[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




  THE FUTURE OF THE INTERACTIVE TELEVISION SERVICES MARKETPLACE: WHAT 
                        SHOULD CONSUMERS EXPECT?

=======================================================================

                                HEARINGS

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                    SEPTEMBER 27 and OCTOBER 6, 2000

                               __________

                           Serial No. 106-166

                               __________

            Printed for the use of the Committee on Commerce

                    ------------------------------  
                    U.S. GOVERNMENT PRINTING OFFICE
67-119CC                    WASHINGTON : 2001





                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

   Subcommittee on Telecommunications, Trade, and Consumer Protection

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    September 27, 2000...........................................     1
    October 6, 2000..............................................    59
Testimony of:
    Case, Steve, Chairman and CEO, America Online, Incorporated..    17
    Froman, John W., Executive Vice President, Circuit City 
      Stores.....................................................    72
    Gray, Lowell J., General Manager, Shore.Net..................    82
    Heffernan, Margaret, President and Ceo, iCast................    76
    Levin, Gerald M., Chairman and CEO, Time Warner, Incorporated    21
    Meisinger, Louis M., Executive Vice President and General 
      Counsel, The Walt Disney Company...........................    68
    Wilderotter, Maggie, President and Ceo, Wink.................    64
Material submitted for the record by:
    Pickering, Hon. Chip, a Representative in Congress from the 
      State of Mississippi, letter dated October 27, 2000, 
      enclosing material for the record..........................   106
    Tauzin, Hon. W.J. ``Billy'', Chairman, Subcommittee on 
      Telecommunications, Trade, and Consumer Protection:
        Letter dated November 6, 2000, to Lowell Gray, General 
          Manager, Shore.Net, enclosing question for the record, 
          and response to same...................................    99
        Letter dated November 6, 2000, to Maggie Wilderotter, 
          President and CEO, Wink, enclosing question for the 
          record, and response to same...........................   101
        Letter dated November 6, 2000, to Louis M. Meisinger, 
          Executive Vice President and General Counsel, The Walt 
          Disney Company, enclosing question for the record, and 
          response to same.......................................   104

                                 (iii)

  


  THE FUTURE OF THE INTERACTIVE TELEVISION SERVICES MARKETPLACE: WHAT 
                        SHOULD CONSUMERS EXPECT?

                              ----------                              


                     WEDNESDAY, SEPTEMBER 27, 2000

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:10 a.m., in 
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Oxley, Stearns, 
Cox, Deal, Largent, Cubin, Shimkus, Pickering, Markey, Boucher, 
Gordon, Rush, Eshoo, Engel, Luther, Sawyer, Green, McCarthy, 
and Dingell (ex officio).
    Staff present: Linda Bloss-Baum, majority counsel; Kelly 
Zerzan, majority counsel; Cliff Riccio, research analyst; and 
Andrew Levin, minority counsel.
    Mr. Tauzin. The subcommittee will please come to order.
    This morning we are pleased to welcome both Mr. Case and 
Mr. Levin, who will give us an understanding of the 
implications of this historic merger that their two companies 
have now pending before the regulatory authorities here in 
Washington.
    When Congress passed the Telecommunications Act in 1996, we 
fully expected that its impact would be nothing short of 
revolutionary. We knew it would dramatically transform the 
telecom marketplace by providing the requisite incentives to 
foster pretty bold thinking among companies with regard to 
technology innovation.
    Clearly we anticipated the convergence of television and 
computers and telephony, but while we had a glimpse of that 
future, we had no specifics in terms of the technology or the 
players. For years we had spoken about technological 
convergence, but at today's hearing we herald its arrival de 
novo in the form of interactive television services, a concept 
that embodies the convergence of television and the computer.
    Moreover, we anticipated that some of the Nation's largest 
companies would seek to offer exciting and newly integrated 
service packages to their consumers. We had a sense consumers 
would like that, they would like to receive more and more 
services and packages from different providers, and that in 
receiving these integrated packages, they might get added value 
and more exciting offers. We specifically encouraged 
traditional telephone and cable companies to penetrate each 
other's markets, and, in the context of doing so, to offer a 
full suite of services to their consumers.
    Clearly the overarching goal of the Telecom Act of 1996 was 
to bring about real consumer benefits in the form of more 
choices, lower prices, and improved product offerings.
    Mr. Markey and I as early as 1992 joined forces on the 
floor of the House in the cable act of that year with that 
specific goal in mind, because Mr. Markey and I, I believe, 
share a common vision that when you have got one store in town, 
you generally have bad prices, bad products, bad attitudes; but 
when you have two stores in town, prices get better, products 
improve, and certainly attitudes improve. When three stores 
come to town, all hell breaks loose, and consumers generally 
are in charge of the marketplace.
    We also knew that a by-product of the 1996 act's passage 
would be that some companies would likely merge. Earlier this 
year the country's No. 2 cable company, Time Warner, and the 
dominant provider of online services in the world, America 
Online, announced their intention to do just that.
    It is against that backdrop that today this subcommittee 
holds its first oversight hearing entitled The Future of the 
Interactive Television Services Marketplace: What Can the 
Consumer Expect?
    I think we are very eager to examine what impact this new 
entity, if it gains the requisite regulatory approvals to 
merge, will have on consumer choice in the fast-arriving and 
much anticipated interactive television services 
marketplace.Will consumers have a genuine choice among a 
panoply of competitors in this emerging market, or will they be 
left with a Hobson's choice, electing to enjoy products offered 
by AOL or Time Warner, or from no one at all? We are 
particularly interested in learning from our two distinguished 
witnesses about what new and exciting services a combined AOL-
Time Warner intends to offer consumers, and in what form: How 
will they be packaged? What exactly should consumers expect?
    This oversight hearing is intended to be a learning session 
about what services consumers will enjoy, what the competition 
will look like in this emerging interactive television services 
marketplace.
    I, for one, am particularly interested in ensuring that the 
genuine robust competition thrives in this new market. Above 
all else consumers should have a meaningful choice in what 
interactive television services they receive, and they must be 
assured they will be able to enjoy the highest quality of 
interactive television services, regardless of the provider.
    Consistent with the 1996 act and this subcommittee's 
interest in fostering competition in all markets, this 
subcommittee obviously will not be content with the creation of 
de facto monopolies or situations where consumers will not have 
real choices. We want to see real, vibrant competition, not 
something illusory.
    I am aware that members of the minority are interested in 
hearing from others on this issue, and, frankly, I agree with 
them. Like them, I am eager to learn more. In that regard I 
have been working with Chairman Bliley's staff to find the 
additional date, Mr. Markey, and Mr. Dingell, when he arrives, 
that we might conduct a second hearing this session.
    I am told that--I have a sense, rather--that it is likely 
to be the 6th, sort of a sixth sense, that Friday morning is 
what we are aiming at, so we can, in fact, learn more from 
others about this interesting prospect before we leave this 
session.
    As I said, this is just the beginning of the learning 
process. We look forward to hearing other perspectives after 
this morning.
    This morning when we complete this very important hearing, 
we have an unusually important job to do as a subcommittee. 
That is to finish our work on the Firestone recall legislation. 
So in order to accommodate this hearing and to get us in a 
position where we can move into action on that important bill, 
we will proceed as follows, if members will, by unanimous 
consent, agree.
    What I would ask by unanimous consent, first of all, is 
that all members' written statements be made part of the 
record, without objection; that our witnesses' written 
statements be made part of the record, without objection; and 
that our witnesses be permitted, instead of the normal 5, 10 
minutes to explain exactly what this new merger portends for 
American consumers.
    Then, by unanimous consent, I will also ask that all 
members be permitted 10 minutes rather than the usual 5 in the 
Q and A session so we can thoroughly explore all of the issues 
that I know are on members' minds.
    Is there any objection to this unanimous consent?
    Mr. Stearns. No objection, just a question. I understood 
this was going to be a hearing of approximately 1 hour. I just 
wondered, if we had all the subcommittee here and each person 
had 10 minutes, I am not sure we would be able to get around to 
all members. I know we want to get around. I just pose that as 
a question.
    Mr. Tauzin. Actually, we have an hour before we have to 
recess. At 10 o'clock the committee will recess to go 
downstairs to take the official committee picture with Chairman 
Bliley, and we will have a recess for that purpose, and then we 
will return here to continue and complete the hearing. So I 
think we can complete it as the chairman has suggested in the 
unanimous consent.
    Is there any objection to the unanimous consent request?
    Hearing none, then it is so ordered.
    The Chair is now pleased to welcome and recognize for an 
opening statement my friend, the gentleman from Massachusetts, 
Mr. Markey.
    Mr. Markey. Good morning. Thank you, Mr. Chairman, for 
conducting this hearing today.
    Although this hearing is billed as a hearing on the future 
of interactive television, I think we all know that this is not 
the true subject for today's hearing.
    You might think I am referring to the AOL-Time Warner 
merger as the real subject of today's hearing, but that is only 
the subtext of the matter. Today's hearing is a hearing on 
virtual reality. That is because today the subcommittee is 
having its first virtual witnesses.
    Although we do have two real-world witnesses before us, and 
I would like to thank Mr. Levin and Mr. Case for taking time 
out of their busy schedules to spend the morning with us, we 
have not been permitted for this hearing, in this timeframe, to 
invite real witnesses with different views and perspectives to 
come and testify at this morning's hearing, so today we are 
going to have to conjure up virtual witnesses in order to 
balance today's proceedings.
    There are obviously other competitors, innovators, and 
entrepreneurs that have raised concerns about a merger of AOL 
with Time Warner. There are a number of consumer advocates who 
have concerns over choice and rates and diversity. What would 
those virtual witnesses have testified to if they had been 
permitted to appear before the subcommittee today? Let me 
venture a few guesses.
    For instance, if Margaret Heffernan were here, she would 
have a number of things to say about openness and 
interoperability. Margaret is the CEO of iCAST. iCAST is a new 
breed of entertainment company based not in New York or Los 
Angeles but, rather, in Woburn, Massachusetts. The Internet 
permits companies like iCAST to utilize the open platform and 
do-it-yourself nature of the Internet to permit users to create 
and share multimedia entertainment.
    iCAST has concerns shared by Yahoo, Microsoft, and dozens 
of other companies about instant messaging interoperability. 
She probably would have noted that unlike e-mail and telephone 
communications, instant messaging, or IM, does not yet operate 
through compatible standards. She would observe that instant 
messaging already is an application that has some 100 billion 
instant messages sent every day by millions of users worldwide, 
and that it is highly popular and an integral part of her 
company's future business plans.
    She would lament the fact that AOL has failed thus far to 
work with her company and others to develop an open set of 
technical standards to enable users of any instant messaging 
service to communicate with each other regardless of which 
service provider they use.
    Ms. Heffernan would probably raise arched eyebrows at media 
reports that AOL has managed to work out interoperability with 
two of its own IM services while it seemingly cannot figure it 
out for the rest of the world. Ms. Heffernan would clearly tell 
us that AOL dominates the IM market, that interoperabililty is 
in the hands of that one company, and that AOL has been 
dragging its feet on this, and that AOL should be required to 
reach an agreement on standardization by date certain as part 
of any merger approval.
    Our next virtual witness is an Internet service provider. 
What would that ISP witness have testified about? Our virtual 
ISP witness would have insisted that telecommunications 
services such as broadband access to the Internet over cable 
systems must be fully open for unaffiliated, independent 
Internet providers. The CEO of EarthLink, Rocky Mount Internet, 
or Shorenet in Lynn, Massachusetts, or any other CEO of the 
thousands of ISPs could have been here to tell of their dreams 
of being the next Steve Case.
    They would tell us that our policy should be one of 
continuing the open architecture and consumer empowerment model 
of the Internet. Our virtual ISP witness would explain that the 
platform for driving innovation and economic growth for our new 
economy is a policy of open access rather than one of optional 
access, where the cable guy gets the option to choose who gets 
on and what to charge competitors. Our virtual ISP witness 
would talk about their desire to have concrete, legally binding 
open access rights as part of any AOL-Time Warner merger 
approval.
    Another virtual witness today is somebody representing a 
competing content provider, such as Disney, ABC, or NBC. This 
virtual witness would point out the ability of a merged AOL-
Time Warner to unfairly favor its own content. This witness 
would testify to what consumers would miss out if a walled 
garden developed and other content providers were discriminated 
against. This witness would explain that open access rights 
that enable content providers to get into a system would have 
that right rendered next to meaningless if their content was 
then electronically buried, technologically degraded, or 
consumers had difficulty finding it.
    The concern about being discriminated against on a 
systematic basis would lead this witness to talk about the need 
to scrutinize closely all of the issues around the nexus of 
content and conduit, and for tough nondiscrimination safeguards 
to be part of any merger approval.
    Finally, Mr. Chairman, what would our virtual consumer 
witness tell us? Consumer groups such as Consumers Union and 
Consumer Federation of America and the Media Access Project and 
Center for Media Education have filed comments at the FCC 
petitioning the Commission to deny the merger approval. They 
are concerned about media concentration, especially where AOL-
Time Warner would have corporate relationships with both AT&T 
and with Direct TV. They have obvious concerns about cable 
rates and cross-subsidies. They would note that important 
principles of consumer choice could be thwarted without 
effective open access rules.
    Our virtual consumer witness would want commitments on 
consumer privacy protection as well, and could call for 
eliminating the cross-ownership with AT&T and Direct TV.
    I am not sure exactly what our virtual panelists would say 
about every issue, or what they might respond with or point out 
when Mr. Case and Mr. Levin pledge openness and 
interoperability and attest their merger is both proconsumer 
and procompetitor. I only know to a virtual certainty that this 
committee and the members would have been better served if the 
virtual witnesses would have been permitted to appear in 
person, in real time to air their views in public.
    I appreciate the fact that we will have a hearing with the 
other witnesses at some point in the future before the session 
ends, but I think it would have been better for all of us if we 
had it all part of this one discussion so we could have reached 
conclusions as to what the best way was to approve the merger, 
which I think ultimately will happen, but with conditions that 
were fair to all other participants in the marketplace.
    Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentleman and can assure him--
actually give him virtual assurance that we will have those and 
other witnesses before this panel. We simply cannot under time 
constraints have them today.
    The Chair recognizes the gentleman from Florida, Mr. 
Stearns.
    Mr. Stearns. Thank you, Mr. Chairman. Also let me 
compliment you for holding this hearing, and also to say to Mr. 
Case and Mr. Levin, we appreciate very much you being here. We 
know how busy you are.
    But in a democracy, I am reminded that when I go back to my 
district, and I have town meetings, and generally the people 
are very supportive of what I am trying to do, but occasionally 
they will say to me, ``Congressman, I want you to help pick up 
my trash.''
    I try to explain to them that I deal with Internet issues 
and Federal issues, and whether we go to war or not. And the 
woman will generally--the woman said to me, ``Well, 
Congressman, I need help.'' So I said, ``I will try to help 
you, but have you called the mayor of the small town,'' which 
was in Okahumka, and she said, ``I have not called the mayor.'' 
I said, ``Why haven't you called that person first, in all 
deference to you?'' And she said, ``I didn't want to start that 
high.''
    In a democracy, the people rule, so perhaps you might be 
reluctant to come up here. We have CNN, I am sure, and we also 
have C-SPAN. Your every word will be recorded and played again 
and again throughout this country.
    But in this wonderful country, we all report to somebody, 
and obviously, I report to the constituents who are concerned 
about your merger, this huge merger, and you as individuals, 
very successful, very rich, also have a responsibility and a 
fiduciary responsibility to these people to explain what is 
happening and to come forth and talk.
    So I compliment you for your forthrightness and willingness 
to come here. I am sure you have some trepidation.
    Mr. Chairman, I think in a larger sense, as you pointed out 
in your opening statement, this is a hearing on interactive 
television services and focusing what consumers can expect in 
the future. This interactive television will allow you to 
practically order any movie ever made without having to leave 
your living room, order a CD while watching a concert on your 
television and to download it immediately to your home stereo 
system, allow you to play interactive games on your television 
with people on the other side of the world. The possibilities 
are only limited by our imagination and these two great 
entrepreneurs and their corporations this morning.
    Interactive television is blurring the distinction between 
home computers and television sets by allowing viewers to use 
advanced digital desktop devices to access a two-way 
interactive communications network. It changes the concept of 
TV broadcasting, because viewers can have a direct and intimate 
relationship with advertisers, networks, and, of course, their 
favorite TV shows.
    According to the research firm of Frost and Sullivan, 
interactive television service and advertising revenues will 
grow from $554 million in 1995 to more than $13 billion by the 
end of the year 2002. A major trend contributing to the 
market's growth is a full-service provision to be offered by 
the cable and telephone companies. Service providers recognize 
this, and industry consolidations and crossovers are already 
resulting in a handful of dominant companies. This is one 
example this morning.
    AOL and Time Warner is a $120 million pending merger. As a 
result, this committee would be remiss in its duties if it 
failed to carefully scrutinize such a megamerger and, further, 
if it failed to fully highlight and uncover the full 
ramifications it may have on the future of e-commerce, the 
Internet, and, of course, interactive television services.
    So I hope to hear from our witnesses today and be assured 
that as interactive television services are just being 
actualized and taking off the ground, companies will not try to 
strengthen their dominance in this market. As such, I am 
particularly interested in learning what witnesses are doing to 
develop interoperabililty standards in instant messaging and to 
learn more about the implementation of the memorandum of 
understanding as it relates to an open access platform for 
competing providers.
    I think all of us are just elated that you are here. We 
appreciate your taking your time. We support competition and 
lower prices and choice. That is a hallmark of the American 
culture, choice being the No. 1 trait.
    Mr. Chairman, I commend you again for this hearing and look 
forward to it.
    Mr. Tauzin. I thank my friend from Florida.
    The Chair is pleased to welcome the gentleman from Texas, 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. To move along, I will 
paraphrase my opening statement and put in the full statement.
    Mr. Chairman, again, I appreciate the opportunity for us to 
be here. The merger of these two companies will combine one 
company with 20 million cable subscribers and an ISP with over 
130 billion worldwide subscribers. That is a significant amount 
of market power that I think concerns everyone. Blocking 
access, or perceived to be blocking access to emerging 
technologies, including instant messaging, as my colleague 
mentioned, coupled with the demonstration of the market power 
to the detriment of competition does not serve the public 
interest.
    I am particularly concerned because I have a district in 
Houston involved with the origination of the conflict between 
Time Warner and ABC-Disney last year. I thought we were just 
being picked on. I found out it was really a nationwide 
problem.
    But when you are dominant in a certain market, and 
particularly with cable service, you have the ability to impose 
terms and conditions that would normally not be available in a 
competitive environment.
    That was ultimately solved, and I was glad it was, but then 
it was followed up with a problem locally with a Time Warner 
employee, actually a disturbing campaign to target the 
competition for DSL services in Houston, and I know that 
employee was disciplined. Again, that kind of demonstration of 
market power is something that our committee in 1996 did not 
intend to do with the telecom deregulation.
    I know both Mr. Case and Mr. Levin--I am glad you are here 
in our committee to ensure market competition. I have been 
assured that AOL supports open cable access and has pledged to 
have an interoperabililty platform for IM by June of 2001. 
These are positive signals, Mr. Chairman. I hope we would 
continue to see that.
    I yield back my time.
    Mr. Tauzin. I thank my friend.
    The Chair leads to the gentlewoman Mrs. Cubin.
    Mrs. Cubin. Thank you, Mr. Chairman. Most of us have 
expressed the same concerns about what is going on today. You 
might think we were talking to the same people.
    The representatives of the two companies that are here with 
us today are obviously major players in the interactive 
television marketplace; however, they are not alone. Several 
companies are meeting the demand for interactive television 
besides these companies, Microsoft and AT&T just to name a 
couple.
    The AOL Web site expresses the importance of open, equal 
and consumer choice, the role of Federal authority and laws in 
fostering competition in the Internet industry, and a wide 
range of content and consumer protection issues.
    The Web site goes on to say, and this is a quote, ``As the 
Internet becomes increasingly integrated into our societal 
fabric, it is crucial to strike an appropriate balance between 
the role of the government and the role of industry in 
formulating solutions to Internet policy issues.
    ``Finding this balance is the key to ensuring that the 
Internet will continue to grow and reach its full potential 
unhampered by unnecessary regulation, but appropriately guided 
and monitored in crucial areas to protect the safety and 
security of its users.''
    I could not agree more. I'm sure everyone on this panel 
agrees that that is of the utmost importance.
    As we continue to debate regarding open access to the 
existing telecommunications infrastructure, it is definitely in 
the industry's best interest to resolve this question so that 
Congress does not have to do so. Until that time, this 
committee does have a responsibility to get to the bottom of 
some of these issues. I am anxious to hear from Mr. Case about 
what AOL plans to do regarding their interoperability of 
instant messaging, and if we expect any advances in 
telecommunications, we should ensure that systems interact with 
each other and that consumers have the ability to communicate, 
even though they may not be on the same network.
    In addition, I would like to hear from Time Warner what 
they are willing--what assurances they are willing to give us 
that television networks outside AOL-Time Warner family will 
continue to be carried on Time Warner's cable systems.
    Finally, regarding interactive television, I am a huge 
football fan. Some of the highest points of my life and some of 
the lowest points in my life have revolved around the Denver 
Broncos. So I want to be sure that when interactive television 
comes to Wyoming, I can watch the Broncos on ABC's Monday Night 
Football over Time Warner's cable network and call up the 
statistics from ESPN using my Yahoo Web browser.
    If I would have thought 5 years ago that I would be saying 
anything like that, I would ask you to slap me. But anyway, you 
get the message.
    Thank you very much, Mr. Chairman, for holding this 
hearing. I certainly appreciate the gentlemen's presence here 
today.
    Mr. Tauzin. The Chair recognizes Mr. Gordon for an opening 
statement.
    Mr. Gordon. Thank you. We welcome Mr. Case and Mr. Levin. 
It seems like we are trying to filibuster so you don't have any 
chance to talk today.
    I am going to be very brief. You know why you are here. Our 
interest is obviously in the merger. Our poet laureate of the 
committee Mr. Markey, as well as others, have laid out the 
major issues. I hope you will address those, and address them 
beyond just your good faith and interest, which I have no 
question about, but how you intend to institutionalize this 
effort to have interoperability so that if you were to leave 
tomorrow, we would know that we would have a foundation for 
this to occur.
    Again, thank you for being here.
    Mr. Tauzin. I thank the gentleman.
    The gentleman from Virginia, Mr. Boucher is recognized.
    Mr. Boucher. Thank you, Mr. Chairman. I am pleased to join 
with other members of the committee this morning in welcoming 
the chief executive officers of two of the companies that will 
lead the way in the introduction of interactive television and 
other advanced services. I want to thank Chairman Tauzin for 
presenting the opportunity this morning for what I think is a 
timely discussion.
    As AOL, Time Warner, and others launch interactive 
television services, a new urgency is brought to the debate 
over the need for a national policy on open access which will 
assure that all Internet users have a choice of Internet access 
providers, whatever platform they use for Internet transport.
    My Virginia colleague Bob Goodlatte and I have introduced 
legislation that would make open access the national policy. We 
recently sent a letter to the Chairman of the FCC urging that 
the Commission move forward quickly with a rulemaking to 
require open access as the national policy. It will promote 
consumer choice, it will promote competition and innovation in 
the offering of Internet access services, it will provide 
regulatory parity across all Internet transport platforms, and 
it will offer greater assurance that all content providers have 
a clear path to the consumer, free from potential disruption or 
discrimination.
    Given the emerging practice of using the Internet for the 
interactive content tied to television services and the 
benefits of open access which I just mentioned, the need for a 
uniform national policy of open access is today clear, but at 
the present time, the policy is anything but uniform. It is 
fraught with disparity.
    The disparity is both geographic and industry-specific. It 
is geographic in the sense that open access is now the law 
within the States that are within the jurisdiction of the U.S. 
Court of Appeals for the Ninth Circuit, which has now held that 
cable modem service is a telecommunications service, and as a 
telecommunications service, it carries with it the preexisting 
requirements for open access that apply to all of the services 
that are so defined.
    The current law doesn't require open access anywhere else 
in the Nation, but it does in that select group of States. It 
is industry-specific because it applies to telephone companies, 
but not to other Internet transport platforms. The voluntary 
commitments of some cable companies to provide open access are 
anything but uniform and differ greatly in both timing and in 
the elements the various voluntary commitments will contain.
    For all of these reasons, the time has come to end the 
disparities, to end the uncertainties, and to assure content 
providers access for interactive TV by making open access the 
national policy, and to make it applicable to all Internet 
platforms.
    That said, in my view it should not be applied company by 
company as a merger condition. To do so would create unfair 
competitive advantages and disadvantages among those who offer 
similar services and only worsen the uneven and disparate 
application of open access requirements which characterize the 
national policy today.
    So the time has come for the FCC to move quickly to 
implement open access as the national policy, and I hope that 
during the course of this hearing we can underscore in a more 
definitive way that very clear need.
    Thank you, Mr. Chairman. I look forward to the testimony of 
these witnesses.
    Mr. Tauzin. I thank my friend from Virginia.
    The Chair is pleased to welcome and recognize the gentleman 
from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. An early hearing, but 
I know this is an important one.
    Interactive TV is right there, it is on the horizon. I 
think everyone is real excited about it. I am looking forward 
to hearing the testimony to learn more about it, its 
capabilities, and how it will help expand our economy. I think 
this communication revolution technology really gets the credit 
for this boom in economic activity that we have in this great 
country, and this is part of the debate. I thank the folks for 
coming in early.
    I yield back my time, Mr. Chairman.
    Mr. Tauzin. Thank you.
    The Chair recognizes the gentlewoman from California, Ms. 
Eshoo for an opening statement.
    Ms. Eshoo. Thank you. Good morning, Mr. Chairman. Thank you 
for holding this important hearing.
    Welcome to our distinguished witnesses.
    The technological revolution we are witnessing continues to 
amaze, I think, every single one of us. The Internet, which 
initiated this tremendous change just a few short years ago, 
has become invisible in many ways because it can no longer be 
associated with just the personal computer. It has itself 
evolved to the point that it is accessible from a multitude of 
devices, one of them being the television set.
    Today we are going to hear about another new technology, 
interactive television, which incorporates the Internet and 
other existing technologies into a single interactive consumer 
experience. This remarkable technology will allow viewers to 
purchase products while they are watching them being advertised 
on television. It will allow viewers to watch television and 
chat about it at the same time, which I guess we can do today, 
but it can even allow Mr. Markey to check the statistics of his 
beloved Red Sox as he watches the game on television. This 
truly represents, I think, the convergence of television, 
Internet, content and commerce into one medium for consumer 
consumption.
    Interactive television is equally remarkable in the e-
commerce opportunities it will generate. This market is 
estimated to reach $25 billion by 2005.
    As always, new technology is accompanied by new issues. 
Issues of interoperability, open access, and revenue collection 
and distribution must be resolved so we may achieve seamless 
communication and functionality. Providers, of course, want to 
offer universal access to their products or systems, so these 
issues gain increasing importance as new technologies come into 
the marketplace.
    The companies represented here today have a significant 
stake in how this technology reaches America. AOL is the 
dominant Internet service provider, while Time Warner has a 
significant share of the cable and entertainment industries. 
Together these companies will be the dominant content provider 
for many Americans who access the Internet.
    Many of the issues I mention here are the basis of the 
concerns that have been raised about the pending merger of 
these companies. For example, the instant messaging technology 
that AOL has been instrumental in bringing to online 
communications at this time is incompatible with other systems. 
Does this contradict Internet philosophy, which is freedom of 
information and communication worldwide?
    Because the public is growing increasingly accustomed to 
interactivity and its corresponding benefits of choice, 
convenience, and control, the inability to freely and easily 
communicate is something worthy, of course, of the attention of 
FTC and the FCC, and, of course, we are going to discuss it 
here this morning.
    Having said that, however, I believe that this merger will 
allow consumers to experience technology such as interactive 
television sooner than they would have otherwise. I also 
believe the Internet community will be the recipient of still 
unrealized benefits that will be an outgrowth of this merger. 
The merger certainly deserves careful review, but the careful 
review does not automatically mean imposing conditions which 
would prevent consumers from reaping these benefits.
    So with all of this in mind, I look forward to the 
testimony. I am very glad to see the witnesses. I think that 
between the two of you, that you have captured the attention 
and a lot of the imagination of people across our country.
    Thank you, Mr. Chairman, for holding this important 
hearing. I appreciate it. I look forward to participating in 
it.
    Mr. Tauzin. I thank the gentlewoman.
    The Chair recognizes the gentleman from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you, Mr. Chairman.
    There are really only three things I want to do today: I 
want to join my colleagues in welcoming our witnesses; I want 
to submit my statement for the record; and third, I want to 
yield back the balance of my time.
    [The prepared statement of Hon. Tom Sawyer follows:]
  Prepared Statement of Hon. Tom Sawyer, a Representative in Congress 
                         from the State of Ohio
    I would first like to thank Mr. Case and Mr. Levin for testifying 
today before the Subcommittee. I realize that this is a very sensitive 
time in the merger process and appreciate you being here today to 
listen to the concerns of Congress and to answer questions about the 
pending merger and interactive television.
    First, I am worried that AOL will have the ability to discriminate 
against unaffiliated content and interactive services providers. I 
understand and agree with the AOL argument that what is good for the 
goose is good for the gander--meaning that if open access applies to 
AOL, it should also apply to everyone else in the market as well. 
However, I am concerned that if the approach is to wait on the FCC to 
rule on open access, or even worse, to wait for Congressional action, 
real open access is at best two to three years away. That means that if 
we follow this approach, AOL-Time Warner will have a good two to three 
year run with a dominant share of the market coupled with the ability 
to discriminate against those ISPs and content providers that are 
unaffiliated with their system. I would appreciate it if Mr. Case and 
Mr. Levin could address how they see the market working in the next 
couple of years if a non-discrimination caveat is not part of the 
merger and how we can maintain diversity of voice over interactive 
television.
    Second, I am troubled by the length of time it is taking to 
integrate instant messaging systems. As I understand it, a consumer of 
AOLTV would currently be blocked from using another IM system. As AOL-
TV is rolled-out in Time Warner territories, does AOL have a plan to 
integrate not only AOL instant messaging but other instant messaging 
systems as well? Once again, I would appreciate Mr. Levin and Mr. 
Case's insight on how interoperability of IM systems could be 
influenced by the roll-out of AOL-TV in Time Warner territories.
    Thank you Mr. Chairman for holding this hearing. I look forward to 
the witnesses testimony and if, by chance, we run out of time today, I 
look forward to an ongoing dialogue on these issues during further 
debate on the pending merger and the roll-out of AOL TV.

