers who, you know, who are probably my buddies.

MR. CASE: The issue right now is anybody can use our instant messaging
system for free. Nobody has to pay us anything.

COMMISSIONER TRISTANI: But you\'re not answering my question. Why
couldn\'t there be an ‑‑

MR. CASE: No. I\'m about to answer your question. Anybody can use any of
the messaging systems of any of the dozens of companies, pretty
significant companies, Lotus and Apple and Lycos, and so forth, that
have their own customized versions of this. What we\'re trying to now do
is server-to-server interoperability so you can download some other
system and the servers talk to each other in a way that protects the
privacy and security and prevents spam and pornography and things like
that.

COMMISSIONER TRISTANI: Which is back to ‑‑

MR. CASE: That requires a technical architecture, which we have
submitted to the IETF, which companies are now able to comment on.

COMMISSIONER TRISTANI: When did you submit that?

MR. CASE: About a month ago.

COMMISSIONER TRISTANI: About a month ago? Because I think we got into
another issue. Yeah, you can do it eventually, but the idea is since
this is such a wonderful ‑‑

MR. CASE: Well, to be honest, this is an issue which troubles me,
because I think if today we were sitting here with a huge market share
in instant messaging and the only way to get instant messaging was to
pay AOL a monthly fee, and people said, you know, maybe, because instant
messaging is becoming more important, maybe this company should actually
make it available to other companies on some kind of license basis, I
think nobody would have hypothesized that an appropriate, fair thing to
do would be require us to give it away free to consumers and license it
on a royalty‑free basis to companies. I think that would be viewed as
overreaching, just as I think that would be viewed as overreaching if
the government thought that, you know, the way to deal with the
Microsoft issue was to basically put the Windows on the Web \-- anybody
could download it for free and any company could modify it and use it
for free.

But we did both of those things voluntarily, and now we\'re going an
extra step and trying to work with the Internet standards body, IETF, to
promote server-to-server interoperability that will allow anybody to
talk to anybody using any system in a way that protects privacy and
avoids spam and a lot of other problems that could emerge. I think we
should be applauded for what we\'ve done.

CHAIRMAN KENNARD: We\'ll have some more discussion on instant messages.
Commissioner Powell, you\'ll have to have the last comment, because we
‑‑

COMMISSIONER POWELL: I just want to, again, try to make sure we sharpen
these concerns. I applaud and am more impressed by the second half of
your answer, but I want to say something about the first. It is classic
information industry network effect to give product away in order to
build and install base to substantial levels, and only then, when you
have substantial customer bases, to then potentially try to develop new
and more value‑added services from which the revenue comes.

I\'m sure I wouldn\'t ask you nor would you want to commit that any and
all services that would be generally categorized as instant messaging
will stay free forever. For example ‑‑

MR. CASE: I think it\'s highly likely they will stay free forever. It
hasn\'t in industry, but we have no plans to change that. We believe
instant messaging is a feature, not a business, and we want to make that
feature broadly available.

COMMISSIONER POWELL: Well, it would be one thing if it\'s, if you\'re
going to make some representation it will stay free forever, but we
expect, and I think that we would applaud, that there\'ll be development
of innovations using that technology, for example, net-to-phone
functionality for voice services will then offer, I think as it is on
AOL, for a cent a minute or two cents a minute, there are service
relationships and fees associated with those services. And I think those
are good things, but those are not free things, and a free thing can be
a leverage to things that ultimately produce revenue.

And I just want to emphasize that that\'s part of the concern, and I
don\'t, again, I don\'t think that it means it\'s wrong, but it, but it
means that I think it\'s important in the responses to be focused on to
what degree ‑‑

MR. CASE: Well, if I could just quickly respond. I understand the
network dynamic, and I would just add that, as I said before, Microsoft
launched a messaging service 10 months ago and now has 18 million users,
so it hardly suggests that somehow the network effects in this
particular feature are such that it\'s somehow impeding competition. I
think competition is robust. I think Microsoft is going to integrate,
unless the government doesn\'t allow them to, that messaging service in
the operating system and will have far more than 18 million customers a
year from now. So it\'s a vibrant, competitive market.

CHAIRMAN KENNARD: Thank you very much for your testimony, and we\'ll
invite the next panel to come up, which is Esther Dyson and Barry
Nalebuff. Thank you. While people are coming up for this next panel,
I\'d like to ask everyone here to please turn their cell phones off.
This is the FCC. We love cell phones but not in our open meetings, so
please turn them off. We\'re very pleased to have our next two
panelists, Esther Dyson and Barry Nalebuff, and I\'ll remind you to
please confine your presentation to five minutes so we can have some
time for a free interchange with you. Esther?

MS. DYSON: Thank you very much, Chairman and Commissioners. I\'m glad to
be here. I\'m neither an economist nor a lawyer, so I am generally going
to try and set some perspective from the viewpoint of a longtime
industry observer, a venture capitalist and someone who\'s intimately
involved with some of the policy issues for the Internet\'s
infrastructure.

I\'d like to start out by saying that I think these hearings are
tremendously important and useful. The Federal Communications Commission
may have some very specific things it can and cannot do, but the role of
government is not simply to either interfere or let things move forward
without interfering. It is to educate the citizenry broadly, to educate
the press, the consumers. I think what we want here is neither federal
regulation nor is it self‑regulation. It is regulation by the
marketplace.

And in order for that to happen, the marketplace has to be informed.
Consumers may have a lot of choice, but if they don\'t know what those
choices are, if they aren\'t aware of them, they won\'t be able to
exercise them. So I want to say from the start, even though I do believe
this merger should go forward, I think these hearings are an important
part of the process of what the government should be doing. And with
that, I\'d like to talk in my remaining three minutes about the
marketplace and a little bit about the government\'s role.

This market is changing incredibly rapidly, and I don\'t think the
Federal Communications Commission or Time Warner or AOL or I or anybody
here could really figure out what is going to happen, but it\'s clear to
me that the way people are looking at this market now seems to be
missing a number of very interesting phenomena. Nobody here today has
mentioned Napster or Gnutella.

This whole ‑‑ we\'re talking about the content business as if the
business of eating were entirely Lutess and perhaps McDonald\'s. But
there\'s a huge amount of home cooking going on. And AOL built its
business by providing its users access to each other more than it did by
providing content. It is now heavily reliant on commerce. Content is
almost ‑‑ it\'s like the beer you serve in a bar, but what you\'re
really selling is the ambience ‑‑ the bartender, the other people in the
bar. And to look only at content is to miss the point.

We\'re looking today also at access. We\'re, again there\'s going to be
huge amounts of competition from various other players. This has been
gone into at length. But another part to mention is the whole billing
relationship with the customer. That\'s, that\'s what AOL has now, to
some extent. It sells access to these consumers for purposes of
e‑commerce. And in that way, it\'s going to be competing with banks,
with utilities, with Amazon.com.

The real key is to have that customer relationship, and here I would
like to disagree or at least point out something that I think was
missed. Through AOL you can indeed get to all these other Internet
sites, and they would be incredibly stupid to try and block access. But
they do provide links. They have favored marketing partners, for which
they are paid. And that\'s part of what the issue is here today.

How much choice does the consumer have and know about? How easy is it?
At what point does making things incredibly convenient for the consumer
limit the consumer\'s choice because he doesn\'t know about what else is
out there? And that\'s why I think consumer education is tremendously
important. In that context, then, the role of the government, I think,
should be to let this go forward but to raise concerns ‑‑ to say this is
what we\'re going to be watching for.

Some people will say, well, that\'s unpredictable and arbitrary and the
government should stick to its knitting and simply implement the laws,
but this is a fast‑changing market. There are concerns. There are
concerns about things like instant messaging and, yes, AOL is starting
to do the right thing, but I would hardly say it\'s voluntary. I would
say it\'s in response to consumer and political pressure. And God bless
it. I like to see that happen. And I see hearings like this as part of
that whole process.

Finally, there is indeed all the issues of open access, and Barry\'s
going to talk about this, but let me just end by saying open access is
not just a matter of principle, it\'s a matter of pricing. And so,
watching those contracts and the terms of those contracts is indeed an
important function. Thank you very much.

CHAIRMAN KENNARD: Thank you very much. Dr. Nalebuff.

MR. NALEBUFF: Chairman, Commissioners, many people here, myself
included, are trying to understand the future of the Internet, its
impact on our lives and the economy and how this proposed merger will
change the course of history. Yes, actually I think the stakes are that
big. And at the same time, I think that predicting the future of the
digital economy is actually hopeless. In fact, given the flux of the
environment today, I would be more than content to predict where we are
today.

So that leaves us in a predicament. The stakes are high and our
knowledge is low. In this type of an environment, how do we best set
policy? My answer here is simple. Keep a level playing field so that the
best man, woman, technology company may win. This one single rule should
be what guides any policy prescription.

Now, of course that\'s easier said than done. What is the field? Is it
home? Work? Mobile? What is level? Do we want to emphasize levelness
within a technology, and thereby promote intersystem competition? Or
emphasize levelness across technologies, and thereby promote intersystem
competition? We certainly don\'t want to create equality by bringing
everyone to the lowest level. And the current environment is decidedly
unlevel.

While phone and cable technologies are converging, the regulatory
environments have not. There are open access requirements on DSL that do
not exist for cable. Do we relax requirements on DSL? Create
requirements for cable? Try to find some middle ground? Or simply rely
on competition to sort things out?

I think that creating a level playing field for open access will be your
most challenging problem, and that is where I will focus my remarks. I
believe that it is in the self‑interest of Time Warner AOL to provide
access to their system and that this is in line with their public
statements. The question is at what price and with what terms?

The bundling of a cable modem pipe and an ISP is not all that different
than bundling an operating system and a network browser. The ability to
sell a package of complementary goods and services as a bundle offers
the bundler a tremendous advantage in the marketplace. By
\"complementary,\" I mean goods that enhance each other\'s values, as in
hardware and software, hamburgers and french fries or, in this case,
broadband cable pipes, ISPs and content.

What\'s interesting here is that the advantage of the bundler comes from
being able to offer a lower ‑‑ not higher, but lower price. And this is
now where you see my role as a theorist come into play. When two
separate firms get together to coordinate their pricing of complementary
products, such as A and B, the monopoly price is lower than the result
with uncoordinated pricing. The intuition is that when the price of A
falls, that helps expand the market and part of those gains go to B.
Unless the sellers of A and B work together, they won\'t fully recognize
those gains, and thus the price will be too high.

This is in direct contrast to when firms coordinate the price of
substitutes or competing products, and thereby raise the price. When
firms coordinate the price of complements, the price goes down. Thus, at
first glance both the firms and the consumers are better off. The only
reason that you may be wish to be concerned is that those who don\'t or
who can\'t bundle are left at a big disadvantage and over time that may
change the nature of competition.

Bundling is neither win‑win nor win‑lose. It\'s win‑win‑lose. A win for
the bundler, a win for consumers today, and a lose for those who are
excluded from the bundle. This brings us back to the issue of a level
playing field. Do you want to help keep the level field ‑‑ the playing
field level for players who are left out of the bundle? What does the
FCC want to do for players who, like AOL just a few months ago, are
worried they\'ll have no one to dance with?

If all consumers could choose between competing bundles for broadband,
this wouldn\'t be a concern. In many places, competition does exist,
from DSL bundles, from RCN second cable line, from wireless, cable and
satellites. I expect that third generation mobile wireless technology
will really solve this issue, but we are not there yet. Therefore, the
question is whether or not to level the playing field by giving other
ISP and content providers access to the Time Warner AOL bundle.

I don\'t wish to regulate how the elements of a bundle should be prices
when broken up into its components. The resulting arguments over setting
those prices would be a lose‑lose game. But we do have the advantage of
AOL selling dial‑up service and content as an add‑on to those with
Internet access.

That leads me to ask whether the price they set for those two services,
whatever they choose, might be a useful proxy for how much to discount
the cable bundle when offering their cable pipeline services to other
players. In particular, I think the discount should be at least the
bring‑your‑own‑access price, currently \$9.95, plus some fraction of the
extra price for dial‑up service, currently \$12.00 ‑‑ to get to the
\$21.95 price ‑‑ reflecting the basic ISP services.

My final point is that there\'s another subtle example where the playing
field today seems tilted. And it\'s a problem I think you should be
concerned about, and it\'s something, actually, we heard again and again
in Mr. Levin\'s testimony. This proposed merger is what has caught your
eye, but practically every single issue that you will talk about today
could also arise as a result of contracts, typically exclusive
contracts. And you\'ve heard about the problems that have been created
by the Road Runner contracts and the \@Home contracts, many of which are
trying to be undone today. I believe that the FCC and other government
agencies should be paying as close attention to these contracts as they
do to merger agreements. Thank you.

CHAIRMAN KENNARD: Thank you. Thank you both for that testimony. It was
wonderful testimony. Let me follow up with a couple of questions, first
for Dr. Nalebuff. Is there a role in this future of telecommunications
as you see it for anyone who doesn\'t or can\'t bundle? Will we lose the
unbundlers, if you will? Or the unbundled companies.

MR. NALEBUFF: If, in the end, there is enough competition in different
types of platforms, the advantages of opening up those platforms to, if
you\'d like, single providers, I think will allow them to exist. On the
other hand, whether or not venture capitalists and the market will fund
those companies in a world where they\'re not sure to get access is a
question. The fact that they do have access now on dial‑up or in the
case of DSL certainly is helpful.

I\'m less worried, I guess, in a world in which you could have bundle
against bundle competition. But I think it is inevitable that people who
are ‑‑ who don\'t have a bundle to offer will be at a disadvantage in
the marketplace.

CHAIRMAN KENNARD: Okay. And let me ‑‑ I don\'t mean to characterize your
testimony. I\'m really just trying to understand here. Are you saying
that in order to create that environment where someone who is not able
to bundle its access to the platform, if you will, are you suggesting
that requires some government intervention to make that happen?

MR. NALEBUFF: I believe that they will certainly have access. The
question is at what terms and what price. And moreover, I believe that
if you required everything to be unbundled, actually prices would be
higher, and adoption would be slowed down and consumers would be worse
off. And so there is this tradeoff, if you\'d like, between success
today, penetration today and serving consumers today, and the ability of
people to play going forward. I don\'t have more of an answer, I guess,
than that.

CHAIRMAN KENNARD: Okay. Fair enough. Other questions?

COMMISSIONER POWELL: Yes. Ms. Dyson, I was really quite intrigued by
your, your observation that by the nature of this medium and this
phenomenon itself, there\'s a certain really high value to being able to
go where you want, when you want in the way that you want, and that
there is an economic incentive to do that, and I think it\'s an
important point. And you pointed out that the more critical issue is
favored status potentially, or links, or what consumers may not know
about something.

I, too, used to be sort of more persuaded by that argument, but I wanted
to probe with you something that at least modified my thinking about it.
I\'m struck by the fact, in Internet space, that one\'s brand is, in
fact, directions to their house. That is, if I\'m Commissioner Mike.com,
that\'s not only who I am, that\'s where I live. And in advertising or
raising the prominence of my brand, I\'m also raising the prominence of
how to find me.

And we could all go outside and sit on Independent Avenue and watch
Metro buses go by with extraordinary amounts of dot com advertising.
Television revenues and ads last year increased dramatically by virtue
of the increased advertising by dot com companies. We tend to forget, I
think, that reaching consumers about the possibility of sites or Web
sites and access is not limited to whatever portal or medium accesses on
the instrument itself.

And I have a hard time seeing the day when I see an ad for
Gaps.Jeans.com that I want to go to and AOL won\'t let me get there and
forces me to go to Levis. We\'re going to have a very nasty conversation
very quickly. And could you sort of comment on that phenomenon and
whether that mitigates that concern to some degree.

MS. DYSON: Well, I\'m not sure whether I agree with you or disagree with
you. I, the point I was trying to make is, though, even though you can
type in GapJeans.com, and people will, and you can also go to a search
engine, you are, when you get to, for example, the AOL site, there\'s
going to be a link that says come to such and such a place. There are
going to be ads, and you can follow those links. That happens a lot as
opposed to people typing stuff in.

And at the same time, there is a new generation, which unfortunately is
not testifying, at least not so far as I know, which is 22‑year‑olds,
who are much more comfortable with the medium, are used to using search
engines and floating around and so forth, but there is, there is a
challenge to have you get onto that piece of prime real estate, which is
whatever the consumer sees when he first logs on, whether it\'s the AOL
home page or ‑‑ a depressingly small number of people pick their own
home page, which is not that of their primary provider.

So the issue is making sure that at least those contracts are disclosed.
If I get linked to someplace, I should know that somebody paid something
to have me go there. That it wasn\'t that somebody thought it was simply
the best place to buy jeans, but that they get 29 cents for every, every
time I buy a jeans there.

It\'s becoming, for better or worse, a very mercenary world. That\'s
probably better than a world where people control things for political
reasons, but it is very, very commercially driven.

COMMISSIONER POWELL: I guess the point I was making is I\'m concerned
about the overstatement of the sophistication required for a user to get
to something other than the favored link that the provider, by virtue of
the bombardment and, by the way, often rich experiences of television
advertisement, which people will say is the singly greatest mass
marketization tool, advertising, newspapers, magazines, I mean
everything is dot com. My five‑year‑old thinks everything is dot com.

And I know that there\'s this youth component, but I\'m not so sure that
‑‑ I guess I\'m questioning that one\'s knowledge about what\'s
available is really as sophisticated a function when there is this mass
marketization of dot com addresses anyway.

MS. DYSON: Again, I think there is this incredibly large commercial
component, but people are also very much driven by their friends, and
they ‑‑ the whole Napster, Gnutella phenomenon. They go where it\'s not
commercial. And they understand that difference in a way that maybe the
adults don\'t. They know what\'s commercial and what\'s not and, of
course, they understand people are going to be trying to advertise to
them. They, they\'re much more cynical than we are.

But those things exist. And that was all I was trying to say. I have a
fair amount of faith in the consumer, but I also believe in the role of
the press and government and everybody else in educating them about
what\'s going on.

CHAIRMAN KENNARD: Mr. Furchtgott‑Roth?

COMMISSIONER FURCHTGOTT‑ROTH: I would particularly like to welcome our
witnesses, and particularly Professor Nalebuff. He and I were
undergraduates together and sat through Professor Houseman\'s public
finance course together. I think I had the seat right behind him, and if
I\'d been more clever I would have perhaps copied from Professor
Nalebuff\'s notes, because he was the star of the class. And I think I
may be one of the few people in the audience today who actually
understood everything professor Nalebuff had to say.

