Testimony of Preston R. Padden

Executive Vice President, Government Relations

The Walt Disney Company

At the

Federal Communications Commission

En Banc Hearing

On American Online, Inc. and Time Warner, Inc.

Applications for Transfer of Control,

CS Docket No. 00-30

July 27, 2000

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Thank you Mr. Chairman.

We are very grateful to have this chance to talk about the future of
Interactive Television and the AOL/Time Warner/EMI merger.

Often promised in the past, Interactive Television is now rapidly
becoming a reality with the convergence of traditional television,
internet content, communications services and commerce applications all
rolled into a wondrous new servant of consumer needs. The Walt Disney
Company is investing millions of Dollars in the development of
compelling new content and services for Interactive Television -- a
play-along interactive companion for "Who Wants To be A Millionaire";
detailed statistics, games and separate audio tracks for sporting
events; behind the scenes coverage of the Academy Awards; in depth
election coverage far beyond anything possible on old fashioned one-way
TV; and our imaginative "Zoog Disney" interactive content for children.

We are here today to advocate a world of Interactive Television in which
each consumer enjoys the freedom to choose, or to NOT choose, our
content and our services based solely on how good a job we do in
satisfying consumer needs and tastes. And, we are here to warn against a
world in which consumer choice is limited and skewed by the conflicted
business interests of the company that operates both the pipeline to the
home and a closed and proprietary marketing environment.

All the analysts agree that 2-way broadband hybrid fiber-coax networks,
built by the cable industry, will be the primary platform for
Interactive Television. For many consumers, cable will be the only
platform. Millions of Americans, including many in apartment buildings,
have no access to satellite. And satellite is limited to a narrowband
return path. Future deployment of broadband uplinks from consumer's
homes is unlikely to be cost competitive with the existing cable
infrastructure. And, at least for the foreseeable future, DSL will not
have the capacity to deliver full screen, full motion live television.

Because of the likely dominance of the cable platform, and the scarcity
of good substitutes, Disney considered raising concerns regarding recent
cable mergers involving TCI, AT&T and Media One. We also nearly
succumbed to AOL's constant and relentless entreaties for us to join the
fight for government assured open access of cable pipelines. But, our
respect for our cable system customers, and our understanding of this
agency's desire to not prematurely regulate broadband, kept us on the
sidelines.

The merger before you today pushed us into the debate. This transaction
would merge AOL's internet dominating closed and proprietary "walled
garden" architecture and business practices with Time Warner's
bottleneck cable pipelines and vast content library to pose a clear
threat to consumer choice and competition in Interactive Television. The
combined company would control:

1)  the bottleneck cable pipeline past 20 million homes,

2)  50% of the narrowband internet marketplace,

3)  a vast content library including a dozen leading cable networks,

4)  set top box computer hardware,

5)  the operating system for those boxes,

6)  "sticky" application such as e-mail and chat,

7)  a near monopoly in Instant Messaging", and

8)  publishing rights to nearly 80% of the music used in popular films
    and television programs.

Interactive Television platforms present myriad opportunities for
technologically sophisticated discrimination in favor of content and
services owned by, or affiliated with, the owner of the pipeline. Given
the unprecedented concentration of market power that would be created by
this merger, there is a clear threat to consumer choice in the 20
million homes passed by AOL/Time Warner cable. In addition, there is
clear danger of a deal in which AOL/Time Warner completes AT&T phone
calls in return for AT&T favoring AOL/Time Warner Interactive Television
content and services. Such a deal would extend AOL/Time Warner's control
of Interactive Television to more than 50% of the market. Add in
AOL/Time Warner's equity stake in satellite provider Direct TV and the
domination of Interactive Television will be complete.

This massive aggregation of market power cannot be left to voluntary
promises of good behavior. Both AOL and Time Warner have demonstrated
their propensity to abuse their bottlenecks and market strength to limit
and skew consumer choice and to inhibit competition. AOL has perfected a
collection of predatory tactics and business practices that result in
consumers spending 85% of their time online trapped inside AOL's
proprietary "walled garden." AOL requires its content partners to
disable or limit consumer navigation links to sites outside the "walled
garden." It prohibits advertising for competitive services. AOL takes
affirmative steps to render its instant messaging services incompatible
with competitive services resulting in a market share in excess of 90%.
And, AOL actually developed client software that disables the client
software of any other ISP on the customer's desktop.