    Mr. Tauzin. I want to thank the gentleman.
    The Chair recognizes the gentleman from Michigan, the 
ranking member of the full committee, for an opening statement.
    Mr. Dingell. Good morning, Mr. Chairman.
    Mr. Tauzin. Good morning, Mr. Dingell. I am pleased to 
recognize you for an opening statement.
    Mr. Dingell. First, I commend you for holding this 
important hearing today on the future of interactive 
television, Mr. Chairman, and I extend my appreciation to the 
distinguished witnesses for appearing. I know Mr. Case of AOL 
and Mr. Levin of Time Warner, and I know that they have 
provided the subcommittee with valued and valuable insights. 
Thank you, gentlemen, for testifying.
    I must say, however, I am equally troubled that this 
committee will not be hearing from any witnesses today who 
would describe alternative visions to the one provided by AOL 
and Time Warner. I want to make it clear I am not for or 
against any particular resolution of the questions before the 
committee today. I think, however, that the committee needs to 
gather all the facts, and I appreciate your offer, Mr. 
Chairman, to hold an additional hearing before adjournment that 
would allow consumer groups and competing enterprises an 
opportunity to articulate their own visions of the future and 
to voice concerns that they may have about the perspective of 
which we will hear today.
    I appreciate this offer, Mr. Chairman. I would note, 
however, that the witnesses that we are discussing were refused 
the opportunity to testify at today's hearing, particularly 
since we have such little time remaining before adjournment. 
The planning for this hearing began more than a month ago. We 
in the minority trusted that the hearing would be fair and 
balanced, as is the customary practice of this subcommittee.
    The situation today is particularly distressing because the 
proposed AOL-Time Warner merger will have a profound effect on 
the future of all telecommunications and information services, 
including interactive television. There can be little doubt 
that the combined company will be an extraordinarily powerful 
player in every line of business that falls within this 
subcommittee's jurisdiction, including cable programming, 
distribution, broadcast television stations and networks, land 
line and fixed wireless telephony, and, of course, Internet 
access and broadband delivery systems.
    Yet despite the vast implications of this merger for all 
American consumers and competing providers, this hearing is the 
first that the committee has held on the prospective activities 
and actions, and the perspective we will hear about today is 
going to be quite narrow.
    I have no doubt that the proposed merger will produce 
genuine benefits for the American public. I am even more 
certain that the witnesses today will do a splendid job in 
commending our attention to them. Unless and until we hear 
today about the potential harms that may result, I believe it 
would be imprudent to make a judgment about the wisdom of this 
transaction.
    Unfortunately, this puts the committee in the awkward 
position of having to blindly defer to the FCC, an agency whose 
judgment on these kinds of matters has caused us great distress 
in the past, and whose judgment on other matters raises still 
further questions.
    I want to make it clear, I do not oppose and I do not 
support this. I feel that, however, the committee has the 
distinct responsibility of gathering all the facts, hearing 
from all the witnesses, and knowing as much as possible about 
this before we have completed our oversight responsibilities 
and done our duty on these matters.
    I do, however, look forward to hearing the testimony of the 
witnesses before us. I welcome them. I am glad to see they are 
here. I have heard their comments on this merger, and I believe 
they are genuinely trying to not only benefit the company, but 
also to serve the public interest.
    I want to thank you, Mr. Chairman, for your willingness to 
explore all sides of the debate in the coming weeks. I am 
hopeful that we will have time to do so and will not find that 
we lose that opportunity because of adjournment or other 
events. I remain hopeful that today's witnesses and their 
representatives will be able to participate in that discussion, 
as well.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Tauzin. I thank my friend.
    [Additional statements submitted for the record follow:]
   Prepared Statement of Hon. Michael G. Oxley, a Representative in 
                    Congress from the State of Ohio
    Thank you, Mr. Chairman. I commend you for holding these hearings 
today.
    I also want to thank Steve Case and Jerry Levin for being here. 
Putting together a merger of this size is an absorbing, full-time task. 
We very much appreciate their willingness to come and talk about the 
merger's benefits for their companies, as well as for all Americans.
    Ever since I first came to Congress nearly twenty years ago, I've 
been hearing about the promise of interactive television. But in all 
that time, the closest we've come to interactive TV probably has been 
channel surfing.
    Well, it seems that's finally about to change for good. I look 
forward to hearing from Steve and Jerry about their plans for 
television's future. America Online is spearheading the internet 
revolution, and Time Warner has long been a leader in television, from 
cable to programming. So the combination of these companies holds great 
promise to help television take the next great leap forward.
    But, I bet we won't just talk about interactive television today. 
This hearing is the subcommittee's first formal opportunity to hear 
about the historic AOL-Time Warner merger ``up close and personal'' 
from Mr. Case and Mr. Levin.
    I always have believed that government generally has no business 
interfering with economic activity, or trying to judge what the 
``best'' decisions should be. So it will not surprise anyone that I 
support the AOL-Time Warner merger. These companies leaders in their 
fields--have so much potential to lead the ``wired world'' of the 21st 
century, that we should be cheering them in the world marketplace 
instead of trying to micromanage the terms on which these companies 
will merge.
    We are living in a time of telecom and media mergers. This is by no 
means the biggest one. For example, the Vodafone and Mannesmann merger 
was larger--and that merger went through the European Union process 
faster than some Olympic marathoners. There are many other mergers on 
tap from Vivendi and Universal, to Deutsche Telekom and Voicestream.
    In such an environment, is it really fair--or good public policy to 
string out and micromanage merger approvals of American companies? Of 
course not. In a global economy, it is clear that the best solution is 
to encourage all this economic activity. It can only provide better 
products and services for all our citizens. So, clearly, the AOL-Time 
Warner merger should be approved, and soon,
    Which leads me to my second point. For years, the FCC has 
convincingly made the case that it needs to be reformed. The best case 
for FCC reform has been the way it's handled mergers. The FCC's m.o. is 
as clear as any crime show on television. It tries to intimidate and 
extort concessions from companies, instead of taking on issues through 
the rulemaking process as Congress intended.
    Now, with the AOL-Time Warner merger, the FCC is at it again. 
Threatening merger conditions is nothing more than extortion. The FCC's 
``process''--if you can call it that--actually tries to pick economic 
winners and losers by saddling one company with legally binding 
requirements that no other company has to live with. It's the worst 
possible way to make public policy, and yields the worst possible 
result. I hope my colleagues can send a unified message today that we 
don't want the FCC doing business in that way any longer.
    Again, I welcome Steve and Jerry to the committee, and look forward 
to hearing more from them today about their plans for their new 
combined company. Thank you, Mr. Chairman.
                                 ______
                                 
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Mr. Chairman I will make my opening remarks very brief. I want to 
welcome our two very distinguished witness. I'm will be extremely 
interested to hear their views on the rapidly changing convergence of 
technologies that is driving this digital economy and the future of 
interactive television.
    The proposed AOL/Time Warner merger, if approved, will be the 
single largest commercial transaction in history. I think it is safe to 
say that both of these companies are the dominant entities in their 
respective industries. That is why since the merger was announced 
several months ago there has been a great deal of discussion and 
scrutiny regarding consumer choice, as well as, what will this merger 
mean for competition in the emerging field of digital information and 
entertainment services including internet service, interactive T.V. and 
music.
    If I can create a word picture, the combination of AOL/Time Warner 
is like a very large aircraft carrier that for the past few months has 
been strafed by its various competitors. Personally, I have kept an 
open mind about the potential benefits of the merger, and I look 
forward to hearing from our witnesses.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you Mr. Chairman. I'd like to personally welcome Mr. Case 
from America Online, one of Virginia's finest exports, and Mr. Levin 
from Time Warner to the House Commerce Committee and thank them in 
advance for their testimony this morning.
    Today's hearing is indeed about an important merger that will 
affect the way that people around the world receive and share 
information. That is the merger between the PC and the television. 
These two devices, which are commonly used in separate rooms of most 
American homes every day, are on the brink of becoming one interactive 
machine that will combine the passive viewing nature of the television 
with the active communication abilities of the PC.
    Since its passage of the Telecommunications Act of 1996, this 
Committee has undertaken a variety of initiatives to spur the 
development of electronic commerce. For example, we opened up the 
market for the retail sale of navigation devices, such as the AOL-TV 
set-top box; we rewrote the WIPO bill to ensure that consumers would 
have access to new information products and that manufacturers would 
have the design freedom to innovate; and more recently, through our 
oversight responsibilities, we have encouraged the FCC to speed the 
rollout of new digital television products and services. The resulting 
explosion of the technology sector has allowed companies to compete and 
bring the best services, such as interactive television, to the 
American public.
    However, the marketplace for interactive television is still in its 
infancy, with only two major players currently offering interactive 
devices in the mass market. Because of this, average consumers do not 
yet understand how the technology can ultimately affect their viewing 
habits. And there are a number of unanswered questions involving data 
speed, billing, control of the screen image and its imbedded 
information, and how revenues can be shared for products purchased over 
the medium. I look forward to hearing this morning's testimony about 
how these important issues will affect the further development of 
interactive television.
    Clearly, it is impossible to discuss the future of interactive 
television with these two witnesses and ignore the AOL-Time Warner 
merger pending before the FTC and FCC. According to press reports, I 
understand that the FTC and FCC may condition the merger on a mandate 
that AOL and Time Warner open their cable to nonaffiliated ISPs. 
Whether or not I support open access, I am troubled that the FTC, an 
agency lacking communications expertise, is considering the adoption of 
merger-specific conditions affecting only one entity. Any open access 
rule should be the product of a FCC rulemaking, with the benefit of an 
open debate from all parties, that governs the actions of all market 
participants.
    I am also troubled that there appears to be an inordinate amount of 
merger negotiation information making its way into the press. Just last 
week, a FCC ``draft order'' was leaked to the Washington Post, and 
repeatedly merger negotiations, that are supposedly part of a non-
public investigation, are ending up in the papers. These leaks not only 
affect delicate merger negotiations, but they can, and do, upset the 
markets on Wall Street. I have sent letters this week to both Chairman 
Pitofsky and Chairman Kennard outlining these concerns.
    I look forward to learning more about this merger and the merger's 
affect on the future of interactive television. I thank Mr. Tauzin for 
having this hearing and I thank the witnesses for coming this morning.
    With that, I yield back.
                                 ______
                                 
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Chairman Tauzin and Ranking Member Markey for holding 
this hearing on the future of interactive television. I look forward to 
the testimony of Mr. Case and Mr. Levin on the merger between their 
companies and the impact it will have on the future of interactive 
television, the need for open access, the role of instant messaging in 
interactive television, and the privacy concerns interactive television 
may raise. I hope a future Subcommittee hearing on interactive 
television will have additional witnesses expressing a wide variety of 
view points.
    The Internet revolutionized the way we communicate. It has provided 
people with a means to gather and disseminate information and ideas 
from all over the world. Interactive television expands upon this 
revolution by converging television, the Internet, content, and 
commerce so that consumers are able to not only choose their 
programming, but interact with it. For example, consumers will be able 
to purchase a CD of the music being played by a band during the 
telecast of the Grammys by using their remote control.
    As exciting as the possibilities of interactive television seem, 
there are some significant issues that I hope will be addressed by our 
witnesses today. First, can interactive television exist in a 
competitive marketplace if cable operators do not allow access to non-
affiliated content providers, and if service providers discriminate 
against content providers with whom they are not affiliated. If a 
viewer is watching a baseball game on FOX and clicks a link to get 
additional statistics, can that viewer choose FOX's sports website or 
CNN-SI's website for this material?
    Second, I am very interested to hear from our witnesses about their 
views on possible privacy issues arising out interactive television. 
Will set top boxes provide cable or satellite operators with the 
ability to store information on the viewing habits and purchases of its 
customers? If so, how will that information be used? Will it be sold to 
third parties? Will consumers be informed of the fact that their 
viewing habits and purchases are being monitored? Will they have the 
ability to opt out of it? Are the same privacy issues facing users of 
the Internet applicable to users of interactive television as 
technological advances become more invasive. We must ensure that 
consumers do not exchange their right to privacy for the potential 
benefits of interactive television.
    Lastly, I would like to. hear their views on about AOL's instant 
messenger (IM) system becoming interoperable with other instant 
messaging systems as a condition of merger approval. Does AOL currently 
plan on making its IM system interoperable with competing IM systems?
    While it is important that the federal government not stifle 
innovation in nascent technologies, we must consider the ramifications 
of those technologies on a competitive marketplace, consumer choice, 
and privacy. Interactive television service providers must not 
discriminate against the content of competitors. Open access to 
broadband networks and interactive television set top boxes as well as 
the interoperability of competing IM systems are necessary to promote 
competition and a fair playing field. It is my hope that as the 
interactive television service market grows, industry will work 
together to achieve these goals.
    Thank you Mr. Chairman. I yield back the balance of my time.

    Mr. Tauzin. Before I introduce our witnesses, let me assure 
my friend, as I have already, that we are working with the 
staff to fix the date. It looks like it might be Friday, 
October 6, in the morning, of next week, when we are very 
likely to be around. It is my hope that we can work with the 
gentleman, as well as my friend from Massachusetts, on an 
appropriate witness list and take your concerns into account.
    I share your interest in hearing from other witnesses. Our 
problem was simply scheduling the second panel with the 
pressure of the action we have to schedule today in terms of 
the Firestone bill.
    I thank the gentleman. We will accommodate them. We will 
always try to accommodate the minority on these sorts of 
requests.
    Mr. Dingell. We have had a discussion, you and I, Mr. 
Chairman, and I appreciated that discussion. I appreciate your 
comments just now. I know that you have the best of intentions. 
I am hopeful that events will not preclude those good 
intentions from bearing appropriate fruit.
    Mr. Tauzin. We have comparable hopes here.
    Mr. Dingell. As my old daddy used to say, trust everybody, 
but cut the cards.
    Mr. Tauzin. Like Mr. Regula said, trust but verify.
    We are going to again work with the gentleman. I have asked 
the ranking minority member of the subcommittee to deliver to 
us the appropriate letter under rule 11 today, and we request 
that we receive that before the termination of this hearing.
    Mr. Dingell. Mr. Chairman, I would just observe one thing. 
We don't really like to write a letter under a rule, and if we 
have your commitment on these matters, I think that you will 
probably not receive a rule 11 letter.
    Mr. Tauzin. That is your call, Mr. Dingell. It is simply a 
formality that if you would like to proceed with, we would be 
happy to receive it.
    The Chair is now pleased to welcome our two distinguished 
witnesses, first, Mr. Steve Case, the chairman and CEO of 
America Online, Incorporated, a sometimes musician, guitar 
player, who was obviously interested in making sweet music with 
our other distinguished witness today Mr. Gerald Levin, 
chairman of and CEO of Time Warner, Incorporated.
    Thank you very much, gentlemen. As I stated, you will be 
recognized to speak for 10 minutes. You may summarize your 
statement since we will accept your written statements.
    We will begin with Mr. Case. You are certainly welcome.

  STATEMENTS OF STEVE CASE, CHAIRMAN AND CEO, AMERICA ONLINE, 
   INCORPORATED; AND GERALD M. LEVIN, CHAIRMAN AND CEO, TIME 
                      WARNER, INCORPORATED

    Mr. Case. Good morning, Mr. Chairman and members of the 
committee. Jerry and I are looking forward to talking to you 
today about some of the trends that are transforming the 
landscape of media and communications, specifically convergence 
and interactivity. The effects of these trends, we think, will 
be astonishing, creating remarkable new opportunities not only 
in our industries, but all across all sectors of our new global 
economy.
    We believe that the merger of our two companies will help 
to drive these trends and make interactivity and convergence 
more accessible to consumers around the world. The simple fact 
is this merger will increase consumer choice in ways that 
really enrich people's lives by spurring new innovations that 
consumers increasingly want and demand.
    In less than 10 years, the Internet and interactive 
technology have embedded themselves in nearly everything we do. 
This is not only because the digital revolution has increased 
consumer choices in ways we only dreamed of 10 years ago, it is 
because it has empowered the consumer in ways that no other 
medium has done before. This, in turn, has really begun to 
shape people's expectations of what all media--whether it be 
television, telephone, video, or music--can and should be able 
to do. It is a revolution in the making.
    Having gotten a little taste of interactivity, consumers 
are increasingly demanding a lot more. People are starting to 
ask, why can't I bookmark my favorite television programs the 
way I can bookmark my favorite Web sites? Why can't I use my 
cell phone to get directions to restaurants, buy tickets to a 
movie, or check my portfolio? Why can't I store the music I 
like on a portable jukebox I can listen to anywhere I want? Why 
can't all these newfangled devices work together in a way that 
is simple and easy to understand?
    We want to change the answers to these questions to, ``Yes, 
you can.''
    As you all know, this is just the beginning as broadband 
and wireless connections, new handheld and household devices, 
and the intersection of traditional and digital mediums have 
really started taking off in the United States as they have in 
Europe and Asia. The possibilities for innovation will be 
limitless.
    There is no better example of this sea change in consumer-
driven innovation than the example of interactive television. 
For many years television didn't change that much. When most of 
us were growing up, there were three broadcast networks and 
public television. Then cable came along. The innovations in 
movies and television news formats that it created began 
revolutionizing the way we watch television, increasing our 
choices and creating specialized channels to attract specific 
segments of a viewing audience.
    More than that, it spurred a remarkable era of competition 
not only in the television industry, but also in the movie 
business, as companies rushed to give consumers what they 
wanted, and it made the market for advertising a lot more 
competitive as well.
    That is where we have been with television now for about 
the last 20 years. Television has offered more choice of 
channels, but those channels have spoken to us, not with us. 
All that is about to change with the advent of interactive 
television.
    For years people have been saying that interactive 
television is the next big thing. As Jerry will tell you in 
just a minute, there have been a lot of experiments over the 
last couple of decades with varying, but mostly unsuccessful, 
results.
    That is partly a function of technology--it just wasn't 
quite there yet--but it is also because consumers weren't ready 
for it. The pump hadn't been primed. Now we think technology is 
finally catching up with our imaginations. Consumers have begun 
to expect their televisions, to say nothing of their 
telephones, CD players, and other handheld devices, to provide 
them with the same interactivity, the same range of choices, 
and the same convenience and consumer control that they are now 
getting used to because of the Internet.
    As one analyst recently put it, TV is about to get a whole 
lot smarter, but the terrain is still largely uncharted. In 
fact, the current crop of interactive television 
experimentation is so new that if you ask three different 
people what interactive TV is, you will probably get three 
different answers.
    For Microsoft and other Internet companies, it may mean 
using telephone connections like Web TV does to provide TV 
screen access to the World Wide Web. If you ask TiVo and other 
consumer electronic companies, it may mean interactive digital 
video recorders. If you ask companies like Wink or RespondTV, 
it may mean a new form of e-commerce. Or if you ask a company 
like GemStar, it may mean electronic program guides. For still 
other companies, it might mean video on demand, or other kinds 
of interactive services like e-mail or instant messaging or on-
screen shopping.
    All of these services, separately and in combination, will 
be available in a variety of ways, from satellite to cable to 
DSL, and also through narrowband connections. The possibilities 
for innovation in interactive television seem limitless, and I 
believe the potential benefits to consumers is enormous.
    But this really is just the beginning of the beginning. The 
truth is it is anyone's guess which of the products on the 
market and now in development are going to drive the 
interactive television phenomenon. We are still waiting to see 
how early adopters of this new technology make use of it, and 
whether it can reach the mass market in meaningful ways that 
really improve people's lives.
    We do know that people are increasingly watching television 
and using the Internet simultaneously, chatting online about 
television shows, plugging in Web addresses they read on 
television to buy new products or get more detailed information 
about news stories or sports events and other kinds of 
programming.
    To try to meet this kind of consumer demand and test out 
these concepts, AOL is introducing a new service, AOLTV, this 
fall. We want to give consumers the greatest range of choices 
and the richest possible experience by trying to add some 
aspects of interactivity to television. So AOLTV includes well-
known features like e-mail, chat, and instant messaging from 
the PC to the TV, and it gives users picture-within-a-picture 
access to the World Wide Web while they are watching 
television. It lets people bookmark their favorite television 
shows, and it includes an electronic program guide that lists 
services and programming so they can further customize their 
experience.
    We are looking forward to helping develop this new medium 
so it can reach its full potential. So far broadcasters and 
programmers have had little incentive to develop interactive 
content without an audience, and service providers have had 
difficulty building an audience without compelling interactive 
content.
    Already we are providing programmers the tools they need to 
enhance their television programs, adding everything from live 
polling to play-along games to letting viewers pick alternative 
endings to television shows.
    We believe that AOLTV's unique combination of features will 
connect with consumers and spur a whole new way of innovation, 
but as I think I have made clear, we won't be the only one out 
there. In this new environment, companies around the world are 
going to compete harder than ever to bring consumers what they 
want, when they want it, at prices they can afford, and in ever 
more useful and convenient ways.
    That is as it should be. This cycle of competition and 
innovation has brought the Internet, and, frankly, both of our 
companies, to where they are today. That cycle has always 
benefited 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 variety of platforms. And 
we have no doubt that our commitment to innovation will prompt 
our competitors to develop new and better offerings of their 
own. Ultimately consumers will be the winners.
    So I appreciate the time and effort the committee is taking 
to listen to us today, and Jerry and I look forward to 
answering any questions you might have.
    [The prepared statement of Steve Case follows:]
   Prepared Statement of Steve Case, Chairman and CEO, America Online
    Good morning, Mr. Chairman and members of the committee. Jerry and 
I are looking forward to talking to you today about some of the trends 
that are transforming the landscape of media and communications--
specifically, convergence and interactivity. The effects of these 
trends will be astonishing--creating remarkable new opportunities not 
only in our industries, but also across all sectors of our new global 
economy.
    We believe that the merger of our two companies will help to drive 
these trends and make interactivity and convergence more accessible to 
consumers around the world. The simple fact is, this merger will 
increase consumer choice in ways that really enriches people's lives--
by spurring the new innovations consumers increasingly want and demand.
    In less than ten years, the Internet and interactive technology 
have embedded themselves in nearly everything we do. This is not only 
because the digital revolution has increased consumers' choices in ways 
we only dreamed of 10 years ago. It is because it has empowered the 
consumer in ways that no other medium has done before. This, in turn, 
has really begun to shape people's expectations of what all media--
whether it be television, telephone, video or music--can and should be 
able to do. It's a revolution in the making.
    Having gotten a taste of interactivity, consumers are beginning to 
demand a lot more. People are starting to ask, ``Why can't I bookmark 
my favorite television programs the way I bookmark favorite places 
online?'' ``Why can't I use my cell phone to get directions to a 
restaurant, or buy tickets to the movies, or check my portfolio?'' 
``Why can't I store the music I like on a portable jukebox that I can 
listen to anywhere I want?'' And, ``Why can't all these new devices 
work together in a way that's simple and easy to understand?''
    We want to change the answers to those questions to ``Yes, you 
can!''
    As you all know, this is just the beginning, as broadband and 
wireless connections, new handheld and household devices, and the 
intersection of traditional and digital mediums really start taking off 
in the United States as they have in Europe and Asia. The possibilities 
for innovation will be limitless.
    There is no better example of this sea change in consumer-driven 
innovation than interactive television.
    For years, television didn't really change that much. When most of 
us were growing up, there were three basic channels and public 
television. Then cable came along. The innovations in movies and 
television news formats that it created began revolutionizing the way 
we watch television--increasing our choices and creating highly 
specialized channels to attract specific segments of a viewing 
audience.
    More than that, it spurred a remarkable era of competition, not 
only in the television industry, but also in the movie business, as 
companies rushed to give consumers what they wanted. And it made the 
market for advertising a lot more competitive.
    That's where we've been now for around 20 years. Television has 
offered more choice of channels, but those channels have spoken to us, 
not with us. All that is about to change with the advent of interactive 
television.
    For years, people have been saying that interactive television is 
the next big thing--and as Jerry will tell you, there has been a lot of 
experimentation with varying but mostly unsuccessful results. That's 
partly a function of technology--it just wasn't there yet. But it's 
also because consumers weren't ready for it--the pump hadn't been 
primed.
    Now, technology is finally catching up with our imaginations. 
Consumers have begun to expect their televisions--to say nothing of 
their telephones, CD players and handheld devices--to provide them with 
the same interactivity, the same range of choices, and the same 
convenience and control the Internet provides.
    As one analyst recently put it: ``TV is about to get a whole lot 
smarter''--but the terrain is still largely uncharted. In fact, the 
current crop of interactive television experimentation is so new that 
if you ask three different people what interactive TV is, you'll 
probably get three different answers.
    For Microsoft and other Internet companies, it may mean using 
telephone connections like WebTV does to provide TV screen access to 
the World Wide Web; for TiVo and other consumer electronic companies, 
it may mean interactive Digital Video Recorders; for companies like 
Wink or RespondTV, it may mean ``e-commerce''--or as we're beginning to 
call it, ``t-commerce''--opportunities; for GemStar it may mean 
Electronic Program Guides. For still other companies it might mean 
video-on-demand, or other interactive services like e-mail, instant 
messaging, and on-screen shopping.
    And all of these services--separately and in combination--will be 
available in a variety of ways--from satellite, to cable, to DSL and 
narrowband connections.
    The possibilities for innovation in interactive television seem 
limitless--and I believe the potential benefits to consumers is 
enormous.
    But this really is just the beginning of the beginning. The truth 
is, it's anybody's guess which of the products on the market and in 
development are going to drive the interactive television phenomenon. 
And we are still waiting to see how ``early adopters'' of this new 
technology make use of it--and whether it can reach the mass market in 
meaningful ways that really improve people's lives.
    We do know that people are increasingly watching television and 
Internet simultaneously: chatting online about television shows, 
plugging in web addresses they read on television to buy new products 
or get more detailed information about news stories, sports events and 
other programming.
    To meet this consumer demand, AOL is introducing our own 
interactive television service, AOLTV, this Fall.
    We want to give consumers the greatest range of choices and the 
richest possible experience. So AOLTV includes well-known features like 
e-mail, chat and instant messaging from the PC to the TV, and it gives 
users picture-within-a-picture access to the World Wide Web while 
they're watching television. It lets people bookmark their favorite 
television shows and includes an electronic program guide that lists 
services and programming so they can further customize their 
experience.
    And we are looking forward to helping develop this new medium so 
that it can reach its full potential. So far, broadcasters and 
programmers have had little incentive to develop interactive content 
without an audience, and service providers have had difficulty building 
an audience without compelling interactive content. Already, we are 
providing programmers the tools they need enhance their television 
programs--everything from live polling, to play-along games, to letting 
viewers pick alternative endings to television shows.
    We believe that AOLTV's unique combination of features will really 
connect with consumers--and lead a whole new wave of innovation. But as 
I think I've made clear, we won't be the only one out there. In this 
new environment, companies around the world are going to compete harder 
than ever to bring consumers what they want, when they want it--at 
prices they can afford and in ever-more useful, convenient ways.
    That's as it should be. This cycle of competition and innovation 
has brought the Internet--and both of our companies--to where they are 
today. And it has always benefited 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 variety 
of platforms. And we have no doubt that our commitment to innovation 
will prompt our competitors to develop new and better offerings of 
their own. Ultimately, consumers will be the winners.
    So, I appreciate the time and effort the Committee is taking to 
listen to us today, and Jerry and I look forward to answering any 
questions you might have.