I particularly want to ask you, Professor Nalebuff, about the following
situation, and this gets to a level playing field. Most of the issues
that have been raised today potentially come under the rubric of
potential anticompetitive behavior. The merger, at large, as opposed to
license transfers ‑‑ the merger, at large, is being reviewed by the
Federal Trade Commission. If the circumstances had been slightly
altered, if perhaps the market valuation of the companies at the time of
the acquisition had been slightly different, it might well have been the
case that Time Warner had acquired AOL, in which case this hearing would
not take place, because this agency would have no license transfers to
review, there would have been no application for license transfers to
come to the FCC.

There are two situations. You might even describe them, as an economist,
as two games that might be followed. One, in which ‑‑ and two entities
come before one antitrust authority. And I wonder if you could comment
first on whether any and all the issues that have been raised today will
in fact be reviewed by the Federal Trade Commission in their antitrust
review. And second, whether the outcome of a single ‑‑ the review by a
single antitrust agency is likely to be different from a review by
multiple antitrust agencies.

MR. NALEBUFF: I have to say that you have obviously picked up on the ‑‑
quite rightly that many of the issues here are as much competition
policy and antitrust as they are communication policy. I am also in
Esther\'s camp in the sense of getting companies to talk about what
their policies will be, establishing track records, getting this out in
the open, I think will actually solve many of the concerns that people
are, people have.

Take one specific case. I think it is possible for cable operators to
control and limit possibly access through their pipes. That if they
decided that they didn\'t want Napster, no matter who your ISP is, it\'s
possible they could block that. I think, in the end, they\'re not going
to do it. I think that there will be a public discussion about this
point and, as a result, if people thought that this was one of the
things that they would go ahead and do, the clamor against that would
actually prevent it from happening.

So my view is that, like Esther\'s, that the process of getting people
to talk about their plans for the future and the kind of commitments
that they intend to make, the type contracts, is actually a good
substitute in this case for regulation. And if they do that once or if
they do that twice, I don\'t think it hurts. And that\'s my take.

CHAIRMAN KENNARD: Sounds like a good endorsement for this hearing. Any
other questions from the bench? Commissioner Tristani.

COMMISSIONER TRISTANI: I wanted to follow up, professor, on your comment
about contracts, which you made in your statement and you\'ve just made
now when you said the FCC and other government agencies should pay more
close attention to these contracts. Can you enlighten me as to what
paying close attention might mean?

MR. NALEBUFF: Well, we see today how much effort Time Warner is going
through to get out of the contracts that it was so happy to enter into
two years ago. We see the problems that are possibly caused by the
\@Home contracts. So to the extent that you are all concerned with
issues of open access, to the extent that this is in the companies\' own
interests, you know, how do we get ourselves to this position today?

And the answer is that these companies signed contracts which do not
look to be in either the public interest or their own interest, where we
sit today. And yet, part of the problem was there was no discussion
about those at the time. They sort of went under the radar. And I
suspect that having the same type of public attention, press attention
to the contracts that would literally keep other players out of the
market and shape the game ‑‑ well, let me go back one step ‑‑ as a game
theorist, I think the way you win, the way you succeed is not
necessarily just by playing the game well, but by changing the game.

And ways you can change the game include changing the players, as we see
through this merger, and sometimes by changing the rules. And that\'s a
way of doing it ‑‑ contracts are a way to do that. And so when we see
cases where the game is being fundamentally changed, either through the
playing field, the rules, the players is a time when we should be
thinking about the consequences of that.

CHAIRMAN KENNARD: Commissioner Powell?

COMMISSIONER POWELL: I had a pretty broad‑reaching question about ‑‑
people seem to accept quite simply that vertical integration or bundling
is, A, necessarily going to prove advantageous as a producer or provider
and, B, will automatically be accepted by consumers, when there are some
fairly nontrivial examples, historically, of incredibly failed attempts
to do that. Particularly, oddly enough, in information industries.

Many people widely believe that Apple Computer Corporation\'s refusal to
license other producers of its systems limited its network in a way that
put it under water for a very long time. Similar, vertical integrations
by IBM in hardware and/or software. The lists go on. Ford Motor Company
doesn\'t produce steel anymore, as opposed to doing this. And there are
some interesting examples of even bundled services being rejected by
consumers. Some things as simple as they don\'t want a \$350
communications bill, but they seem to be more comfortable when they\'re
on six different ones.

Could you opine a little bit about how safe an assumption it is that
these vertical integrated companies and/or this bundled services will
actually prove superior or is detrimental as suggested.

MR. NALEBUFF: I think you\'re spot on there, and companies have gotten
better and more sophisticated in their use of bundling. If you\'d like,
you don\'t just have a happy meal choice. You can also buy a hamburger
or fries or a drink too, but you\'re given incentives to do all three. I
think the notion that you would bundle and not give people any incentive
to buy the individual components would be foolish both from a business
perspective, as well as from a policy perspective.

And so now the question is how much of an incentive will you have to buy
what bundle? What are the combination of bundles that will be available?
And who will be invited to play in those games? And so, yes, you can try
to carry it too far, but I think we\'ve seen, especially in the software
industry, just the dramatic success of software bundles. And here, I
actually don\'t mean Explorer and Windows. I really mean Office.

MS. DYSON: I\'d just like to add that another phenomenon that\'s going
on is outsourcing, and AOL itself got rid of its own ISP operations and
found it more effective to operate that way. I think you\'re going to
see a lot of banks and other people offering ISP services not because
they themselves own anything but because they\'re reselling them. And
again, they have that consumer operation.

So what looks like bundling from the point of view of the consumer may
well be an assembly of different services from different providers. And
that often is more effective, because nobody\'s very good at doing
everything. And it\'s controlling that access, again, that is the issue.

CHAIRMAN KENNARD: Commissioner Ness?

COMMISSIONER NESS: You mentioned earlier that what we need to see is
more disclosure of the provisions of the contract, and if consumers know
what would be in these contracts, then they would be able, presumably,
to make better choices as to where they want to go and what they want to
see, and public pressure on the companies to provide more opportunities.
How do we achieve such disclosure? Is this something that will happen
within the marketplace itself? Either one of you.

MS. DYSON: Ideally, you do it by getting the press to write about it, by
holding hearings such as these, by getting consumers to ask, by creating
competitive pressure. If that doesn\'t work, you probably, as the FCC,
call up your friends at the FTC. There are ‑‑ and it\'s not simply what
contracts some provider may have with another provider. It is what ‑‑
how much is being paid for this link.

And you know, there\'s a question. How much do consumers want to know?
How much do they take for granted? But I would like to see simply a
broad education system where people understand this stuff. And if they
don\'t, then maybe it\'s the government\'s job to educate rather than to
regulate. But I hope the press pays more attention to this stuff, makes
consumers more economically literate.

CHAIRMAN KENNARD: Any other questions from the bench? Hearing none,
we\'ll move to the next panel. Thank you both very much. We really
appreciate your taking the time to do this. And I wanted to publicly
acknowledge and thank Esther Dyson\'s work with ICANN. That is a
tremendous public service, not only for the country, for the world, and
we\'re very appreciative of your work.

(There was a brief recess.)

CHAIRMAN KENNARD: Okay, we\'re prepared to begin our next panel. We have
a very distinguished set of panelists here. I also want to note that
there are representatives from AOL and Time Warner at the table here.
They will not be making opening statements, but they will be available
to respond to arguments and critiques from the other panelists.

It\'s my view that we have a more robust discussion if we can get a
little bit of a debate going. It usually fleshes out the issues a little
bit more and it makes for more interesting dialogue. So that\'s why Mr.
Parsons and Mr. Schuler are sitting at the table. And with that, I\'d
like to begin with our first panelist, Professor Orton from the
University of Wisconsin. And I\'ll ask that you give your name and
affiliation for the record when you begin your statement. Professor.

MR. ORTON: I\'m Dr. Barry Orton, professor of telecommunications at the
University of Wisconsin, Madison, and I\'m a consultant to local
governments who are franchising authorities in cable television. I\'m an
original founder of the National Association of Telecommunications
Officers and Advisors and president of its Wisconsin chapter. I advised
the city of Milwaukee and 28 Milwaukee area suburbs on the Time Warner
AOL merger and, in fact, one of those suburbs was Brown Deere,
Wisconsin, the hometown of Deborah Latham\'s family. So I\'ve been
representing local municipalities for about 20 years on cable matters.

After reviewing the technical, legal and financial qualifications of AOL
Time Warner and receiving assurances that existing franchise obligations
would remain intact, my Milwaukee area franchising authorities all
approved the transfer of control last month on my recommendation. They
did not consider open access platform issues as part of their transfer
process, and they are convinced that this is a national issue rather
than an local issue.

However, they are concerned about the local impacts of broadband
convergence as reflected in this merger. Historically, they have had
good experiences with Time Warner and its predecessors, going back to
original Warner Amex back in the early \'80s that got the original
franchise in the Milwaukee area. From most communities\' perspective,
Warner has been a relatively good cable operator and a responsible
corporate citizen. They have been, as you heard, at the forefront of
experimentation with two‑way cable and in development of quality
programming.

They were one of the original social contract cable operators, as you
know, and they\'ve been long supportive of public educational and
governmental access on the local level. The willingness of the Milwaukee
area municipalities I represent to approve this merger largely stems
from the fact that the Time Warner entities holding their franchises
remain in place, and Time Warner has agreed to continue to abide by the
provisions of those franchises. There is a level of trust that\'s been
built up from long‑term service and from relationships with Time
Warner\'s people. When problems have occurred, there has been good faith
efforts to find solutions and make corrections.

America Online has a far different history and does not enjoy the same
level of trust on the part of local governments. Their repeated failure
to provide adequate service capacity to meet the demand their marketing
generates has a track record that makes local officials very nervous,
quite frankly. AOL ‑‑ to most professional users and long‑term users of
the Internet, AOL has been looked at as the sandbox where people learn
to use the Internet and perhaps graduate to more sophisticated services.

My colleagues in education, particularly in distance education, have
told me from various parts of the country that they have had problems
with students who tried to take distance education courses who were on
AOL, because they don\'t have all the full features that others do, for
example, the ability to take full attachments from anywhere. And that\'s
been a real detriment to some individuals trying to take distance
education while on AOL.

In some periods between 1996 and 1998, AOL\'s performance quality and
level of customer service rivaled the worst cable operators before cable
re‑regulation in the \'92 Act. If AOL hadn\'t been in the virtual
marketplace but in the real marketplace and they sold hundreds of
thousands of tickets to Bruce Springsteen concerts with only 50,000
seats available for the public, they probably would have been indicted.

The three successive assurances of voluntary compliance with multiple
state attorney generals, where they were explicitly forced to correct
every part of their operation from the size of their modem pool to their
refund policy to their telephone support system, their marketing
materials and service capacity really bear looking at very carefully. In
1996, 20 states required AOL to refund customers who tried and failed to
cancel their service and AOL abruptly switched to a 1995 flat monthly
rate.

In 1997, 36 attorneys general required them to stop advertising until
they could provide sufficient modem access. In 1998, a 44‑state attorney
generals voluntary compliance act forced AOL to clarify its free trial
offers, disclose its minimum ‑‑ its premium surcharges, its cancellation
procedures and reform its other business practices. As Ohio Attorney
General Betty Montgomery said in 1998, \"The problem we\'re experiencing
with AOL is similar to a parking attendant that sells too many monthly
passes. When drivers show up at the garage, it\'s already full of
cars.\"

You should look at these voluntary compliance assurances and their
subsequent reports to the attorney generals that they were actually
meeting the terms of those and, in case you have problems getting them,
which we did, I\'ve finally gotten them and I\'ve passed them on to the
cable bureau staff. So I would recommend your looking at that.

Finally, I recommend that you consider your regulations established
under Section 76 through .309 that allow local governments to enforce
minimum standards for telephone availability, installation and service
calls and outages for cable television, and expand those to include
high‑speed cable modem service so that local governments could have the
tools to answer the inevitable complaints they will get when providers
of all sorts on cable modem service, whether it\'s \@Home, Road Runner
or others have outages, have service call problems, have telephone
problems.

Give local governments the tools they need to enforce those kinds of
customer service standards, and I think some of ‑‑ at least the
customers that do have problems will have someplace to go. Thank you.

CHAIRMAN KENNARD: Thank you, professor. Mr. Cooper?

MR. COOPER: Thank you, Mr. Chairman. My name is Dr. Mark Cooper. I\'m
director of research at the Consumer Federation of America. The Consumer
Federation and its member groups have testified on this issue from
Cambridge to Los Angeles to Broward County, Florida.

We believe that the principle of nondiscriminatory access is not
technology‑specific. It has governed the communication and commerce
highways of this nation since its founding, from roads to canals to
railroads to highways to telecommunications network, open access,
nondiscrimination is a standard that stands above technology and
accommodates changes in technologies.

Open access is above economic interests. Economic interests must be
subservient to the principle of nondiscrimination. We firmly believe
that if we had not taken up that fight at the local level, there would
be no national policy debate, there would be no concessions. It is the
cities across this country who voted for open access and went and got
sued by AT&T that have created this debate and turned all of the major
newspapers in this country around on the issue.

For while consumers have enjoyed the benefit of hundreds of competitors
on the narrowband Internet, things are moving in a very different
direction on the broadband internet, which of course the Department of
Justice has defined as a separate market. We have a dramatic increase in
the concentration from recent mergers. We have the refusal of vertically
integrated facilities owners to provide open access. We have the failure
of proprietary platform owners to inter‑operate for communications.

The chokepoints on the broadband Internet are clear, backbone, bit rates
and bootstream. The sticky features that lock consumers into the
Internet platforms have been identified, instant messaging, keywords,
e-mail addresses and electronic programming information. A handful of
dominant firms are leveraging those chokepoints to extract economic
rents and foreclose choices to consumers.

The cable industry has succeeded for several years now to prevent
competition by banning streaming video. Millions of consumers have been
denied a choice of ISPs on their cable modem systems. The dispute over
AOL\'s instant messaging practices has simmered for a year with no end
in sight. AOL\'s would‑be cable subsidiary has given the public and
policy makers a brutal lesson in what it looks like to negotiate with
someone who can pull the plug.

If wire owners can give their own programming an edge, we will not have
fair competition for eyeballs. What is quite clear is that as the
commercial value of the Internet increases, these companies are more
than willing to destroy its openness in pursuit of their proprietary
economic interests. These powerful interests will frustrate commercial
negotiations for nondiscrimination.

Two years after we first asked for open access, the exclusionary
contracts are still in place. Virtually no deal ‑‑ details of
nondiscrimination have been provided. And there is no way for any
individual ISP to assert a right to that nondiscrimination if they are
frustrated. The frailty of the voluntary access promises was
demonstrated in Los Angeles when AOL was asked to simply put its MOU at
the back of the franchising agreement. And it objected vigorously.

How can it be that it is in the economic interests to provide open
access but when you ask, would it hurt them if they were required to do
so, it suddenly becomes a disaster? The two cannot both be true, unless
they want commercial leverage in negotiation, which is exactly what
they\'re exercising. We do not have to tolerate the refusal to
interconnect and to provide open access.

The U.S. Appeals Court in the Ninth circuit clearly concluded that the
\"provision of conduit services of underlying telecommunication services
are, in fact, subject to a common carriage obligation,\" that
200‑year‑old principle I mentioned at the beginning of my remarks. Open
access is the law of the land. Open protocols and fair competition for
eyeballs must be the policy of this Commission.

We have outlined four specific steps that this Commission should take
before they allow this merger to go forward. And one of them might well
be until they deliver those promises, don\'t approve this merger. Wait
till the end of the year or the middle of next year until you see what
open access looks like before you let the merger go forward. And that
may be a fifth one.

First, in order to maximize rivalry between companies, you should
prevent them from owning any interest in each other\'s operations.
There\'s a handful of them left competing for consumers in this
industry. Second of all, although cross‑technology has never disciplined
market forces in this industry, we must maximize that policy by not
allowing any entity to own more than one platform technology.

Third, to prevent the leveraging of market power in conduit in
facilities into the content market, we must have open access. And
fourth, proprietary \--

CHAIRMAN KENNARD: Thank you, Dr. Cooper. Mr. Mirabal.

MR. MIRABAL: Thank you. My name is Manuel Mirabal. I\'m chair of the
board of directors of the Hispanic Association on Corporate
Responsibility, better known as HACR. HACR is a coalition of 10 of the
largest Hispanic national organizations working on public policy in the
U.S. We represent the interests of 36 million Hispanic Americans.

HACR has a vital interest in the proposed merger. We believe it is
essential that the potential economic and social benefits of the
Internet and telecommunications revolution must be available to all
segments of the population. We further believe that the proposed
regulatory process, which we\'re seeing today, is necessary. These
hearings afford citizens the right to be heard, and through this
process, we must ensure that the interest of the public is protected.

HACR has serious concerns about the claims AOL and Time Warner have
made. I have concerns that the merger will not foster a more competitive
environment, offer more choices nor create social benefits. We believe
that the merger will create a dominant entity, which has the potential
to limit competition, restrict content and monopolize services in an
industry that continues to evolve rapidly and that will penetrate more
and more into our everyday lives.

The combined record of both applicants in responding to the needs of the
Hispanic community consists of minimal efforts to address programming,
cable service and Internet access. Furthermore, neither company has
responded to our request for information concerning the impact of the
merger on the Hispanic community. Consequently, we are deeply concerned
that this merger will make matters worse than they are now for the
Hispanic community, because of the limited ability of this community to
afford costly Internet services, the existing disparity in access to
Internet and telecommunications services and the limited geographical
cable service areas, which exclude large segments of our community.

We, therefore, are urging the Commission to deny the application for
transfer of control by AOL and Time Warner. Combined, the new company
would become a cable Internet media conglomerate, dominating three
important and distinct elements of this industry ‑‑ cable and television
content, Internet content, and cable assets. The potency of this
vertical integration in one company, we believe, could serve to dampen
competition and harm all consumers.

Diminished competition would disproportionately affect the Hispanic
community due to socioeconomic reasons. AOL brings with it 23 million
narrowband customers. Time Warner brings a dominant position in the
delivery of entertainment news and educational programming in geographic
markets it serves. With this impressive collection of assets and
dominance in the related markets, the combined AOL Time Warner will be
able to behave in ways that could limit consumer choice and harm
competition.

This merger, which brings these elements together under the control of
one company may prove a threat to the competition in conduits and
content if left unchecked. AOL Time Warner will have complete control of
content and distribution in markets served by Time Warner Cable and may
engage in controlling content by denying or complicating access to their
cable delivery system.

It\'s not enough that Mr. Levin and Mr. Case have signed a nonbinding
memorandum of understanding pledging to open their cable lines to
multiple Internet services. We have to see that in place. The new
company will also have greater incentives to control or discriminate
with regard to content as we move into the uncharted territories of
Internet interactive television. Cable has a virtual monopoly in the
delivery of this television service, and that doesn\'t appear to change
in the near future.