Time Warner's history is replete with similar anti-competitive
practices. The common thread to Time Warner' actions has been use of its
cable distribution bottleneck to reduce consumer choice and to exclude
service offerings deemed competitive with Time Warner offerings. For
example, almost alone among cable companies, Time Warner historically
has refused to carry local and regional news channels owned by others.
In Florida, Texas, Ohio, New England and the Northwest, Time Warner has
refused to carry non-owned news channels thereby reducing consumer
choice in news and preserving the market for its own existing or planned
news channels. It is instructive that the Federal Trade Commission was
forced to order Time Warner to carry a non-Time Warner owned National
news channel as a condition on the approval of its merger with Turner
Broadcasting.

Similarly, Time Warner stood almost alone among major cable companies in
refusing to carry Disney Channel on basic on most of its systems. Time
Warner would prefer that children watch Cartoon Network, which it owns.
By reducing consumer choice in children's channels, Time Warner could
expect to increase the market share of its own offering.

On its Manhattan cable system -- arguably the most important and
influential cable platform in the world -- Time Warner moved its own
channels to the highest traffic and most desirable lower channel
positions. In fact, TNT and TBS were added to the lower tier only after
Time Warner purchased Turner Broadcasting.

Time Warner also sought to reduce consumer choice in electronic program
guides -- the all important navigation map of Interactive Television. By
affirmatively stripping Gemstar data streams out of local broadcast
station VBI's, Time Warner rendered the Gemstar guide an empty and
useless vessel. This action left consumers with only one choice in
interactive guides -- the Time Warner guide.

The most prominent episode in this clear pattern of restricting consumer
choice occurred on May 1 of this year when Time Warner illegally shut
off ABC for millions of consumers nationwide. Worse yet, when ABC tried
to provide consumers with an alternative by giving away satellite
dishes, Time Warner fought furiously to maintain its monopoly by
threatening financial retribution against ABC. Time Warner threatened to
reduce Disney/ABC license fees by \$5,000.00 per dish given away. And,
Time Warner seemed to carry out its threat when it unilaterally reduced
the fees that it was paying to Disney.

In the face of this very clear pattern of anti-competitive conduct --
all aimed at reducing consumer choice -- there is simply no way that
anyone can rely on generalized and vague assurances of good behavior
from the parties to this merger. As AOL itself argued to the House
Judiciary Committee just one year ago, strong government action is
needed to assure consumer choice and competition in Interactive
Television.

Absent government intervention, AOL and Time Warner are likely to employ
a variety of tactics to further their dominance in Interactive
Television, including:

1)  excluding competing interactive content and services (*e.g.*,
    dropping an interactive ABC);

2)  force-feeding AOL/Time Warner/EMI content (*e.g.,* send the customer
    to CNN when he or she clicks on a "news" icon, instead of offering a
    "menu bar" of competitive news choices);

3)  transmitting its own content "downstream" to consumers at
    preferential (*i.e.*, faster) data rates;

4)  blocking critical, interactive "return path" communications between
    customers and competing content providers and services;

5)  limiting customers' ability to access locally "cached" data to their
    own content;

6)  favoring its own content in navigation systems and links;

7)  favoring its own content with more simple and convenient consumer
    interfaces;

8)  building its own merchant lists to the exclusion of the content
    provider's list; and

9)  developing AOL/TW controlled interactive advertising, even if it
    undermines the content providers advertising message (*e.g.*,
    supplying a navigation link to Ford, when the content provider is
    advertising GM).

In our supplemental comments filed earlier this week, Disney provided
the Commission with a broad menu of possible remedies to assure consumer
choice and competition in Interactive Television. That menu included a
separation of content and bottleneck conduit and a comprehensive list of
behavioral remedies. I would be happy to discuss any and all of those
remedies in response to your questions.