    Mr. Tauzin. Thank you, Mr. Case.
    We are pleased to welcome Mr. Gerald Levin, Chairman and 
CEO of Time Warner, Incorporated.
    Mr. Levin.

                  STATEMENT OF GERALD M. LEVIN

    Mr. Levin. Thank you, Mr. Chairman.
    I welcome this opportunity to discuss the revolution that 
is under way, particularly with this subcommittee, because over 
the years we have had the chance to deliver consumers the 
broadest choices in telecommunications and media.
    Whether it has been enhanced competition in telephony or 
satellite delivery of broadcast or digital television, we have 
actually shared the same goal of ensuring that this ever-
increasing pace of technology will offer consumers true 
diversity in both content and distribution.
    It was this subcommittee that set us on an irreversible 
path to a consumer-driven telecommunications marketplace when 
it wrote the 1996 Telecommunications Act, and again more 
recently with the Satellite Home Viewer Act.
    Along with my own involvement in the expansion of the media 
marketplace, I have had a special interest in the potential of 
television. This interest goes back 30 years to a project that 
we called the Green Channel. At that time, there was growing 
interest in the possibilities of using cable to provide access 
to what we called special pay-per-view events. But the Green 
Channel proposed to go beyond that, creating what we then 
referred to as pay cable-per-channel, a new kind of 
subscription service. But behind that rather awkward phrase was 
a rather startling concept that challenged the accepted wisdom 
of the then media establishment, because for a quarter of a 
century, viewers had lived with a television universe in which 
three networks provided one-size-fits-all programming and 
reaped large profits from the mass audiences they delivered to 
advertisers.
    Though this model seemed to be chiseled in stone, there was 
a small band of mavericks, including Ted Turner and myself, who 
believed that television was a far from finished medium. Back 
then I think what people loved about television was the 
instantaneous access it gave them. If you turned it on only 
between 6 a.m. And midnight, there would be something there. 
Unfortunately, it might not have been something that they 
actually wanted because maybe they were looking for news or 
movies, which meant they had to consult a printed guide. The 
odds were that if they were patient and waited, they still 
wouldn't find the movie or the news that they were after.
    What people obviously missed in television was real 
programming choice, control, and convenience. Out of that need 
came Time, Inc.'s decision to launch Home Box Office, that is 
what we called the Green Channel, which was the first breach in 
the self-contained world of the broadcast triopoly controlled 
television set.
    It was approximately almost exactly 25 years ago, September 
30, 1975, when HBO set cable's course from a reception novelty 
to the programming industry it is today when we arranged the 
satellite distribution of the Ali-Frazier fight to cable 
systems in Florida and Mississippi.
    Along with the success of Ted Turner's superstation, HBO 
called into being the dramatic increase in programming 
selection we now mostly take for granted: CNN, Fox, CNBC, 
Disney, the Cartoon Network, ESPN, Nickelodeon, discovery, TNT, 
C-SPAN, these are all channels that you can find on the over 
250 channels available now on most cable systems.
    I mention this not for my own nostalgia, but because it 
directly concerns the discussion that we are having today about 
the future of the media, particularly the future of television, 
because even at that time I came away with the strong belief 
that it was the power of technology that could remove the 
limits on consumer choice. I was convinced that as enthusiastic 
as viewers have always been about television, television was 
still a long way from being what it could be.
    So almost a decade ago, we began taking the next step. In 
December 1991, we launched something called Quantum, the first 
150-channel service in our Queens, New York, cable system. 
Based on what we learned there, in 1994 we debuted the world's 
first truly interactive switch digital network in Orlando, 
Florida.
    As I am sure many of you know, short term, the Orlando 
project was a failure. It did not lead to the rollout of 
interactive television. Long term, however, it proved to be 
very helpful to us because in designing and deploying the basic 
system, our engineers put in place a hybrid architecture that 
elegantly blended coaxial and fiberoptic cable into a two-way 
digital pathway which actually resulted in Emmy award-winning 
design. Thanks to Orlando, but most significantly with the 
advent of the Internet revolution, we are now at the forefront 
of offering consumers high-speed data delivery.
    Now, when the Internet burst on the scene, the pundits, 
many of them, said that the long-awaited arrival of media 
convergence was bypassing television in favor of the PC. As it 
turned out, as it usually does, the pundits were right about 
the fact that convergence arrived, but wrong about where.
    In looking at the future of interactive television, we must 
be clear about the profound force that is at work across the 
communications spectrum. Convergence is not about any one 
discrete machine or device. Convergence is the Internet 
protocol network itself, the digital framework that supplies 
and drives whatever is connected to it; that is, televisions, 
PCs, stereos, or a proliferating number of wireless devices.
    So whether it is cable, DSL, satellite, or wireless, it is 
the Internet protocol that is irrevocably changing our 
understanding of what television is all about. Because of it, 
consumers can have access to an endless array of content 
anywhere, anytime, that no corporation and no government agency 
can control, because the Internet is the technology of human 
freedom.
    As a practical matter, the Internet is already deepening 
television and changing it. In terms of news, for example, one 
in three Americans use it as either a replacement or a 
supplement to what they read in the papers or watch on TV. As 
Steve has pointed out, when it comes to actual programming, the 
interactivity enabled by the Internet is just one of several 
options. Whether that is digital recording devices, digital 
set-top boxes, AOLTV, the point is that there is one form of--
there is not one form of interactive television. Television 
today is as unlimited as the digital world to which it belongs.
    It is also true that no one knows today what interactive 
television will look like in the years ahead, or what 
innovations we and others will provide. We don't know because 
the technology is evolving minute by minute. Unlike a 
generation ago, we no longer live in a closed television 
society. The Internet has taught us that it is the consumer who 
is in charge, and a lot of money is being lost by those who 
either fail or refuse to understand and who try to impose their 
own notions of how interactivity should work.
    Finally, as someone who has been at this game for quite 
some time, I feel not only a sense of excitement about 
television's digital future, but a certain element of pride, 
and I am not a prideful person, in having been part of bringing 
it about.
    Our hope when we started HBO was to set in motion a 
competitive cycle that would destroy the limits on consumer 
choice and programming diversity. That dream is finally before 
all of us.
    Thank you.
    [The prepared statement of Gerald M. Levin follows:]
   Prepared Statement of Gerald Levin, Chairman and CEO, Time Warner 
                              Incorporated
    Thank you, Chairman Tauzin and members of the subcommittee.
    I welcome this opportunity to discuss the revolution now under way 
in the communications marketplace and am particularly pleased to do so 
before this subcommittee.
    Over the years, we've worked together to deliver consumers the 
broadest choices in telecommunications and media.
    Whether it's been enhanced competition in telephony or satellite 
delivery of broadcast or digital television, we've shared the same goal 
of ensuring that the ever-increasing pace of technological change 
offers consumers true diversity in both content and distribution.
    Certainly it was this subcommittee that set us on an irreversible 
path to a consumer-driven telecommunications marketplace when it wrote 
the 1996 Telecommunications Act and again, more recently, with the 
Satellite Home Viewer Act.
    As you know, along with my involvement in the overall expansion of 
the media marketplace, I've had a special interest in expanding the 
potential of television. What you might not be aware of, however, is 
that this interest goes back almost thirty years to a project dubbed 
the Green Channel.
    At that time, there was growing interest in the possibilities of 
using cable to provide access to special pay-per-view events. But the 
Green Channel proposed to go beyond that, creating what, for lack of a 
better name, we called ``pay cable-per-channel.''
    Behind that awkward phrase was a startling concept which challenged 
the accepted wisdom of the media establishment.
    For a quarter of a century, viewers had lived with a television 
universe in which three broadcast networks provided one-size-fits-all 
programming and reaped huge profits from the mass audiences they 
delivered to advertisers.
    Though this model was supposedly chiseled in stone, and couldn't be 
changed, there was a small band of heretics and mavericks--including 
Ted Turner and myself--who believed that television was a far-from-
finished medium.
    Back then, what people obviously loved about television was the 
instantaneous access it gave them. Turn it on between 6:00 a.m. and 
midnight, and there'd be something there.
    Unfortunately, it might not have been the something they wanted. 
Maybe they were looking for news or movies, which meant having a 
printed schedule that told when they'd be available. Even if viewers 
were patient and waited, the odds were it still wouldn't be the movie 
or news they were after.
    What people obviously missed in television, I believed, was real 
programming choice. Out of that belief came Time Inc.'s decision to 
launch Home Box Office--the name superseded the Green Channel--the 
first breach in the self-contained world of the broadcast triopoly.
    Almost exactly twenty-five years ago, on September 30, 1975, HBO 
set cable's course from novelty to the programming industry it is today 
when it was my good fortune to arrange the satellite distribution of 
the Ali-Frazier fight--``the thrilla in manila''--to cable systems 
across the country.
    Together with the success of Ted Turner's superstation, HBO called 
into being the dramatic increase in programming selection that we now 
mostly take for granted--CNN, Fox, CNBC, Disney, the Cartoon Network, 
ESPN, Nickelodeon, the Discovery Channel, TNT, C-SPAN, the list is long 
and continues to grow.
    I mention all this not for nostalgia's sake, but because it 
directly concerns the discussion we're having today about the future of 
the media in general and television in particular.
    Although I wasn't granted a clairvoyant glimpse of the internet, I 
came away with a stronger-than-ever belief in the power of technology 
to remove the limits on consumer choice.
    I was convinced that as exciting and different as cable was--and as 
enthusiastic as viewers were to have a whole new array of programming 
choices--television was still a long way from being what it could be.
    Almost a decade ago, we began taking the next step. In December 
1991, Time Warner launched Quantum, the first 150-channel service, in 
our Queens, N.Y., cable system.
    Building on what we'd learned there, we took a far bigger, more 
important step in 1994, when we debuted the world's first truly 
interactive network in our Orlando, Florida, cable system.
    Short term, the Orlando project was a failure, in that it didn't 
lead to the rapid rollout of interactive TV.
    Long term, it's proved a significant success.
    In designing and deploying the basic architecture for the system, 
the engineers of Time Warner Cable did something that had never been 
done before. They put in place a hybrid architecture that elegantly 
blended coaxial and fiber-optic cable into a two-way digital pathway--a 
break-through design that was honored with a special Emmy award.
    Thanks to Orlando, we're now at the forefront of those offering 
consumers high-speed delivery of the internet.
    When the internet burst on the scene almost at the same time as our 
Orlando project, the pundits seemed agreed that the long-awaited 
arrival of media convergence was bypassing television in favor of the 
personal computer.
    As it turned out, they were right about when convergence arrived 
but wrong about where.
    In looking at the future of interactive television, it's critically 
important to be clear about the profound force that is at work across 
the whole communications spectrum: convergence isn't about any one 
discrete machine or device. Convergence is the internet protocol 
network itself, the digital framework that supplies and drives whatever 
is connected to it, TVs, PCs, stereos, or a proliferating number of 
wireless devices.
    Whether carried by cable, DSL, satellite or wireless, it's the 
internet protocol that's irrevocably changing our understanding not 
just of television but of all media.
    Because of it, individual consumers have access to a literally 
endless array of content, whether print, audio or video, anywhere, 
anytime, that no corporation or government agency can control.
    More than merely another medium, the internet is the technology of 
human freedom.
    At a minimum, this transformation means a degree of openness and 
innovation that just a few years ago existed only in science fiction. 
In fact, the first lesson of the internet has already been written: If 
you think you can do business in the realm of digital interactivity the 
way you've always done it . . . think again.
    As a practical matter, the internet is already both deepening TV 
and changing it. In terms of news, for example, one-in-three Americans 
use it as either a replacement or supplement to what they read in the 
papers or watch on TV.
    As Steve pointed out--and it deserves repetition--when it comes to 
actual programming, the interactivity enabled by the internet is just 
one of several options.
    The newest generation of digital recording devices allows users to 
watch TV the same way they would a VCR, pausing, fast forwarding and 
skipping commercials.
    Digital set-top boxes offer a vastly expanded channel capacity and 
video on demand.
    AOLTV hopes to bring the interaction of the online community to 
enrich people's experience of television.
    The point is, there is no one form of ``interactive television.'' 
Television is now as unlimited as the digital world to which it 
belongs.
    No one knows what interactive television will look like in three or 
five years or what other innovations it will lead to.
    We don't know because the technology is evolving minute-to-minute 
and, unlike a generation ago, we no longer live in a network-centric 
universe, where a trio of powerful networks calls the shots.
    The internet has already taught us that it's the consumer who's in 
charge, and a lot of money has been lost by those who've either failed 
or refused to learn that basic lesson and tried to impose their own 
notions of how interactivity should work.
    As someone who's been at this game most of his adult life, I feel 
not only a sense of excitement about television's digital future but 
pride at having been part of bringing it about.
    Our hope with the Green Channel was to set in motion a competitive 
cycle that would destroy the limits on consumer choice and programming 
diversity.
    That dream is finally coming true.
    Thank you.