Absent conditions prohibiting AOL Time Warner from discriminating
against content it does not own or control, it is conceivable that the
new company could dampen competition. Of equal concern to the potential
risk of content discrimination, should the merger be approved without
safeguards to protect the consumer, is the threat to competition in the
market of delivery of broadband and content services.

The potential for consumers to be harmed by the diminished competition
in content and its delivery is far greater if AOL Time Warner is allowed
to engage in preferential dealings with other cable providers. Together,
AOL Time Warner will reach 80 percent of American households, and
together their content ownership will cover the majority of the most
appealing content in cable and on the Internet. If allowed to engage in
business dealings which favor each other, undoubtedly, competition and
consumers, we believe, will be harmed.

The record of AOL and Time Warner in addressing the concerns of the
Hispanic community is poor. Although Time Warner has done more than AOL
to respond to issues, which we have raised in the past, we cannot state
today that they have acted responsibly in addressing our concerns about
programming, diversity and community‑building investment.

We are reminded how little commitment there is to address these issues
when we continue to see movies like Fort Apache regularly shown on their
stations and production companies like Castle Rock produce shows that
use the burning of Hispanic flags as jokes and typecast Hispanics as
gang members from the West Side Story decades ago. Time Warner has done
little to rectify this situation to date. One documentary, Americanos,
does not resolve the problem that we have with their programming.

AOL\'s Steve Case has stated to investors that the proposed merger would
create something new and powerful and would become even more central to
people\'s lives. With a record as bare as AOL\'s in addressing
Hispanic‑American concerns and with no apparent interest in learning
about our needs, this merger is a recipe for disaster for the Hispanic
community.

The two companies have independently operated without regard for the
Hispanic community in areas of their businesses from employees to
customers to businesses at the very top of both organizations. The
Hispanic community has been systematically ignored or denied equitable
service and opportunity. For these reasons and others, which are stated
in our submission to you, we urge you to deny the application. Thank
you.

CHAIRMAN KENNARD: Thank you, Mr. Mirabal. Mr. Love.

MR. LOVE: Thank you. My name is Jamie Love. I work in Washington, D.C.
for a consumer group, a group that was started by Ralph Nader in 1995. I
work a lot on issues relating to Internet, intellectual property rights.
I used to do a lot of work in telecommunications, but I haven\'t done it
for a while, and people like Mark Cooper, Jeff Shester, other people
kind of got mad at me and told me to get involved in this issue, so I\'m
here today.

A lot of people have said a lot of, I think, important things. I\'m not
going to repeat everything. I\'d like to thank the Commission for the
excellent panels. I thought that Esther and professor Nalebuff ‑‑ I\'m
saying it wrong I\'m sure. Barry and Esther, I thought did a very nice
job of setting the stage for the debate.

I appreciate the discussion a lot about the bundling issues and the
contract issues. I thought that was quite important. And I think that
the other witnesses before me on this panel have done a nice job of
reminding us that it\'s not always a good idea to sit around and have a
charming CEO of a company or two come up and ‑‑ these guys are good
salesmen, that\'s what they do.

I mean how else could Micro ‑‑ how else could America Online persuade
people to pay a premium price for a service that force-feeds you ads and
makes it almost impossible to find the real Internet beneath, at the
same time telling people they\'re too dumb to figure out how to do it
the regular way. I mean that\'s what I call salesmanship. So, you know,
we have a tough job here to compete with them.

Now in terms of the architecture, the thing that strikes me about
looking at this issue is not the Internet we know today, which is
nondiscriminatory access where anybody could connect to an Internet
server and anybody can get their product out there and connected to
people at the same time, but it\'s the next generation Internet that
we\'re reaching.

And really, the issue that I think the Commission has been derelict at
looking at and what people have tried to raise to the Commission, in our
case back in the mid‑1990s before we just stopped beating our head
against the wall, is where that\'s going to be in terms of the broadband
platform. Now I\'d like to skip in my testimony to the top of page 3 and
read some excerpts from a document that Cisco prepared that you may have
seen before. It deals with the way they\'re designing services for cable
operators to control data that\'s going to go into broadband networks.

It starts out at the top of the page. It says, \"The ability to
prioritize and control traffic levels is a distinguishing factor and
critical difference between new world networks employing Internet
technologies and \"the Internet.\" So the first thing they do is they
say, the Internet that we know today is going to be the past and what\'s
going to replace it is going to be something that\'s a network that
employs Internet technologies but it\'s not the same as the Internet.
That\'s something to think about.

The next paragraph, they point out the kind of things that technology
they\'re providing for cable operators to track content, and I\'m going
to read it, because I think you should think about this. It says,
\"Traffic type identification allows you to isolate different traffic
types in your IP network. Through Cisco quality of service, you can
identify each traffic type. Web, e-mail, voice, video. Tools such as
type of service bits identification allow you to isolate network traffic
by the type of application, even down to the specific brands, by the
interface used, by the user type and individual user identification or
by the site address.\"

So that\'s really what the cable companies are asking the company to
build for them in terms of the technology to track data. Now skipping
down a bit in the paragraph that begins with, \"Among other things,\"
Cisco points out that quality of service can also propel you forward by
giving you the information you need to offer advanced differentiated
service at a profit. For example, time and usage‑based billing. Now
that\'s something that people on the Internet have always ‑‑ I\'m sure
the Commission\'s heard about these kind of ideas about metered Internet
use, but this is sort of one of the features of the new technique is the
ability to more efficiently do this from the cable operator.

Next paragraph. \"Cable companies can optimize service profits by
marketing express services to premium customers ready to pay for
superior network assets.\" So it\'s really a fast pipe, a slow pipe, a
go‑fast button, things like that. And what people are concerned about is
the highly differentiated level of service and who\'s going to get and
at what terms and at what level of discrimination to access.

And the next paragraph on the next page, the full paragraph, it says ‑‑
this is ‑‑ and I think quite a key paragraph. They\'re talking about
competitors\' service here. And they say, \"If a push information
service that delivers frequent broadcasts to its subscribers is seen as
causing a high amount of undesirable network traffic, you can direct
CAR\" ‑‑ which is, you know, one of the Cisco services ‑‑ \"to limit
subscriber access speed to the service. You could restrict the incoming
push broadcast, as well as the subscriber\'s outgoing access to the push
information site to discourage its use. At the same time, you could
promote and offer your own or a partner\'s services with full‑speed
features to encourage the adoption of your services.\"

Now, what in the history of the cable industry, of all the years of
discrimination makes you think that these companies won\'t want to do
this to benefit their own integrated services? And what, in the history
of litigation and broken promises and things like that and failure to
make real specific commitments make you feel that you can leave the
public in the lurch on an issue like this? My time is up. Thank you very
much for the opportunity to be here.

CHAIRMAN KENNARD: Thank you, Mr. Love. Ms. Cunningham.

MS. CUNNINGHAM: Thank you. I\'m Cathy Cunningham. I\'m here from the
city of Irving, Texas, and I also am here on behalf of the National
Association of Telecommunications Officers and Advisors, which has 432
local government members representing over 20 million cable subscribers.

I would like to deviate or supplement the comments that I filed with ‑‑
first of all, by addressing some of the things that I\'ve heard brought
up in the initial comments of the Commissioners and subsequently. First
of all, in regard to whether ‑‑ why it\'s important that we meet ‑‑ and
I wanted to say I\'m very grateful, as a representative of a local
government to be here and that the FCC is showing this kind of interest
in the role local government plays in response to the consumer advocacy
on behalf of our citizens.

But I think it\'s important to have these kind of hearings as just a
person who lives out almost in, maybe not quite in the middle of nowhere
‑‑ I\'m near Dallas ‑‑ but still, in the middle of America. It\'s, this
is an issue that\'s very interesting to people, and I think that if you
had just passed over this like a standard type of license transfer, it
would be seen as not gaining the public trust. The public wants to hear
these things talked about. I don\'t think it would benefit the public,
the Commission or the companies involved not to have this kind of
hearing.

I think that the public wants a hearing like this, and I think that
it\'s ‑‑ it would really be actually detrimental even to the companies
to not have this. It would just be seen as wrong by the public, by those
people who aren\'t living in this city but who live outside this city. I
think they want this sort of thing and they want to be able to see it
and know that ‑‑ and hear these explanations that are being produced by
the company representatives, by the panel before us, this panel and the
next panel. This is the sort of thing the public wants to hear about.

And I think the answer to all four of those questions that were posed is
really that it\'s important for public trust, as much as public interest
or anything else. And as the professor, whose last name I won\'t even
attempt, said before, two hearings doesn\'t hurt. People, hearing it
more than once sometimes helps some of us what some of the issues are
and to either get a comfort level or know where we\'re not comfortable.

Secondly, a comment I heard several times mentioned was there were
discussion about marketplace. And I know that this Commission struggles
with and is sincerely interested in doing the right thing as far as
marketplace versus governmental regulation or even intrusion into
certain areas. In my city, in the city of Irving, Texas, we have been
blessed or cursed, depending on how you want to look at it, but the
location. We have more than 20 telecommunication companies that have
build‑out facilities in our rights of way.

And in all that 20 new companies, none of them have come to the
residents to offer competition. They\'re going to the big businesses or
they\'re just passing through town. So taxpayers are helping to, in some
ways acquire that property they benefit from, but the individual
resident has not seen the competition, they\'re not seeing additional
choices. And in the area of town I live in, which is considered a
middle-class neighborhood with a lot of Internet users, there\'s not
DSL.

I mean it\'s not ‑‑ it would be very nice, I would like to hear all
these things and say yes, a marketplace exists, but sometimes it
doesn\'t. It doesn\'t in all parts of the country. It doesn\'t in my
neighborhood. And that\'s despite the remarkable facilities built out
that I struggle with at work trying to find room for all of these
companies.

So once ‑‑ right now, our cable company, which is a partnership between
Time Warner and AT&T, hasn\'t yet to rule out the broadband services ‑‑
I think that\'s coming soon ‑‑ but right now, there\'s no high‑speed
broadband access, and when the cable company does roll it out in the
next couple of months they said, they\'ll be the first ones and for a
while they\'ll be the only ones. I suspect that DSL is coming, but it\'s
not there yet.

And so right now, without, without governmental intrusion, the
marketplace isn\'t working, because there is no marketplace for some of
us right now. What I think the cities want ‑‑ I don\'t think the cities
are ‑‑ speaking on behalf of all of them, which is pretty presumptuous
for me to do, but at least on behalf of myself, I don\'t think we\'re
here to give answers, because you\'re struggling with some very
difficult questions, but we\'re here to encourage you in that struggle.
We want to encourage you to help us make sure that our citizens have a
quality, universal, timely service.

We want to work in partnership with the Federal Government, as Professor
Orton mentioned as far as consumer standards or something like that. If
you were to set those types of standards, we would certainly be ‑‑ the
level of government that consumers are going to turn to when they have
problems, they\'re probably not going to dial a long distance number.
They\'re going to dial us, and they\'re going to expect something gets
answered.

Second, this goal goes along with it. I thank you for including us in
this. I hope you will continue to include your local governments as
these sort of things develop, and I would like to mention that our city
‑‑ and in closing, I would just like to mention our city did approve the
transfer agreement. And in our city, Time Warner agreed and actually
provided language concerning an open access provision in the transfer
agreement. I think that if it was okay for us, I don\'t know why it
wouldn\'t be okay across the country.

And if the feeling is that the agreement, as I heard in the testimony,
the first panel, that the agreement is binding, I don\'t see what it
would hurt for this Commission to put a stamp on it or for somebody to
put a stamp on it and help make that so for the American public. Thank
you.

CHAIRMAN KENNARD: Thank you very much, Ms. Cunningham. And thank you
all, all the panelists for your testimony. I want to direct my initial
questions to Mr. Mirabal. Mr. Mirabal, you made some what I consider to
be fairly serious allegations against the merging parties here and, in
particular, you allege that Time Warner has not been providing service
to the Hispanic community.

I believe that that is one of the most serious allegations you can make
before this Commission, and that\'s not a personal whim. I think that
that\'s strongly grounded in Section 1 of the Communications Act, which
charges this Commission with ensuring that we have a truly nationwide
communication service that serves all of our communities, including the
rich diversity of our country.

So I\'d like to find out a little bit more from you what\'s behind these
allegations. You mentioned programming, but I want to, in particular,
find out whether you have concerns about the deployment of services by
Time Warner in the Hispanic communities, if you have allegations in that
regard. You touched on it briefly, but you didn\'t really elaborate.

MR. MIRABAL: Certainly, Mr. Kennard. We do have additional data and
reports that we can give to the Commission concerning those issues, but
let me just say that we, we have been attempting to work with Time
Warner over the last several years ‑‑ about three, to be exact ‑‑ yet
upon their commitment to us to conduct a self‑evaluation on those
issues, which we mentioned ‑‑ they include governance, employment,
diversity issues in the company, the issue of procurement for minority
suppliers, the issue of service of their cable and other facilities to
our community ‑‑ we have yet to receive a report from Time Warner on
those very issues.

They have made repeated requests to us to delay reporting on these
matters to us, although we have raised concerns that go all the way from
south Florida through Atlanta up through New Haven and all of the
Northeast states and many other areas of the country about concerns
about being able to access certain cable services where those services
do not go into certain communities for various reasons. That information
has not been made available to us.

CHAIRMAN KENNARD: When did you request this information?

MR. MIRABAL: This started almost three years ago, sir. And shortly
afterward, Time Warner joined a corporate board of one of our member
organizations and made to commitments to conduct, as I said before, a
self‑evaluation of these issues. And that has yet to be presented to us.
More recently, when the merger was announced by AOL Time Warner, we sent
a letter to the chief executive officers of both companies, and Mr.
Levin was one of them, and requested a meeting, because we wanted to
address our concerns regarding this merger as far as it affected the
Hispanic‑American community.

And we have yet to be able to hold a meeting where we get any details or
any answers as to when those details will follow to us. So we ‑‑

CHAIRMAN KENNARD: Mr. Parsons, would you like to address this issue?

MR. PARSONS: I think I would, Mr. Chairman. I want always to be careful
not to seem to engage in a food fight on these kind of panels but I,
like you, think the allegations that have been made are serious. And
first, I would hope that whatever followup data Mr. Mirabal is going to
share with the Commission he would also share with us. To my knowledge,
which is while not exhaustive, at least extensive on this subject, since
it is an area that reports to me and our corporation, I think we have an
exemplary record in terms of not only serving the Hispanic community but
serving the full breadth of, as you call it, the diversity and the
richness of the communities in which we operate.

To start, with our cable company, we serve all areas of the franchises
in which we are in. We\'re the first, I think, cable company to enter
into a social contract with the FCC where we made commitments within
communities to not only serve all areas within the communities but to
make sure that we drove broadband deployment of our, of our plant into
all areas of the communities. That commitment, which we made in 1994,
was to have, in terms of the 20 million homes passed that the Time
Warner Cable franchises serve, all of those plans upgraded to full 750
megahertz capacity by the end of this year. And as I think the chairman
knows, we\'re on schedule to do that.

We also committed to wire all the schools in those communities and so
that the schools would have access to the broadband capacity beyond the
cable service. And so I would be more than amazed, I would be shocked if
there were, if there was actual data to support the allegation that we
somehow are underserving the Hispanic community within the franchises
where we operate.

Secondly, from a programming perspective, I think that you can look at
Time Warner\'s programming across its many programming platforms, which
includes broadcast with the WB, HBO in terms of premium cable, all of
the Turner services, and they have been more than even‑handed. We have
reached out to the minority communities, including the Hispanic
community because, frankly, they over‑index in terms of television
watching. In fact, HBO will launch in September the first of what will
be called HBO Latino. It will be one of the multiplex services on our
HBO offering, because we understand there is a need in that community
and there is an appetite in that community.

The Americanos, which Mr. Mirabal spoke about, was a movie project and
book project we did in conjunction with James Edward Olmos that was
precisely to celebrate, and give visibility to, the impact and
contribution that the Hispanic community is making to America today. And
that has traveled around the country. I could go on and on.

WEA Latina. We are, as you know, a major record company. About 20
percent of the Latin music that\'s available in this country is from
artists that we\'ve gone out and found and developed and nurtured and
then brought to the public\'s attention. So I would be very interested
to see the documentation that Mr. Mirabal has agreed to share with you.
We have probably ‑‑ in fact we just won an award for having one of the
best minority and women in business development initiatives in corporate
America. So I can\'t say that our track record is entirely spotless or
that we are the exemplar. We sure try. We\'ve sure been recognized.

There\'s lot of tangible data to point to that suggests we\'re making
some progress and, while I listened very carefully to Mr. Mirabal\'s
response to your very direct question, I didn\'t hear any actual
evidence of, or factual allegation that suggests that we aren\'t doing
our job in this area. The fact that he has not had the meeting that he
has asked for with Mr. Levin is something I\'ll have to look into in
terms of whether he\'s met with any of the other people in our company.
But on the record and on the facts, I think we\'re hard to fault.

CHAIRMAN KENNARD: Well, there seems to be an interesting disconnect
here, and I look forward to the information that you plan to submit, Mr.
Mirabal. Other questions? Yes.

COMMISSIONER TRISTANI: I just have a question, and I don\'t know if you
keep these statistics, but do you know what proportion of your
subscribers are Hispanics?

MR. PARSONS: I don\'t as I sit here today. I could get that information
for you, I suspect.

COMMISSIONER TRISTANI: I\'d be interested. I\'d be interested. Thank
you.

CHAIRMAN KENNARD: Any questions. Commissioner Furchtgott‑Roth.

COMMISSIONER FURCHTGOTT‑ROTH: I\'d like to thank the witnesses for
coming today. I\'d particularly like to thank Ms. Cunningham for
addressing the questions that I asked and for her comments about the
value of this hearing. I, too, listened very carefully to Professor
Nalebuff\'s comments and to Ms. Dyson\'s comments as well, which I
interpret as meaning that there\'s value in having public discussion of
matters that are of great public interest. I still wonder about whether
this agency has been ‑‑ does this in a discriminatory manner or not in
choosing which issues to raise and which not, and also whether there
aren\'t other federal agencies that address these more directly.

And so I\'d like to hear from each of the witnesses whether, in fact,
the information that you are providing to the FTC ‑‑ FCC today is
similar to information that you may have provided to the Federal Trade
Commission as well.

MR. COOPER: Let me ‑‑ I didn\'t want to directly use the initial time. I
expected you would come back around to your questions. And let me make a
couple points about why there is multiple review of mergers between
agencies. Second of all, why some mergers attract more attention than
others.

It seems to me that the Communications Act, for at least six and a half
decades, has recognized that communication and broadcast are special and
different. And that\'s why we have a Communications Act in addition to a
Sherman Act. And it holds these industries, because they\'re so vital to
democracy, to a higher standard. And you have a statute that exposes to
a public interest test, which is different than a market competition
test.