    Mr. Tauzin. Thank you, Mr. Levin.
    We have received a call from downstairs that the 
photographer is ready to take the official Committee on 
Commerce picture, so we will take a 15-minute recess. We will 
be right back.
    [Brief recess.]
    Mr. Tauzin. It is 10:40. The committee will please come 
back to order.
    When the committee recessed, we had completed hearing the 
testimony of our two distinguished guests. The Chair now 
recognizes himself and members in order of their appearance on 
the committee for a round of questions.
    Under the unanimous consent, members will be recognized for 
a 10-minute limit.
    Let me begin, first of all, by asking I think kind of the 
central question here, Mr. Levin and Mr. Case; that is, will 
consumers in this new world of interactive television, in your 
opinion, have several fully capable systems by which they can 
choose the products, services, for interactive television 
envisioned, that the merger will allow?
    Let me be perhaps a little more specific in the question. 
One of the reasons why I think satellite television was an 
inadequate competitor for many years to cable, despite the fact 
that we passed in 1992 program access laws that allowed 
satellite companies the right to buy cable programming at 
nondiscriminatory prices, was the fact that satellite did not 
have the legal nor physical capacity to offer local channels in 
their packages.
    I remember seeing many ads by the cable company, Mr. Levin. 
They were very effective. They basically said to consumers, you 
shouldn't have to run around your house with rabbit ears and 
tin foil to try to get your local signals. You can get it all 
from the cable company. The message simply was that the cable 
was more fully capable as a competitor of delivering the kind 
of television that consumers wanted, and that until we passed 
the recent act that allowed local signals in the satellite 
package, that consumers really did not have a fully capable 
choice; that cable, in effect, was the most capable, and, 
therefore, the system of real choice for consumers. Choice was 
sort of illusory rather than real.
    The question that confronts us today as we look at your 
merged entities and the incredible capacity of your merged 
systems to make good on the promise of interactive television, 
is there going to be any system as fully capable as yours that 
consumers in the various communities in which you serve will be 
able to turn to if they don't like your prices, terms, or 
conditions, or, as I pointed out, the attitude of your 
salesmen?
    Please respond.
    Mr. Levin. Let me start, Mr. Chairman. We are actually in a 
wonderfully prolific period because there are at least four 
platforms that can deliver the kind of services that the 
consumer is beginning to acknowledge. One is broadband cable. 
Another is satellite, which is now not only fully effective in 
delivering one-way services, but is now fully capable of 
delivering interactive or two-way services using a telephone 
return path and soon a satellite return path. Three is the 
telephone system itself through something called DSL, digital 
subscriber line, which is currently capable of delivering high-
speed data into the home, whether it is into a PC and soon into 
a television set. Finally, the fourth area is wireless. You 
probably have seen that not only for normal cellular telephony, 
but what is called 3G, or the next generation of wireless 
capability, you will be able to receive broadband video through 
a wireless device.
    So you now have a full complement of platforms, so both 
from an AOL perspective and a Time Warner programming 
perspective, all these platforms are available to everybody.
    Mr. Tauzin. Given that, the question of awkwardness, the 
question of user-friendliness--if your platform is not only 
fully capable, but extraordinarily user-friendly, and other 
platforms have weaknesses in the architecture, weaknesses in 
the design--as you pointed out, satellite has to rely on a 
telephone return path for interactivity. Telephone DSL, as you 
know, is significantly behind in terms of deployment around the 
country. We are working on policies in that area. But the 
question is will there be in real time user-friendly, fully 
capable alternatives, given the fact that these other 
technologies you mentioned are, I think, significantly behind 
your own?
    Mr. Levin. Let me just add one thing. By the way, just as a 
side comment, not to intrude on the notion of the number of 
hearings or the number of people who are testifying, I think--I 
commend the committee and you, Mr. Chairman, for taking up this 
subject because it is the most interesting, fascinating subject 
in the emerging communications industry.
    It is an unusual situation, because as many witnesses as 
you may get, they will define differently what they mean by 
interactive television. I think the strength in that is the 
fact that there is an opportunity now for multiple concepts and 
a lot of innovation to take place. In other words, there is no 
one definition, one platform.
    Mr. Tauzin. We will be looking at that. I want you to know 
that that is going to be the focus at least that I want to take 
in these hearings, and that is whether or not there will be 
real choice, not illusory choice.
    Mr. Levin. I think it is crystal clear that just as we can 
see today the interactivity that comes through Internet 
protocol through the Internet, that, in fact, the ability to 
deliver whatever the concept is, and that is, additional 
program information, different camera angles, the ability to 
purchase, play games, call down movies, all these different 
ideas can be serviced.
    As you know, today the satellite delivery of movies and 
multiple channels is just as robust as anything on cable.
    Mr. Tauzin. We limit it, so let me try to be specific. If 
you are the most capable and you are the best there is for some 
time, and regardless of other competitors offering similar but 
not necessarily as fully capable or as smoothly operative as 
your own systems, then you will get a lot of questions here 
today about if you are the dominant player, the best player in 
the marketplace, are you going to allow open access to other-
owned programming? If you are going to allow open access, under 
what conditions will you allow that?
    I want to raise this question, because I have come to 
understand that there are really two debates here. One is 
whether or not government should compel open access, and we 
have had discussions of this privately and publicly on the 
record, or whether or not, given a lack of government policy 
requiring open access, whether you would want to do that on 
your own as a good public policy for the company and for the 
public; or, third, given the circumstance where people have to 
negotiate their way onto your system, will they have equal 
technological treatment on your system?
    That is an interesting question that people are beginning 
to raise. If I am a programmer that needs to be on your system 
to reach as many consumers, because you are the best, most 
capable, most fully operative system that consumers would 
likely choose, will I have the same technological treatment as 
your own programming on those systems? Will I be as fully 
interoperative, fully interactive, as any other program on the 
system, or will I find that because we are talking about 
dollars, sales of products, telemarketing in the television 
era, am I going to be treated differently when I do negotiate 
my way onto your system?
    Please respond, either one of you.
    Mr. Levin. Let me start, and we are talking about two 
areas.
    One, for interactive television, as we have indicated, this 
is an emerging series of ideas, and I think you will find many 
participants who will have no problem delivering as much 
material downstream as they want, and getting it back up is 
relatively easy. That is true for everyone.
    With respect to multiple ISP, that is, the kind of high-
speed Internet access, we have been working in a very focused, 
systematic way to deliver multiple ISP. This started well 
before the announcement of the AOL-Time Warner merger. The 
first thing we did was to acknowledge a set of principles that 
took the cable industry well beyond where it currently resides 
in two respects; that is, not to limit the delivery of full-
motion video coming through a PC, through Internet protocol; 
and second, not to limit the ability of any ISP to market and 
bill and service the consumer.
    Mr. Tauzin. In that sense, if I am ESPN, and I negotiate my 
way onto your system, will the consumers who watch that 
programming have the same technological capabilities of 
visiting an ESPN shop to purchase products, or will that be 
treated differently because ESPN is not owned by your company?
    Mr. Levin. The simple answer is yes, both technologically 
from a sound business perspective, that is, giving the consumer 
exactly what they want and desire, and there is no limitation.
    I think, again, we have two different streams in the 
question. One relates to the notion of the emerging idea of 
what is interactive television. The other is high-speed 
Internet access delivered through some kind of broadband 
platform. It is the latter that we are normally talking about, 
the concept of markup ISP or open access.
    In that case, we have publicly declared and invited any ISP 
to come--and remember, Time Warner cable serves only a portion 
of the country--to come and participate now as we are trying to 
restructure some of the early exclusivity arrangements that 
have been entered into, and provide a technical test that 
enables these routers to deliver and pass through the ISP 
without the cable system touching or doing anything with 
respect to that feed.
    Mr. Tauzin. We will be submitting some written questions. I 
want to explore that further.
    I want to leave one question with you as my time does 
expire. We know there is an existing relationship between Time 
Warner and AT&T. AT&T owns, I think, 25 percent. The question 
is, absent a separation, a sale, an acquisition of that 
ownership, will AOL-Time Warner be able to leverage its 
programming onto the AT&T cable systems if that is not settled 
somehow through negotiations or through government action?
    Mr. Levin. I think the clear answer to that, Mr. Chairman, 
is no. In fact, AT&T has a passive partnership interest in a 
partnership that was acquired through the acquisition of Media 
One that was established in 1991. There is no control or no 
opportunity to influence Time Warner cable or any of its 
programming services.
    Mr. Case. If I could just add, Jerry certainly is the 
expert on television because he has been focused on this for 
the last few decades. I am not an expert on television, I am 
not even in the television business yet, but hopefully in the 
next month or so that will change.
    But I will give you my perspective, coming at it from more 
of the Internet side. There has been a lot of experimentation 
in interactive TV. In 1980, when I graduated from college and 
moved to Cincinnati, Ohio, one of the benefits I thought of 
moving to Cincinnati, Ohio, in addition to working for Proctor 
and Gamble is the Cube Interactive TV system was being tested 
in two cities in the country, Cincinnati and Columbus. I 
thought I would get to experience it, in addition to which I 
read about it in college in a variety of science fiction 
futuristic things. Twenty years later, people are still waiting 
for interactive television. Nothing material has happened. So 
this is a market that needs more attention and more innovation.
    I think AOL-Time Warner can stimulate that. I think we 
already have stimulated more dialog about this, more investment 
in this. The bottom line is television has not changed very 
much other than the more choices that consumers have, largely 
stimulated by Time Warner's innovations with HBO and CNN.
    What people now want is the kind of choice and control 
which they get from the Internet, which I think AOL is as 
responsible as any company for making that mass market 
phenomenon.
    Together I think we can make the promise of interactive TV 
a reality. It is still in the starting point. There are many 
different interactive TV systems. There are many different 
delivery paths in terms of communications. Sitting on top of 
those are dozens, probably soon to be hundreds, of different 
devices. You can go to Circuit City or Best Buy tonight and buy 
some interactive TV boxes that sit on top of your television 
and either connect with your cable or satellite.
    Soon I think we will connect over DSL or wireless. That 
will connect to hundreds, eventually thousands, of different 
services.
    So I think the Internet model of choice and consumer 
control is starting to move into the television industry. That 
is really what this is all about. It is in the starting gates. 
It is very exciting. We are optimistic about it. The reality is 
it is still in its inception, and it requires more focus and 
investment.
    Nobody is bright enough to know exactly what is going to 
develop. As I said in my opening statement, there are many 
different companies with very different views of how this will 
develop. We just think it requires more time and attention. I 
assure you, the kinds of things you are concerned about are not 
going to be of concern. The choices are going to be the kind of 
choices that you are used to on the Internet, when consumers 
are watching their television 5 years from now.
    Mr. Tauzin. Thank you.
    The Chair recognizes the gentleman from Tennessee Mr. 
Gordon.
    Mr. Gordon.  Thank you.
    Just following up on more questions about interoperability, 
Mr. Case, going to your area of expertise, can you give us your 
information in terms of instant messaging?
    I know there have been some negotiations. Your critics will 
say you have broken those and have not moved forward on that. 
Where does that stand? Tell us where it stands now and what 
your intentions are to open this up.
    Mr. Case. Our intention is to have an interoperable instant 
messaging system that is as interoperable as e-mail, but more 
effective in terms of protecting consumer security and privacy.
    I think people know the benefit of e-mails is that any 
system can talk to any other system. That has helped stimulate 
the demand for the Internet. More than half the mail that gets 
distributed each day gets tossed away because it is spam and 
pornography and things that need to be blocked from the system.
    The e-mail connectivity that was put in place more than a 
decade ago did not think through some of the issues regarding 
parental controls and other things to protect safety. What we 
are trying to do with interoperability of instant messaging is 
providing the benefits. Anybody can talk to anybody using any 
systems, but some of the protections which I think people 
need--hopefully we can learn from some of the lessons of e-mail 
over the past decade.
    To give some history on instant messaging, we invented it 
15 years ago as part of our first service. For more than a 
decade, the only way to get it was pay us money. Subscribe to 
AOL, and you can use instant messaging. We decided to make it 
free years ago. Now it is freely downloadable. It costs nothing 
to use. Any ISP customer can use that at no cost. We have since 
licensed it on a royalty-free basis to more than a dozen 
companies.
    I would venture that you won't find another technology 
invention as popular as instant messaging that has been so 
broadly given away free, because of our belief in the Internet 
model of openness and making sure it really is as seamless as 
possible.
    What we have been doing over the past year is trying to 
work on server-to-server interoperability so we can connect 
directly with companies in the instant messaging business, of 
which there are dozens, and provide this kind of seamless 
connectivity with the proper protections.
    I think we are making good progress on that front. We 
indicated at an FCC hearing that it would take about a year to 
do the technical development to make that possible. In the 
meantime we have put in architecture in front of the IATF to 
get people to comment on our particular approach.
    Meanwhile, this is a very competitive market. We are 
committed to interoperability. We think it is the right thing. 
We are moving quickly toward it. In the meantime, this market 
has developed where there are dozens of companies, including 
Microsoft and Yahoo--Microsoft launched an instant messaging 
service a year ago. It is now climbing up to 20 million users. 
A couple of weeks ago it integrated it into the Windows 
operating system.
    Instant messaging is now becoming part of computing. Yahoo 
has, I think, tens of millions of people using instant 
messaging as well. So this is a vibrant market with lots of 
different competitors. AOL was the company that invented it. 
AOL is the company that has taken the lead in popularizing it. 
AOL opened it up and made it free to use, download, license. 
AOL is the company that will make interoperability work over 
the next year.
    Mr. Gordon.  Are you going to set a hard deadline of a 
year?
    Mr. Case. It is hard to set a hard deadline. It requires 
cooperation with a lot of different companies and a standards 
process. We have said things we can do from a technical side--
that we have said by next summer we will be able to technically 
support interoperability on a server-to-server basis with these 
particular precautions. We are eager to move down that path.
    Mr. Gordon.  Do you think before a merger is approved, 
there should be something--a more definite timeframe set?
    Mr. Case. No.
    Mr. Gordon.  Why would you say that?
    Mr. Case. I think we have already demonstrated that--again, 
if you look at the history of technology, I don't think 
Microsoft has taken Windows and made it free to download and 
free to use, or then freely licensed other companies to change 
it in whatever way they wanted. Nor has that happened in any 
other instance, real audio or other technologies.
    I think we should be applauded for the leadership we have 
already taken in taking something we have invented and making 
it freely available, and for the steps we took even before we 
announced the merger to move down the path of interoperability. 
Frankly, we would get there sooner if this merger had been 
approved already. A lot of people are focusing a lot of time on 
the lobbyists' side of things, not the engineering side of 
things. The sooner we can get back to the engineering side of 
things and figure out how to make this work, the better off we 
are.
    In the meantime, I think we are looking at a market that is 
working. Microsoft has integrated it now in the operating 
system. That is the subject of a whole other process. It is the 
precisely the kind of thing the government is concerned about.
    What it will do with instant messaging, it will probably 
make them the dominant provider of instant messaging over the 
next year or 2 because it is integrated in the operating 
system.
    Mr. Gordon.  Since you intend to make it interoperable 
anyway, would you have any objections to the FCC making that a 
requirement for the merger?
    Mr. Case. We are having a dialog with the FCC. We are 
having a dialog with the FTC, and also with the European Union. 
We believe that our commitments are significant, and the steps 
we have taken on interoperability with instant messaging, the 
steps we have taken on open access in terms of ISPs, are 
significant.
    We think it would be better for us to demonstrate in the 
market that these things work, which we are committed to do, as 
opposed to having a piecemeal approach applied through the 
merger review process.
    Mr. Gordon.  I conclude by saying, what are those 
commitments that you said you made?
    Mr. Case. On which topic, open access or instant messaging?
    Mr. Gordon.  Interoperability with instant messaging.
    Mr. Case. We will continue to make it freely available to 
consumers. There is no plan to change that. We will continue to 
license it to lots of different companies on a royalty-free 
basis. We continue to work aggressively toward server-to-server 
interoperability to connect other instant messaging systems in 
a way that is safe and secure for families.
    Mr. Gordon.  Thank you.
    Mr. Levin. If I could just add, of course, this merger 
doesn't implicate instant messaging as you normally have in a 
horizontal merger where there are overlapping businesses. Time 
Warner is obviously not in the instant messaging business. 
However, just as an observer, we have great respect for what 
AOL is doing in terms of trying to design a system that deals 
with some of the flaws of the current e-mail system, which we 
have all experienced during the past year, from viruses to 
intrusive e-mail.
    Mr. Tauzin. I thank the gentleman.
    The Chair recognizes the gentleman from Florida Mr. 
Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    I think when I hear your question with my colleague, 
talking about making it free and making it available, I guess 
the question would be, the interoperability, when this is going 
to occur.
    You obviously can't give us a date today when you think 
that this would be solved, but I think--as I understand it, the 
crux of this debate is whether you will make interoperability 
for other competition.
    Wouldn't you say that is pretty much the crux of what we 
are talking about, why people are concerned?
    Mr. Case. I think there may be many concerns. As the 
chairman said, the hearing is focused on interactive 
television. There are concerns about interactive television. I 
think there are many issues related to this merger.
    One of the benefits, frankly, of this merger is it has 
focused a lot of attention on the possibilities in this new 
world, and has led more companies, I think, to rethink their 
strategies and try to figure out ways to be more innovative.
    As it relates to instant messaging, I do think that a lot 
of progress has been made in the last few years. Most people 
didn't know what it was 5 years ago. Now more and more people 
are using it. Many of our Instant Messenger customers--at last 
number, about 40 percent of our customers using AOL Instant 
Messenger already used some other instant messaging services, 
and people can use multiple services. They are all freely 
available. When they buy their new computers, they will soon 
have the Microsoft version freely available on the operating 
system. So the market is working. Instant messaging is a 
feature now that tens of millions of people are enjoying.
    We agree, and have been saying this for over a year now, 
that server-to-server interoperability is the next step, and we 
are willing to take the lead in making that happen, connecting 
our servers with the servers of Microsoft or Yahoo or other 
companies, so the kind of seamlessness that consumers want they 
can get, but the kind of protections that they need they also 
can get.
    Mr. Stearns. I am looking at this Wall Street Journal of 
Monday. Just reviewing it, it talks about Mr. Parker, Richard 
Parker from the Federal Trade Commission. I guess he is the top 
antitrust cop. He is going to recommend that the merger be 
blocked unless the two companies agree to a tough list of 
conditions. Have these conditions been explained to you? Do you 
know what they are?
    Mr. Case. We certainly are having a dialog with the FTC and 
with other agencies. We have indicated that we think this 
merger is unusual. It is large in scope. It gets a lot of 
attention.
    Mr. Stearns. No, the question is when he lets the press 
know that he has these lists of tough conditions before he 
would recommend the merger, is it correct--is my understanding 
correct that he has a list of tough conditions? Has he made 
them known to you? Just yes or no.
    Mr. Case. We do have a dialog with the FTC. We think that 
is best a private dialog, not a dialog to read about in the 
press.
    Mr. Stearns. I understand. Then the FCC seems to have some 
concerns, too.
    I guess my question is do you feel that the conditions that 
the Federal Trade Commission is offering you are going to be 
difficult to comply or are unreasonable?
    I am giving you an opportunity, a public forum, not to talk 
about the details and what these tough conditions are which he 
threatens to block this merger with, but in a general way, both 
of you to explain, what is the FTC generally asking you to do 
that is difficult for you? Or perhaps maybe you can give us in 
a general tone what you feel the problem is.
    Mr. Levin. If I could respond----
    Mr. Stearns. This article I thought was pretty much putting 
you in a box between the FCC and the FTC. They are talking 
about some of the things we are talking about. They call it a 
Kabuki dance between you folks. They are saying that they are 
threatening to block this whole thing.
    Maybe the public does not have to know all the conditions, 
but I think the public should have an idea of what we are 
talking about. Maybe if that is possible, you could illuminate 
here today.
    Mr. Levin. First of all, obviously this is a press report. 
It may or may not be accurate, although we are the press, so I 
hesitate to say that.
    But let's go back. I think it is clear that Time Warner and 
AOL have been quite responsive to all of the regulatory 
authorities who are implicated in this merger. By that I mean 
in terms of interaction, document requests, and fulfilling all 
of the procedural requirements that obtain here in the United 
States and, as Steve indicated, in Europe.
    Second, we said at the outset that it is clear that the 
merger of AOL and Time Warner is a profound idea. Indeed, one 
of the stunning ironies is the fact that the conversations that 
we are having and the public policy debates are actually quite 
healthy, because it is forcing people to think about the future 
and the future destination of where interactivity is going, 
what the digital revolution means, because it is underlying our 
economy. It has a lot to do with American ingenuity and how 
that is being transmitted around the world. So in every venue 
we have actually welcomed the opportunity.
    Now, obviously in each case there are a different set of 
standards being applied because they are operating under 
different jurisdictional requirements. I think it is fair to 
say that at the outset we believe that there are no overlapping 
businesses. Even the discussion we have just had on instant 
messaging is not implicated by Time Warner at all. It is one of 
those unusual situations where the concepts are more 
interesting than perhaps the true issues.
    We have also been very responsive from day 1 even before 
this process got under way by identifying the concept of 
multiple ISPs and a form of access on cable television. We have 
taken the leadership on that.
    Indeed, I can say that I am very focused and systematic in 
pursuing that, regardless of the regulatory bodies. So I think 
it is not wise for us to characterize in public what is really 
a private regulatory process. I think every agency is doing its 
job, and we are doing ours.
    Mr. Stearns. Okay. In your opinion, no antitrust laws are 
being violated?
    Mr. Levin. That is certainly our opinion. There are no 
overlapping businesses between these two companies.
    Mr. Stearns. The fact that they are putting tough 
conditions and so forth for you, either with the FCC or the 
FTC, your position is that basically there are no antitrust 
laws being broken? Perhaps you don't need to have any 
conditions because this is a merger between two companies that 
will enhance the public's ability to operate the interactive 
television?
    Mr. Levin. Again, I wouldn't want to characterize the 
nature of the discussions, because obviously what is being 
pursued is the FCC's views on its jurisdictional mandate, and 
the FTC is doing the same thing.
    I would characterize the process as constructive.
    Mr. Case. I would just add that as it relates to the 
merger, as Jerry said, there are no overlapping businesses, so 
there aren't the same kind of classical antitrust issues when 
we look at ExxonMobil or WorldCom, or most of the mergers--the 
airlines, most of the mergers out there.
    Most of the issues really have to do with public policy, a 
national policy, as Mr. Boucher said; what should the broadband 
policy be for our country for all technologies, or what should 
the proper policy be for instant messaging systems or other 
kinds of issues like that. The view that many have expressed is 
that it would be better to deal with those as policy matters 
either through the regulatory bodies or through Congress 
determining what those policies should be, as opposed to using 
the merger process to try to set policy in sort of a piecemeal 
fashion.
    We have a good dialog. We are not antagonistic. We 
understand it is a big merger. It has generated a lot of 
attention. I think the dialog we have had has been 
constructive. We are obviously eager to finalize this merger, 
and we are open-minded, but we do think that there are 
significant policy issues that are probably better dealt with 
in the right policy forums.
    Mr. Stearns. When I am on Netscape, let's say--let's say I 
am on AOL and I want to get to the World Wide Web, I can do 
that through your site. If I am an ISP subscriber, would I be 
able to enjoy the interactive television experience without 
having to pay more as a consequence of them not being an AOL or 
AOLTV subscriber?
    Do you follow what I am saying? Let's say you are a Juno 
subscriber or any other ISP subscriber. Will you be able to 
enjoy the interactive television experience without having to 
pay more as a consequence of the customer not being on AOL or 
an AOLTV subscriber?
    Mr. Levin. Let me just start, because with that particular 
example, we have actually entered into an arrangement with Juno 
to give them the same access that any other service, including 
AOL, would have to our consumers.
    I would say they have been very responsive. We have held 
out our hand, and we have invited every ISP who would like to 
participate in the broadband technology to come and join us. So 
far we haven't been overwhelmed by responses.
    Mr. Stearns. The point, Mr. Chairman, this afternoon is 
basically since we only have one group testifying, the idea is 
to give them an opportunity to answer some questions, because I 
don't know if they are coming back. So they have their 
opportunity now to express their opinion. They might not have 
it at the subsequent hearing.
    Are these gentlemen coming back to the subsequent hearing?
    Mr. Tauzin. They wouldn't come back after a second panel, 
anyhow. I don't think there is any----
    Mr. Case. On that topic, if I could interject, and earlier 
there was sort of--I didn't fully understand what was being 
discussed, but sort of an intramural dispute over this 
particular hearing and who is participating, and some concerns 
that were expressed about maybe issues have not been properly 
vetted, or maybe consumer groups or competitors haven't been 
given a say.
    I would just give you this comfort: This merger has been 
the most scrutinized merger in history. We have had numerous 
hearings in Congress, the FCC. Many companies, not just ours, 
many competitors, have been deposed by various regulatory 
bodies.
    I would like to assure you that all the issues are being 
dealt with, all the voices are being heard. When this merger 
ultimately is approved, which I expect it to be, I think you 
can be comforted that it had more scrutiny than any merger in 
history.
    Mr. Tauzin. The gentleman's time has expired.
    Let me make the point as we move on, I, for one, agree with 
the gentleman. I think it is awful that part of this process is 
being conducted behind closed doors. It is kind of ironic that 
the place is called The Portals, because they have shut the 
doors. They have the discussions in room 385.
    The Commission can, if it wants to, apparently impose 
conditions upon the parties or force them to accept conditions 
that you can't appeal once you have accepted them. I think the 
process stinks. We ought to have an open discussion about what 
is really being discussed in room 385. We ought to know what 
the public interest discussions are all about. You ought to be 
able to talk to us about it.
    Maybe we will invite the FCC to come and talk to us and the 
FTC to tell us what is going on behind closed doors.
    Mr. Stearns. If the gentleman will yield, I think it would 
be worthwhile to have Mr. Parker come here and testify.
    Mr. Tauzin. Everybody is constrained not to talk. That is 
the way it works. That is unfortunate. We ought to change the 
law so it stops working that way.
    Mr. Case. Mr. Chairman, we are trying to be responsive to 
the process that exists. I think it has been a constructive 
process.
    Mr. Tauzin. You happen to be before them now. Whoever gets 
before them has that chance in that little room. They end up 
having to accept all kinds of conditions to get out. There is 
something wrong about that. We are going to talk about that 
more next year.
    The Chair recognizes the gentleman from Virginia Mr. 
Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
underscore again what I believe to be the inappropriateness of 
imposing an open access policy company by company as a merger 
condition. I agree with the comments made by the others this 
morning, that that should not be a condition of approving the 
merger between AOL and Time Warner.
    As a matter of fact, I strongly support the legislation 
that Chairman Tauzin has introduced which would deny the 
ability of the regulatory agencies to impose additional merger 
conditions beyond the mere requirement that companies come into 
compliance with the requirements of current law. Everybody 
should meet those dictates. But beyond that, these agencies 
should not, in my opinion, be able to impose conditions that 
are not a feature of current law.
    That being said, I very strongly believe that now is the 
time that we should have a national policy on open access. I 
mentioned in my opening statement the many benefits that open 
access will provide. From the standpoint of today's hearing on 
interactive television, it would assure content providers that 
they have a clear and uninterrupted path to the ultimate 
consumer, free of any potential disruption or discrimination. I 
think it is important that they have that assurance.
    We have anything but a national policy today. The policy we 
have at the present time is fraught with both geographic and 
industry-specific disparities, creating competitive 
disadvantages in regions of the country and among various 
industry participants. I think that is a condition that we 
simply can't tolerate.
    Mr. Case, earlier this year you and I had a conversation 
about an effort that I know you have had under way over the 
last several months to have conversations with a number of 
cable companies, including the one that is controlled by Time 
Warner, but the others as well, in the effort to persuade them 
to adopt on a voluntary basis an open access policy. I wonder 
if you would take just a few minutes this morning to enlighten 
us concerning the progress of those conversations. I have seen 
in the press statements by a number of the cable MSOs that they 
endorse the general principle of open access, but those 
statements have been remarkably short on details. We really 
don't have a clear sense today of what the elements of their 
to-be-voluntarily assumed open access policies will be.
    What I am asking you is to comment on a number of things: 
First of all, the progress on these discussions, the extent to 
which you are pleased or displeased with that progress. If you 
can talk about it this morning, I think it would be helpful for 
us to know what elements of open access Time Warner is willing 
to adopt. Mr. Levin might participate with you in answering 
that portion of the question.
    Also, I would ask what elements of open access the other 
cable companies are willing to adopt, as revealed in your 
conversations. In answering that question, I hope that you 
would be specific with regard to at least these elements: First 
of all, the need for nondiscrimination in the treatment of all 
of the unaffiliated Internet providers. They should be given 
access on exactly the same terms and conditions that the cable 
companies' affiliated Internet access provider enjoys.
    There should be a direct relationship between the customer 
and the unaffiliated Internet access provider with the cable 
modem opened and its affiliated Internet access provider having 
no role in that relationship.
    Third, I would say there ought to be a commitment to permit 
the unaffiliated Internet access providers to attach at the 
cable head end. By allowing attachment at that point, 
competition can exist for the carriage of the data traffic from 
the cable head end to the Internet backbone and even beyond.
    There are some Internet backbone segment providers that 
also have cable companies and affiliated cable modem services, 
and I have no doubt that those particular companies would be 
very interested in carrying the traffic from the originating 
customer throughout the entire length of the Internet backbone, 
and perhaps, if they are lucky, even having that message 
terminate on their own cable system somewhere else.
    That is not healthy, in my opinion. I think that we ought 
to have competition for the carriage of that data traffic, and 
the simple requirement that the unaffiliated providers be able 
to attach at the cable head end provides that assurance. I 
think that is an essential element of Internet access.
    I am going to be quiet. I have asked you several questions. 
I would appreciate your thoughts on those various matters.
    Mr. Case. I agree with you about the importance of a 
national policy that encompasses all broadband platforms. I 
agree with you that it complicates things to have more of a 
piecemeal approach.
    I think the discussions we have had with cable companies 
have been encouraging in principle, but so far have not had the 
level of specificity that could result in an agreement, frankly 
because of this merger process.
    The same is true in terms of Time Warner's negotiations 
with other ISPs. A lot of people are in a wait-and-see mode 
trying to see how this merger settles out, and some ISPs, 
including major ISPs, have explicitly told us they are not 
going to enter into an agreement, even though we have offered 
open access, until the merger is approved because they don't 
want to help the merger get approved and may get better terms 
if they wait.
    So the merger review process has, I think, slowed us a 
little bit in terms of achieving what we believe we can achieve 
in the marketplace. But once the merger is approved, I do 
believe that we will make progress in getting other cable 
companies to embrace the concept of open access, and getting 
many other ISPs to benefit from the commitments Time Warner has 
made for open access, which include the things you have talked 
about, nondiscrimination, and a direct relationship with the 
customer, and being able to connect to the cable system the 
same way AOL connects to the cable system; and many other 
things you didn't mention, including offering the video stream, 
which previously has been blocked, and directly bill the 
customer, and so forth.
    I would say, however, that I think it would be better, if 
your desire is to have open access on cable, to have a 
situation where AOL and Time Warner are doing that voluntarily 
because they believe it is in their business interests, which 
is the case, as opposed to having it mandated as a condition, 
because I fear that if it is mandated as a condition, the other 
cable companies will be less likely to embrace it voluntarily, 
because they will feel that this was just the price we paid to 
get a merger approved and wouldn't necessarily be in their 
interest. So actually I think it would be more difficult to get 
open access throughout the cable systems if we had a condition 
than if we didn't.
    That said, if that is the way things play out, then we will 
do our best to try to embrace this notion not just with ISPs, 
which we can do from Time Warner cable, but also other cable 
companies. But thinking of this as a national policy matter 
across all these broadband platforms and trying to allow us to 
demonstrate in the marketplace, which we can and will do, that 
open access can work, and it does make good business sense as 
well as good policy sense, would be the better approach. We 
have made that view clear.
    Mr. Levin. I want to be very clear and very specific. As a 
business proposition, having nothing to do with the national or 
regulatory debate on open access, we believe strongly that 
multiple ISPs are an important service to provide to our 
consumers.
    I say that because we are a product of our own history. We 
did the same thing with multiple pay television services in the 
early days, in 1970, where you used to just have one service to 
assist them, usually owned by the same company. As soon as the 
technology and the consumer demand permitted it, we had 
multiple pay services.
    So this is a business proposition. I advised the Chairman 
of the FCC about this well before the AOL-Time Warner merger.
    Second, we have publicly announced a series of operative 
principles that will apply. The most significant one in 
February was that there should be a direct relationship between 
the ISP and the consumer in terms of the service, marketing, 
and billing. We also agreed that there should be no limitation 
on video streaming.
    Next, we have undertaken to enter into actual ISP 
agreements, and the one agreement I referred to before with 
Juno does effectively contain nondiscrimination, because the 
terms are the same terms that a service called Roadrunner has 
and that a service called AOL would have.
    Finally, the interconnection point, which we have been very 
open about, is at the head end. We are not insisting, and we 
have said this publicly, that an ISP has to use any of the 
services, backbone or otherwise, or any transport services.
    Finally, it is in our best interest to give the consumer 
choice and not to interfere with the ability to gain high-speed 
Internet access from multiple sources. That is our position. I 
have stated it publicly. I am firmly committed to it.
    As we speak, we are doing several things, including testing 
in Columbus, the famous spot for the Cube system, the first 
trial of a virtual router that can actually handle ISPs, 
because it has never been done before. Recognize that the 
architecture of the cable system was designed to deliver 
television systems pursuant to a must-carry regime from the 
FCC, and space has to be provided for whatever is necessary for 
digital services. Consistent with that, this test is now going 
forward.
    Finally, in all the cable industry there are exclusivity 
agreements which prohibit the carriage of multiple ISPs. We are 
in the process of restructuring our agreement to advance the 
time when we will no longer have exclusivity.
    Mr. Oxley [presiding]. The gentleman's time has expired. He 
is recognized for 2 additional minutes.
    Mr. Boucher. Mr. Chairman, let me commend Time Warner on 
the integrity of your open access policy. I think the 
preliminaries that you have announced can be a model that 
should be applied if we eventually come to a national open 
access policy and that, in the meantime, should be adopted 
voluntarily by the other cable companies.
    But my question to you is this: Given the fact that your 
policy is solid, given the fact that it does constitute genuine 
open access, you have committed to all of the principles that I 
personally think are important in defining real open access, 
don't you see yourself as being at something of a competitive 
disadvantage unless the other cable companies are required to 
comply with terms that are at least as onerous; and have we not 
come to the time, therefore, when the Federal Communications 
Commission should not just have a notice of inquiry, but 
actually launch a rulemaking in order to establish open access 
as a national policy and eliminate the disparities in the 
application of that policy that exist today?
    Mr. Levin. Certainly the FCC is the regulatory agency that 
is charged, and now judicially charged, with having either a 
policy that has some provisions to it or defers from exercising 
its jurisdiction, and that needs to take place.
    As a business proposition I am satisfied, as long as we are 
not saddled with any discriminating conditions that we would 
have to undertake, that part of my assignment has always been 
to demonstrate in the marketplace that there is a business 
formula that makes a lot of sense to the consumer, just as we 
have done in many other cases. And if I can demonstrate that 
multiple ISPs is a sound business practice, then it will 
proliferate in the cable industry.
    Mr. Boucher. Thank you.
    Mr. Oxley. The gentleman's time has expired.
    The Chair recognizes the gentlewoman from Wyoming.
    Mrs. Cubin. Thank you, Mr. Chairman. I want to go to a 
little different area. Thank you for educating me on the issues 
that I am about to talk about.
    Mr. Case, you testified before the Senate Committee on 
Commerce earlier this year. I understand that you didn't 
specifically talk about interoperability, but you did talk 
about licensing.
    Could you tell me where AOL is with--first of all, tell me 
what licensing is, what you are licensing, and who it is, and 
then how does that differ from interoperability.
    Mr. Case. There have been several steps in this process in 
terms of opening up Instant Messenger. The first was making it 
free to any consumer who wants to use it, irregardless of what 
network they are connected to, what ISP they are connected to, 
what have you. Tens of millions of consumers have taken 
advantage of that free feature.
    About 1\1/2\, 2 years ago, some companies approached us and 
said, it is great that you are doing that. We would like to 
create kind of our own version of it. Instead of just having 
AOL and Instant Messenger, your product, we want to have our 
own product, Lycos Messenger, Novell Messenger, Lotus 
Messenger. Those are some of the companies that did express an 
interest. We would like to enter into a license with you so we 
essentially can take what you have developed, this technology, 
and modify it so it is essentially our product, not your 
product.
    So we entered into licenses, royalty-free licenses, to 
enable them to do that. I don't know what the current number 
is, but at least a dozen companies have entered into that. 
Other companies are welcome to do that. We don't have to wait 
for a standards process to essentially allow systems to talk to 
each other.
    Interoperability is a different issue. It is kind of 
related, but different. That would allow any company to connect 
on a server-to-server basis without licensing our technology. 
They can do whatever they want as long as their servers 
interoperate with our servers, and there are consistent 
standards in terms of business practices, like making sure that 
security is protected in a consistent way and things like that.
    So interoperability is the next step, a step that is 
important to take so any company can connect with instant 
messaging without having to have any relationship with us, just 
based on embracing some industry standards, some open 
protocols. That is the next step, and we are now moving to 
that. In the meantime, any consumer who wants it can use it for 
free. Any company that wants to license it can do so on a 
royalty-free basis.
    Mrs. Cubin. Tell me what that means, a royalty-free basis. 
What is the benefit to you of the licensing? Is it like a 
franchise?
    Mr. Case. Instant messaging has obviously generated a lot 
of interest. We have always viewed it as a feature, not a 
business. It is not really a revenue-generating business for 
us. We make the service free, and the usage of it is free.
    We think it is an important part of the Internet. We have 
always believed that the soul of the Internet was community, 
building a sense of community and allowing people to talk to 
each other, talk to the people they talk to anyway, but maybe 
more easily, like your family or friends, or meeting people you 
otherwise wouldn't have met and talking to them.
    So we have one integrated community which we think is 
better, because people would like to be able to reach anybody 
through instant messaging, not just people using a particular 
system. But it is not for us a business per se, it is a 
feature, but we think a very important feature.
    Mr. Levin. If I could just comment, the concept of royalty-
free license usually means it is not being done as a business 
proposition, but it is a form of making sure that adequate 
standards are recognized. I think that is mostly the issue here 
about trying to do something here with respect to the spam, 
pornography, and trying to control this form of communication, 
which hasn't taken place with e-mail.
    Mr. Case. Many companies have--IBM, Lotus, Apple, Lycos, 
Novell--there is a long list of companies that have done this. 
It is not just something we did with a few companies. We have 
done this with many companies and are eager to do with more 
companies.
    Mrs. Cubin. Along that line, I realize AOL has made several 
statements regarding the importance of security and privacy as 
they relate to instant messaging.
    Can you tell me--and I believe that the Internet 
Engineering Task Force is working on standards. Can you tell 
me--AOL isn't working with that group; is that correct?
    Mr. Case. That is not correct. We are working with that 
group. We have submitted an architectural proposal in June to 
that group.
    Mrs. Cubin. How long after they make their public 
announcement of what the standards should be do you think that 
AOL will implement it; 3 months, 6 months?
    Mr. Case. We would have to ask our engineers. I guess it 
depends on what specific approach they are recommending, how 
many modifications it would require to what we are doing.
    In the meantime, as I said, we are doing everything we can 
to popularize instant messaging. While we are eager to move the 
interoperability, we have this architecture on the table now 
people are beginning to look at and comment on. I believe 
working groups have been set up to deal specifically with this 
server-to-server interoperability issue. We are open to work 