And we have, we have a variety of rules on limitations on ownership that
go way beyond the Sherman Act, some of which have been involved in
recent mergers and one merger that is more or less still pending. So
that the Communications Act is different, it establishes different
authorities, it establishes different standards, and so I think there\'s
a legitimate reason to ask both similar questions and different
questions. That\'s why we have multiple review across the agencies.

Second of all, why does a merger like this attract more attention than
other mergers? Well, one, in some license transfers there\'s a *de
minimis* issue. If it\'s a small transfer between two companies, it may
not matter. Second of all, this merger involves cross‑ownership between
content and conduit, which have been the subject of a great deal of
concern in public policy. So that raises different kinds of questions
than other mergers.

Third, I would suggest that, given that we have a pending petition for
reconsideration on the AT&T Media One merger, you literally have before
you almost two‑thirds of the wires in the cable industry to be
considered. So, in point of fact, if you were to treat those two mergers
‑‑ I understand you have ruled initially on the AT&T Media One, but we
do have a petition on reconsideration and clearly these mergers were
before you at the same time ‑‑ you could have the effect of establishing
what is virtually an industrywide policy in a framework that is much
quicker than the normal rulemaking.

So those, I think, are good reasons. The whole industry was here, a
cross‑ownership issue was here. Communications Act is very different
than the Sherman Act. Those are good reasons that this Commission gives
a very, very hard look at these kinds of mergers and, in fact, passes
through a single license by a small operator that doesn\'t own any
content. I don\'t think the differential scrutiny is inappropriate when
you have so many important issues and so much of the industry structure
at stake.

COMMISSIONER FURCHTGOTT‑ROTH: Dr. Cooper, by your own testimony, the
Sherman Act and the Communications Act are quite different, and I come
back to my question, which is, is the information that you testified
about today similar to the information that you\'ve presented to the
Federal Trade Commission, which enforces the Sherman and the Clayton
Acts.

MR. COOPER: Well, some of it is and some of it isn\'t. We don\'t
necessarily raise, and I personally haven\'t raised, all of the issues I
raise here under the Communications Act down at the FTC or the
Department of Justice under the Sherman Act. But there is an overlap.
The Congress passed the Communications Act 30-plus years after the
Sherman Act ‑‑ I\'ll do the math ‑‑ and they understood that there was
an overlap. And in fact, because communication and broadcast is so
important, it is not unreasonable to have two agencies look at the
issue. So, certainly a certain amount of the information is the same.

COMMISSIONER FURCHTGOTT‑ROTH: But Dr. Cooper, isn\'t it the exact same
public interest standard under the Communications Act that applies to
broadcast, to all wireless licenses, to the tens of thousands of license
transfers that this agency reviews every year, and to which this agency
does not apply anticompetitive tests, does not hold public hearings?

MR. COOPER: Well, again, the difference in this merger ‑‑ and I think I
have testified in almost all of the *en banc* hearings the chairman
referred to ‑‑ these are very large mergers affecting substantial
portions of the country, frequently involving, in this case,
cross‑ownership of content and conduit, so they raise different issues.
They clearly raise different issues when I\'m looking at AOL Time Warner
versus a small license transfer, SBC Ameritech, which definitely was a
similar context.

So I think it is, it is reasonable for the Commission to give different
levels of scrutiny to mergers that are ‑‑ the magnitude is dramatically
different. So I do not see anything unfair in giving high scrutiny to a
merger that raises so many issues.

CHAIRMAN KENNARD: Mr. Love.

MR. LOVE: Well, we\'ve talked to the Federal Trade Commission about this
merger. We\'ve talked, you know, today, to this one. We\'ve actually had
different conversations. One of the reasons why the conversations were
different is that the Federal Trade Commission has a, has a particular
expertise in competition policy where it\'s more fruitful to explore
certain types of issues.

For example, the Federal Trade Commission, along with the Department of
Justice, administers the merger guidelines. And we have concerns ‑‑ and
this has been a case that\'s brought up ‑‑ that the treatment of
collaborative ventures, the so‑called joint venture guidelines ‑‑ are
too much of a safe harbor for mergers and not enough of a, don\'t do
enough to capture the degree to which the companies are not really
independent. The fact that ‑‑ people have talked as if AT&T and Time
Warner are somehow these independent companies, but they have an
incredible web of joint ventures and collaborative agreements, which
makes them something different than just independent entities.

And so this merger, in a sense, from that point of view, we think is,
would be cast a bit different. And then another issue that has come up
with the Federal Trade Commission and the Justice Department is whether
or not mergers in these cases remove players from regulatory
proceedings. The case would be \-- in a case in the regional Bell
operating companies, the problem was companies like Compaq Computer and
Intel would only intervene in certain markets, depending on the ARBAK
(phonetic) and ‑‑ proceedings I was involved in ‑‑ and Intel told me
this and so did Compaq, that they had board‑level decisions not to
intervene in Bell Atlantic\'s territory for both Intel and Compaq,
because of corporate relations.

So when Bell Atlantic merged with Nynex, that was just a half, you know,
half a country. They couldn\'t really intervene in it. And so we raise
that issue, because we believe that having more players makes the
regulatory environment work better because you hear more voices. Now
that\'s something that\'s sort of different. Now \--

COMMISSIONER POWELL: Why is that remarkable?

MR. LOVE: What\'s that?

COMMISSIONER POWELL: Why is that remarkable that corporate interests
might elect not to intervene in a public proceeding. I mean you
couldn\'t possibly suggest that the government should compel ‑‑

MR. LOVE: No, no, but I mean Intel ‑‑

COMMISSIONER POWELL: Or encourage parties to file in the proceedings if
they choose not to for their own self‑interest.

MR. LOVE: No. Well, Intel, Intel was very active in this particular set
of proceedings I was involved in ‑‑ Pac Bell Territory, U.S. West
territory ‑‑ and we worked closely with Intel and in some cases with,
and some SBC tours, and also with Compaq in some of these proceedings.
But then they would in some areas and they wouldn\'t in other areas. And
we had issues with 3COM, whether 3COM would intervene in some and not in
others. And it\'s, I didn\'t find it remarkable at all, but I found it a
consequence of merging a bunch of ARBAKs (phonetic) together is that
nobody wants to intervene because there\'s just too much at stake.
There\'s too many.

At one point, to give you an example, Pac Bell took a videoconferencing
product that Intel sold, they threw it across the table at the salesmen
and they said, why are you intervening in this ISD in re case we have in
‑‑ this was back about five years ago in California ‑‑ and go talk to
your, you know, go talk to your government relations people and come
back, and then we can talk about, you know, whether we\'re going to buy
your product or not. Well, Pac Bell\'s a pretty big customer for that
kind of thing.

So, you know, those kind of discussions take place. So when there\'s a
merger of companies, after a while, it\'s more and more difficult to ‑‑
like, consumer groups have, you know, miniscule resources, we kind of
depend upon maybe some giant company will see things our way. Like,
we\'re glad Disney\'s on the next panel, for CNIPES sakes. That\'s
pretty weird. But, you know, that\'s the way it is.

Now, that\'s what we have to kind of depend on in this world. Now, you
put everybody together, it\'s harder to get somebody to take on the
12,000‑pound gorilla, you know, so I mean that\'s kind of an issue. We
tried to raise that with Justice and we\'re trying to raise it with FTC,
because these are kind of generic issues for them that go way beyond
what you do. And you may not, you know, necessarily have as much
interest as they have.

On the other hand, the reason to bring things up in this proceeding is
because you have more of a permanent relationship with the cable
industry than the FTC does. FTC looks at these things from time to time.
You look at them on an ongoing basis, and so in a way you\'re more of a,
you\'re more related to them than the Justice Department or the FTC is.
And so I think you have more of an oversight role. But I also think you
have more of a responsibility.

Some of the solutions are more regulatory than antitrust in nature, by
their, because of the, just you can\'t come up with, you know, a little
consent order today that would solve all the problems tomorrow, because
you don\'t even know what they\'re going to be yet. And so you\'re
trying to sort of, I think as some people implied in the last panel,
develop a bit of a, what is the body language, you know, what, you know,
you tell them kind of where you want them to go and then, you know,
you\'re going to see them again. So that sort of makes more sense to
have that investment. If Robert Petowsky has that discussion, it\'s not
really that meaningful.

CHAIRMAN KENNARD: Mr. Love, I\'d like to take the discussion away from
jurisdiction and process and back to sort of the substance of the issues
that are before us in this particular transaction. We\'ve had some
discussion from this panel on the access question, the open access
question. And one of the frustrations I have with this debate is that
there is not a baseline definition.

When the cable industry talks about open access, they have a very
different ‑‑ which they call forced access ‑‑ they have a very different
definition of what acceptable access is for the consumer than the
discussion I hear from some competitors to the cable industry,
particularly the telephone companies and the consumer groups. Mr.
Cooper, I know you to be a veteran of the telephone wars where we have
debated this issue of access to a platform ad nauseam all across the
country. I would like to ask you how you define open access.

Is it more than interconnection? Does it get into issues of caching and
speed and pricing? So that we can have a better understanding of what
we\'re talking about when ‑‑ at least when we hear from you ‑‑ on this
open access question. You mentioned that open access is one of your four
recommendations as to how we deal with this merger, but you didn\'t
really tell us what that means.

MR. COOPER: Well, the Commission certainly has a very lengthy
description of open access that I filched from AOL and AT&T. You will
recall that AOL, in San Francisco and AT&T, in Canada, defined in great
detail to regulatory bodies what they meant by open access. And frankly,
what they said, and certainly what AT&T said in Canada, looked an awful
lot like 251, 271 under the Telecom Act.

And as I read the 9th circuit, that is one path you may have to go down,
depending on how that plays out, the nature and structure of common or
open access, because it may or may not be full common carriage under the
Telecom Act now applies to the cable industry, at least in the 9th
circuit, although obviously, we may yet litigate that question with you.
But, so at one level, that is the level of detail into which this
Commission may have to go under the law.

The interesting thing is that for the almost two years that we have been
arguing for this around the country, we had not advocated that. We had
advocated almost a simple sentence that said, essentially, unaffiliated
Internet service providers shall be allowed to gain access to cable
modem systems on \"rates, terms and conditions that are no less
favorable than\" affiliated ISPs, the identical language that we have
for cellular providers interconnecting with ARBAKS.

So you have that history. And in that case, there is not this huge
structure of regulation that we have had to live through in the last
four years in 271. Those are two models of access that this Commission
has and has applied in a nondiscriminatory framework. We don\'t have to
do an awful lot of work, as I pointed out to this Commission in the case
of Texas and New York.

You have operating irreversibly open markets. In those states, the
Commissions in those states have worked out with the dominant incumbent
carriers open access rules. One can argue that under the Ninth circuit,
you should apply those rules to the cable system. We have been asking
for a lot less than that for the last couple years. We may have a legal
right to all that.

So my answer to you is either use the nondiscrimination language from
the cellular providers or the nondiscrimination structure from New York
and Texas. Off the shelf. They exist. No long proceedings. We know how
to do it.

Alternatively, I\'ll give you another example. Recently, Montgomery
county adopted a policy in which they defined open access, which was
interconnection, at the head end, with no other modification to the
system. I also read that as no other intervention between the customer
and the ISP from the host cable operator. Very simple definition. One
paragraph. I\'ll make sure you have it.

And language like that put it into this merger agreement, put into the
AT&T merger agreement under reconsideration will have the effect of
establishing the level playing field we heard about. It will balance the
bargaining power of the unaffiliated ISP and the affiliated ISP. That\'s
a level of detail I think answers your question.

CHAIRMAN KENNARD: Not exactly. You outlined a couple of options.

MR. COOPER: Yes.

CHAIRMAN KENNARD: But my question very specifically, are you
recommending under your formulation of open access, that we consider the
issue of pricing and speed?

MR. COOPER: I, the best language is, \"rates, terms and conditions that
are no less favorable than affiliated entities get.\"

CHAIRMAN KENNARD: But that just begs the question, because rates, terms
and conditions usually include the issue of pricing.

MR. LOVE: What that does, if you, if AOL had agreed in San Francisco to
what they had advocated or if San Francisco had agreed to what AOL had
advocated, what would happen then is that the ISP would have the right
to ask for interconnection, access to the system on rates, terms and
conditions no less favorable. If that entity felt that they were being
discriminated against, that entity would have a legal right to litigate
or perhaps arbitrate, which is the framework of the Telecom Act in 251,
251.

So that may be the better way to go. Give them the right. Tell them to
arbitrate disputes so that you don\'t have to try and write rules. We
tried to get through this without writing rules by letting private
parties have the private right of action. That is what AOL asked for in
San Francisco.

CHAIRMAN KENNARD: Thank you, Mr. Cooper. Any other questions of this
panel? Commissioner Ness, you haven\'t gone yet.

COMMISSIONER NESS: Disney claims that the merged entity would be able to
discriminate in routing and caching of data, among other things. Dr.
Cooper, since you have addressed this in previous discussions, do you
agree with that statement?

MR. COOPER: Well, they clearly have the technical ability. That was the
great service that the Cisco documents gave to us. The answer is that a
policy to allow nondiscrimination would prevent that. And I thought
Montgomery county did a good job of pinning that down. That is, a
provider like Disney ought to be allowed to deploy its own caching or
obtain caching that ‑‑ on rates, terms and conditions that are no less
favorable than the cable operator provides to its affiliated service
provider.

COMMISSIONER NESS: Mr. Parsons, would you care to respond to this
question?

MR. PARSONS: Well, I think that both my colleague from AOL, who\'s more
technically proficient, and I would care to respond. I\'m going to let
Barry start, but I have a point that I want to make in summary.

MR. SCHULER: Yes. I\'ve listened to this issue being discussed of
limiting choice, this notion that somehow the merged entity is going to
limit choice to consumers, will somehow disadvantage competitors. I just
wanted to point out that that idea is an old media idea. It\'s not an
idea that really applies to our media world.

What\'s happening today is, if you think about, if you think about old
media, you think about choice is important because there\'s finite
choice. There\'s so many hours of prime time at night. Therefore, if
you\'re in the media business, your job is to try and get as many people
doing exactly the same thing. That\'s how you make money. That\'s how
you get ratings.

In the Internet world, because it\'s infinite because it\'s on demand,
because you can get what you want when you want it. Our motivation is
different. We\'ve learned that the good thing and what consumers want
are lots of choice. It doesn\'t matter to us whether or not people are
all doing the same thing.

In fact, if you asked 100 different people what AOL is to them, you
would hear them say they\'re completely different things. It\'s where I
get news, it\'s where I talk to my friends, it\'s where I get sports,
it\'s where I get, talk to my friends, where I go to the quilting forum.
So from our point of view, we can\'t discriminate content. If we were to
employ some kind of caching that somehow discriminates against content,
what that means is, to some segment of our members, they all of a sudden
have a bad experience. And so it makes absolutely no business sense. In
fact, if we did it, what it would do is they would complain.

COMMISSIONER NESS: Mr. Orton has agreed that that happens. Have you not?

MR. SCHULER: They would complain to us.

MR. COOPER: Let me respond.

COMMISSIONER NESS: Go ahead, Dr. Cooper.

MR. COOPER: Technically, he\'s admitted, well, the question was a
technical question. Can he? And the answer is yes. And so his point is
that, look, if I discriminated against CNBC, then my viewer experience
is degraded and I\'m going to lose a customer. However, if, yeah, I
discriminate against CNBC, but they go over to CNN, which really isn\'t
as good on content but now is just, is faster and prettier and quicker,
the answer is that I don\'t know how far they\'ve degraded, and of
course they\'ve captured all the economic rents from the fact they\'re
saving the customer.

MR. SCHULER: That, that is not how, unfortunately ‑‑ and I think our
friends at Disney would be the first to say ‑‑ consumers buy brands.
Brands are not fungible. The fact of the matter is somebody wants to
watch the Yankees, it\'s not as good to go watch the Mets. Someone wants
to watch, you know, Disney, it\'s not as good to go watch Mickey Mouse.
If someone wants to go ‑‑

CHAIRMAN KENNARD: But Mr. Schuler, what if the Mets are in black and
white as opposed to color. Isn\'t that the question?

MR. SCHULER: But understand, but understand that because of the fact
that the experience of the Internet is so diverse and it\'s so different
and it\'s so nonreal‑time based, meaning anybody can go on at anytime,
our job, and what consumers are buying from us, is providing the best
quality of service to what they want when they want it. And we never
know what that is. It\'s impossible to know what it is.

In fact, history has shown to AOL, who six years ago when the Internet
came along, was a proprietary service, there was no Internet. The
Internet came along. Everyone said it was going to kill us, it was going
to put us out of business. Instead, what we did was we embraced the
Internet. We incorporated it into our service.

In fact, we set out to be the best Internet service provider out there.
And we discovered that by doing that, by providing unrestricted access
to content, that people came. Today, 23 million households have decided
to buy that.

COMMISSIONER NESS: Okay. Thank you. Mr. Levin, you wanted to respond
also.

MR. PARSONS: I would like to make a comment.

COMMISSIONER NESS: Okay. One moment. Mr. Parsons, and then Mr. Levin.

MR. PARSONS: Commissioner Ness, you know, you folks have a tough job
because you\'ve got to, you have to make a fine balance. Virtually
everything that we\'ve heard on this panel today is about stuff that
could happen. In fact, as I was sitting here doing a mild slow burn on
Mr. Mirabal\'s comments and thinking about things like CNN en Espanol
and People en Espanol and all the things we do in that area, I
remembered one of his comments. He said, it\'s conceivable ‑‑ this is a
quote, I think ‑‑ \"it\'s conceivable that this could have an
anticompetitive effect.\"

Now that\'s unarguable. It is conceivable. I mean, technically, you
could degrade the stream on the Internet. Technically, you could degrade
the stream that a cable company puts across, but what Barry is saying is
not only why would they do it ‑‑ they don\'t do it. They don\'t do it
because, because of the marketplace, because of the competitive dynamic.

And I think too many of the commenters on these proceedings have come
from the point of view of, not, are we trying to protect competition,
but are we trying to protect a competitor? Competition won\'t let them
do, or us ultimately if this Commission and FTC sees its way to clear
our merger, do or enter into the kinds of behavior that are conceivable,
because there\'ll be lots of other ISPs out there that are carrying
these brands, and we\'ve committed to open access in the way we\'ve
defined it in our MOU, Mr. Chairman, so that you can see it.

So that I think, you know, the Commission has the job of understanding
‑‑ yes, the dimension of the playing field, what is the art of the
possible ‑‑ but the Commission also has the very difficult job of trying
to find the balance so as not to, to borrow a phrase from constitutional
law and the first amendment, not to put a \"chilling effect\" on
innovation and on competition by trying to conceive of everything that
could go wrong and anticipatorily block it.

I think that the genius of our economy and the strength of our economy
over the last 15 or 20 years has been, frankly, a cutting back of
regulatory impositions that has allowed innovation and competition to go
forward. And it\'s enabled to sort of put ourselves in the front rank.
So that ‑‑

COMMISSIONER NESS: Okay, thank you. Mr. Levin, you wanted to respond. I
know we\'re running out of time.

CHAIRMAN KENNARD: You\'re on the next panel too, so you\'ll have a
chance to continue your monologue. But ‑‑

MR. PARSONS: Appreciate it.

MR. LEVIN: AOL right now discriminates in content. You get the front
page of AOL and it\'s not a random selection of little content that you
see on the page. There are people that pay millions of dollars to AOL to
have discriminatory placement on the thing. That\'s what they do.
That\'s the difference between AOL and a generic ISP is you have
strategically placed content.

The reason that they\'ve been fighting with Microsoft is Microsoft gave
a number of discriminatory events that have affected AOL in certain ways
that AOL has complained to the Justice Department, and they\'ve seen it
happen in the very marketplace that Mr. \-- that was described by AOL as
something that would be impossible. I mean this is really a load of
crap. This idea that the cable companies don\'t discriminate is
ridiculous. That\'s what they do. They\'re the gatekeeper of the
platform. They decide whether you get the golf channel or the food
channel, and, you know, if they\'re part owner of you, your odds of
getting on tend to be a little higher, but I mean that\'s exactly
precisely what they do.

Now, what\'s going on with the architecture at the next thing is
different than what AOL deals with right now. It\'s going to be
qualitatively, characteristically different. The people at ‑‑ Steve
Wolf, the guy that used to run NSF\'s operation on the Internet that
went over to Cisco used to debate this, you know, about eight years ago
on the Com.priv list (phonetic), and he used to talk about wouldn\'t
people pay for a go‑fast button? Now, what\'s driving it is multimedia.
If you\'re talking about simple frames of Web pages and e-mail message,
you don\'t really have to have this high‑tech, go‑fast stuff like you do
now, but with streaming media, the kinds of things they want to convert
the Internet into, these things resurface.

The fact that the technology is where it is right now is part of a
cycle. It\'s like this now. Five years from now, it\'s going to be
different. And maybe five years later it will be like it is again now.
It goes through cycles. Thank you.

CHAIRMAN KENNARD: Excuse me, I\'m going to have to cut you off. We are
running very far behind. Commissioner Powell has an engagement, so he
has to leave soon. Commissioner Tristani, you\'ll have the last question
on this panel. Then, we\'re going to have to break for the final panel.

COMMISSIONER TRISTANI: I had a question for Mr. Mirabal and a bit of a
comment, but first of all, you made some statements that Time Warner was
running a ‑‑ and I think it was a Seinfeld episode? ‑‑ is that a fact?
And I\'m talking about the Seinfeld episode which ridiculed Puerto
Ricans, burned the Puerto Rican flag and made all Puerto Ricans look
like rioters.

MR. MIRABAL: That\'s correct.

COMMISSIONER TRISTANI: They are running it on syndication?

MR. MIRABAL: They, they produced it through one of their production
companies, Castle Rock. And prior to the airing of that episode, a
coalition of Hispanic organizations requested well in advance that we be
allowed to screen that episode because of the denigrating manner in
which it presented ‑‑

COMMISSIONER TRISTANI: I know about that, and that\'s kind of, that
happened, but my concern is now, is that still being run? Do you know
that as a fact?

MR. MIRABAL: The, the piece that is continuing to be run is Fort Apache,
which is worse than the Seinfeld episode, because the Seinfeld episode,
to the extent that it is a comedy, treated that with some humor, which
we were not happy about. But Fort Apache does not treat it with any
humor. And that continues to be run on the station.

COMMISSIONER TRISTANI: Have you asked them not to run it?

MR. MIRABAL: Yes, we have. They have, they probably in their records
continuously dating back from when they began running that, that
particular movie. I saw it once only three months ago when I was in
Boston doing a speech, and I was appalled that it was running again on
the station.

COMMISSIONER TRISTANI: And let me ask you another, and this will be my
final question, but you, I think, raised some concerns about there not
being programming about Hispanics. Is this something that\'s just a
problem with Time Warner or is it a problem with other ‑‑

MR. MIRABAL: No, it is not. I\'m a member of the National Hispanic Media
Coalition, and we\'ve been very public about our concerns on all
stations, lack of programming addressing the Latino community. And as I
said before, there is limited programming in all stations, but we\'re,
we\'re citing Time Warner, because that is the basis of this discussion
today.

COMMISSIONER TRISTANI: Thank you, Mr. Mirabal.

CHAIRMAN KENNARD: Finished? Okay. Thank you all very much for this
panel. We will take a 10‑minute break and then reconvene. We need to
move through the next panel quickly, because I\'d very much like to
reserve some time for statements from the general public. Thank you.

(There was a brief recess.)

CHAIRMAN KENNARD: Before we begin our next panel, I wanted to make an
announcement. We very much view this process as an ongoing process of
collecting information for the record that we\'re developing in
connection with this proposed transaction. And in that regard, we have
established a Web site and an e-mail address where people who are
interested in contacting us about this transaction and providing
additional comment, which will be included in the record, can do so by
sending their comments to AOLTWPS at FCC.gov. That\'s AOLTWPS at
FCC.gov.

We\'ll now go to our next panel, which will be industry perspectives on
this transaction. And the first witness will be Mr. William Reddersen,
executive vice president of BellSouth Corp. Mr. Reddersen.

MR. REDDERSEN: Mr. Chairman, I suspect that I don\'t have to introduce
myself now. I am Bill Reddersen, and good afternoon to all,
Commissioners and to the staff. Let me start by thanking you for this
opportunity to share with you BellSouth\'s concerns surrounding the
merger of these two great companies. Before I get into the specific
issues, I would like to make a couple of brief comments up front.

Today\'s industry convergence is a very natural outcome of both
broadband and Internet technology, and this trend will likely result in
a limited number of vertically integrated players like this combination
and AT&T. Given this consolidation, we at BellSouth do not object to
this merger, per se. However, we do believe that this merger must be
conditioned to ensure that the consumer value created by it is not
outweighed by the potential anticompetitive choice‑limiting impacts of
it.

Finally, these issues are purely about conditions on a voluntary merger.
They have nothing to do with regulating the larger Internet, per se.
Given the consolidated market power and concentration of key resources
created by this merger, there are three deal‑specific areas with which
this Commission, the FTC and the Justice Department must be concerned.

First, if a limited number of megaplayers is a natural industry
progression, then real competition will result only if these new
megaplayers are required to compete rather than allowed to cooperate and
share markets.

Secondly, the scarce and required resources individually controlled by
AOL and Time Warner, each with their own substantive market power, must
be made available on market‑based terms and conditions, or competition
will be reduced.

Third, all of these players, including AOL, are in the network business.
This Commission has understood for decades that independent or
unconnected networks restrict competition. Given these points, we
believe this merger must be conditioned it the following three ways.

First, a very bright line must be drawn between the new AOL Time Warner
and the merged ATT/TCI/Media One. The DOJ has already identified this
concern but clearly did not have this additional merger in its scope.
These two gigantic companies must be required to compete and not allowed
to share markets in any way. All current and joint ownership between AOL
and AT&T should be eliminated and prohibited going forward. The simple
test which must be applied to all future AOL AT&T relationships is to
require that they be based solely on generally available market terms
and conditions.

Second, as both AOL and Time Warner stated in their May 11th filing,
open access to content is their policy. The public interest will be best
served if this voluntary policy is clearly codified. The dominance of
AOL\'s distribution control is unrivaled by any other network today,
broadcast, cable or satellite. This Commission clearly knows that
withholding content will have serious impact on competition.

You lived it with satellite and cable overbuilders, and you will relive
it in the broadband Internet world if we are not vigilant. The
relationship between Time Warner content and AOL-packaged distribution
must be based on generally available market terms and conditions. Again,
a simple principal simply applied to this merger.

Finally, AOL is a network in and of itself. In fact, it is one of the
highest volume communications networks in the world. It is the largest
by an order of magnitude of any other consumer Internet network.
Combined with Timer Warner Cable, it will grow even larger in its market
power. The issue here is simple, as well. Like any other network, AOL
must be required to openly interconnect with other networks.

This issue is best seen in the instant messaging debate. If I reduce
this complex debate to a simple telephone analogy, what it would mean is
that customers on a competing SELEX (phonetic) network would not be
allowed to talk to customers on BellSouth\'s network equally. Without
such standards‑based interconnection, no long distance or local
telephone competition could ever or would ever develop. Certainly, such
a standard should be applied to this merger, as well.

In closing, let me summarize quickly. First, AOL Time Warner and ATT\'s
TCI Media One must be fully separate and must compete with each other
and not allowed to join together. Second, Time Warner content that is
packaged and distributed through AOL\'s dominant Internet environment
must be made available on market terms and conditions. Finally, AOL\'s
network must openly interconnect to others.

It is no accident that these merging parties clearly recognize these
critical issues going into this merger. That is why they voluntarily
offered up their MOU and their May 11th letter to this body. Now, all
that remains is for these stated promises and policies to be refined and
codified as conditions to deal approval.

I\'ve listened to all of the discussion today very carefully. There\'s
been a consistent theme coming out of a lot of different points made.
That is that we\'re dealing with a past history of closed environments.
We\'re dealing with the technical capability and potential self‑interest
to continue some of that behavior. We\'re dealing with a theme of
\"trust me,\" going forward that doesn\'t make sense anymore.

And all of the panelists, to a member, have said, don\'t take the
\"trust me\" theme. Codify the promises. Thank you, Mr. Chairman.

CHAIRMAN KENNARD: Thank you. Mr. Padden?

MR. PADDEN: Thank you, Mr. Chairman. I\'d like to focus my remarks today
on interactive television, which, at least to our way of thinking,
represents the convergence of traditional television, Internet content,
communications and commerce. And our company is investing millions of
dollars in developing wonderful new interactive television content for
consumers. For example, on election night this year we\'re going to have
interactive election coverage, the likes of which the American people
have never seen before. They won\'t have to wait for the race, the
information about the races they\'re interested in to be selected by the
director in the studio to come up on the screen.

You\'ll be able to pull up and call the election results you want.
We\'ll be able to do instant polls. We\'re also doing, although not
quite on the same level of civic responsibility, a play‑along game with
Regis Philbin on Who Wants to be a Millionaire, and interactive content
to go along with Sunday night and Monday night football. And even on
Saturday mornings, we have interactive content for children. We call it
Zoog Disney. The Zoog\'s are creatures that live in the Zether, which is
the space between the computer and your television. And we\'ve had
wonderful success with all of this.

And Mr. Love remarked that he thought it was a little strange that a big
company like Disney was taking the position we are. But it\'s really
very easy to explain. All we want is a world where, as we deploy this
interactive television content, consumers have the right to choose or to
not choose our content based on how good a job we do creating it and
promoting it. And what we\'re trying to avoid is a world where that
choice is skewed or limited by the business interests of the company
that owns the pipe to the consumer\'s home.

And we are very focused on the cable plant, because all the analyst
reports that we read say the hybrid fiber coax network will have great
advantages over every other technology in delivering this interactive
television product. Certainly, DSL, which may be competitive with cable
modems for high‑speed Internet access, at least as it exists today and
for the foreseeable future, consumers are not going to have the option
of getting interactive television over DSL, because the technology just
doesn\'t support it.

Satellite is great, but a lot of consumers don\'t have access to
satellite, and even those that do, the return path is not comparable to
the return path available on full interactive two‑way cable. Now our
company stayed out of other mergers that have come before this agency,
despite significant concerns. We\'ve also stayed out of the open access
debate. We\'ve not been among those who have been critical of this
agency for not moving more quickly, frankly, because we heard the
rationale that you didn\'t want to stifle the development of broadband,
slow its deployment, and that made some sense to us.

There\'s two things that pushed us over the line with respect to this
transaction. First, you heard Mr. Levin say that they are now starting
to install routers that are capable of open access. And I think in that
statement there\'s a very important fact. And that is the architecture
for interactive television systems is being set now. Decisions are being
made now about what kind of routers are in fact going to be installed in
these networks. What capabilities will be in the box and in the
operating system.

And we think it\'s important that the concept of openness get built in
now. Also, we believe this merger is different than any other merger
that has come before you. A different collection of assets. It\'s a
merger of the AOL walled‑garden marketing environment with the narrow,
bottleneck cable pipeline and the Time Warner content library. Several
of the witnesses have referred to all the pieces of the puzzle that come
together in this company ‑‑ cable past 20 million homes, half of the
narrow‑band Internet marketplace, and on and on ‑‑ we don\'t think you
can rely on promises of good behavior.

We think there\'s a history here with both companies, the common thread
being abusing bottlenecked facilities to limit consumer choice. I\'ll
give you just a few examples. AOL, if you want, if you\'re a company
that wants to put your content inside their walled garden, their
contract will require you to disable navigation links otherwise
available to the consumer. There is no way to characterize that
requirement as pro consumer choice. It\'s anti-consumer choice. It\'s
taking choice and options away from the consumer.

We\'ve provided those contracts to the Federal Trade Commission. If we
can work out the appropriate protective order, we\'d be happy to provide
them to you. With respect to Time Warner, they refuse to carry the local
and regional news channels they don\'t own. That\'s not the consumer
making the choice, that\'s Time Warner making it for them. They refuse
to carry Disney channel on basic. They own a children\'s channel called
Cartoon Network. We believe they have a conflict of interest and that\'s
why they did that.

I see my time is up. We\'re very concerned about what they\'re going to
do in this interactive marketplace, particularly discrimination on the
return path. And I just wanted to read you the one sentence from our
just‑negotiated, hard fought retransmission consent agreement with Time
Warner with regard to the return path so you\'ll know, despite all the
focus on this issue, what we were able to achieve.

The contract says, \"Nothing contained herein shall obligate operator to
provide broadcaster with access to any return path provided to
subscribers by operator for any purpose.\" So we got nothing. Thank you,
Mr. Chairman.

CHAIRMAN KENNARD: Thank you, Mr. Padden. Mr. Weed?

MR. WEED: Good afternoon, thanks for being here. I\'m Steven Weed. My
real job is I run a group of cable systems in the Northwest, but I\'m
here today as vice chairman of the American Cable Association. The ACA
represents about 300 independent cable companies, representing about
three million subscribers, primarily in smaller and rural markets. ACA
must transact with media conglomerates like Disney/ABC, Viacom, Fox and
Time Warner for programming essential to its video business.

Those companies have overwhelming market power over independent cable
companies. In many cases, they use this market power to determine ‑‑ to
the detriment, excuse me, of independent cable and its customers.
That\'s why we\'re here today. On behalf of our members, I thank the
Commission for the invitation to voice our concerns. ACA has
participated in this proceedings to raise one important public interest
issue.

Postmerger Time Warner AOL will control essential Time Warner
programming, AOL services, including AOL TV, and substantial investment
in the largest direct TV broadcast company, Direct TV. These factors
give AOL Time Warner the market power to threaten the public interest
and a viable independent cable industry and its progress in closing the
digital divide.

I want to about the digital divide. The Commission has voiced repeated
concerns over the digital divide. That is, the concern that consumers in
certain markets, including smaller markets in rural areas, will not have
access to broadband services. In fact, recently, Chairman Kennard
observed that the lack of high‑speed access in rural regions stems
primarily from the high cost of providing such services. Chairman
Kennard stated, \"Providing customers with sophisticated services in
areas of low density is an expensive undertaking.\"

ACA members know this economic very well. But one important point is
overlooked in the digital divide. Independent cable is making great
progress in smaller markets. Increasing numbers of ACA members are
delivering high‑speed broadband services, including high‑speed Internet
access, to smaller communities in rural areas throughout the United
States. It\'s an expensive undertaking, but independent cable is
figuring out how to serve these markets and is taking the risk and
making it happen.

But the business model in smaller markets is far from proven.
Independent cable\'s progress could be stalled by the imposition of
costly local, federal regulation or by abuse of market power by
companies that control essential programming and Internet services. This
brings us to the ACA\'s primary question to the applicants. Will AOL
Time Warner require independent cable operators to carry AOL services as
a condition of access to essential Time Warner programming?

If they answer in the affirmative, the question would pose a serious
threat to independent cable\'s progress in providing advanced service to
smaller markets. It could ultimately force many smaller systems out of
the business altogether. Here\'s how it could happen: To advance AOL\'s
anywhere strategy, AOL Time Warner could require carriage of AOL service
on independent cable systems as a condition of access to essential Time
Warner programming. They could make independent cable pay for these
services like Disney/ABC and others make independent cable pay for
undesired services as a condition of access to its essential broadcast
and satellite programming now.

Independent cable systems would have no choice but to accept Time
Warner\'s terms or lose customers to satellite dishes. This would
disrupt existing ISP partnerships, raise costs for small cable
operators, cut margins, deter investment and stall network upgrades. AOL
and Time Warner have responded to ACA\'s question but in inconsistent
ways.

First, the applicants argue that they would not require carriage of AOL
services as a condition of access to Time Warner programming, because it
was not in their economic interest to do so. Independent cable operators
would just find an alternative programming, Time Warner said. This
economic argument does not work. Of course it is in the applicant\'s
economic interest to leverage key programming assets to force carriage
of other services.

As a prime example, Disney/ABC. To gain access to ABC programming and
essential services like Disney and ESPN, independent cable must agree to
a varying array of burdensome and costly conditions. AOL Time Warner
would have the same incentives to tie programming and AOL services
unless they valued the public interest and a viable independent cable
industry. The applicants have suggested they might.

In their July 12th filing, AOL and Time Warner made an unequivocal
statement that they would not require carriage of AOL services as a
condition of access to Time Warner programming. ACA cheered. Time Warner
and AOL, it seemed, to be the first media conglomerate acknowledging its
obligation to temper its economic interest with the public interest and
fair treatment of independent cable companies.

But then, in the applicant\'s July 17th filing, they appeared to retreat
from this statement. With this apparent inconsistency on the record, ACA
asks today for clarification. The most appropriate clarification for
these applicants is to affirm that they will not condition access to any
Time Warner programming on carriage of any AOL services. With that
clarification on record and included in this Commission\'s order in the
docket, ACA can support the merger.

Moreover, ACA can commend AOL and Time Warner for their willingness to
step up to the important public interest obligations of supporting
independent cable and its efforts to close the digital divide in smaller
markets.

CHAIRMAN KENNARD: Thank you, Mr. Weed. Mr. Bagully?