with any company on an interim basis, at least to license them 
so they can use it right now.
    In terms of how long it would take us to support it, it 
really depends on what the specific technology is in place, 
what protocols are put in place, and how much of a modification 
our system would be required to embrace that approach.
    Mrs. Cubin. For some reason I was under the impression that 
AOL wasn't actually at the table with the task force and 
communicating. I would think if they were, that a lot of the 
things that you described implementing would--it would make 
implementing easier.
    Why do I think you are not at the table when you just told 
me you are? Are you a member of that task force?
    Mr. Case. We are a member of the committee. We are active 
participants in the process.
    Perhaps this can be explored in your subsequent hearing 
next week. Maybe some of those companies can on the record talk 
about what we have done or haven't done. I think there is a lot 
of misinformation on this topic, and when people really look at 
the facts, they will see that AOL has done a lot already and is 
committed to doing more through the proper Internet standards 
bodies.
    Mrs. Cubin. That is why we are having this hearing today is 
to find out some of those things.
    Mr. Chairman, I don't have any further questions. I yield 
back the balance of my time.
    Mr. Oxley. The Chair recognizes the gentlewoman from 
California Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman.
    I can't help but make the following observation: That is, 
the genius of America. I think there is a lot of it at the 
table today. Obviously, there is a lot of it in the room. But I 
think that all of us are struck by that.
    I have a deep appreciation of it. I do. I am in awe of what 
we are doing in our country, what we are bringing forward. 
Obviously, every time you punch the pillow, you put a dent in 
it and something pops up, so there are new issues and 
challenges. But I don't think for a moment that we should lose 
sight of what is at hand and what it all represents. It is 
astounding. It is extraordinary. It is very American. That 
thrills me.
    I want to get back to something that my colleague Rick 
Boucher brought up about which direction to go. I think he was 
touching on that. He went into some of the specifics that 
underscore parts of this legislation.
    To you, Steve, AOL has always stated that you favor a 
market approach rather than a regulatory or a legislative one 
to the open access question as far as making available cable 
lines to rival Internet providers. That has been a huge debate. 
There have been bills introduced. Some say that it was the 
intent of the Telecom Act, and it has fallen short, so now we 
have to reverse things, et cetera, et cetera.
    In your opinion, is the market providing a solution? I ask 
this because it is a broader question. Obviously there are 
cameras here, so you are speaking to America. There are many 
communities that are debating this. What evidence can you offer 
to us that the market approach really remains the best response 
to this issue? If it is working, and I think that it is in so 
many areas, is it providing a solution fast enough? Because 
there is an impatience. You have spoiled us with your 
instantized everything. We want microwaved answers to 
everything these days because the industries have so spoiled us 
with fast responses.
    Could you comment on that? And then if you can get to this 
one, today's Washington Post describes your situation with a 
small cable operator in Florida who is withholding his local 
cable franchise license that AOL needs transferred from Time 
Warner to the merged company. His action could apparently delay 
the rollout of high-speed Internet service in that area.
    Have you encountered similar battles elsewhere in the 
country, and do you expect this to be a relatively common 
occurrence, and what would alleviate the problem? Should the 
FCC step in with action? Does the lack of a single legislative 
framework, which was alluded to, add to the confusion?
    Mr. Case. I will let Jerry take the second one.
    In terms of the first question, I think we are really at 
the beginning of the second Internet revolution that will take 
us beyond PCs and phone lines and allow you to connect through 
many different devices, your telephone, even your stereo, all 
kind of different things connected to many different networks, 
both wired and wireless networks, narrowband and broadband 
networks.
    I think there is an enormous innovation and investment 
going into all these areas with unprecedented capital 
infusions, the venture capital market, the ISP market, and so 
forth, a lot of IPO markets .
    As it relates to broadband, a lot has happened. A couple 
years ago we were concerned that cable might be the only 
distribution path for broadband, and those companies might not 
move--even though we thought it was in their business interests 
to do it--to open the systems up rapidly enough. What has 
happened in the last couple of years is one of the leading 
cable companies, Time Warner, has made a very clear commitment 
I think, to open access with a memorandum of understanding. 
Other companies are starting to embrace at least the concept of 
it. But moreover, other broadband technologies have emerged. 
DSL, which a couple of years ago was questionable, now has a 
fair amount of momentum. If you talk to some of the companies 
like Cisco, they will probably say they are selling more 
routers to support DSL than to support cable. If you turn on 
the television, you will see Verizon offering DSL and many 
other companies. So the DSL market is quite robust and 
competitive.
    Satellite has also emerged as an option, which was not so 
clear 2 years ago, right now with using the telephone as a 
return path, but their next generation, which will come out 
next year, which is a two-way satellite system.
    There are many different wireless companies. Wireless has 
become extremely hot in the last year or 2. The options over 
the third generation spectrum are going for many billions of 
dollars. A lot of people believe wireless is going to be the 
best solution because it is more mobile, and it still over time 
can provide the same kind of high-speed broadband access.
    We are now seeing many technologies coming to fruition, 
funded by significant capital, many, many billions of dollars.
    Your earlier point, I think it does demonstrate America's 
creativity and ingenuity. Because of the interest in high-speed 
access, all this activity has happened.
    On the cable side, I do believe that when Time Warner--when 
we finalize this deal and Time Warner is demonstrating in the 
market that open access works, other cable companies will 
embrace that. But in the meantime there are many different 
choices available to other ISPs today and other consumers 
today. I do think it demonstrates that the market can work.
    Mr. Levin. Let me respond, first of all, to the lengthy 
article in the Washington Post this morning.
    In fact, there are about 1,200 local jurisdictions that 
Time Warner cable has sought some form of change in, and .69 
percent of those local jurisdictions have now approved the 
process, but for the one--a couple of systems. In fact, it has 
actually gone much more smoothly than I would have predicted at 
the beginning of the process. It says something about, I think, 
the quality of the relationships that Time Warner cable has 
with its local jurisdictions.
    With respect to competition, I think it is quite clear that 
what we are seeing on two fronts is the most robust form of 
marketplace competition I have seen in my period of being in 
the business.
    First, with respect to high-speed Internet access, DSL is a 
technology that has been available for some time on the part of 
the telephone companies. It is only now being marketed and 
promoted because of the activity of cable systems in putting in 
high-speed cable modems, so you now have a real marketplace 
contest to put high-speed either DSL or cable modems in, a lot 
of advertising. So that is actually working.
    On the other side, digital television, the competition 
between satellite and cable is quite significant. That proceeds 
apace. I think what we are seeing now is very healthy 
competition to give the consumer either interactive high-speed 
access to the Internet, or forms of digital television.
    Ms. Eshoo. Thank you both, gentlemen.
    I leaned over and said to my colleague much earlier in this 
that I think one of the real compliments that can be paid to 
witnesses is when they not only answer your questions, but 
that, whatever you say, you become very instructive to the 
committee. So this has been educational as well.
    I compliment you. I wish you well. I still think there are 
tons of things to deal with, but I think it is progress that 
really is pushing all of this and creates the new problems. So 
I welcome the problems, because they are being pushed by 
success. Thank you very much.
    Mr. Case. Thank you. I agree, there are tons of questions, 
tons of problems as we move into this more connected world. I 
am eager to complete this merger review process, which creates 
some tension, so we can resume the more collaborative effort we 
have tried to have with this government and other governments, 
so we can collectively, industry and government together, shape 
the right policies, because there are many thorny issues that 
will be addressed over the next decade as we move to this more 
connected world.
    Ms. Eshoo. I urge the chairman to continue holding hearings 
with all the affected parties in this, because I think it is so 
important for us. If we take the wrong step legislatively, it 
is like the elephant's hoof coming down on the ant. It can 
really do a lot of damage.
    Mr. Tauzin. We have made the announcement. We are 
scheduling additional hearings. If we had hearings with all the 
affected parties, we would be here through Christmas, so I 
don't think the gentlewoman would want this.
    Ms. Eshoo. Neither would the chairman. Maybe a different 
chairman.
    Mr. Tauzin. We will have a different chairman here 
regardless.
    Let me correct the record. The room I refer to is 
apparently the FTC building, not The Portals. But it is still a 
closed-door meeting that you can't talk to us about.
    The point is the same. One day we ought to have a law that 
opens those doors and lets the public in, since the public is 
going to be affected by whatever decisions are made and 
whatever voluntary conditions you are coerced into accepting.
    The Chair recognizes the gentleman from Ohio, Mr. Oxley.
    Mr. Oxley. Thank you, Mr. Chairman.
    You may be an ant, but you are a big ant, particularly 
after the merger.
    Mr. Levin, you mentioned Cube. Twenty-five years ago in 
Columbus, Cube began, and I remember it very well. I was a 
member of the legislature at the time, and spent time in 
Columbus, obviously, the capital. I was exposed to Cube, I 
think the first interactive television experiment. It was 
fascinating, particularly because one of the programs was 
interactive communications between Coach Woody Hayes and his 
not-so-adoring public.
    On the first show he received several--had interactive 
capability with several fans who basically said that it was 
time for him to move on, which was kind of a blood sport in 
Columbus, anyway, in those years. There was a Goodbye, Woody, 
Club. Woody was, all of us know, the Bobby Knight of his day. 
His responses got more and more vehement as he faced all of 
these probing questions.
    Mr. Tauzin. He didn't choke on camera, did he?
    Mr. Oxley. No. Interactive TV has not gone that far, even 
today, where it could reach out and choke the accuser, but he 
verbally did. I remember that very well.
    The reason I remember that whole thing is now we are 
talking about interactive TV. That was going to be the wave of 
the future. Twenty-five years later, what leads us all to think 
that the public is going to embrace that wonderful concept, 
even though it was introduced with great fanfare in Columbus, 
Ohio, some 25 years ago?
    Mr. Levin. I joined this industry 30 years ago because I 
read something called the Sloan Commission Report that talked 
about the interactive television and the wired Nation in 1970. 
We still don't have it, so I think--by the way, I had the 
dubious duty of interring the last Cube box about 10 years ago, 
kind of as a memorial to what was a failed experiment. On the 
other hand, what came out of it were things like Nickelodeon 
and lots of interesting programs.
    We had another experiment in 1981 where we tried to deliver 
news on demand to precursors of computers, and it just failed 
miserably. Yet the concepts were always there. That was for two 
reasons: One, the technology was not there. I mean, the true 
digital technology for cost-efficient interactivity just did 
not exist. Second, the consumer didn't know, didn't understand, 
wasn't fully appreciative of the notion that television is kind 
of a lean-back, passive experience.
    The profound nature of the Internet has done two very 
significant things. One is it actually provides a digital 
system that can interconnect and can be interactive, but 
second, it has given everybody the experience that we all used 
to associate with interactive television; that is, the 
opportunity to get news on demand, to shop, to play games, do 
all these lifestyle things.
    So that habit structure has now proliferated, and the 
digital technology, which we didn't really have--by the way, it 
is another irony that the last medium to be digital is actually 
television. The first medium was print, which we did 25 years 
ago. We now have the platform predicate and the consumer 
experience that is probably setting the stage for interactive 
television.
    But to the extent history teaches us anything, it is the 
fact that nobody has a handle on what the concept is yet.
    Mr. Oxley. Mr. Case?
    Mr. Case. If I could add, I am younger than Jerry. I 
actually got interested in this business in 1978 reading books 
like Alvin Toffler's The Third Wave, talking about interactive 
television, and not that much has happened. But I agree with 
Jerry that now the time probably is right. The technologies 
have gotten better.
    More importantly, consumer habits have changed. People are 
more used to interactive services because of the growth of the 
Internet. They are starting to ask, if I can do all of this on 
my PC, why can't I take more control of my TV? Why do I just 
see what the networks want me to see? Why can't it work like 
the Internet where I can go where I want, do what I want, where 
I want?
    So I think the consumer appetite is there, but I don't 
think anybody is smart enough to know exactly how this will 
develop. I think this merits attention, it merits investment, 
it merits innovation.
    That is beginning to happen. Over the next 5 or 10 years, I 
do think television will be transformed. Some existing 
companies in that business may not like that because they kind 
of like the way it is working, but I think it is going to open 
the doors up to many newcomers, just like with Internet. The 
growth of Internet, fueled by AOL and others, has really 
resulted in a whole slew of new companies being formed and 
unprecedented innovation. Now the time is to focus on 
television and try to create that same kind of competitive 
dynamic.
    I am optimistic it can happen. At the same time, AOLTV, 
which is just rolling out now, over the next year will get tens 
of thousands of people to use it. It is not going to be kind of 
an out-of-the-gate home run. We are still listening and 
learning. You have to be on the playing field, you have to 
interact with customers, you have to give them things to use 
and play with and learn from.
    That is the story of AOL in the last decade is learning 
from people and finding out what they like and don't like, and 
doing more of what they like and less of what they don't like.
    Mr. Oxley. I am sorry I didn't get a chance to give my 
opening statement, but I do think these kinds of mergers have 
tremendous upside potential.
    I obviously wish you well. I share the concerns that other 
members of the panel expressed about the micromanaging going on 
at the FTC and FCC and trying to pick winners and losers.
    You may fall on your face, but you and your shareholders 
have taken that risk. Indeed, the marketplace is going to 
determine at the end of the day, when you are back here 5 years 
from now, whether it has been a success or it hasn't.
    It seems to me that the overall majority on this committee, 
on both sides of the aisle, hope that this is the beginning of 
a great new revolution in interactive television and all kinds 
of entertainment and news and the like.
    How does the rollout of high definition television and its 
implications--how does that affect your view of the future?
    Mr. Levin. This is another example of the technology that 
has been around for many years. I know at HBO, for example, 
probably 10 or 12 years ago we started picking up our boxing 
events in high-definition television, even though the consumer 
wasn't there.
    I think the digital technology enables the transmission and 
the delivery of high-definition television that broadband 
capacity can now permit, and the quality of the picture, and 
the fact that you use what is called an aspect ratio, so it 
looks very much like what a motion picture looks like as 
opposed to a television screen, is very powerful.
    The problem is that the spectrum that has been given to the 
broadcasters to use for that purpose is now being thought about 
in a different way, to use it for many other applications that 
relate to the use of high-speed data and other forms of either 
subscription or advertising-supported video. I think it is 
unfortunate, because, in fact, it is a striking technology. It 
is still somewhat costly, but probably over time it will be 
delivered, but you don't see very much business support for 
high-definition television today.
    We have, in our case, tried to make arrangements with those 
who are delivering high-definition signals, whether that is 
everyone from CBS to HBO, to carry it on our cable systems.
    Mr. Oxley. We have already seen the effect of the Internet 
and the explosion of television programming, cable and the 
like, changing the whole face of television. The market share 
for the major networks, the three other networks, is 
substantially down. One would guess that that would continue to 
be the case.
    How do you both see, let's say, 5 years from now, the video 
landscape as it relates to the networks, the traditional 
networks? Where is the audience going to go, in your 
estimation? Is this the beginning of the end for the three or 
the four or five, whatever, broadcast networks?
    Mr. Levin. Well, this is a persistent question. There is no 
doubt that when you have a 250-channel system, which you have 
through satellite, the cable now, the share of the audience on 
the part of the major broadcast networks is continually 
declining, although the business is still very healthy because 
it is the largest aggregation of eyeballs to deliver to 
advertisers.
    What has happened is that, first of all, the broadcast 
networks are participating in the fragmentation of television. 
That is, they all own or have interest in a number of 
specialized channels, so they are no longer just one broadcast 
service.
    I think, second, the reason for so much interest in what 
either interactive television or applying the Internet 
experience to television--the reason for that interest is to 
try and carve out additional business formats that can actually 
take advantage of the smaller and smaller niched audiences 
where people are going to what their personal interests are.
    Having said that, I think we will always have major events, 
from the Super Bowl to the Academy Awards to some of the 
reality television we have seen recently. The point is to give 
the consumer much more control than the consumer currently has. 
That is what the broadcast networks need to learn.
    Mr. Case. I am confident a few years from now you will have 
a 24-hour Survivor channel.
    Mr. Oxley. Oh, no. This is the low point in this hearing. I 
yield back.
    Mr. Tauzin. I am not sure we want to survive that.
    The Chair recognizes the gentleman from Chicago, Mr. Rush.
    Let me point out that we have apparently a vote on the 
floor, which will be followed by 5-minute votes, so that we 
probably are going to have to take a little recess after this 
to give everybody the time perhaps to have some lunch or relax 
a bit. My guess is that we will be gone for at least a half 
hour once we recess.
    Mr. Rush.
    Mr. Rush. Thank you, Mr. Chairman. I am going to try to 
elevate this, to turn back up to some loftier heights here.
    Mr. Levin, your merger with AOL and Time Warner will bring 
interactive TV to new heights. I want to share the comments of 
my colleague Ms. Eshoo. I think the fact that you are here and 
we are discussing this issue is really testimony to the 
greatness of America's ingenuity and know-how. I believe 
sincerely that this is a very, very powerful moment and a 
powerful undertaking that you are engaged in.
    However, I want to deal with some content issues here. You 
and I have both had violence visited upon our houses, and I 
know you are sensitive to street violence, also. I really want 
to take this moment to ask you, how do you assess violence in 
America today, and how can you and I both, and others, harness 
this enormous power and potential that we have to try to deal 
with the issue of violence in America?
    Mr. Levin. Well, obviously, this is a deeply personal 
subject for me.
    Mr. Rush. I understand that but--please forgive me, but I 
just want to take this opportunity to do that.
    Mr. Levin. I find it appalling that a subject so important 
gets somehow caught up in either politics without addressing 
the real issues or taking one part of our society and putting 
the blame there. I think it is just a constellation of things--
everything from guns to drugs, to failure of the educational 
system, to the lack of not just parental authority but coming 
from the churches and the synagogues and the mosques should be 
playing more of a role in the community.
    So what should we be doing? I do think that we need a much 
more informed national dialog on this issue. The reflex 
response every time there is a tragedy is just an unfortunate 
way of dealing with it. No one truly knows why young people--
their empathetic response just shuts down when they are young, 
and they have no way of dealing with society. I think it is 
fairly clear that the experience of real violence as opposed to 
fantasy violence, either in our peer groups or through parental 
abuse, that is where this is learned. So I would just say there 
are a whole host of things to recognize the complexity.
    As you know, there is a hearing taking place in the Senate 
right now on the subject of the marketing of R-rated films to 
young people; and, you know, our company is trying to be very 
responsive. I just think we need to take a look at every facet 
and recognize that we all need to work together on this.
    As a matter of fact, it is not just because of deep 
personal experience, but I think companies do care about this 
issue and want to help and want to play a role in trying to 
ameliorate one of biggest problems in our society. Because it 
occurred even yesterday in a school in New Orleans, that there 
is a national epidemic that is not solely attributable to the 
media. In fact, if you would just talk to young people and ask 
them what they think the issue is, it is not music, lyrics; it 
is not R-rated films. It has a lot to do with the kind of adult 
supervision and the fact that in our education system----
    In addition to my son, who was a heroic teacher, I have a 
daughter who is a social worker who works in schools. Because 
teachers can't contend with the issues they have. And who is 
paying attention to the role of teachers in our society, giving 
them the support?
    That is why some of the things that we are trying to do as 
a company are designed to deal with that. So rather than that 
being an adversarial relationship, we should all be working 
together for the sake of our young people. I can't give you a 
singular answer.
    Mr. Rush. I don't expect you to give a singular answer, but 
I wanted to take a moment to applaud you. Because I have 
recognized and I have seen a visible evidence of HBO really 
trying to deal more effectively with this violence, and I would 
like to applaud you.
    Mr. Case, do you have anything you would like to add?
    Mr. Case. I think Jerry was very articulate about it. It is 
a very complicated problem.
    I think government needs to take a more macro perspective 
on it, even though, obviously, there are a lot of parts to it 
that have very passionate views on both sides. I think 
companies like AOL, companies like Time Warner, and certainly 
AOL and Time Warner together, would hope to be a leader in 
trying to deal with some of these thorny issues or some things 
that the media entertainment companies can do and will do to 
try to do its part. There are some things that can be done 
through the advent of the Internet and other interactive 
technologies, but it is a much more complicated problem.
    Everybody has to do what they can within their own 
businesses or their own groups or what have you, and there 
needs to be people taking a step back and trying to be more 
strategic about it, more thoughtful about it and less reactive.
    So certainly we have said for some time that we aspire to 
be the most valuable company in the world, but we also aspire 
to be the most respected company in the world. And we are only 
going to be the most respected company if we do conduct 
ourselves in a responsible way, if we do follow up on 
commitments, whether it be open access or messaging 
interoperatively, some of the things we have talked about 
today.
    But, in addition, we go beyond that and really try to 
establish a new kind of dialog between businesses and 
government and deal with some of these issues, whether it be 
violence or education or health care, in a more collaborative 
way.
    We don't think the traditional--looking at the past 
century, the sort of hostility that has existed between 
industry and government with the industry generally trying to--
at least viewed this way, particularly in the robber baron 
era--trying to get away with as much as they possibly can and 
the government trying to be responsible and rein them in is the 
right approach for the next century. We think a more 
responsible, more balanced, more constructive, more 
collaborative approach is critically important for many issues 
but this one, certainly that is the case as well.
    Mr. Levin. If I could just add, because I chose to come 
back and continue to be the CEO of our company; and one of the 
reasons was there is such an important role to play.
    I would simply use an example that occurred recently, and 
that is through news and story telling--CNN's Pierre Thomas on 
CNN did a probing report on heroin addiction in Baltimore. HBO, 
at the same time, Charles Dutton had a series called The 
Corner, which was a harsh series, but it disclosed the same 
issue done in story telling. It was an important message to 
deliver both in journalism and in what we call the 
entertainment business. But that is perhaps more powerful than 
any other way of delivering the message that we have to pay 
attention.
    Mr. Rush. I saw that series, and I really take my hat off 
to you. It was a very, very insightful--brutal but insightful 
and educational series.
    Mr. Levin. Our proudest moment was when it got four Emmys 
and the recognition that this is the role we can play.
    Mr. Rush. Thank you so very much.
    Mr. Tauzin. I thank the gentleman.
    On the other hand, Bobby, I don't think Tony Soprano can be 
a lot less violent than he already is. He suddenly mellows out 
on us.
    Let me an announce that we are going to----
    Mr. Largent. Can I follow up on just a real quick--because 
we have to go vote?
    Mr. Tauzin. We have about 4 minutes.
    Mr. Largent. I was listening very intently, Mr. Levin, to 
your answer. I guess when you talked about a whole 
constellation of issues surrounding youth violence in our 
country I couldn't agree more with that. There is a lot of 
contributing factors but I never heard you say that the graphic 
movies, music that your company produces is one of those 
contributing factors to the level of violence that exists in 
our country. Do you agree with that statement?
    Mr. Levin. What I would like to say, and this comes from 
deep emotion, my son used materials that we produce to reach 
children in the South Bronx who are otherwise unreachable, used 
movies, used music, all of this material to improve their 
vocabulary; and to me that was the most heroic example I can 
think of and personally dedicating himself to that. I take full 
responsibility for everything this company produces, but I have 
profound respect for what he did, which far exceeded anything I 
have heard from anyone else.
    Mr. Largent. Again----
    Mr. Levin. And I would prefer that you not pursue it, 
because this is something that is more personal to me and not 
professional.
    Mr. Largent. Okay. You still did not answer the question.
    Mr. Levin. Fortunately, you haven't had the personal 
anguish that I have.
    Mr. Largent. There is no question about that.
    Mr. Case. Let me just add, because I am certainly not an 
expert in some of these businesses, movies and so forth, I am 
just learning about them. And I certainly cannot even relate to 
some of the issues that Jerry and Mr. Rush have had to deal 
with. But I don't want you to leave with the impression that 
when you are talking about constellation that we are somehow 
saying that the companies that we are involved with have 
nothing to do with it. We do think that the companies we are 
involved with do have an influence, and we do think what we do 
has a positive influence.
    I am sure mistakes are made from time to time, and people 
have to assess what is being done in terms of the creation of 
content, also marketing distribution of content and so forth; 
and that is something we will continue to look at to make sure 
we are doing the best we possibly can. But the main point is it 
is unfortunate that this issue, which is a serious issue in 
terms of overall problem, gets politicized during the election 
cycles.
    Mr. Tauzin. We have 2 minutes left.
    Mr. Case. I think it masks the broader issue and the 
broader challenge which is to deal with this in a constructive 
way with everybody doing their part and doing the best they can 
to try to make a better world.
    Mr. Tauzin. We have 2 minutes. We are going to have to 
recess. We will continue this discussion when we get back, Mr. 
Levin.
    It is very interesting, on the Senate side Jack Valenti on 
behalf of the movie industry is taking some responsibility for 
mistakes and admitting that the industry can do better.
    We will come back in a half hour. The committee stands in 
recess.
    [Brief recess.]
    Mr. Tauzin. The subcommittee will please come back to 
order.
    While we are awaiting the arrival of a few members I know 
who wanted to engage you in several questions--we will see 
whether they make it back in time--let me ask a question that 
the staff propounded in their memo on the members which is kind 
of interesting.
    Steve, you remember we had our conference at Landsdowne on 
privacy when we talked about the fact that the Internet and its 
e-commerce features was essentially telemarketing, just in a 
new and more vibrant and perhaps more interesting form. That 
essentially a lot of the e-commerce companies on the Internet 
are selling services and goods in the same way that people call 
you up on the telephone and offer to sell you services and 
goods. It is simply done in this new medium. And as we go to 
interactive television, essentially, we are moving from 
telemarketing to telenet market to television marketing in an 
interactive fashion. So the question, how those dollars are 
going to be divvied up, becomes quite interesting.
    The staff propounds this scenario. If Nike sells a pair of 
shoes on a CBS program transmitted by an AT&T cable TV system 
to a Motorola set top box running Microsoft software and 
ultimately on a Sony television, who does Nike pay for 
advertisement of its products? How is that going to work?
    I mean, we all understand generally how the advertising 
world works on television today. We understand how it gets more 
complex on the Internet. This is incredibly new levels of 
complexity that I think nobody yet can understand. Can you help 
us understand it?
    Mr. Case. I don't think anybody knows for sure how that 
will work. Because I said before nobody knows for sure how 
interactive television will develop. And it is certainly fair 
to say as this world converges there is lots of companies, 
thousands of companies that are trying to figure out how to get 
some piece of the action.
    If you look at other businesses, other models such as the 
Internet, there are companies that are providing 
communications, there are companies that are for manufacturing 
chips, there are companies for manufacturing PCs, there is 
retailers, there is Internet service providers, there is 
portals, there is thousands of different web sites; and they 
all come at this from somewhat of a different vantage point.
    The nice thing about the Internet is, as you know, anybody 
can create a web site and anybody can get to that web site. So 
it really becomes more promotion to drive awareness to the site 
and to drive traffic to the site.
    Right now, in the Internet context, there are many 
companies--AOL is certainly one of them--but many companies, 
portals like Yahoo, PC manufacturers such as Compac, who now 
sell buttons on their keyboards. There are a variety of 
different companies that are doing things in terms of 
interactive television.
    It really is not clear now what interactive television will 
be and exactly how it will develop. It becomes very difficult 
to understand the business models. I think the first step is 
building interest in the category, getting people to use it, 
and then trying to figure out how to build a business out of 
it.
    Mr. Tauzin. So, in short, it is going to be a marketplace 
resolution. There will be negotiating and contracting. And I 
suppose--Mr. Pickering, get ready, because I am about to 
recognize you--I suppose in the context of your negotiating 
with other programmers to put programs on your systems that the 
division of revenues in the interactive sales will be part of 
the negotiating that goes on in terms of locating that channel, 
that program on your system. Is that what the dispute is all 
about, the dollars derived from profits of sales in interactive 
TV?
    Mr. Levin. To the extent there is a dispute, no one really 
understands it to even ask the right question at this point, 
which is mildly amusing. In fact, one of the things that is at 
issue here is whether--I think the case of, you know, broadcast 
program, whether the direct--the commerce that is related to it 
is a part of the program or it is something separate, it is a 
separate business.
    Because, actually, the FCC has some rules about that in 
terms of the requirements for carriage. How much of it do you 
have to carry? If it is program related, you do. If it is not 
program related, you do not. There has to be a bargain.
    You also have what is the use of the digital spectrum that 
is being given to the broadcasters. Will that be used to 
transmit data to use it for electronic commerce? If that is the 
case, who is going to get paid?
    That is why these issues are so. Difficult because you 
can't take the traditional television regulatory regime and 
transpose it to this Internet-powered digital activity because 
the rules just do not seem to apply. That is why it probably is 
helpful if the marketplace tries to deal with this to see what 
the allocation of responsibilities is to come up with a formula 
that works that the consumer can respond to. It is still very 
early in the game.
    Mr. Tauzin. Only one comment, I think you probably will see 
policymakers both in the regulatory darkrooms and here on 
Capitol Hill more willing to let that happen if there is truly 
comparable competitive delivery systems from whom consumers can 
choose and from whom programmers can negotiate different rates 
in terms and conditions. That is going to end up being the test 
in the end.
    And I will just leave with you that thought.
    Mr. Levin. I will think that you are absolutely correct, 
and that is why the real issue is how robust are these various 
platforms.
    Mr. Tauzin. How robust is the competition. As good as you 
get, is there anybody that can be nearly as good or comparably 
as good so that there is real choice out there, not only for 
consumers but for those who want to sell their videos, their 
services, their music, whatever it may be?
    Mr. Levin. Again, I would credit the 1996 act and 
everything that has happened, the Satellite Home Viewer Act. 
There is robust competition. There has been a wake-up call for 
all the players, including the telephone companies, the cable 
companies, the satellite companies and the wireless companies. 
That is what is taking place. And the financial community is 
actually financing a lot of this now.
    Mr. Tauzin. Parenthetically, we still have some work to do 
in the digital transition, as far as I can see.
    Mr. Pickering from Mississippi is recognized.
    Mr. Pickering. Thank you, Mr. Chairman. Thank you for 
having this hearing today.
    I apologize for being late to the hearing, and I may ask 
questions that have already been covered, and if I do please 
forgive me. I will try to ask questions in a different way.
    Mr. Levin, it is good to see both you and Mr. Case with 
AOL. Bob Pittman, a great Mississippian at your company, Time 
Warner, having one of the first systems in Jackson, 
Mississippi, plays a historical role. We appreciate both of 
your contributions to what we are seeing in telecommunications 
and technology interactivity convergence.
    I do have a few questions for both of you.
    One, the recent FCC staff recommendation, as one of their 
recommendations on a condition for approval of your merger was 
the instant messaging interoperability. What is your response 
to that staff recommendation? Do you think it is necessary? If 
not, why not?
    Mr. Case. Well, we did talk a little bit about this this 
morning. But we don't think it is appropriate, at least on our 
side, to be discussing in any detail the kind of discussion we 
have had with the FCC or the FTC. We read about it sometimes in 
the paper, and sometimes it is right, and sometimes it is not 
right. But we do not think the process is well served by having 
us talk about specific issues.
    The overall issue is we do believe that the merger is pro-
competitive for the reasons we just talked about. It stimulates 
the development of many different markets such as interactive 
television. We do recognize and I think everybody now 
recognizes there are no overlapping businesses. So there aren't 
the traditional anti-trust issues. And we as a company do 
believe that the commitments we make publically are 
significant, whether it be related to what Time Warner cable 
said on open access, what AOL said on instant messaging. And we 
do not believe that it would be appropriate just from a policy 
standpoint to deal with these issues through merger conditions. 
We think it is better to deal with these issues either through 
relying on the market to work and allowing companies to make 
commitments and to deliver on those commitments or to have a 
more national policy approach as it relates to different 
technologies, different competitors.
    So a simple answer to the question is, we don't believe any 
conditions are necessary or appropriate. At the same time, we 
don't have any desire to get into a tiff with the United States 
government. If there is some kind of approach that everybody 
can agree on and allow us to move forward sooner rather than 
later, then we will try our best to reconcile that with our 
fundamental belief that it would be inappropriate for this 
particular merger and, actually, it would be bad public policy.
    Mr. Pickering. My understanding is you have made 
commitments or agreements to move to interoperability within a 
1-year period of time; is that correct?
    Mr. Case. Right. In our instant messaging--I will be happy 
to go through some of the things we talked about this morning 
in more detail--but, basically, we talked about the history of 
instant messaging, how we got it to where it is, what we have 
already done in terms of making it free to consumers and 
licensing it on a royalty-free basis to more than a dozen 
companies and what we have talked about in terms of server-to-
server interoperability. And we did indicate in a hearing over 
the summer that we thought it would take about a year, from a 
technical standpoint, to allow that to happen; and then we have 
to work with some companies and test it out.
    We do believe we are on the path to operability. But, in 
the meantime, we are pleased that consumers are able to use 
instant messaging without subscribing to AOL or without even 
using an AOL instant messenger. They can use the Lycos 
messenger or Lotus messenger or what have you messenger.
    The other point that we talked about a little bit this 
morning is Microsoft launched a messaging product a year ago 
and are already saying they have 20 million customers and in 
the last couple of weeks integrated with the operating system. 
So people are concerned about instant messaging and making sure 
that it is open and competitive.
    I think perhaps more attention should be foscused on the 
long-standing debate about the operating system and what 
product should or shouldn't be integrated in the operating 
system. I think we have done a lot already; and we will do more 
over the next period of time, particularly on operability, over 
the next year.
    Mr. Pickering. This is one follow-up final question on this 
subject. As part of that compatibility operating system, as you 
know, one of the issues is being able to be use the 
technologies that would filter out from the instant messaging 
those things that are inappropriate for children, whether it is 
pornography or obscenity or other things that parents or 
schools or libraries decide would be inappropriate. Is that 
interoperability, in your view, necessary to be able to use 
those technologies, those tools to protect our children? And 
with your current approach, can those types of tools be used, 
those filters, those technologies? What is the state as it 
currently exists in relation to those technologies?
    Mr. Case. Well, as I hope you know, AOL has been a leader 
over many years in developing parental controls. We do believe 
we shoulder considerable responsibility not just to make the 
Internet available to everybody but make it safe for families 
and allow parents to decide what contents or communications 
should or shouldn't be appropriate.
    There is a whole series of things we have done in terms of 
people being able to block certain websites or block certain e-
mail addresses or block people from using instant messaging. 
And that is precisely one of the issues that we are focused on 
as we move to interoperability, to make sure the safety 
standards, the community standards that we have worked hard to 
put in place are protected as we move to interoperability so we 
don't have some of the problems with instant messaging that, 
frankly, we have had with e-mail, was pretty serious problems 
that do concern a lots of parents.
    As it relates to right now, to my knowledge at least some 
of the popular filtering software--but just to clarify, with 
AOL the filtering software is built in already for free, 
parental control. So they are already in place.
    If you use AOL Instant Messenger, which is a product that 
doesn't cost anything to use, doesn't cost anything to 
download, you can use any Internet service provider to connect 
to that service. The filtering programs, which is a Net Nanny, 
do still work in the context of, if you click on a web site in 
instant message and let's say a pornographic site that your 
parents have set up to block that, as I understand it, the 
instant messaging service would block access to that.
    It is unclear to me whether every single feature of those 
products works with our product. But I think, to my knowledge, 
something like Net Nanny works better with AOL instant 
messenger than it works with Microsoft messenger or other 
projects. I am sure over the coming months we will continue to 
refine things so that we can provide the interoperability 
everybody wants but also the safety that parents need.
    Mr. Pickering. Mr. Chairman, I have one other question on 
how this affects competition, but if I have taken too much 
time----
    Mr. Tauzin. Not at all. Proceed, sir.
    Mr. Pickering. One final question on competition, and this 
goes back to what you see or what you predict in the 
marketplace as far as capital flows.
    One small anecdote. I have some friends back in Mississippi 
who are beginning a new startup company coming out of 
telecommunications, trying to buy rural telecommunications 
companies to then give the upgrade to broad band capability, to 
interactive capability, voice video data. That is their 
business plan and the concept, and that is going into small 
towns, rural communities, and that is their approach. Do you 
see interactivity and the convergence of these technologies 
being the driver in the future for competition for broad band 
capability into places like my district, primarily outside of 
Jackson, rural, small town? Is that your prediction for the 
future?
    Mr. Levin. I think one of the most interesting aspects of 
this is the fact that the onset of the digital technology which 
was brought about by this convergence means that you can now 
deliver voice video and data in a highly efficient, cost-
efficient way in rural areas as well as urban areas. In fact, 
the capital markets, the financial system are in a very 
significant way financing many new startups who can kind of 
appear almost overnight. It is like you are leapfrogging all 
the technology and all of the developments that have taken 
place over the last 25 or 30 years. So it is a very encouraging 
time for people to be able to do that, and I think it is a good 
sign for kind of the rest of America to have this opportunity. 
Because we are also seeing it in the larger markets, too, where 
there are startup companies that can actually overbuild cable 
systems. There are DSL resellers who can provide high-speed 
Internet access. So there are a thousand flowers blooming as a 
result of this.
    Mr. Pickering. Thank you, Mr. Chairman. I think they want 
to buy one of the rural ones in your district.
    Mr. Tauzin. Well, we need a little competition in my 
district. I thank the gentlemen.
    Let me, apparently, wrap this session by thanking you and 
asking several things of you.
    One, you have heard from some of the members some of the 
concerns that will be expressed by other witnesses who will 
come at a later date and give us their perspectives on what 
interactive television, particularly your own merger, may mean 
for them and their competitive opportunities or lack of 
opportunities, whatever they believe about this. It would be 
very useful knowing that if you would perhaps want to 
supplement in writing to us some comments about some of these 
concerns that you have heard expressed today and certainly we 
will hear expressed in the next meeting.
    Second, the hearing record will stay open for 30 days; and 
I would like to send you a few written questions that you can 
respond to, particularly in the area of this question of 
technologically equal status. I hear more and more about it. I 
want to know more about it. Is it a question that you have to 
decide in the open market or is it something we are going to 
have to face as a policy issue 1 day? Is it an architecture 
question or is it a dispute over dollars, who gets revenue from 
interactive television marketing sales?
    Obviously, the questions we are going to face regarding the 
use of the spectrum, if you can correctly put your finger on 
that, we are going to face those questions as we complete the 
digital transition through the year 2006. And this enormous 
adventure you are about to enter will have great implications 
upon some of those questions about carriage and about standards 
and about some of the architecture questions about these 
systems and about consumer product manufacturers. We are 
probably going to want to know more about as we go forward.
    Finally, let me tell you that I think your merger is the 
most intriguing and probably the most impacting merger on 
American consumers that I have seen in the last several years. 
There have been a lot of telecom mergers, but this one, because 
I think it portends so much in terms of new packages of 
services and new implications on competition and consumer 
choice, is probably one of the most--I think probably one 
having the most and largest impact upon some of the policy 
questions we will face next year. So you know we are going to 
pay a lot of attention to it. Our business is not to decide 
your application before the regulators, but obviously the 
impacts of it and how this unfolds and, as you said, much of 
this is de novo and we will learn together.
    But I would very much appreciate it if you will remain 
available to us and in future months as we gather again to get 
an update of how it is going and to get some understanding 
again on whether these concerns that have been raised are real 
or fictitious or really problems that normal competitors face 
when they try to compete against one another in a new market.
    Mr. Case. I will be happy to do that.
    Mr. Tauzin. Let me also announce that once we adjourn we 
are going to ask all our guests here to clear the room because 
we will have to set it up for the markup that starts at 2 
o'clock.
    So unless there is further business to come before the 
committee, let me thank you for the courtesy of your visit and 
your testimony; and we will look forward to hearing from you in 
writing with additional questions.
    The hearing stands adjourned. Thank you.
    [Whereupon, at 1:13 p.m., the subcommittee was adjourned.]