MR. BAGULLY: Good afternoon, Mr. Chairman, Commissioners. I\'m Ross
Bagully, CEO of Tribal Voice. We\'re an independent provider of instant
messaging services. I want to first thank you for the opportunity to be
here today and to participate in this hearing. I would also like to
depart from the printed text that I have previously provided, to take
the opportunity to address some of the comments made here today.

But initially, I want to comment that there are 28 million deaf and
hearing impaired American citizens who rely on instant messaging
services, much like most of us use the telephone, and I would ask, do
any of us believe that those 28 million citizens should have less
functionality in their communications media than those of us who use the
telephone have today. Certainly, none of us would tolerate the example
that we heard from BellSouth, where you had to have a different service
to communicate with somebody who had AT&T or Sprint or MCI. Certainly,
that should be ‑‑ that should carry over in the world of instant
messaging to the deaf and hearing impaired community.

Earlier today, Mr. Case discussed the availability of the AOL instant
messenger and his commitment to interoperability. However, one year ago,
Mr. Schuler promised to fast-track interoperability within the IETF.
During that one‑year cycle, there has been very limited if any
participation by AOL in the IETF process. Two to three months ago, Mr.
Case again addressed the issue of IM interoperability, and at that time,
his suggestion was you could achieve interoperability by licensing
AOL\'s software. Shortly thereafter, AOL has again changed its position,
again promising to fast track interoperability with the IETF but using
as an excuse, security and privacy concerns of its members.

I guess my question, Barry, would be why didn\'t you tell us that a year
ago? And the next question would be were you misleading us then or are
you misleading us now? On the question of interoperability and its
effect on security for the members and privacy concerns, there\'s not
been one indication that anybody has demonstrated that security and
privacy is in any way more threatened or further at risk with
interoperability than it is without it. And in fact, maybe Mr. Schuler
can address that later this afternoon.

One of the comments was ‑‑ that Mr. Case made was that AIM can be
downloaded for free from the Internet and can be used. This is
absolutely correct. However, the answer to that is, what happens to the
competitive marketplace and where is the incentive for new features, new
functionality, new choice for the consumer if everybody in fact is using
a single delivery product?

The other point on that, by the way, was while it is free, there is a
licensing agreement. The licensing agreement gives AOL the unilateral
right to change the terms and conditions of your use of that product at
any time in the future. Now, that\'s not unusual in a licensing
agreement. What\'s unusual is that this is an excuse why there doesn\'t
need to be any competition and it\'s okay for them to completely own the
market.

Commissioner Tristani, I would urge you to take up Steve Case\'s offer
to download AIM and to try that product. And I would ask you at the same
time, try Microsoft\'s, try Yahoo\'s, try Tribal Voice\'s, try Otogo\'s
et cetera. And after you do that, I would ask you to think about when
you want to make your choice about which product to use, do you want to
have the option of making the choice because one product had features
and functionality that you preferred, or because one product gave you
access to 92 percent of the world to communicate with and the other
products limited you to eight or 10 percent?

We all know that interoperability is essential for networks to grow and
expand. That\'s been true for a long time. Mr. Parsons discussed a lot
of issues earlier, and he was saying that we were anticipating bad
behavior, but what I\'m talking about today isn\'t anticipatory at all.
I\'m talking about bad behavior that has been occurring for the past 12
to 18 months. AOL consciously, intentionally and knowingly blocks ours,
Icast\'s, AT&T\'s, Microsoft\'s access to inter‑operating with their
system, all companies using protocols, which AOL published themselves
and which they use for their own system.

In closing, I ask the Commission to join us in telling Mr. Case, break
down this wall. Thank you.

CHAIRMAN KENNARD: Thank you. Mr. Melcher?

MR. MELCHER: Thank you, Mr. Chairman. I\'m last. I hope I\'m not least.
Good afternoon, my name is Christopher Melcher and I\'m vice president
and general counsel for RMI.NET. I would like to thank the Commission
for providing me the opportunity to comment on the proposed merger of
AOL Time Warner and its impact on the issue of open access for
residential and business consumers to Internet access over the cable
technology.

RMI.NET is a national Internet commerce solutions provider with a strong
regional focus in the Midwest, Southwest and Western United States. We
will have approximately \$50 million in revenue for year 2000.
Significant in our minds, but obviously pales in comparison to the other
folks at this ‑‑ some of the other folks at this table and who have
spoken previously. We believe ourselves to be a provider of the broadest
possible range of Internet access services to business and residential
customers and a premier one‑stop provider of Internet access and web
services to small- and medium‑sized business customers. We are one of
the small to midsize ISPs that have been talked about here today.

We provide Internet access to more than 100,000 customers nationwide,
and we offer the full spectrum of Internet access from standard dialup
to DSL to high‑volume T1s and DS3s all the way up to wholesale Internet
access as a backbone provider for other smaller ISPs. We are a primary
Internet access provider for thousands upon thousands of residential
Internet users across our nation, especially those located in rural
America and isolated communities throughout the Midwest and Western
United States.

We are a member of the United States Internet Industry Association, a
nonprofit association that represents the interests of smaller to
midsize Internet service providers. RMI.NET and the U.S. Internet
Industry Association both strongly support the opening up of the
nation\'s cable systems to true competition at the wholesale and retail
level. We believe this should be an express condition of any FCC
approval of the proposed merger between AOL and Time Warner.

As Chairman Kennard correctly raised earlier today, the real issues is
not whether high‑speed cable as a broadband access technology will
compete with DSL or other forms of high‑speed Internet access. The issue
is whether we should close one form of high‑speed access to the Internet
to competition. Given that cable may prove to be the superior form of
broadband Internet access, your decision will affect the entire Internet
industry and will affect how our nation and the world communicate.

With the change in AOL\'s position on open access from prior to their
proposed merger with Time Warner to now their position following that
announced merger, it becomes imperative that the FCC take up the cause
of open access for consumers on the nation\'s 8,000 smaller Internet
service providers. The FCC should make open access a clear and
enforceable condition of its approval of the AOL Time Warner merger. Let
me explain briefly why we support open access and discuss the four most
common myths perpetuated by opponents of open access.

First, we believe the correct analogy should be the analogy to DSL. Open
access should mean that Internet service providers have access to the
cable plant and to the cable head end, and that should be that we have
direct access to the consumer, with no interference. The first myth the
cable industry will tell you is that open access is not fair. They will
tell you that they have built or purchased their systems and have the
right to control access.

In fact, we believe those systems were built with the support and
participation of the public, not only through franchise awards but
through guaranteed consumer revenue for the cable companies in the form
of predictable cable rates and increases a local regulated monopoly, if
you will. I would argue that the public, therefore, has some portion of
equity or ownership in these cable systems, which entitles the public to
have competitive open access and choice on that system which they helped
to build.

In reality, we believe AOL and Time Warner would prefer to create a
tilted and skewed playing field by creating a closed system for Internet
access and telecommunications services over that system. This would
force the consumer to make difficult, noncompetitive choices.

Myth number two is that open access cannot be accomplished quickly.
Until recently, the argument was that open access could not be
accomplished at all. It was technically impossible. I assume AOL and
Time Warner would agree that today there are no technological barriers
to open Internet access over the cable plant. As we all know, AT&T
admitted as much several months ago in a letter to the FCC with
Earthlink.

The question of open access for all Internet service providers over the
cable system is no longer a question of whether there should be access,
but the question is simply is only when and under what terms. AOL and
AT&T have now publicly admitted that the critical issue will be how open
access will be implemented, and both have started to develop and
implement open access cable trials to explore how multiple Internet
service providers would operate over that cable system. AT&T began a
trial in Boulder, Colorado. We\'ve just learned recently that AOL is
starting a trial in Columbus, Ohio.

We are pleased to be a participant in the AT&T open access cable trial,
and we are beginning that process now. We also would hope to be a
participant in AOL\'s open access cable trial, and I would like to take
Mr. Levin up on his offer that any ISP that requests will be asked to
participate. We so request. But those trials are proceeding very slowly
and with very limited focus.

We have seen absolutely nothing yet that would support any decision by
the FCC to delay or eliminate the immediate intervention and regulation
to ensure true open access over the cable system. These trial are going
through several phases. We do not expect those, even the preliminary
phase to be completed until well into later this year or into next year,
2001. We don\'t expect there to be any significant results on a number
of issues until well into 2001, perhaps 2002.

History has taught us that you cannot allow the owner of a monopoly or
monopsony technology to control the terms of the access to that
technology. This is what we learned from the breakup of Ma Bell in the
1980s and the Telecommunications Act of 1996.

The third myth is that requiring open access would hurt competition and
the marketplace. What will hurt competition in the marketplace is to
allow AOL in concert with AT&T to divide and control nearly 75 percent
of the broadband access market. If AOL Time Warner are allowed to
control and close off a significant percentage of the broadband access
market, the remaining small Internet service providers like RMI will
quickly be extinguished.

Competition, as one Commissioner mentioned earlier, is not allowing two
800‑pound gorillas to fight over a technology superior product. It\'s
allowing for all of the Internet service providers to compete over that
product. That\'s the model that has resulted in the phenomenal growth
and success of the Internet. Cable may be the superior product.

DSL and other high‑speed broadband access pass only roughly 30 percent
of the homes in America today. Cable and cable broadband currently pass
nearly 90 percent of the homes in America. It\'s a significant issue.

The final myth is that open access will hurt the consumer. Again, dead
wrong.

CHAIRMAN KENNARD: Mr. Melcher, I\'ll ask you to sum up, please.

MR. MELCHER: Thank you, Mr. Commissioner, Mr. Chairman. In sum, we would
say that the final myth is that open access will benefit the consumer by
allowing the consumer to retain the service that they have now from
their local Internet access provider. We ask the FCC to mandate open
access as a condition of this merger. Thank you very much.

CHAIRMAN KENNARD: Thank you. And thank you all for your presentations. I
think, in fairness to Mr. Schuler, we should give him an opportunity to
respond to the questions of Mr. Bagully that were offered in his
presentation.

MR. SCHULER: Thank you. Let me just provide a lot of perspective, or at
least put some context around this instant messaging issue, which I know
is very confusing to people. And it\'s important to know, when we talk
about instant messaging being free, which was a surprise to some people,
that we made it free voluntarily. We actually stimulated ‑‑ I think the
reason why Tribal Voice is in business today is because we created that
category.

The way consumers are using instant messaging today is, while the
services don\'t talk to each other, every consumer can talk to each
other. If your friend happens to use Yahoo Messenger and you know it,
you download Yahoo Messenger. And it\'s not like the telephone metaphor,
where you have to have six phones. It\'s really all on your computer.
We\'re talking about the difference between how many buddy list windows
might you have up. One, two or three.

But for consumers today, they essentially have interoperability. Now,
that does not mean that we think interoperability is a bad idea. We
think it is a good idea, for a lot of the reasons that are, have been
suggested. And it\'s also been suggested we\'ve slow‑rolled
interoperability for some ominous reason, but I\'d like to talk about
that as well. And I want to use e-mail as the point of history.

If you go back 15 years, e-mail also was not interoperable.
Corporations, who mostly used e-mail all had their own systems, and you
could only mail people inside of a corporation. Then, the industry
decided to create protocols to allow e-mail servers to talk to each
other. We believe that that\'s exactly the way you need to enable
instant messaging interoperability.

However, while e-mail interoperability was done successfully,
unfortunately, when it was done, no one knew about spam. No one thought
about the idea that when servers had open protocols and that they could
talk to each other, that harmful people out there would all of a sudden
start figuring out how to send lots of mails, which were, are either
marketing materials or, worse yet, pornographic materials that end up in
people\'s mailboxes. You\'ve heard about things like the Love Bug virus
that caused damaging effects on networks. Those are all distributed via
e-mail.

And I can tell you we have 8,000 people in our call centers. We take two
millions calls a week from our customers. The single biggest complaint
we get from them is spam. They think we let it get through. We get ‑‑ I
read these things, I see it, I\'ve seen things, why did you let my
daughter see a pornographic picture?

So in thinking about this interoperability issue, our biggest concern
is, so now, when we go to do this again, how do we make sure we build in
the controls that are going to A, give consumers the ability to filter
out what they don\'t want, B, to ensure that the hackers and spammers
out there who seem to be much smarter than all of us who run the
networks and manage to get their way in, will be prevented? And how can
we, who each want to run independent services, can maintain the
standards of our service?

And this is the most important thing of all. On AOL, instant messaging
is a feature. And one of the reasons people buy AOL today is because we
have standards. We have community standards, and we monitor and police
them. If people do bad things, we throw them off.

On our instant messaging service, we have a little button, and it says
\"Notify AOL.\" And what it does is if someone\'s harassing you, if
someone is ‑‑ and understand that spam or harassment in instant
messaging is real time. It\'s someone who\'s talking to you and may be
saying bad things to you ‑‑ if that happens, we have a button that you
press. It says, \"Notify AOL.\" When you press it, it goes to a real
live human being in our call center who immediately intervenes. That\'s
the standard of service we offer, and that\'s what we pay for ‑‑ that\'s
what people pay us for.

If you go to Tribal Voice ‑‑ and they also have standards, but let me
tell you how, on their own Web site, they tell you to deal with a person
who harasses you. I will just read this. It won\'t take too long. \"If
you\'ve been abused or harassed on Powwow, find the IP address of the
perpetrator by clicking on the name field in the person\'s powwow
window. The window cycles between the person\'s powwow ID and his or her
IP address.\" It goes on and on for a couple of more paragraphs.

\"Once you have the IP address, you can look up the person\'s Internet
service provider using any WHOIS program. The Internet provides a Web
page from which you can run a WHOIS inquiry directly. Such an inquiry
usually returns the name, address and phone number where you can file a
complaint. Be sure that you can provide the IP address, offender and the
time of the occurrence. If you are unsuccessful at identifying abusers,
e-mail Abuse at Tribal.com and we will track them down. Please include
the person\'s powwow name, powwow ID, powwow address.\" It goes on and
on.

And then it comes to the end. \"In addition, if criminal actions are
involved, we urge you to contact your local police. Tribal Voice will
cooperate fully with the authorities.\" Now, the point I\'m making here
is that he is free in his business to set the standards for his
community he wants.

There are two ways to do interoperability. There\'s a right way and a
wrong way. In the wrong way, the client-to-client or peer-to-peer way,
we would be forced to the lowest common denominator of providing service
to our members. In the right way, server-to-server, the proposal which
we put forth to the IETF, the IETF has been struggling with this issue
‑‑

COMMISSIONER TRISTANI: I think one other point you maybe misunderstood
Mr. Bagully made was that a year ago, he was told one thing, and then a
few months ago, he was told it\'s the privacy issue ‑‑

MR. SCHULER: Well, no ‑‑

COMMISSIONER TRISTANI: And the security issue. Let me finish.

MR. SCHULER: Um‑hum.

COMMISSIONER TRISTANI: And he also indicates that there had been
flip-flops.

MR. SCHULER: Okay, so let me clarify ‑‑

COMMISSIONER TRISTANI: So there were different, so, and, and it would
surprise me that you weren\'t thinking about these issues a year ago or
18 months ago if you were really seriously thinking about doing
interoperability.

MR. SCHULER: Okay. My turn? We have been absolutely consistent all the
way through ‑ and we can go show you my quotes ‑‑ that privacy and
security and the difficulty, the technical difficulty of getting these
systems, which must communicate in real time to be able to allow us to
do what we\'re talking about doing. And that is us to offer a level of
service, other companies to offer a level of service. It is very hard.
We run another service. We have another instant messaging service ‑‑

COMMISSIONER TRISTANI: Do you think this is something you can do?

MR. SCHULER: We do. We do, and we put forth the way we believe it can be
done. Just so you know, the industry standards body, who has been
working on this issue for more than a year gave up. The people, the work
group who has been trying to figure out how you put forth the protocols
absolutely gave up, and finally ‑‑

COMMISSIONER TRISTANI: Were you, were you working with them?

MR. SCHULER: We were working with them. And finally, they just basically
said, look, we\'ll take proposals from the industry on how to do that.
We were the only ones who did it. We came forward ‑‑

COMMISSIONER TRISTANI: But you were working with them throughout from
the beginning?

MR. SCHULER: Yes. And we put forward a proposal that outlines how to do
this server to server interoperability. Nobody else did. Microsoft
didn\'t. Yahoo didn\'t. Tribal Voice didn\'t. No one else came forward
with a proposal. We did.

CHAIRMAN KENNARD: Mr. Schuler.

MR. SCHULER: And the important thing to add is that interoperability has
to be true interoperability. There are many services out there ‑‑

CHAIRMAN KENNARD: Mr. Schuler.

MR. SCHULER: Let me finish. Let me finish. The fact of the matter is ‑‑
Oh, I\'m sorry, I\'m sorry.

CHAIRMAN KENNARD: I understand your getting carried away with the
excitement, but we really do need to get back to a couple fundamental
questions. I just want to know what the time frame is. You\'ve said that
you want this to happen and that you can do it. Could you tell us for
the record when it will get done?

MR. SCHULER: Well, we can tell you for the record that there are two
pieces to the puzzle. One piece of the puzzle is building the technology
that will allow our servers to interoperate with other services and
incorporate all the controls that allow us to protect our consumers. We
think that\'s about a 12‑month job. Then, there\'s another ‑‑

CHAIRMAN KENNARD: Twelve months from today.

MR. SCHULER: We are working at it right now. But there\'s another issue
‑‑

CHAIRMAN KENNARD: Is that a yes?

MR. SCHULER: Well, yes. Twelve months from today.

CHAIRMAN KENNARD: Twelve months from today.

MR. SCHULER: But let me clarify. That\'s 12 months to do the technology.
There is another issue that\'s important, and that is the issue ‑‑
understand that as we are publishing what we are doing, as these
protocols are public, that at the same time that we are developing and
other people are developing their systems to interoperate with ours, the
hackers and spammers are out there figuring out how to break it.

This is an issue we deal with every single day. Our system is under
attack every single day. And so along with the development of the
system, there has to be a period of quality assurance, a period of us
testing the system and assuring that when we put it up ‑‑ because
understand, and this is an important issue, this is a Pandora\'s box.
It\'s like mail. When the door is open, you can\'t take it back.

The reason that spam is such a horrible issue today is that, with the
door open, you can\'t ever close it up again. So the important thing is
to do it properly. There\'s a technology component and there\'s a
component of ensuring that you\'ve built the most unbreakable system
possible.

And I don\'t think there\'s anyone here ‑‑ because today instant
messaging on all services are run relatively spam‑ and intrusion‑free ‑‑
but I don\'t think there\'s anyone here who wants to one day say that,
you know, we pushed this issue and in the process we got
interoperability, but we took a service that people love and enjoy and
introduced a factor they hate, and that\'s spam and intrusion forever.

CHAIRMAN KENNARD: Okay. Thank you, Mr. Schuler. I want to return to
something that Mr. Padden said in his testimony. He testified that his
company had not jumped into this debate earlier but felt compelled to
for a number of reasons, and one of which was that his view is that the
architecture is being built out now, investments are being made and if
this Commission does not act now, we may have lost an opportunity.

And I\'d like to get a reaction on that argument from either AOL or Time
Warner, because I think it\'s an important issue that needs to be
fleshed out. Do you want to go first? Maybe you should have a rest, Mr.
Schuler.

MR. SCHULER: Okay. Well, I just want to comment on the issue that
Preston brings up, which is focused on return path. You don\'t need a
broadband cable system to have a return path. In fact, our AOL TV
product, which we\'ve just introduced, doesn\'t use cable at all. It
uses standard telephony as a return path.

So the fact of the matter is that the architecture for interactive
television ‑‑ and this is a whole new area. Who knows how it\'s going to
turn out? Starting out today, you can do interactive TV with a
telephone, and we\'re doing it. I\'m a little confused about his
argument, because we\'ve approached every broadcaster and cable network
about working with us on AOL TV and told them that they all can program
their interactivity and have a return path and work with us to make this
platform happen, and they have, ABC is one of the networks that has
turned us down for some reason.

So I\'m curious as to, if they\'re so concerned about having return
path, and by the way, there is none today. There are very few set top
boxes I know that offer a true interactive return path. I\'d be curious
why, when give the opportunity ‑‑ and by the way, no cash required,
we\'re not asking them for any money. We just want to work with
everybody to kick start this whole new category. They turned us down for
the opportunity to have return path for all the programming we\'d love
to have them develop.

CHAIRMAN KENNARD: Mr. Padden, would you like to respond to that?

MR. PADDEN: Sure. You know, I described what we\'re going to do on
election night this year and consumers doing interactive television with
a separate TV and a PC with the PC connected to the public switch
telephone network, which is still open, will be able to interact. But if
that same consumer was trying to interact in a single screen experience
using a Time Warner Cable box, the new cable boxes that I saw at the
cable show in March had no phone modem in them at all. It was the cable
in and the cable out.

And I\'ve read you the provision from our contract, which gives us no
access whatsoever to the cable return path. That consumer, when
migrating from the dual screen relying on the telephone network to the
single screen in the cable infrastructure would lose the opportunity to
interact.

CHAIRMAN KENNARD: But Mr. Padden, what about the broadband platform? You
know, the U.S. Congress loaned the broadcasters a lot of spectrum worth
a lot of money for them to develop their own digital platforms. And why
not develop your own as opposed to requiring some divestiture of the
Time Warner system?

MR. PADDEN: Well, so far, our company has invested about \$65 million in
trying to build out that digital spectrum, including ‑‑ I think you know
we did Monday night football in high definition throughout the entire
football season last year ‑‑ but there\'s no return path. Certainly
nothing comparable to the broadband two‑way path of the cable
infrastructure that has any remote chance of being an effective
substitute for consumers to what the cable plant is going to offer. And
what we\'re focused on is what, what the consumer\'s effective choices
are going to be in the world of interactive television. And all the
analysts that we have read to date indicate that the two‑way broadband
hybrid fiber coax network will enjoy advantages over every other
architecture.

CHAIRMAN KENNARD: Mr. Parsons.

MR. PARSONS: Mr. Chairman, with respect, I have a slightly different
perspective on this subject matter, having been deeply involved in it. I
think, I think the reason that Disney is here today is a simple one. And
that reason was because they basically said to us at one point in time
in the negotiation, if you don\'t agree to these demands, we\'re going
to go down and throw, splash cold water all over your merger before the
FCC and the FTC. And it\'s important ‑‑

CHAIRMAN KENNARD: What demands were today, Mr. Parsons? In
retransmission context?

MR. PARSONS: The demands in terms of what I\'ll call open access and
nondiscrimination. It\'s important to note that we in fact offered a
nondiscrimination on the basis of affiliation place and that\'s not what
they wanted. What they wanted was essentially, something goes, that in
effect would require us to discriminate in favor of Disney, because if
thin about what real nondiscrimination is, they basically wanted us to
carry all of their stuff, or whatever we carried of ours to carry of
theirs, and to heck with the rest of the world.

And the remedy that they now come before this Commission with, which is
to break apart, or suggest that you require the breaking apart of the
distribution platform from the content platform is, in my judgment,
almost laughable in the face of the last 50 or 60 years of history of
this country and, in particular, in the face of the beneficiaries of the
relaxing of the regulatory provisions. The notion that we would go back
to sort of 1948 and separate content from distribution or as, or go back
to the 1970s with the thin-thin rules. Precisely the beneficiaries of
the relaxation of those rules, and allowing the industry to come
together in a vertically integrated way, as Gerry was saying earlier,
not only has resulted in the proliferation of content, but choice for
consumers.

And, you know, I think the Commission should think long and hard as it
seeks to consider how to really encourage ‑‑ I\'ll put it that way ‑‑ a
proliferation of both choice and content in this new medium. Do you let
the market do it, where consumer will will drive what is ultimately
presented to them? Or do you try and regulate that from, you know, from
behind the parade, if you will, because of some fear of a host of
horribles that a competitor has said I could be hurt? Not competition
could be hurt. I could be hurt, because I\'ve invested a lot of money in
a business model that relies ‑‑ that requires access to this return path
and if I don\'t get it, I might be hurt in the way in which I\'m
approaching the marketplace.

But what about the consumers? I would submit that the trend has been
clearly in a direction away from what the Disney folks are suggesting
and proposing. And the result of that trend has been more choice, more
consumer empowerment, greater diversity in content. And why would this
Commission want to reverse that?

CHAIRMAN KENNARD: Commissioner Ness.

COMMISSIONER NESS: Thank you. Can you tell me if you provide a return
path for any other programming that\'s on your cable system? Is there
two‑way interactive programming for any other programmers that are on
the service?

MR. PARSONS: We do, we do on a, on a conventional and negotiated basis.
For example, there\'s a service called Wink. A little eye will pop up on
your screen. You can pop the eye. It takes you into an Internet‑based
service. And that\'s right, Gerry reminds me that it\'s unaffiliated
with us ‑‑ that is a commercial service that\'s out there that comes to
the cable operator and comes to the programmer and makes a deal to have
their service ride along board. We\'re totally comfortable with that.

That\'s a negotiated arrangement with unaffiliated services. We\'d be
totally comfortable with our friends at Disney, which they know. But
that\'s not what they want.

COMMISSIONER NESS: Did you want to respond?

MR. PADDEN: A couple specific examples. We know that advertisement are
being made today with interactive triggers. For example, an ad for a
car. Click here if you would like to test drive this jeep. What we asked
‑‑ and we put these letters in the record ‑‑ what we asked our friends
at Time Warner was, we\'re pretty sure if that interactive ad runs on a
channel Time Warner owns, that the system functionality will enable that
interaction and the customer will have a chance to register for a test
drive. All we asked them was assure us that if Chrysler buys that
schedule on ABC instead of on TNT that the system will function the same
for the consumer when they\'re trying to interact.

Another example. In the letter that\'s in the record, we said, in this
new interactive world, we\'re sure consumers will have the opportunity
to drill down while watching CNN if there\'s a news story they would
like more detail about, they\'ll be able to click and get transported to
a broadband Web site that CNN will have developed with more detail on
that news story. We\'re all working on these same opportunities for
consumers. We said, just tell us that the system will function the same
if this consumer\'s watching ABC News and they\'d like to drill down.

We have not asked for any kind of preferential anything. In fact, we\'re
having a hard time trying to think of all the questions we asked. And
the bottom line ‑‑ and you\'ll see this in the letters ‑‑ we asked of
Time Warner, just assure us that the system will function for consumers
when they\'re seeking to interact with our content the same way it does
when they\'re seeking to interact with your content.

COMMISSIONER NESS: Response from Time Warner or AOL.

MR. PARSONS: There\'ll be one from both actually. First of all, one of
the differences between us and Disney, I think, is they seem to think
they know how the world of interactivity is going to roll out in the
future and, therefore, can answer all the questions today. Our concern
was and is ‑‑ and it should be a concern of this Commission as well ‑‑
that no one really knows how these interactive services and how
interactivity, once introduced into television, will roll out and that
it should be determined by the players in the marketplace and by
customer and consumer demand, as opposed to trying to lay the tracks now
that will keep the train from going where it needs to go but put it on a
path that someone thought may happen.

Secondly, I have to disagree respectfully with Mr. Padden\'s
characterization of what they asked for. Essentially, they asked for
parity with all of our services and it\'s, so that, you know, instead of
nondiscrimination on the basis of affiliation. And when I responded ‑‑
well, I won\'t get into all of the discussions, but they were
essentially saying, protect us, and we\'re fine. Promise to do for us
everything that you do for your own services, and we\'re fine.

The fact that that might, and would in fact, preclude other services
that consumers might want ‑‑ we don\'t even, we don\'t even, as the
Commission well knows, carry all of our services, because we\'re guided
by the consumer demand. So I think the ask was a lot more substantial,
and I think that the concern was ‑‑ what Disney was trying to do, and
what we hope this Commission will refrain from doing, is to lay some
tracks across the wilderness when we don\'t know where the watering
holes are, when we don\'t know where the customer demands are, where we
don\'t know how this is going to roll out, because the marketplace needs
to determine that. But I know that Barry wanted to add something.

MR. SCHULER: I just wanted to add that laying the tracks means even
though there are digital set top boxes out there, in order to enable the
kinds of applications that Mr. Padden is talking about, interactive,
more information on news, playing along with games, you need software,
you need services, you need technology to be able to run on those
platforms. It may be that the current platform today can\'t necessarily
support that, but we did introduce, just introduced a platform that does
do it and, again, I will repeat, gave ABC the opportunity to do exactly
what they\'re asking to do without charging any money, and they said no.

So I don\'t know exactly what their issue and concern is, because AOL TV
does enable exactly the kind of technologies they\'re talking about, to
do single screen work, to read those triggers he\'s talking about and
enable them. And so, given the opportunity, the answer was no.

CHAIRMAN KENNARD: Commissioner Tristani.

COMMISSIONER TRISTANI: I wanted to go into another area. Mr. Weed asked
a question that I would like you to address. And by the way, Mr. Weed, I
really appreciate the work that a lot of your members do in the rural
communities, in hard‑to‑serve communities, in communities where no other
players will go so ‑‑ he said that he\'s received inconsistency
responses from AOL Time Warner on the question whether you will require
carriage of AOL services as a condition of access to Time Warner
programming. Which is the answer? Unequivocally?

MR. PARSONS: Unequivocally. We will not. We will not tie them together
in that way. We had thought, we had thought we were clear in our
previous submissions. Obviously, we weren\'t. Mr. Weed has raised the
point. But we\'re being unequivocal now. We will not tie them.

CHAIRMAN KENNARD: Commissioner Powell and then Commissioner
Furchtgott‑Roth.

COMMISSIONER POWELL: I want to briefly go back to this interactive
television issue, because there\'s a lack of clarity here that I think
has a lot to do with merger specificity that\'s important to
distinguish. We have being discussed what is essentially two different
products or platforms with two different potential problems or not
problems, and they\'re not necessarily interchangeable. There is AOL TV,
a product, as I understand, sold at retail. A product, as I understand
has a relatively open opportunity for programming interoperability.

And then there is the potential for Time Warner digital set top box
problems. And I want to get clear from ABC whether they\'re concerned
about both of those, or principally about the cable set top box as a
gateway with Time Warner, which does not capture or bring in the AOL TV
product. You have tended to answer Mr. Schuler\'s question about
programming by going back to the cable box, which is not his product.
And I\'m not so sure your concern, if its exclusive to one of those, is
necessarily specific to the combination.

MR. PADDEN: Well, you\'re right. They\'re two separate products. I
would, we certainly have a concern that I hope we\'ve articulated about
the, what we believe is going to be a cable bottleneck for the delivery
of broadband two‑way interactive television. But with respect to the
stand‑alone AOL TV box, my understanding, Mr. Schuler, is we have not
said \"no.\"

Various parts of our company were approached by AOL, and the offer was
we ‑‑ AOL will make available or proprietary offering tools to enable
you to create content for this AOL TV stand‑alone box that is for now,
anyway, unconnected to their cable distribution. We had an internal
meeting, and each of our divisions either has or will be getting back to
AOL TV to seek more information about exactly what they\'re talking
about. I will say that the minute we heard proprietary offering tools, a
bunch of caution flags went up around our company, because today the
beauty of the narrowband Internet is you don\'t need any, you don\'t
need to rent anybody\'s ‑‑ or have them loan initially before they have
any market penetration loan them for free ‑‑ you don\'t need anybody\'s
proprietary offering tools.

The, you have end‑to‑end connectivity, anybody can play. What, we\'re
going to explore the AOL TV stand‑alone box offer more specifically, but
we have concerns about the standards issue.

COMMISSIONER POWELL: Just one thing quickly about that. I\'m not so
sure, when you have a stand‑alone technological product, I assume with
some form of operating system, that there are often proprietary tools
for writing to that system. I mean certainly the case is true of
Microsoft operating systems or any other operating systems, that you
have to have the APIs and protocol in order to write effectively. I\'m
not so sure that that\'s ‑‑

MR. PADDEN: Well, that\'s why I said caution flags went up and we will
be getting each of the operating divisions, I mean they came separately
to ESPN, to Disney channel, to ABC, and they\'re each going to be
getting back to them.

COMMISSIONER POWELL: Time\'s short, so I don\'t ‑‑

CHAIRMAN KENNARD: Go ahead, Mr. Melcher, quickly.

MR. MELCHER: I\'d like to just raise a point that I think this is
obviously an important discussion for Disney and Time Warner on open
access with regards to open access with regards to content. I think up
until very, very recently, open access has always focused on open access
to, via, or for Internet access via a new technology.

And so I would hope we make sure the distinction is kept separate, that
whether or not you agree Disney should have open access in terms of
content, what is, I think, more of immediate interest to the American
public is that they have access to this cable technology for Internet
access, and not necessarily to watch interactive TV but to surf the
Internet, to use it for work, to use it in all the ways that we use the
Internet.

And that\'s what I think we\'d like to focus on as a service provider.
We want access to this technology on a wholesale basis, equal access, to
use it in whatever way we see fit to serve the American public as they
use the Internet, not interactive TV. Thank you.

CHAIRMAN KENNARD: Thank you.

COMMISSIONER POWELL: Mr. Chairman, I had one more point.

CHAIRMAN KENNARD: Oh did you? I\'m sorry. Go ahead, Commissioner Powell.

COMMISSIONER POWELL: We\'ve heard a lot of talk about instant messaging
and AOL\'s interoperability. I assume you\'re going to tell me Tribal
Voice has no problem inter‑operating with any and all other IM
providers?

MR. BAGULLY: We are, actually two points, Commissioner. One, we are
completely free and agreeable to inter‑operate with anybody that wants
to, and we openly exchange protocols. But we are part of a new group
called IM Unified, which, in fact, consists today of about eight, and
it\'s a rapidly growing number of Internet, or instant messaging
companies that have committed to publishing standard for
interoperability among our companies in the next six to eight weeks, and
to have complete interoperability among our companies by the end of the
year. We think the long‑term solution is, in fact, the IETF publishing
standards, but rather than wait, we\'ve decided to go ahead and do this
on our own.

COMMISSIONER POWELL: Okay. I want to jump in, because I want to be
clear. That\'s an announcement just this week.

MR. BAGULLY: Yes sir.

COMMISSIONER POWELL: But for the last year, if I downloaded any of these
other IM products ‑‑ Microsoft\'s, Yahoo\'s, yours ‑‑ would I have
inter‑operating functionality that we\'re insisting that AOL have? Is
the answer to that yes or no?

MR. BAGULLY: It\'s yes with Microsoft. It\'s yes with AT&T. It\'s no
with Yahoo, though we are working with them. They\'re part of this
organization too.

COMMISSIONER POWELL: So Microsoft\'s IM product can talk to anybody\'s
IM products except AOL.

MR. BAGULLY: Can talk to ours. I don\'t know ‑‑ and it cannot talk to
AOL\'s. Beyond that, I don\'t know.

COMMISSIONER POWELL: So all these other IM products are not necessarily
yet reached this same level of interoperability that\'s so important.

MR. BAGULLY: No. The difference, Commissioner, is that everybody else,
or all the other IM companies, are striving, working together to try to
make this happen as quickly as possible, as opposed to what we believe
is a stalling tactic.

COMMISSIONER POWELL: Okay.

CHAIRMAN KENNARD: Okay. Commissioner Furchtgott‑Roth.

COMMISSIONER FURCHTGOTT‑ROTH: Thank you, Mr. Chairman. I do have a
question for the panel, but before I get to that, I think I may owe you
a bit of an apology, Mr. Chairman. We did hold a hearing on December
14th, 1998, that looked at mergers generally, and there were single
panels on each of three license transfer applications before the
Commission ‑‑ AT&T, TCI, Bell Atlantic GTE, SBC Ameritech ‑‑ although
those license applications for Bell Atlantic GTE, SBC Ameritech were
subsequently withdrawn and resubmitted in radically different forms.
There were no CEOs at those hearings.

COMMISSIONER TRISTANI: Yes there were.

COMMISSIONER FURCHTGOTT‑ROTH: Not all of them. Who was there?

CHAIRMAN KENNARD: Actually, you were doing pretty well. Let him finish,
okay?

COMMISSIONER FURCHTGOTT‑ROTH: There was a general review of mergers. It
was not particularized to one merger. Notabart (phonetic) was in
Illinois on that Monday.

COMMISSIONER TRISTANI: Well, somebody, somebody ‑‑

CHAIRMAN KENNARD: All the CEOs were there, as I recall, but no need to
belabor the point here.

COMMISSIONER FURCHTGOTT‑ROTH: Not according to Com Daily.

COMMISSIONER TRISTANI: Oh, don\'t trust everything you read in Com
Daily.

COMMISSIONER FURCHTGOTT‑ROTH: Oh, I do. Anyway, if one looks at all of
the major license transfer applications we\'ve had before the Commission
while we\'ve been here as a Commission, even if one counted all three ‑‑
and I\'m not sure I would ‑‑ that\'s just a small minority of the major
applications that have been before this Commission. But I do accept
there has been a hearing in the past.

The issue that the gentlemen here raise are all very important issues. I
don\'t mean to suggest otherwise. What I would suggest is, in some
instances, these are issues that may well be being reviewed by the
Federal Trade Commission. In other instances, they\'re not being
reviewed by the Federal Trade Commission because, frankly, it\'s not
clear they are narrowly related to the license transfer or the merger
but rather to general problems between the cable industry generally and
the broadcast industry, or electronic messaging generally.