 
  THE FUTURE OF THE INTERACTIVE TELEVISION SERVICES MARKETPLACE: WHAT 
                        SHOULD CONSUMERS EXPECT?

                              ----------                              


                        FRIDAY, OCTOBER 6, 2000

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:30 a.m., in 
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Cubin, Shimkus, 
Markey, Boucher, Luther, McCarthy, and Dingell (ex officio).
    Staff present: Kelly Zerzan, majority counsel; Cliff 
Riccio, legislative analyst; Andy Levin, minority counsel; and 
Brendan Kelsay, minority research analyst.
    Mr. Tauzin. The committee will please come to order.
    Let me first thank those of you who were downstairs with us 
to witness and to participate in the tribute to Chairman Bliley 
upon his retirement. I think probably that was the last markup 
session of the full committee, and so we took a moment to 
acknowledge the members of our committee who were leaving: Mr. 
Coburn, Mr. Klink and Mr. Lazio; also to honor our chairman. 
And I want to thank those of you in attendance to see that 
tribute and to thank you for being there.
    Second, I want to welcome you to this subcommittee hearing. 
We recently heard from the principals of the AOL/Time Warner 
merger with reference to how that merger would impact upon 
consumer products and services and how in fact that merger 
would provide both opportunities and challenges for the future 
world of telecommunications in that it represented the first 
real combination, the convergence of computer and television on 
the broadband essentially with data and video and audio and 
other services which might merge in interactive systems for the 
benefit of what the 1996 act obviously intended, which was more 
and more packages of services delivered to consumers in the 
kind of one-stop shopping that consumers in America generally 
like.
    There were serious questions raised, obviously, during that 
hearing regarding instant messaging and competitive systems and 
the nature upon which competing and known systems might 
interact with and be a part of the AOL/Time Warner system and 
how consumers might fare in a world where such a tremendous and 
important convergence was occurring.
    And as part of our hearing last week we committed to do a 
second panel, and therefore we are pleased to welcome that 
second panel today in the interest of hearing other 
perspectives of those, how consumers would in fact fare in the 
post AOL/Time Warner merger.
    We welcome the witnesses today. I have worked with Mr. 
Markey and Mr. Dingell to ensure that we had witnesses who 
would bring to the table some of the concerns that they 
expressed at the last hearing. And Mr. Markey and Mr. Dingell, 
I hope that you have been pleased that we have worked with you 
in assembling this panel today.
    I yield back the balance of my time.
    Mr. Markey. Thank you, Mr. Chairman. I want to thank you 
for holding this hearing today. I think it is critical that the 
perspectives which we are going to hear today be heard by all 
of the members of the subcommittee. And I think it is going to 
be the testimony that really helps us to put all of these 
issues in the proper context.
    There are obviously many competitors and innovators and 
entrepreneurs who have raised concerns about a merger of AOL 
with Time Warner. In addition, there are a number of consumer 
advocates concerned about choice and rates and diversity. I 
believe that the future of interactive television is a bright 
one with new services, increased choices, and lower prices. But 
interactive television will only have that bright future if we 
remain steadfast in our policy of promoting open networks, 
interoperability, and ruthless competition as the best way of 
serving consumer interests and promoting economic growth.
    In last week's opening remarks, I offered proxy statements 
on behalf of many of the panelists at the witness table today. 
I look forward to their real world testimony and I thank them 
for being with us.
    Before I yield back, Mr. Chairman, I would like to extend a 
special welcome to two witnesses from Massachusetts here today.
    Mr. Tauzin. We didn't do that, did we?
    Mr. Markey. In a year we should have two.
    Mr. Tauzin. Massachusetts has been well represented by 
yourself, Mr. Markey.
    Mr. Markey. Shore.Net shows us how a relatively small 
company can move markets and prod competition. Shore.Net was 
the first Internet provider in New England to offer Web hosting 
services back in 1994. And Shore.Net was the first in 
Massachusetts to offer digital subscriber lines in 1997.
    Lowell Gray is a former programmer at AT&T Bell 
Laboratories, at Bell Core, NIH Core Research Center 
Laboratories and at Harvard Medical School.
    Another innovative Massachusetts company here today is 
iCast. iCast.com is a multimedia-rich entertainment site which 
empowers individuals with the tools to create, customize, and 
share their personal entertainment interests. They include a 
mix of original, user-generated, and syndicated audio and video 
content, entertainment, news, live and archived events and 
more. iCast has also developed a product called the iCaster. 
The iCaster is a next-generation media player which integrates 
media search with chat, instant messaging and other services.
    Notwithstanding the accent that you will hear shortly from 
Margaret Heffernan, I want you to know that she was born in 
Texas, has a distinguished career in producing. Recognizing 
that the Web would evolve quickly from a print format into a 
more interactive information-rich entertainment medium, 
Margaret decided that she would use her production expertise at 
the BBC to create an interactive multimedia-rich Web site, and 
she has been the CEO of iCast for the last 4 years. She 
received both a BA and MA from Cambridge University which is 
not in Massachusetts, but----
    Mr. Tauzin. But should be.
    Mr. Markey. We would call Harvard Cambridge if they would 
call Cambridge Harvard. I don't think we will be able to cut 
that deal.
    We appreciate your willingness, Mr. Chairman, to have this 
hearing.
    Mr. Tauzin. Mrs. Cubin is recognized.
    Mrs. Cubin. Thank you. I am pleased that the subcommittee 
will hear from other companies today that provide or will be 
providing types of interactive television services as our 
witnesses last week, AOL and Time Warner, did. Although last 
week's witnesses combined will be the dominant player in the 
interactive television marketplace, it will be good to hear 
from smaller competitors and learn what products you are 
bringing to the interactive television marketplace.
    In hindsight, after asking questions of the panelists last 
week, I truly wished that we could have had the panels combined 
so I could get information from both sides and compare some 
answers regarding the accusations of open access, competition, 
and interoperability or lack thereof. But suffice it to say, we 
will cover those areas today.
    The importance of open access and consumer choice cannot be 
overstated. I would like to quote the AOL Web site that I 
mentioned last week: ``As the Internet becomes increasing 
integrated into our societal fabric, it is crucial to strike an 
appropriate balance between the role of government and the role 
of industry in formulating solutions to Internet policy issues. 
Finding this balance is the key to ensuring that the Internet 
will continue to grow and reach its full potential, unhampered 
by unnecessary regulation, but appropriately guided and 
monitored in crucial areas to protect the safety and security 
of its users.''
    That is what AOL says on its Web site. Much of the 
aforementioned quote applies to every component of the 
telecommunications infrastructure, not just the Internet. As 
Congress continues the debate regarding open access to the 
existing telecommunications infrastructure, it would be in the 
industry's best interests, I believe, to resolve this question 
before the Congress finds it necessary to act. If we expect any 
advances in telecommunications, we should ensure that systems 
interact with each other and that consumers have the ability to 
communicate even though they may not be on the same network.
    We will hear today from Disney about the Time Warner cable 
systems and to what extent Time Warner executives should give 
the American people assurances that it is willing to provide 
access to Disney and other companies outside of the AOL/Time 
Warner family.
    Thank you for calling this hearing today, Mr. Chairman, and 
I look forward to communicating and having a discourse with the 
panel. Thank you for being here.
    Mr. Tauzin. I thank the gentlelady.
    The gentleman from Virginia, Mr. Boucher.
    Mr. Boucher. Last week we focused on the need for an open 
access structure at the Internet transport level in order to 
facilitate the arrival of interactive television. Today, in the 
second interactive television hearing, we can examine another 
pressing need for open access, this time at the navigation 
device level. In the 1996 Telecommunications Act, we required 
the Federal Communications Commission to ensure the competitive 
availability of navigation devices, broadly defined as any 
appliance that brings to the consumer services offered by cable 
companies, whether video, data, or the interactivity between 
video and data that we are commonly calling interactive 
television.
    The intent of this committee in writing that provision was 
to assure that these next-generation set-top boxes be 
manufactured by a variety of companies and be sold by a variety 
of retailers. A competitive market for these devices is 
essential to the interactive functioning of information 
technology devices which receive content that is delivered over 
cable systems. A competitive market for navigation devices will 
also assure that no single entity or industry controls this 
critical information gateway into the home. But 4.5 years after 
we imposed the requirement for competition in the development 
and marketing of these gateway devices, the market remains 
closed. Only cable companies are distributing the devices at 
the present time. Not only do we not have the competition we 
were seeking, but a range of additional problems has arisen 
which threaten the ability of consumers to get full use from 
their digital TV sets and their ability to engage in legally 
protected home video recording for time shifting and other 
commonly accepted purposes.
    Today, Circuit City's Vice President for Merchandising, Mr. 
Froman, can describe in detail the reasons that this committee 
and its will is being frustrated, and will suggest steps to be 
taken to ensure that the law on open access and true 
competition for next-generation set-top boxes will be carried 
out. And I would like to call the committee's attention to his 
testimony, and I look forward to the committee receiving it.
    Mr. Tauzin. We have a vote on the floor. Mr. Shimkus has 
already made that vote, so I will recognize Mr. Shimkus for an 
opening statement, place him in the chair, and I will make that 
vote and I will be right back. Mr. Shimkus will introduce our 
panel and we will begin discussion as quick as we can. Thank 
you.
    Mr. Shimkus [presiding]. Welcome to the panel. We are glad 
to have you here. This is a follow-up to the hearing we had 
last week. We are all excited about hearing from you. It is an 
interesting age and period of time, and as things keep moving 
forward, the interactivity of television and streaming 
capabilities, and not just through the coaxial cable but 
telephones and direct satellites, bring new opportunities. My 
basic position is numerous types, numerous choices.
    The Cardinals are in the playoffs and I am a Cardinal's fan 
and as in a baseball game, these late hearings in the year, we 
are in the batter's box. We are in the on-deck circle. We will 
probably step in the batter's box in the next Congress to 
address these things. These are important hearings for us to 
learn.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you, Mr. Chairman. I welcome the witnesses here today to 
discuss the issue of interactive television. Last week we heard from 
America Online and Time Warner on this issue. Today I am pleased to get 
another look at this new technology from the witnesses before us..
    It seems that we have talked about the prospect of interactive 
television for years. Companies around the globe have invested millions 
of dollars in this product. After years of promise, it appears that we 
are finally on the cusp of a new marketplace.
    Interactive television is exciting. The ability to turn passive 
television viewing into an opportunity to participate in a program is 
hard to imagine. CoConsumers will be able to order products from the 
comfort of their homes with just a click of the television remote; 
sports fans will get new access to the field; and children will find 
new ways to learn their A-B-C's. All from the comfort of their homes 
with just a click of the television remote. The possibilities are truly 
limitless.
    Because interactive television is still in its infancy, we can, and 
should, continue to work to ensure that competition thrives and 
flourishes. As I would expect with any new industry, there continue to 
be many unanswered questions--namely, issues of content control, 
interoperability, open access for all competitors, as well as the 
practical effects of the AOL-Time Warner merger. In listening to this 
morning's testimony, I look forward to hearing about how these 
important issues will affect the future of interactive television.
    I thank the Chairman for holding this important hearing and I yield 
back my time.
                                 ______
                                 
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Chairman Tauzin and Ranking Member Markey for holding 
this hearing on the future of interactive television. I look forward to 
the testimony of all of the witnesses regarding the merger between 
America Online (AOL) and Time Warner and the impact it will have on the 
future of interactive television, the need for open access, the role of 
instant messaging in interactive television, and the privacy concerns 
interactive television may raise.
    The Internet revolutionized the way we communicate. It has provided 
people with a means to gather and disseminate information and ideas 
from all over the world. Interactive television expands upon this 
revolution by converging television, the Internet, content, and 
commerce so that consumers are able to not only choose their 
programming, but interact with it. For example, consumers will be able 
to purchase a CD of the music being played by a band during the 
telecast of the Grammys by using their remote control.
    As exciting as the possibilities of interactive television seem, 
there are some significant issues that I hope will be addressed by our 
witnesses today. First, can interactive television exist in a 
competitive marketplace if cable operators do not allow access to non-
affiliated content providers, and if service providers discriminate 
against content providers with whom they are not affiliated. If a 
viewer is watching a baseball game on FOX and clicks a link to get 
additional statistics, can that viewer choose FOX's sports website or 
CNN-SI's website for this material?
    Second, I am very interested to hear from our witnesses about their 
views on possible privacy issues arising out interactive television. 
Will set top boxes provide cable or satellite operators with the 
ability to store information on the viewing habits and purchases of its 
customers? If so, how will that information be used? Will it be sold to 
third parties? Will consumers be informed of the fact that their 
viewing habits and purchases are being monitored? Will they have the 
ability to opt out of it? Are the same privacy issues facing users of 
the Internet applicable to users of interactive television as 
technological advances become more invasive. We must ensure that 
consumers do not exchange their right to privacy for the potential 
benefits of interactive television.
    Lastly, I would like to hear their views on AOL's instant messenger 
(IM) system becoming interoperable with other instant messaging systems 
as a condition of merger approval. Does AOL need to make its IM system 
interoperable with competing IM systems? How will it hurt consumers if 
AOL does not make its system interoperable?
    While it is important that the federal government not stifle 
innovation in nascent technologies, we must consider the ramifications 
of those technologies on a competitive marketplace, consumer choice, 
and privacy. Interactive television service providers must not 
discriminate against the content of competitors. Open access to 
broadband networks and interactive television set top boxes as well as 
the interoperability of competing IM systems are necessary to promote 
competition and a fair playing field. It is my hope that as the 
interactive television service market grows, industry will work 
together to achieve these goals.
    Thank you Mr. Chairman. I yield back the balance of my time.

    Mr. Shimkus. With that, I will end my opening statement and 
I will go into your opening statements. Your statements are all 
submitted in total into the record. What we like to do in this 
committee is have you be conversational. You will be given 5 
minutes to give an opening statement and we will probably not 
be too stringent on that. Try to highlight your opening 
statement so that the vast majority of members who are here can 
get full benefit. They have looked at some of your statements, 
and staff members have already tried to prepare some of the 
members for the testimony. With that, I will yield back my time 
and I will open it up for the panel.
    The first panel is seated and I would like to have Ms. 
Maggie Wilderotter, President and CEO of Wink. You have 5 
minutes. You may begin.

  STATEMENTS OF MAGGIE WILDEROTTER, PRESIDENT AND CEO, WINK; 
   LOUIS M. MEISINGER, EXECUTIVE VICE PRESIDENT AND GENERAL 
  COUNSEL, THE WALT DISNEY COMPANY; JOHN W. FROMAN, EXECUTIVE 
   VICE PRESIDENT, CIRCUIT CITY STORES; MARGARET HEFFERNAN, 
PRESIDENT AND CEO, iCAST; AND LOWELL J. GRAY, GENERAL MANAGER, 
                           SHORE.NET

    Ms. Wilderotter. Thank you very much to the chairman and 
members of the committee. I do appreciate the opportunity to 
appear before you to speak on behalf of Wink Communications 
regarding interactive television. Wink is a 5-year-old software 
and services company based in Alameda, California. Our vision 
is to expand and enhance the television viewing experience by 
providing convenience, utility and choice to the mass market 
television video that consumers love. Using our complete 
solution of products referred to as an end-to-end system, 
networks and advertisers provide consumers interactive 
information, entertainment and commerce offers which are 
synchronized to TV programs and commercial. Wink enhancements 
typically appear as graphics and superimposed on top of the 
television picture in the location designated by the network or 
the advertiser.
    There are no monthly or use fees for the service. 
Furthermore, it is provided on cable and satellite set-top 
boxes so consumers do not incur any incremental expense for 
additional equipment. Consumers use their television remote 
control and can interact with Wink enhancements as easily as 
they change channels or adjust volume. Consumers are alerted to 
the availability of interactive enhancements by a scripted eye 
symbol which appears in the left-hand corner of their 
television screen. They are in full control to access the 
interactive enhancements.
    Examples of interactive television enhancements include 
being able to check current weather forecasts, the latest 
sports scores on ESPN, or request a car brochure or a coupon 
from Clorox while viewing a 30-second commercial, all with one 
simple click.
    Wink's service has been available in the United States 
since June 1998 and is currently provided in markets across the 
country, including New York, Los Angeles, Dallas, Fort Worth, 
St. Louis and Jacksonville. Each of the top five cable 
operators have launched Wink in at least one market. Both major 
satellite operators have agreed to launch Wink nationwide, and 
the launch of DirectTV will be announced shortly. Wink service 
is expected to be available in 3 million TV households by the 
end of this year.
    Central to the Wink proposition is the consumer. The core 
attributes of our service are fundamental to customer 
satisfaction, value, variety, convenience and control. 
Acceptance is great and remarkably consistent across the 25 
communities in which we have launched the service. Wink 
interactive television is provided free of charge to every 
household with an enabled set-box top, and consumer behavior 
speaks for itself. Seventy percent of the households use the 
service. On average, 20 percent of an audience tuned to a 
particular show use the Wink interactive enhancements. Customer 
satisfaction ratings are in the 90 percent range, the highest 
ever recorded for a new service launch by a cable operator.
    Wink creates the experiences that drive the simple 
evolution of television as the consumers want it. It is easy to 
use, it adds entertainment or informational value, and keeps 
the viewer in the driver seat, opting in to use as they choose; 
and most importantly, it is part of watching television.
    The television business is a particularly complicated 
business. In order to facilitate the delivery of interactive 
enhancements to viewers'favorite TV programs and 
advertisements, we at Wink have had to enter into agreements 
with all of the major companies from each of the major 
constituent groups in the television business. Cable and 
satellite operators must agree to allow their plant and set-
tops to be used to deliver interactive programming to consumers 
and to collect viewer responses to those interactive offers. 
Broadcast and cable networks must agree to originate and 
broadcast interactive enhancements to their programming and to 
allow advertisers to air interactive enhancements associated 
with their commercials. Original copyright holders such as 
major sports leagues and the Hollywood studios must agree to 
create or allow others to create interactive enhancements on 
their programming. Advertisers and their agencies must agree to 
create and air interactive enhancements to their commercials 
and to fulfill consumers orders or requests for information. 
And last but not least, manufacturers must agree to enable the 
interactive television services on their set-tops and server 
platforms.
    It certainly has not been easy, but we have not needed any 
regulatory relief to craft partnerships with over 90 companies 
in the business. Our business philosophy has always been to 
respect the industries' existing business models and customer 
relationships and to provide a win/win for all constituents. We 
do not attempt to share in existing advertising revenues or 
subscriber fees, and aim to preserve the network's right to 
determine which content is provided in conjunction with their 
programming and advertisers with their advertising, and, as 
operators have a right to determine which services are provided 
to their subscribers, we respect that. We share our revenues 
with cable and satellite operators and with networks.
    Resolving the competing interests of all of the parties 
involved in interactive television will take time. Cable and 
satellite operators control the final delivery to consumers in 
any associated two-way communication. The industry has 
demonstrated an ability to negotiate carriage of a variety of 
services in arm's length negotiations. We believe interactive 
television is still evolving at a rapid pace. It is not clear 
how technology, access to cable operator networks or consumer 
demand will shape this business. The dynamic marketplace must 
be allowed to develop.
    As stated earlier, we continue to build our business in the 
current environment and we believe that it would be premature 
to attempt to regulate an industry that is an embryotic stage. 
I am honored to have the opportunity to present to the 
committee. Thank you again.
    [The prepared statement of Maggie Wilderotter follows:]
   Prepared Statement of Maggie Wilderotter, President and CEO, Wink 
                             Communications
    Thank you to the Chairman and members of the committee. I 
appreciate the opportunity to appear before you to speak on behalf of 
Wink Communications regarding interactive television.
    Wink is a five-year-old software and services company based in 
Alameda, CA. Our vision is to expand and enhance the television viewing 
experience. Central to the Wink proposition is the consumer. The core 
attributes of our service are fundamental to customer satisfaction: 
value, variety, convenience and control. Acceptance is wonderful and 
remarkably consistent across the 25 communities into which we have 
launched the service. Wink interactive TV is provided free of charge to 
every household with an enabled set-top box in the markets in which 
Wink is deployed, and consumer behavior speaks for itself: 70% of 
households use the service. On average, 20% of the audience tuned to a 
particular show uses the interactive Wink enhancements. Customer 
satisfaction ratings are in the 90% range--some of the highest ever 
recorded for a new service launched by the cable operator. Wink creates 
the experiences that drive the simple evolution of TV as consumers want 
it. It is easy to use, it adds entertainment or informational value and 
keeps the viewer in the driver's seat, opting in to use as they choose, 
and most importantly, it is reliant on a very well-established consumer 
practice--watching television!
    Using our complete solution of products, referred to as an ``end to 
end system,'' networks and advertisers provide consumers interactive 
information, entertainment and commerce offers which are synchronized 
to TV programs and commercials. Wink enhancements typically appear as 
graphics and text superimposed on top of a television picture in a 
location designated by the network or advertiser. There are no monthly 
or use fees charged to the consumer for the service. Furthermore, it is 
provided on the lowest cost interactive set-tops sold at retail or 
provided by cable and satellite operators, so consumers do not incur an 
incremental expense for additional equipment. Consumers use a regular 
remote control, and can interact with Wink enhancements as easily as 
they change channels or adjust volume.
    Consumers are alerted to the availability of interactive 
enhancements by a small ``i'' symbol that appears briefly in the upper 
left corner of their TV screen. They are in full control to decide 
whether to access the interactive enhancements.
    Examples of interactive television enhancements include being able 
to:

 check current weather and five-day forecasts on The Weather 
        Channel, read up-to-the-minute headlines on CNN, view updated 
        sports scores and schedules on ESPN or check out the latest 
        financial market news on CNBC
 look up information about guests and upcoming features on 
        popular shows like ``The Tonight Show with Jay Leno'' on NBC 
        and ``The Early Show'' with Bryant Gumbel on CBS
 purchase the latest CD of the artist featured on VH-1's 
        ``Behind the Music,'' or the currently playing James Bond movie 
        on either VHS or DVD, during the annual ``15 Days of 007'' 
        marathon on TBS
 request a brochure, coupon or sample offer while viewing the 
        commercial for the product
    Wink's service has been available in the United States since June 
of 1998, and is currently provided to close to 350,000 cable households 
in markets across the country, including New York, Los Angeles, Dallas/
Fort Worth, St. Louis and Jacksonville. Each of the top 5 cable 
operators have launched Wink in at least one market. Both major 
satellite operators have agreed to launch Wink nationwide, and the 
launch of DIRECTV will be announced shortly. The Wink service is 
expected to be available in 3,000,000 TV households by the end of the 
year.
    The television business is a particularly complicated business. In 
order to effectively facilitate the delivery of interactive 
enhancements to viewers' favorite TV programs and advertisements, we 
have entered into agreements with all of the major companies from each 
of the major television business constituent groups:

 Cable and satellite operators must agree to allow their plant 
        and set-tops to be used to deliver the interactive programming 
        to consumers, and to collect viewer responses to interactive 
        offers.
 Broadcast and cable networks must agree to originate and 
        broadcast interactive enhancements to their programming, and to 
        allow advertisers to air interactive enhancements associated 
        with their commercials
 Original copyright holders, such as the major sports leagues 
        and the Hollywood studios, must agree to either create or allow 
        others to create and air interactive enhancements for their 
        programming.
 Advertisers and their agencies must agree to create and air 
        interactive enhancements to their commercials and to fulfill 
        consumers' orders or requests for information
 Manufacturers must agree to enable the interactive television 
        services on their set-tops and server platforms.
    It certainly has not always been easy, but we have not needed any 
regulatory relief to craft partnerships with over 90 companies in the 
business. Our business philosophy has always been to respect the 
industry existing business models and customer relationships, and 
provide a win-win for all constituents. We do not attempt to share in 
existing advertising revenues or subscriber fees, and aim to preserve a 
network's right to determine which content is provided in conjunction 
with their programming and advertising, and an operator's right to 
determine which services are provided to their subscribers. We share 
our revenues with cable and satellite operators and networks.
    The regulatory environment greatly affects the deployment of 
interactive television. For example, the broadcast networks enjoy 
guaranteed passage by cable operators of program-related information 
carried in their analog video signals. Cable networks, on the other 
hand, must negotiate for clearance of such content. We have secured 
carriage of our network partners' interactive content with our cable 
and satellite operator customers. In today's mostly analog transmission 
environment, that has been difficult but manageable. In the digital 
transmission environment of tomorrow, where every bit is a bit, 
regardless of whether it is video, audio or data, and the interactive 
content potentially can consume very significant amounts of precious 
bandwidth, negotiations for the carriage of interactive enhancements 
will be even more complicated. Furthermore, much of the value of 
interactive television services hinges on the availability and speed of 
a return path to collect viewer responses and allow for two-way 
communication.
    Resolving the competing interests of all the parties involved will 
take time. Cable and satellite operators control the final delivery to 
consumers and any associated two-way communication. However, the 
industry has demonstrated an ability to negotiate carriage of a variety 
of services in arms-length negotiations. We believe interactive 
television is still evolving at a rapid pace and it is not at all clear 
what the right answer is regarding access to broadcast bandwidth or the 
return path. As stated earlier, Wink has been able to build a business 
that benefits all parties in the current environment. We believe that 
it would be premature to attempt to regulate an industry that is still 
changing very rapidly.
    I am honored to have had the opportunity to present to the 
committee. Thank you again.

    Mr. Shimkus. Next we turn to Mr. Meisinger.

                 STATEMENT OF LOUIS M. MEISINGER

    Mr. Meisinger. Thank you. My name is Lou Meisinger. I am 
the Executive Vice President and General Counsel of the Walt 
Disney Company.
    Let me get right to the issue. What can consumers expect 
from interactive television? Absent regulatory or legislative 
intervention, the answer is, regrettably, quite clear. Speaking 
with remarkable and chilling candor, Time Warner executive 
Kevin Leddy recently told a New York times reporter, ``What you 
see on our screen will be our partners.'' Necessarily then, but 
unstated, what consumers will not see are the interactive 
offerings of content providers who are not Time Warner 
partners.
    AOL/Time Warner's plan to dominate interactive television 
is in active implementation. The Walt Disney Company tried 
mightily to secure from Time Warner a simple pledge of 
nondiscrimination. We sought assurance that Time Warner's 
interactive cable service would work the same for consumers 
whether they were interacting with content owned by AOL/Time 
Warner or other content providers. Time Warner said no. NBC 
received similar preemptory treatment at the hands of Time 
Warner/AOL. Other companies with less clout will likely fare 
much worse, particularly in a postmerger environment.
    Interactive television is an important new entertainment 
communications and commerce service that is here today and 
growing rapidly. We at the Walt Disney Company are investing 
millions of dollars in its development. Today, interactive 
television is largely a two-screen experience, but new cable 
set-top boxes now being deployed contain the necessary hardware 
and software to enable a single-screen experience in which 
consumers can interact with television programming right on 
their television sets.
    ABC and ESPN have developed interactive applications for 
our football broadcasts. While watching the games, consumers 
are able to pull up statistics and can compete against other 
viewers around the country in predicting upcoming plays. 
Despite the inconvenience of the current two-screen experience, 
more than 650,000 viewers participated in ABC's interactive 
television offering during our Super Bowl telecast earlier this 
year.
    Also currently available is a play-along application for 
ABC's ``Who Wants to be a Millionaire?'' and election night 
will provide other opportunities. Still other applications are 
in the offing. Drilling down for detailed comment on news 
programs, ordering up different camera angles and audio feeds 
from sporting events, or watching your friends watch 
programming together.
    None of this innovative programming will be possible unless 
Disney and other content providers have fair and 
nondiscriminatory access to consumers. As a content provider, 
Disney's only objective is a world in which a consumer's right 
to choose is accompanied by the ability to choose or not to 
choose Disney's interactive television offerings.
    This committee should be concerned that consumer choices 
are not limited or skewed directly or by subtle technical means 
in favor of content owned by the company that owns the pipeline 
to the consumer's home. Unfortunately, for at least the next 5 
years, representing the critical formative period for 
interactive television, cable systems will enjoy a decided 
advantage over any other distribution platform such as DSL or 
satellite.
    This merger of the world's No. 1 media company and No. 2 
cable operator, Time Warner, and the world's No. 1 ISP, AOL, 
brings together an unprecedented market-dominating collection 
of assets and capabilities: monopoly cable pipelines to 20-plus 
million homes, a vast content library including many of the 
leading cable television channels, 50 percent of the narrow-
band internet marketplace, a virtual monopoly of instant 
messaging and other so-called ``sticky'' network-effect 
creating applications such as e-mail, buddy lists, chat rooms 
and instant messaging.
    Unfortunately, with this proposed merger, AOL has abandoned 
its years-long advocacy of open access in favor of its own 
self-interest. ``If gatekeepers want to play in the Internet 
game, we should require them to play by the Internet rules. We 
owe consumers no less.'' This is not Disney talking, these were 
the remarks of AOL's senior officer for global and strategic 
policy, advocating open cable access before the House Judiciary 
Committee last year.
    Soothing reassurances provided to this subcommittee are not 
enough. Belying its professed commitment to the consumer, in 
May of this year, Time Warner unilaterally turned off ABC 
television programming for more than 8 million viewers. AOL has 
also insisted upon contractual terms that require Disney to 
remove navigation links to other sites on the Internet and 
foreclosed the sale and promotion of competitive products. When 
Earthlink took up AOL/Time Warner's pledge to provide 
nondiscriminatory access to other ISPs, it was met with 
commercial terms so onerous and so adhesive that doing business 
was impossible.
    Nonbinding MOUs and platitudes are one thing. Real life 
conduct is apparently quite another. Again Mr. Vradenburg's 
prescience was right on the money last year when he said of 
AT&T, AT&T is moving toward a commitment for open access, but 
the rubber is going to hit the road and really test this in 
reality when we, AOL, try to enter into enforceable agreements. 
Well, Disney, NBC and Earthlink all tested Time Warner's tires 
and the results were a blowout.
    The AOL/Time Warner merger is a unique combination. There 
are no other companies that, when combined, would enjoy similar 
market dominance, and both conduit and content and interactive 
television is particularly at risk. Government agencies have an 
obligation to assure consumer choice. Specifically, government 
agencies must ensure open, nondiscriminatory access for 
alternative ISPs through the set-top box and connected through 
the video platform.
    In addition, because AOL and Time Warner currently and will 
continue to command the overwhelming majority of customer 
relationships on their platform, strong nondiscriminatory 
conditions are essential on the AOL/Time Warner platform 
itself. Voluntary negotiations are no substitute for strong and 
enforceable government-mandated open access. The preservation 
of consumer choice and robust competition require no less.
    Thank you.
    [The prepared statement of Louis M. Meisinger follows:]
 Prepared Statement of Louis M. Meisinger, Executive Vice President & 
                General Counsel, The Walt Disney Company
    Thank you Mr. Chairman. My name is Lou Meisinger. I am the 
executive vice president and general counsel of the Walt Disney 
Company. Let me get right to the topic of this hearing--what can 
consumers expect from interactive television? Absent regulatory or 
legislative intervention, the answer is regrettably quite clear. 
Speaking with remarkable and chilling candor, Time Warner Cable 
executive Kevin Leddy recently told a New York Times reporter, ``what 
you see on our screen will be our partners.'' Necessarily then, though 
unstated, what consumers will not see are the interactive offerings of 
content providers who are not Time Warner's partners.
    This prophecy on the part of Mr. Leddy is not simple musing. AOL/
Time Warner's design is in active implementation. The Walt Disney 
Company tried mightily to secure from Time Warner a simple pledge of 
non-discrimination for Disney's highly desirable content. We sought 
assurance that Time Warner's interactive cable service would work the 
same for consumers whether they were seeking to interact with content 
owned by AOL/Time Warner or other content providers. Instead, Time 
Warner insisted on a condition expressly precluding the return path 
communications essential for consumers to interact with Disney/ABC 
Television offerings. Disney's experience was not an isolated 
aberration. According to documents filed with the Federal 
Communications Commission, another powerful content provider, NBC, 
received similarly peremptory treatment at the hands of Time Warner. 
Even armed with the market power of the Olympics, NBC could not gain 
assurance that consumers would be able to interact with NBC content.
    If, even as their proposed merger is under regulatory scrutiny, 
AOL/Time Warner can deal so dismissively with companies like Disney and 
NBC, we need not speculate as to how other companies with less clout 
will fare in a post merger environment.
    Interactive television is an important new entertainment/
communications/commerce service that is here today and growing rapidly. 
The Walt Disney Company is investing millions of dollars in the 
development of innovative interactive television content. Today, 
interactive television is largely a ``two screen'' experience in which 
the consumer uses a nearby computer to interact with programming on his 
or her television set. However, new cable set top boxes now being 
deployed contain the necessary computer hardware and software to enable 
a ``single screen'' experience in which consumers can interact with 
television programming right on their TV.
    Let me give you just a few examples of Disney/ABC interactive 
television services that consumers can enjoy today. ABC and ESPN have 
developed innovative interactive applications to accompany Sunday night 
and Monday night NFL football games. While watching the games, 
consumers are able to pull statistics of their choice from the vast 
database resident at the on-field production facilities. Consumers can 
also compete against other viewers nationwide in predicting upcoming 
plays. Despite the logistical inconvenience of the current ``two 
screen'' experience, more than 650,000 viewers participated in ABC's 
interactive television offering during our Super Bowl telecast earlier 
this year.
    Also currently available is an interactive television application 
that enables consumers to play along with Regis Philbin on ABC's hit 
game show ``Who Wants to be a Millionaire.'' Young viewers to ABC and 
the Disney Channel can interact with our cartoon programs utilizing the 
``Zoog Disney'' interactive application. Finally, on election night in 
a few weeks, ABC News will enable consumers to interact with our 
coverage of the election results by accessing the latest election 
returns for the political contests of most interest to each individual 
viewer.
    In addition to these existing interactive television applications, 
Disney and ABC executives are busily developing even more exciting 
projects. Soon, consumers will be able to click on the screen during 
ABC newscasts and be linked directly to interactive broadband web sites 
devoted exclusively to a single news story. Sports fans will be able to 
access different camera angles and audio feeds. And, consumers equipped 
with inexpensive ``Buddy Cams'' will be able to watch the live image of 
a friend in the corner of a TV screen while enjoying together a 
sporting event or other television program.
    None of this innovative programming will be possible, of course, 
unless disney and other content providers, have fair and non-
discriminatory access to consumers. Anything less plays right into the 
hands of AOL/Time Warner, whose stated strategy is to monopolize this 
field for itself and its privileged partners.
    In considering public policy objectives for the exciting new domain 
of interactive television, we urge this committee to place laser-like 
focus on, and to give pre-eminent consideration to, the issue of 
consumer choice. As a pure content provider, Disney's only objective is 
a world in which a consumer's right to choose is accompanied by the 
ability to choose, or not to choose, Disney interactive television 
offerings.
    that fundamental right of choice to access diverse content must be 
based solely on how good a job we and others do to create and promote 
appealing content. This committee must work to avoid a world in which 
consumer choices are limited or skewed, directly or by more subtle 
means, in favor of content owned by the company that owns the pipeline 
to the consumer's home.
    Unfortunately, for at least the next five years, representing the 
critical formative period for interactive television, hybrid fiber/coax 
cable systems will enjoy a decided advantage over any other 
distribution platform for the provision of interactive television 
services. Cable passes virtually every home in the country and is 
capable two-way broadband transmissions. By contrast, Telco provided 
DSL is great for high speed Internet service but cannot match cable's 
capacity to carry multiple channels of live, full motion television 
programming. In addition, DSL suffers from severe distance limitations 
and is not available at all to a large percentage of American 
consumers. Satellites are great for one-way television, but rely upon 
an inherently limited narrowband return path that limits the range of 
interactive applications.
    These limitations will and do make DSL or satellite dependent 
interactive television services an inferior and, ultimately, non-
competitive option to AOL/Time Warner's Cable enabled offering.
    The proposed merger of AOL and Time Warner dramatically exacerbates 
these cable bottleneck issues. This merger of the world's number one 
media company and number two cable operator (Time Warner) and the 
world's number one ISP (AOL), brings together an unprecedented market-
dominating collection of assets and capabilities: monopoly cable 
pipelines to 20 million American homes; a vast content library 
including many of the leading cable television channels such as CNN, 
HBO, TNT, TBS, Cartoon Network; 50% of the narrowband internet 
marketplace; a virtual monopoly in instant messaging and ``sticky,'' 
network-effect creating applications such as e-mail, buddy lists and 
chat rooms.
    For 18 months, AOL itself foresaw the threat of discriminatory 
cable bottlenecks as consumers migrated from narrowband to broadband. 
AOL aggressively advocated government assured open access to safeguard 
consumer choice. Unfortunately, with this proposed merger, AOL has 
abandoned consumer choice in favor of its own self-interest.
    ``If gatekeepers want to play in the Internet game, we should 
require them to play by Internet rules. We owe consumers no less.'' 
Once again, this is not disney talking. These were the remarks of AOL's 
senior officer for global and strategic policy, George Vradenburg, 
advocating open cable access before the House Judiciary Committee on 
June 30, 1999, conspicuously, before AOL itself sought to become the 
dominant gatekeeper.
    Contrary to the soothing reassurances provided to this subcommittee 
last week, both AOL and Time Warner have in the past abused their 
market position to limit and influence consumer choice. In May of this 
year, Time Warner arrogantly and unlawfully turned off ABC television 
programming for approximately 3.5 million households representing more 
than 8 million viewers. Time Warner also refused to carry Disney 
Channel as part of its basic cable service preferring to offer its own 
Cartoon Network instead. AOL has compromised the open architecture of 
the Internet by creating a formidable ``walled garden'' where, by AOL's 
own reckoning, its customers spend approximately 85% of their time on-
line. In the past, Disney has contracted with AOL to offer Disney and 
ABC websites inside the AOL walled garden. AOL has insisted on 
contractual terms that required us to remove navigation links that 
would enable consumers to ``escape over the wall.'' Again, Disney is 
not the only target. AOL has offered client software that disables the 
client software of any other ISP.
    Even more recently, when earthlink took up AOL/Time Warner's pledge 
to provide non-discriminatory access to other ISP's, it was met with 
commercial terms so onerous and adhesive that doing business was 
impossible. All of this, ominously, has taken place while their 
proposed merger is still under review. Non-binding MOU's and platitudes 
are one thing; real life conduct is apparently quite another. Again, 
AOL's prescient Mr. Vradenburg was on the money last year when he said 
of AT&T, ``AT&T is moving toward a commitment for open access--but the 
rubber's going to hit the road and really test this in reality when we 
(AOL) try to enter into enforceable agreements.'' Well, Disney, NBC and 
Earthlink all tested AOL/Time Warner's tires and the results were a 
blowout.
    The AOL/Time Warner merger is a unique combination. There are no 
other companies that, when combined, would enjoy similar market 
dominance in both conduit and content. Consumers will be deprived of 
choice for interactive television applications because there will be no 
viable full-blown options to AOL/Time Warner's offering. Government 
agencies have an obligation under the anti-trust laws and the public 
interest standard to assure consumer choice. Carrying out that mandate 
requires that this merger either be blocked or be approved with 
conditions so that consumer choice is not limited to AOL/Time Warner 
content partners. Specifically, government agencies must assure open 
access for alternative ISPs through the set top box and connected to 
the video platform. In addition, because AOL and Time Warner will 
likely command the overwhelming majority of customer relationships on 
their platform, government agencies also must require strong non-
discrimination conditions. The AOL/Time Warner interactive television 
cable systems must function the same for the consumer whether that 
consumer is seeking to interact with content owned by AOL/Time Warner 
or its chosen partners or by some other unaffiliated party.
    The range of possible discriminatory practices can be far more 
subtle and sophisticated than the outright exclusion expressed by Mr. 
Leddy. AOL/Time Warner will have the capability to favor its own 
content and content partners regarding downstream data rates, return 
path connectivity and data rates, caching, navigation, menus and 
display formats.
    Instead of government conditions, AOL and Time Warner have offered 
a voluntary pledge of open access. Earthlink's recent experience belies 
the bona fides of that empty pledge. Even more remarkably, two 
different ISPs have advised Disney that Time Warner sought agreements 
which would prohibit the alternative ISP from offering consumers a 
lower price than AOL/Time Warner's own ISP service. If not a per se 
violation of the anti-trust laws, such a demand is at least a clear 
sign that voluntary negotiations are no substitute for strong and 
enforceable government mandated open access. The preservation of 
consumer choice and robust competition require no less.
    Thank you very much for the opportunity to appear before you this 
morning and I would be happy to answer any questions you might have.