The question I have is, for instance, Mr. Padden, are these issues that
are narrowly related to just AOL Time Warner, or are these problems that
are more generic that need to be reviewed by the Commission
industrywide. Do you have the same problems as a broadcaster in dealing
with other cable operators? And the same for the folks involved in
electronic messaging. Is this narrowly involve just AOL? Or are these
issues that, frankly, may be more amenable to generalized rulemaking
rather than rules that would apply to just one player in the industry
and not to anyone else?

MR. PADDEN: I can certainly say for our part, we are here because of the
specific collection of assets in this merger and our specific history of
problems with these companies. We\'ve not had other Internet service
providers ask us, insist that we remove consumer links that would allow
consumers to navigate more freely in order to do business with them.
Disney channel was being carried on the basic tier in 60 million
American homes while Time Warner refused to carry it.

So we certainly are here because of this specific merger, the marriage
of the AOL closed, proprietary, walled‑garden marketing environment with
the Time Warner content assets and cable bottleneck distribution. That
is, we believe, a deadly combination for consumer choice, and that\'s
why we\'re here.

MR. PARSONS: May I, Commissioner, because I think, first of all, you\'ve
put your finger on something that I think is very fundamental. Let\'s
take IM for one second. There\'s nothing about this merger that
implicates the IM issue. Time Warner isn\'t in the business. It\'s,
there is no question as to somehow by the joining up of these companies,
will the IM situation get better or worse? It will be stay the course.

So one question is, is this, a license application like this, an
opportunity to sort of open up the entire business practices of both
companies and look around and see what you would do differently if you
ran the company? I mean, there is no jurisdictional relationship, for
example, between the IM issue and the merger. So I think that\'s one set
of questions.

But the second is, are these, is this a spillover of business disputes
now dressed up to look like important public policy issues. And I submit
it, that\'s exactly what it is. There is no question. It\'s
well‑documented. Everybody sort of had an opportunity to have their,
their fling at the media about the well‑publicized disputes between Time
Warner and Disney.

But to then, to then dress it up as a public policy issue, as Preston
said earlier that, well, there are conflict of interest, Time Warner has
the Cartoon Network and everybody else put Disney down on basic. It\'s
money. That\'s all it is.

CHAIRMAN KENNARD: I need to follow up on that. I need to follow up if
you\'ll permit me. I\'m not sure if you finished. But in the interchange
we saw a few minutes ago, it did sound like what was fundamentally at
stake here was a contractual dispute between ABC/Disney and Time Warner.

And I have to ask you very bluntly, Mr. Padden, because I\'ve seen this
happen before ‑‑ in fact, you were involved ‑‑ when NBC brought
allegations against News Corporation when you were at News Corporation.
Serious public policy issues were addressed. We developed a record.

Then there was a deal that was made between NBC and the Fox network.
Suddenly, their allegations disappeared. And we don\'t like to have our
processes here used as leverage in a contractual dispute. And you
alluded to some meetings coming up, and is this the kind of allegations
that suddenly we\'re going to see ABC/Disney disappear from this
proceeding, because their issues are resolved at the negotiating table?

MR. PARSONS: No, Mr. Chairman. And I appreciate the opportunity to
answer the question, because I think what you have here is sort of the
reverse of the situation you described with NBC and News Corp a few
years ago. Here, the commercial deal got done, and the public policy
dispute follows. So we can\'t possibly be here trying to gain leverage
in the commercial transaction, because we did that transaction.

What happened is we raised in our commercial negotiation with Time
Warner ‑‑ and again, the letters are in the record ‑‑ we raised a host
of what we believe are public policy issues involving nondiscrimination,
one of the core principle of the enabling statute of this agency. And
running through a whole host of operating parameters, knowing that we
were doing a contract that was going to run seven years into the future,
and without being able to know, even, all the right questions to ask,
our core ask in a public policy sense was, just tell us that you\'re not
going to discriminate in the functionality of this system for consumers
depending on whether they\'re trying to interact with your content or
with ours. And it runs through all the issues. Caching, return path,
data rates, all of it.

But what happened in the negotiation is they said, we will conclude the
financial negotiation and you take those public policy issues to
Washington, because we\'re not going to deal with just you on them,
because if we give this, if we agree to be nondiscriminatory to you, we
have to be agree to be nondiscriminatory to everybody, to which we said,
well, of course.

So we ended up doing what they asked. We closed the commercial deal.
That\'s over. And we are here advancing the public policy issues to this
agency.

CHAIRMAN KENNARD: Mr. Melcher, Mr. Schuler and then Commissioner Ness
has some questions.

MR. MELCHER: Two quick points, Mr. Chairman. Thank you. I have, while I
welcome the participation of Mr. Padden at Disney, I have questions, as
well. Recently, it was announced that AT&T secured an agreement with
Quest and U.S. West that they would not participate in the AT&T cable
license transfer. Specifically, it was a deal so that if U.S. West Quest
did not come in and say that the cable should be open for open Internet
access, that AT&T would not oppose the U.S. West Quest merger. And that
deal was just publicized through the efforts of a commission in
Washington, I believe. So I have suspicions.

Secondly though, more importantly, I think this issue may be drawing
some attention away from what I, again, believe to be the most
significant issue, which is open Internet access, not whether the Disney
content gets on Time Warner but whether the American public gets the
superior Internet access product, which is cable. I believe it will be.
And I think, following up on Mr. Reddersen\'s comment earlier, I think
FCC could do well to codify the agreement that AT&T, that AOL and Time
Warner have all stepped up and said that they will honor open access,
make them codify it and enforce it.

I think a rulemaking really is appropriate, but time is running out. And
I would agree with Mr. Padden on that point. Time is running out. There
is no time to wait. We need to make conditions now on this merger and
get into a rulemaking, because if we don\'t, I think we\'ll have an
architecture that\'s built out in the next six to eight, 12 months,
which will prevent open Internet access.

And that is my fear. That AT&T and AOL and Time Warner right now are
building out an architecture with billions of dollars that will prevent
open access. If you do not act quickly, you will lose the opportunity.

CHAIRMAN KENNARD: Thank you. Mr. Schuler, very briefly, and then
Commissioner Ness.

MR. SCHULER: Very briefly. To your point about Disney\'s motivations in
using these proceedings. If you go to page 47 of their own filing, they
say right here in black and white, \"AOL Time Warner can prove Disney
wrong. All it has to do is come to the negotiating table and agree to
arrangements with Disney.\" Blah, blah, blah, blah, blah.

MR. PADDEN: No. Don\'t do blah, blah, blah. Finish. It says to provide
nondiscriminatory access. That\'s all we\'re looking for.

MR. PARSONS: No, no, no. You have it exactly right, Mr. Chairman. It\'s
the same dance, it\'s just a different order of the steps.

COMMISSIONER TRISTANI: I just want to comment that I think AOL
shouldn\'t talk about the same dance or not using proceedings and then
changing course. It used the 9th circuit very effectively till it got a
reason not to do it. That\'s the American way.

COMMISSIONER NESS: Mr. Melcher, you mentioned Mr. Reddersen, who was
commenting also on nondiscriminatory access to programming and his
concern about multiple cable provides not effectively, not enabling
companies that are providing DSL service, for example, from getting
access to the programming, be it AOL or Time Warner. Is that, that was
the essence of your testimony. Is that right?

MR. MELCHER: One of the three points, yes, Commissioner.

COMMISSIONER NESS: Okay. Can Time Warner and AOL please comment about
whether they will be making, on a nondiscriminatory basis, programming
available to DSL providers.

MR. SCHULER: I can say that on AOL\'s part, we have gone to every DSL
provider in the country to cut deals to offer our services over DSL. We
have cut deals with everybody except Bell South, who has not wanted to
do a deal with us. So our intent is to offer ubiquity of broadband
services everywhere, whether it\'s cable or satellite or broadband
wireless or DSL, because that\'s what makes our business work.

COMMISSIONER NESS: Mr. Reddersen, would you like to respond?

MR. REDDERSEN: Yeah, I was about to say earlier that I didn\'t think I
was in a contract dispute with these people, so I couldn\'t comment,
similar to Mr. Padden, but obviously I am. Since Mr. Schuler has brought
it up, I will tell you he is right. We do not have an agreement where
they will provide AOL service over Bell South\'s DSL service. The reason
we don\'t is because they want substantially better terms and conditions
than anyone in the marketplace and they won\'t do a deal without them.

We have available wholesale tariff and we have volume discounts on that
wholesale tariff, and there are many large ISP\'s out there
participating on it and they can participate in that tariff anytime they
want to do that. Let me finish now, Mr. Schuler, please. The issue, I
think, that was brought up earlier is really important. And that is, the
real issue, while there\'s an issue of cable access here and it\'s very,
very important, the real bottleneck here going forward is the AOL
environment. I think that\'s what Ms. Dyson was describing.

And when we talk about and when Disney talks about that control
environment and the content flow in and out of it, what we\'re really
describing is whether other content players will have open access to
that environment and whether content that flows from Time Warner through
that closed AOL environment will be available to other Internet service
providers.

Let me give you a simple and easy example. If the Braves games are
available on streaming media but only available on the AOL environment
in Atlanta, then all other ISPs providing broadband streaming media
might as well close shop in Atlanta. So this is a two‑way issue here for
content providers having reasonable market terms and conditions into
that environment and for the Time Warner content to be made available
openly to other ISPs. So if both parties are concerned about that
control point, there must be some reason for that. And it\'s not a
contract dispute on our part. I will guarantee you that.

COMMISSIONER NESS: Time Warner, go ahead.

MR. PARSONS: Well, I submit though, that the beginning of Mr. Reddersen
response puts this all in context. He says AOL wants too much money.
They say he won\'t pay them the fair amount. Business dispute, you know.
And I, and I do think that, when I say it\'s the same dance that, with
our friends at Disney, it isn\'t just a question of nondiscrimination
because, as I said, we put that on the table. What they wanted was ‑‑
and if you look at their letters and read them carefully ‑‑ they wanted
to be treated exactly the same way in all instances that we treat our
own content.

So does that mean, for example, if you put a CNN box on some web site,
that you have to put an ABC News box on the web site. Those things have
to be negotiated in the marketplace. You can\'t, this Commission, I
don\'t think, can deal with the subtleties and the nuances and the
complexities of trying to arrange business arrangements that are going
to enable a business to grow and be dynamic and innovation to occur.
You\'ve just got to leave that to the marketplace.

Now, what we have done is we\'ve committed to open access on the
broadband platform. I will tell you, we\'ve heard Gerry Levin say it, I
will say it. Time Warner, we make stuff. And the way you maximize the
value of making stuff is you sell it to as many distribution channels
and across as many, as many outlets as you can.

And if you look at the way we manage our business now, that\'s what we
do. That\'s what we\'ve said we\'re going to do in the new environment.

COMMISSIONER NESS: Mr. Reddersen response, please.

MR. REDDERSEN: Very simply, and please don\'t let this whole debate and
the issues get narrowed down to any dispute between Disney and Time
Warner AOL. The whole message being brought to you by Time Warner AOL,
both excellent companies ‑‑ I marvel at the products and services that
they bring to the marketplace ‑‑ is twofold. First, it\'s \"Trust me, I
will be open, in a world where I may not have been in the past, but
trust me in the future. I will be.\" I would urge you, having tried that
argument over the last 15 years in the telecom industry ‑‑ it probably
didn\'t work ‑‑ not to take that argument here.

The second issue and more important issue may be let the market work.
Well, the only other player out there that has the potential to provide
the leverage against AOL Time Warner to make the market work is AT&T TCI
Media One, and there are so many interlocking relationships between
those two entities, that it\'s unlikely that they will establish market
terms and conditions between the two parties that are at all reasonable
to the rest of the industry. So I urge you, if you can establish that
separation, you may at least have a large player out there that can
establish market prices and terms and conditions that are reasonable.
Thank you.

CHAIRMAN KENNARD: I\'m sorry, but that\'ll have to be the last word for
this panel. I\'m sorry, we\'re running way over, and I want to hold at
least 15 minutes so that we can have some statements from people in the
audience who have been waiting throughout this entire panel. So thank
you all very much. I thought we had a really good, robust debate there,
and I appreciate your participation.

We\'ll take 15 minutes and 15 minutes only for anyone in the audience
who would like to make a statement for the record in this proceeding.
I\'ll ask that you speak for no more than two minutes, and I\'ll ask our
timekeeper here to make sure that we keep everybody on the clock. Okay,
please begin here on my right. Nancy? Welcome.

MS. BLOCK: Hello, my name is Nancy Block, and I\'m the executive
director of the National Association of the Deaf, an independent
consumer‑based nonprofit association representing 28 million deaf and
hard-of-hearing Americans. As advocates for communications
accessibility, we are, of course, deeply interested in all technologies
that can solve particular challenges for people who are deaf, late
deafened, hard of hearing and deaf-blind.

In its current incarnation, instant messaging enables deaf-to-deaf and
deaf-to-hearing seamless communication for people with computers and
Internet connections, but only as long as they share the same provider.
Therefore, we have a strong interest in making sure that open and
interoperable communication functions that have helped fuel the
explosive growth of the Internet continue as the medium makes new forms
of communication possible.

As instant messaging technology develops and instant messaging moves on
to wireless devices such as pagers and cell phones, the possibilities
for enhanced communication become even more exciting. A fundamental
principal of accessibility is that users of critical communications
functions should be able to communicate with all others, even those who
have different service providers. Ease of communication, regardless of
the provider, is important to all consumers, and especially so to deaf
and hard of hearing people, for whom instant messaging represents an
important new advance.

Recently, at our biannual convention ‑‑ sorry ‑‑ our biannual national
conference earlier this month, delegates passed a resolution calling for
FCC and FTC attention to the issue of instant messaging, open access and
interoperability. It is of particular importance that people who are
deaf, late deafened hard of hearing and deaf- blind be able to take
advantage of the many advantages that instant messaging has to offer for
seamless, instantaneous and barrier‑free communication. Attention must
also be given to the universal design and the importance of planning for
access right from the start. Thank you.

CHAIRMAN KENNARD: Thank you, Nancy. We appreciate you being here. Yes
sir.

MR. STEINHORN: My name\'s Barry Steinhorn. I\'m the associate director
at the American Civil Liberties Union. I hadn\'t actually originally
planned to speak during this session, but the last panel gave me the
impression that perhaps I should. I don\'t think the Commission should
be diverted from some of the main issues here by a concern about whether
or not some of the comments at the presentations of the last panel were
based on business disputes rather than important public policy issues.
Perhaps they were, perhaps they weren\'t.

But there are important public policy issues here. In particular,
there\'s the issue of open access. And I want to endorse the proposal
that was made by Mark Cooper and others ‑‑ and I won\'t repeat that ‑‑
but I want to put it in a slightly different context. ACLU, for example,
has on a number of occasions represented a small Web site, operates in
the city of Philadelphia, called the Critical Path AIDS project.
Critical Path AIDS project, as the name suggests, provides information
about sexually transmitted disease, partly sexually transmitted disease.
They are somewhat controversial. They have been threatened on a number
of venues with various kinds of punitive actions.

We are very concerned that if this walled garden that others have
described does in fact occur, it\'s not so much that Disney may have
difficulty getting into the walled garden, because we assume that there,
the marketplace perhaps would be able to solve these problems, but the
Critical Path AIDS Project and other small providers, who the Internet
has given an opportunity to speak to audiences large and small will, in
fact, be walled off. That they will not, for example, have the same
access as, perhaps, Web MD, or some other large medical Web site, which
may not be affiliated with Time Warner AOL or with AT&T, but may have an
arrangement or even a credibility with Time Warner AOL or AT&T that may
lead them to get preferential treatment in all the ways that you\'ve
discussed here ‑‑ caching and access streaming video, et cetera.

So we urge you to enact an open access requirement rather than simply
trusting the marketplace to solve that problem, and to keep in mind the
small content providers, not simply the large commercial providers.
Thank you.

CHAIRMAN KENNARD: Thank you for that statement. Jeff Shester.

MR. SHESTER: Thanks. And Barry has stated some of my concern, that what
was in part missing from today is the role that the Internet plays in
our democracy and that the mission that we have, I think, that you have,
historic mission that you have at this point is to make sure that this
end‑to‑end architecture principal that has allowed all of this
diversity, content diversity, including noncommercial and independent
voices to exist and flourish, as well as competition, to help them make
the transition to the broadband environment, which will be dominated by
the ITV space.

Mr. Parsons, I have to say I follow what you\'re doing, and you\'re
running the tracks, you\'re creating the railroad, you\'re creating the
engines and a closed system is moving into place, and we have to ensure
that an open access policy ensures that those noncommercial diverse
community voices are as powerful in some way as the Disneys and the
NBCs. Thank you.

CHAIRMAN KENNARD: Thank you, Mr. Shester. Are there any other statements
from the public. I don\'t see anyone else lined up. Well, thank you all.
It\'s been a long day, but I think it\'s been a very worthwhile and
productive day, and I think that you\'ve certainly enlightened us, and I
appreciate your patience and all the preparation that went into these
presentations.

I also want to thank the Commission staff who worked so hard to make
this event happen today. Deborah Lathan, chief of our cable services
bureau and her great team, including Royce Dickens and John Norton in
the cable bureau and Ruth Dancey, who we\'re happy to have back at the
Commission. Also Michelle Ellison and Michelle Rouseau and Darrell
Cooper were very instrumental in making this happen today. So thank you
all very much and this hearing is adjourned.

(Whereupon, at 6:04 p.m., the hearing in the above-entitled matter was
adjourned.)

//

//

//

//

//

//

//

//

//

//

//

//

//

//

//

//

//

//

//

**[REPORTER\'S CERTIFICATE]{.underline}**

**FCC DOCKET NO.**: 00-30

**CASE TITLE**: In Re: America Online & Time Warner

**HEARING DATE**: July 27, 2000

**LOCATION**: Washington, DC

I hereby certify that the proceedings and evidence are contained fully
and accurately on the tapes and notes reported by me at the hearing in
the above case before the Federal Communications Commission.

Date: \_7-27-00\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

John DelPino

Official Reporter

Heritage Reporting Corporation

1220 L Street, N.W., Suite 600

Washington, D.C. 20005-4018

**[TRANSCRIBER\'S CERTIFICATE]{.underline}**

I hereby certify that the proceedings and evidence were fully and
accurately transcribed from the tapes and notes provided by the above
named reporter in the above case before the Federal Communications
Commission.

Date: \_7-27-00\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Richard Grossman

Official Transcriber

Heritage Reporting Corporation

**[PROOFREADER\'S CERTIFICATE]{.underline}**

I hereby certify that the transcript of the proceedings and evidence in
the above referenced case that was held before the Federal
Communications Commission was proofread on the date specified below.

Date: \_8-7-00\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

George McGrath

Official Proofreader

Heritage Reporting Corporation