    Mr. Shimkus. Thank you.
    Next is Mr. John Froman, Circuit City Stores.

                   STATEMENT OF JOHN W. FROMAN

    Mr. Froman. Thank you. The interactive digital broadband 
pipe into the consumer's home today is the cable wire. 
Fundamentally, competition in the cable market depends on open 
access for content providers to the cable infrastructure, and 
for device manufacturers to the customer'S premises. Neither 
has yet been achieved. Both are necessary. So long as the cable 
industry continues to control the conditions for entry into 
each end of its service, the consumer will not receive the 
benefits of competition.
    In the 1996 Telecommunications Act, this committee included 
a provision that explicitly told the FCC to assure in its 
regulations the competitive availability of devices that 
provide access to cable systems. The FCC has tried to do so. 
But I am here to tell you today that it will take more than a 
single act of Congress to overcome 5 decades of monopoly. The 
Bliley-Markey provision to deregulate cable navigation devices 
ordered the FCC to ensure competitive access in the same manner 
that telephone customer premises equipment had been deregulated 
2 decades earlier. The FCC, in turn, issued regulations 
requiring that by July 1, 2000, cable industry operations and 
specifications must support the operation of competitive 
devices on its systems. This date has come and gone, yet there 
has been no competitive entry.
    Today I want to call to your attention three major reasons 
why competitive manufacturing and retail entrants still do not 
enjoy open access to the market for cable navigation devices. 
First, the motion picture industry has sought to diminish the 
utility of such devices by insisting on restrictive 
anticonsumer licensing terms to which no competitive 
manufacturing entrant has been willing to agree. Second, the 
cable industry specifications for competitive devices do not 
thus far support user interactivity. Consumers wanting 
interactive features would still need to lease a set-top box 
from their cable operator. Third, despite Congress's 
prohibitions on bundling, cable operators are able to subsidize 
the leasing of digital set-top boxes to the more affluent 
customers by charging more for leasing obsolete analog set-top 
boxes to the less affluent customers.
    Under the FCC regulations, in order to enter this market, a 
manufacturer needs a license from the cable industry CableLabs 
Consortium. But cable labs face an explicit threat from the 
Motion Picture Association that content would be withheld from 
cable systems unless this license includes severe restrictions 
on the recording and display capabilities of consumer 
electronics and information technology products. CableLabs has 
felt obliged to offer a license draft that does not allow any 
VCR or PC to be attached directly or work interactively on any 
cable system. The draft license would require manufacturers to 
cutoff the flow of HDTV signals to DTV-ready receivers now in 
the market. Not a single entrant has been willing to sign this 
license.
    The cable industry supports interactivity in set-top boxes 
that they lease to consumers, but not thus far in the 
specifications for competitive entrant devices. In an August 2 
filing with the FCC, the Consumer Electronics Retailers 
Coalition compiled all of the ways in which the cable industry 
still does not support competitive entry, and I have attached 
that report to my testimony.
    Cable operators appear to be loading the cost of their new 
digital set-top boxes, which they lease to affluent customers, 
onto the rental for their old analog boxes, which they lease to 
their less affluent customers. They face no potential 
competition in the market for fully depreciated analog boxes 
which are headed for the scrap heap. This subsidy from the 
monopoly analog market is unfair to consumers and forestalls 
entry into the digital market.
    What I have described thus far are obstacles to open access 
to the cable device market. But unless there is more 
competition for cable services, we can fight through all of 
these roadblocks and still not be able to enter the digital 
device market.
    As was the case with the telephone monopoly, dealing with 
50 years of a closed cable market will require open access to 
the service as well as the device. This will oblige cable 
operators to compete on the basis of efficiency in rendering 
services and supporting customer equipment. Unless and until 
the market for cable services is fully competitive, the only 
way we will achieve a level playing field in the device market 
would be to prohibit service providers from also leasing 
navigation devices.
    Despite Congress having passed a law and the FCC having 
issued regulations, the retailer market share of devices that 
provide interactive access to cable programming remains at 
zero. More needs to be done to get around the set-top 
roadblock. A reasonable license that is fair to consumers needs 
to be worked out. Technical specifications for the devices 
leased by the MSOs must be the same as those for competitive 
entrant devices. The rules pertaining to the subsidies and 
leasing of MSO-provided boxes need to be clarified, and the FCC 
should be encouraged to proceed with achieving open access to 
the broadband infrastructure across the board.
    Mr. Chairman, we greatly appreciate the interest and 
leadership that has been shown by this subcommittee. Much 
remains to be done. Circuit City and the other members of the 
Consumer Electronics Retailers Coalition remain committed to 
bringing real competition in interactive products to consumers.
    [The prepared statement of John W. Froman follows:]
    Prepared Statement of John W. Froman, Executive Vice President, 
    Merchandising, Circuit City Stores, Inc., on Behalf of Consumer 
                    Electronics Retailers Coalition
    Mr. Chairman and Members of the Subcommittee, my name is John 
Froman. On behalf of Circuit City Stores and the Consumer Electronics 
Retailers Coalition, I would like to thank the Subcommittee for 
inviting me to appear today.
    As Circuit City's Executive Vice President for merchandising, I am 
responsible for all product purchasing decisions. Circuit City has long 
believed that consumers want and expect interactivity in their digital 
television products. Unfortunately, we are still a long way from being 
able to offer it to our customers. And we are not the only ones. I am 
also appearing today as a member of the Consumer Electronics Retailers 
Coalition (``CERC''). The other CERC members are Best Buy, RadioShack, 
Sears, the International Mass Retail Association (IMRA), and the 
National Retail Federation (NRF).
Open Access To Both The Headend And The Set-Top Is Necessary To 
        Competition
    Fundamentally, competition in the cable market depends on open 
access--for content providers, to the cable infrastructure; and for 
device manufacturers, to the customer's premises. Neither has yet been 
achieved. Both are necessary. So long as the cable industry continues 
to control the conditions for entry into each end of its service, the 
consumer will not receive the benefits of competition.1
---------------------------------------------------------------------------
    \1\ See, e.g., the discussion of the relationship of set-top boxes 
to Internet access in the October 4, 2000, Wall Street Journal, at B8.
---------------------------------------------------------------------------
Open Access To The Set-Top
    In the 1996 Telecommunications Act, this Committee included a 
provision that explicitly told the FCC to assure, in its regulations, 
the competitive availability of devices that provide access to cable 
systems.2 The FCC has tried to do so. But I am here to tell 
you today that it will take more than a single act of Congress to 
overcome five decades of monopoly.
---------------------------------------------------------------------------
    \2\ This provision was first offered as a separate bill by Chairman 
Bliley and Rep. Markey. Ultimately it was incorporated, as Section 304, 
in the Telecommunications Act of 1996. Section 304 became Section 629 
of the Communications Act of 1934 and is codified at 47 U.S.C. 
Sec. 529.
---------------------------------------------------------------------------
    For 50 years, Federal and state law allowed cable operators to 
define, limit, and lock up the market for any device that could control 
access to all cable programming. The Bliley-Markey provision, to 
deregulate cable ``navigation devices,'' ordered the FCC to ensure 
competitive access, in the same manner that telephone customer premises 
equipment had been deregulated two decades earlier.3 The FCC 
in turn issued regulations requiring that by July 1, 2000, cable 
industry operations and specifications must support the operation of 
competitive devices on its systems.4 This date has come and 
gone, yet there has been no competitive entry.
---------------------------------------------------------------------------
    \3\ Hearing on Telecommunications Reform Legislation Before the 
Senate Committee on Commerce, 104th Cong., 1st Sess. (Jan. 9 
1995)(statement of Hon. Thomas J. Bliley, Chairman of House Committee 
on Commerce ``we have seen what has happened in the telephone market--
we should insist on the same type of dynamics for . . . set-top boxes 
and other devices.''); See, S. Conf. Rep. No. 104-230, at 181 (1996); 
H.R. Rep. No. 104-204, at 112 (1995).
    \4\ In the Matter of Implementation of Section 304 of the 
Telecommunications Act of 1996; Commercial Availability of Navigation 
Devices, CS Docket No. 97-80, Report & Order, 13 FCC Rcd 14775, para. 
11 (Rel. June 24, 1998).
---------------------------------------------------------------------------
    Today I want to call to your attention four major reasons why 
competitive manufacturing and retail entrants still do not enjoy open 
access to the market for cable ``navigation devices.''

1. The motion picture industry has sought to diminish the utility of 
        such devices by insisting on restrictive, anti-consumer 
        licensing terms, to which no competitive manufacturing entrant 
        has been willing to agree.
2. The cable industry's specifications for competitive devices do not, 
        thus far, support user interactivity. Consumers wanting 
        interactive features would still need to lease a set-top box 
        from their cable operator.
3. Despite Congress's prohibitions on bundling, cable operators are 
        able to subsidize the leasing of digital set-top boxes to their 
        more affluent customers, by charging more for leasing obsolete 
        analog set-top boxes to their less affluent customers.
    (1) Licensing Restrictions. Under the FCC regulations, in order to 
enter this market a manufacturer needs a license from the cable 
industry ``CableLabs'' consortium. But CableLabs faces an explicit 
threat, from the Motion Picture Association, that content would be 
withheld from cable systems unless this license were to include severe 
restrictions on the recording, and even the display, capabilities of 
consumer electronics and information technology products. CableLabs has 
felt obliged to offer a license draft that does not allow any VCR or PC 
to be attached directly, or work interactively, on any cable system. 
The draft license would also require manufacturers to cut off the flow 
of HDTV signals to DTV-ready receivers now in the market. To our 
knowledge, not a single competitive entrant has been willing to sign 
this license.5
---------------------------------------------------------------------------
    \5\ According to NCTA, as of the July 1 deadline, only Scientific-
Atlanta (an entrenched industry supplier) had executed some version of 
this license, on June 28. Three months after the July 1 deadline, the 
issue is still under negotiation, and is back in the hands of the FCC. 
In a letter dated September 1, 2000, however, FCC official Dale N. 
Hatfield asked this Subcommittee to initiate action to clarify the home 
recording issues raised by this draft license. In a September 18 
declaratory order, the FCC said that its rules would not prohibit 
``allowable'' license restrictions on home recording capabilities. In 
the Matter of Implementation of Section 304 of the Telecommunications 
Act of 1996; Commercial Availability of Navigation Devices, CS Docket 
No. 97-80, Further Notice of Proposed Rule Making and Declaratory 
Ruling, para. 29 (Rel. Sept. 18, 2000). The FCC has not yet defined 
``allowable.''
---------------------------------------------------------------------------
    (2) Discrimination in Specifications. The cable industry supports 
interactivity in the set-top boxes that they lease to consumers, but 
not, thus far, in the specifications for competitive entrant 
devices.\6\ In an August 2nd filing with the FCC, the Consumer 
Electronics Retailers Coalition compiled all the ways in which the 
cable industry still does not support competitive entry. I have 
attached this report to my testimony.
---------------------------------------------------------------------------
    \6\ In technical terms, we will have achieved a level playing field 
only when all Navigation Devices, from whatever source, are OpenCable 
compliant, operate according to applications that can be downloaded 
from the headend, and rely on the Opencable ``Middleware'' software 
specification that is now under development.
---------------------------------------------------------------------------
    (3) Subsidies For The MSO Set-Top Box. Cable operators appear to be 
loading the cost of their new digital set-top boxes, which they lease 
to their more affluent customers, onto the rental charges for their old 
analog boxes, which they lease to their less affluent customers. They 
face no potential competition in the market for the fully depreciated 
analog boxes, which are headed for the scrap heap. This subsidy from 
the monopoly analog market is unfair to consumers and forestalls entry 
into the digital market.
    The Bliley-Markey provision forbade subsidy of cable equipment 
through service charges. Cable operators also should not be able to 
load their digital acquisition costs onto the backs of their customers 
who are stuck with the old analog boxes.
Open Access To Services
    What I've described thus far are obstacles to ``open access'' to 
the cable device market. But unless there is more competition for cable 
services, we could fight through all these roadblocks, and still not be 
able to enter the digital device market.
    So long as the cable operator remains the gatekeeper for broadband 
access, the industry attitude is that it ``already owns'' its customer 
base. With such a mindset, cable operators have little incentive to 
engage retailers to market cable services, or to support the 
convergence of cable functionality with freely marketed consumer 
electronics and information technology equipment. The paradigm of the 
set-top box, delivered to the door by the cable operator, will remain 
the standard model until the industry is faced with competition for its 
installed base.
    As was the case with the telephone monopoly, dealing with fifty 
years of a closed cable market will require open access to the service, 
as well as the device. Open access to the cable broadband 
infrastructure will promote new and competitive means of distributing 
entertainment programming, such as pay-per-view and video-on-demand 
entertainment. This will oblige cable operators to compete on the basis 
of efficiency in rendering services and supporting customer equipment.
    Unless and until the market for cable services is fully 
competitive, the only way we will achieve a completely level playing 
field in the device market would be to prohibit service providers from 
also leasing navigation devices.
What Needs To Be Done
    Despite Congress having passed a law, and the FCC having issued 
regulations, the retailer market share of devices that provide 
interactive access to cable programming remains at zero. When Congress 
passed the Bliley-Markey provision, it foresaw that interactive 
functionality would be incorporated into PCs, VCRs, DVD players, and 
new generations of ``convergence'' products.7 But we are 
still not in a position to offer these features to our customers, 
either in stand-alone set-top boxes, or in other consumer electronics 
or information technology products. More needs to be done to get around 
the set-top roadblock.
---------------------------------------------------------------------------
    \7\ See also Navigation Device Report & Order para. 25.

 A reasonable license, that is fair to consumers, needs to be 
        worked out. The FCC has given the cable industry until October 
        18 to submit such a license, that addresses the copy protection 
        issue within ``allowable'' limits, but has not defined those 
        limits. We believe such limits must be informed by the 
        ``encoding rules'' included by the Congress, under the 
        leadership of this Committee, in Section 1201(k) of the Digital 
        Millennium Copyright Act, 8 and must ensure that 
        HDTV programming over cable will not be denied to those 
        consumers who have invested in the present generation of DTV 
        receivers.
---------------------------------------------------------------------------
    \8\ 17 U.S.C. Sec. 1201(k).
---------------------------------------------------------------------------
 Technical specifications for competitive entrant devices must 
        be the same as those for the devices leased by MSOs. The FCC 
        has recently noticed a proceeding asking whether, in light of 
        the roadblocks to which I have alluded, the date for such a 
        level playing field (presently January 1, 2005), needs to be 
        moved up. We believe this date can and should be set at January 
        1, 2002.
 The rules pertaining to subsidies and leasing of MSO-provided 
        boxes need to be clarified. It is simply not fair to ask your 
        less affluent constituents to pay more than their analog boxes 
        are worth, so that the cable operator can forestall competitive 
        entry into the market for digital navigation devices. The 
        sooner cable operators are accountable for the real costs of 
        these devices, the sooner they will support efficiencies, such 
        as the successful integration of navigation features into 
        consumer electronics and information technology products. It is 
        the convergence of such products that will lower costs to all 
        consumers.
 The FCC should be encouraged to proceed with achieving Open 
        Access to the broadband infrastructure, across the board. When 
        this infrastructure is recognized as the common carrier 
        resource it is, competition will bloom for both services and 
        devices. If this cannot be accomplished expeditiously, the only 
        alternative is to prohibit service providers from leasing 
        navigation devices.
    Mr. Chairman, we greatly appreciate the interest and leadership 
that has been shown by this Subcommittee. Much remains to be done. 
Circuit City and the other members of the Consumer Electronics 
Retailers Coalition remain committed to bringing real competition, in 
interactive products, to consumers.

    Mr. Tauzin. Thank you.
    The Chair is now pleased to welcome Ms. Heffernan, 
president and CEO of iCast.

                 STATEMENT OF MARGARET HEFFERNAN

    Ms. Heffernan. Thank you, Mr. Chairman. iCast is an 
Internet entertainment company based in Woburn, Massachusetts. 
We employ 200 people and are located in a warehouse site made 
famous by the Woburn Superfund. Today that site is filled with 
many new economy companies like mine.
    I want to thank you, Mr. Chairman, and especially Mr. 
Markey, for calling this hearing today and giving me the 
opportunity to testify. I was one of those virtual witnesses 
that wanted to testify last week and I want to thank you, Mr. 
Markey, for previewing the points that I am going to make on 
AOL.
    My story is typical of many companies in the new economy. I 
was born in Texas, raised in the U.K., and I moved back to the 
United States because of the tremendous opportunities provided 
here to explore interactive television. To that end, my 
company, iCast, provides an interactive application called the 
iCaster which allows members to instant message each other 
while listening to radio streams or watching Webcasts. It is 
one of a number of hybrid applications which paved the way to 
interactive television.
    As a consequence, the merger of AOL and Time Warner is of 
grave concern. Why? Because in our own attempt to enter the 
instant messaging market, we have discovered how closed AOL has 
made it. Although our iCaster is technically interoperable with 
AOL's Instant Messenger, AOL has deliberately blocked us since 
we launched. They continue to do so; and when we protest, they 
maintain that they believe in interoperability, but not right 
now.
    This market dominance is a problem, therefore, right now. 
In the old world of AT&T, who would have dared to start Sprint? 
Where would we have found a market? The merger takes a big 
problem and makes it bigger, makes the market dominance that 
AOL currently enjoys more secure, and makes any semblance of 
competition a foregone defeat.
    If I didn't have nerve and daring, I wouldn't work in new 
technology. But I know that the odds favor Goliath against 
David. This merger makes Goliath bigger and heavier and no 
nicer. Everyone involved in the debate over instant messaging 
agrees this is a major application and a major market. Lehman 
brothers valued AOL's instant messaging market at nearly $6 
billion. A senior executive at Verizon called AOL's network the 
biggest communications market in the world. So we all agree, 
it's big. Everyone agrees that interoperability is good and 
needed, and the sooner the better. So the debate resolves down 
to can AOL/Time Warner be trusted to live up to its public 
commitment to fast-track interoperability.
    The record speaks for itself. In July 1999, AOL wrote that 
it would fast-track its efforts to create a standard for 
interoperability with the Internet Engineering Task Force. Here 
is the full record of their contribution. This organization 
works through e-mail. You can see on the chart AOL's stunning 
leadership. Last week, Mr. Case sat here and told you that AOL 
was providing leadership to this process and mentioned that 
they had submitted a proposal to the IETF; but what he didn't 
tell you was that it was instantly thrown out because it was 
last-minute and insubstantial. It was a cover up for inaction.
    When the Wall Street Journal documented how AOL has begun 
to make its own two services interoperable, AOL said it wasn't 
true, but the chat rooms are full of people using it. Mr. Case 
told you that filtering companies like Net Nanny were happy 
with AOL's instant messaging but, as Net Nanny wrote 
Congressman Pickering yesterday, that isn't true either. Net 
Nanny has not been able to strike a deal with AOL's instant 
messaging service. As their CEO wrote, ``The chief obstacle we 
face is the lack of an industry-wide open standard that we can 
use to develop our software.''
    When he sat here last week, Mr. Case told you the merger 
would spur new innovation that consumers want, but our iCaster 
users want to be able to talk to AOL users.
    Mr. Case and Mr. Levin told you that they were committed to 
consumer choice, but what choice have they offered their own 
customers when they can't communicate with other instant 
messengers? Believing these statements is like believing that 
the Berlin Wall was really built for the safety of East German 
citizens. When he came here last week, Mr. Levin said the 
Internet is the technology of human freedom, but he clearly has 
one kind of freedom in mind for his company and another kind of 
freedom for everybody else's. Mr. Levin espoused a belief in 
openness and innovation. But what kind of openness is it that 
exaggerates IETF contributions, hides AIM and ICQ 
interoperability and denies parents the choice of filtering 
safeguards?
    I am very grateful to the members for the penetrating 
questions that they asked last week. It is no small matter for 
a company like mine to go up against the Goliath that is AOL, 
but we have no choice. In the absence of any evidence that AOL 
will live up to its public commitments, we have to ask that the 
committee help protect consumer interests. History teaches us 
consumers benefit from interoperability, and this committee 
knows that better than anyone. This committee, which has to 
protect consumers when market forces cannot, must address the 
simple question: Can AOL be trusted to do this themselves? The 
record says, no. If AOL/Time Warner is allowed to merge without 
a clear and certain path for interoperability, consumers will 
be denied the benefits that an open market can bring.
    [The prepared statement of Margaret Heffernan follows:]
   Prepared Statement of Margaret Heffernan, President and CEO, iCAST
    My name is Margaret Heffernan. I am the President and CEO of ICAST, 
an Internet entertainment company based in Woburn, Massachusetts. Our 
company, which employs 200 people, provides an array of multimedia 
content and tools that enable our users to view, listen to and share 
that content over the Internet.
    What I'd like to do today is, tell you first, of my personal 
experience with AOL's tactics of keeping a stranglehold over the 
Instant Messaging (``IM'') market; second, how the proposed merger with 
Time-Warner will make that stranglehold worse, and; third, why 
government officials should not be fooled by AOL's rhetoric of openness 
but instead should base the government's decision-making on the facts. 
Those facts clearly demonstrate AOL's desire to maintain its wall 
around the IM market for as long as it can. And the facts also 
demonstrate that it is in the public interest that that wall be removed 
as soon as possible.
    But as a preliminary matter I want to make it clear that my 
company, and the many others who have joined in this effort, do not 
seek to regulate the Internet. Rather, we want to ensure that Internet 
services remain competitive, accessible, and devoid of entry barriers.
    As Chairman Tauzin said at the last hearing, the purpose of these 
hearings is to ensure that consumer choice is protected. It is clear to 
us, and to many others in the Internet community that unless the 
Government imposes necessary conditions on the AOL/Time Warner merger, 
consumer choice will not be protected and IM, a vibrant and critical 
platform for future exchanges of information, particularly for 
interactive television, will be rendered non-competitive and non-
accessible, with impossibly high entry barriers.
             i. icast's hope for im and experience with aol
    At iCAST, we know that IM is an application that has tremendous 
consumer and business value. One of the most powerful and 
distinguishing features of the IM protocol is ``presence detection''--
i.e., the ability to allow users, subject to their control, to let news 
and entertainment providers, work colleagues, friends or others know 
when they are ``online'' and available, and which Internet-connected 
device they are using. Competitive delivery of services utilizing the 
presence detection and other unique capabilities of the IM protocol 
would bring enormous public benefits. IM can serve as an ``intelligent 
agent,'' enabling weather alerts, school scheduling information and 
time-sensitive news to be delivered to any device. IM can support 
advanced audio and video-based conferencing and other audio and video 
related services, including collaborative business document sharing. IM 
can bring additional capabilities to wireless tools, such as telephones 
and personal digital assistant (PDA) devices. And, as AOL highlights in 
its public statements, IM can play an important role in interactive TV 
offerings.
    Over this past winter, we at iCAST developed a downloadable media 
player that combines the power of IM with the excitement of 
experiencing multimedia online. The product, called the iCASTER allows 
users to play a variety of music and video formats, while 
simultaneously IM'ing their friends through its fully integrated 
instant messaging functionality. Further, the product is designed to 
allow users to easily share music and video files by simply ``dragging 
and dropping'' music and video files from their play lists to names on 
their IM ``buddy list.''
    For our IM platform, we chose a product created by Tribal Voice, as 
we believed it had features that best suited our product. We wanted our 
customers to be able to freely communicate with everyone, just as they 
can with telephones and e-mail. As AOL controls 80-90% of the market we 
knew that we would need them not to block our users messages. But we 
were hopeful that AOL would allow us to be interoperable as Tribal 
Voice had developed a product that utilized an AOL sanctioned IM 
protocol that it made publicly available on its Web site, thus 
eliminating privacy and security concerns. Further, AOL's public 
statements at the time indicated it favored interoperability.
    In February of this year, when we launched the ICASTER it was 
designed to be interoperable with AOL AIM, MSN Messenger and Tribal 
Voice's PowWow instant messaging products. This meant that our users 
could communicate with over 60 million IM users. AOL blocked 
interoperability with our product within two days. I called AOL to try 
to determine if the blocking was unintentional. I was told that no, the 
blocking was intentional, and that AOL would continue blocking. I was 
also told that they thought the iCASTER application was really cool. I 
ask if they would consider, as a gesture of good faith and in 
accordance with their public comments about interoperability, whether 
they would consider not blocking until the industry agreed on an open 
standard. I was told, in no uncertain terms, the answer was no.
    So as a company, we had a problem. It is one thing to face a 
powerful incumbent with a huge built in advantage. That is the nature 
of the market and we are ready to take on such a fight.
    But it is entirely a different thing to face a market in which the 
incumbent, and a potential competitor, controls your ability to even 
communicate with your customers and potential other customers.
    As Congressman Tauzin noted at the beginning at the first panel, 
when's there's only one store in town, you get bad service, bad prices, 
and bad attitudes. And that is what we have right now with Instant 
Messaging.
    And it's about to get worse.
 ii. how the proposed merger will make the existing problem far worse, 
                particularly for interactive television
    It was clear that we faced a difficult situation. But when we began 
to think through the future implications of an AOL joined with Time-
Warner, it became obvious that the existing problems were about to 
become even worse.
    With its control of well over 80% of the active IM users AOL 
already enjoys market power over both consumers and the content and 
applications providers that require access to the IM platform to bring 
presence-enabled services and applications to those consumers.
    The proposed merger with Time Warner will deepen that dominance in 
a variety of ways.
    In particular, the proposed merger would:

 Allow AOL to leverage its IM dominance into interactive TV 
        services provided by Time Warner. To be sure, AOL has stated 
        that it will not block the Advanced Television Enhancement 
        Forum signals from rival video programmers. At the same time, 
        however, AOL has announced that IM--that is, AOL's closed IM 
        system--will be an integral feature of its interactive TV 
        platform. In fact, they are saying that AOL's closed IM will be 
        the exclusive IM service supported by AOLTV. By declining to 
        allow IM interoperability and allowing rival interactive TV 
        providers to use AOL IM only upon payment of substantial 
        license fees (or not licensed at all), AOL would substantially 
        raise rival interactive TV providers' costs. This could enable 
        AOL to use its IM monopoly to help tip the interactive TV 
        business in its favor and also through vertical integration to 
        foreclose the millions of IM-capable TVs of Time Warner 
        subscribers to rival IM providers;
 give AOL the incentive and ability to make Time Warner's IM-
        enabled content (and related applications) exclusive to the AOL 
        IM platform, thereby making AOL IM the only platform over which 
        consumers can access all content and substantially raising IM 
        rivals' costs by forcing two-level entry (in both IM and IM-
        enabled content/applications);
 eliminate a well-financed potential IM entrant with broadband-
        enhanced next generation capabilities, and, by adding the one 
        million (and growing) Time Warner/Road Runner subscribers to 
        the AOL IM subscriber base, further reduce the prospect that 
        another IM provider can effectively compete;
 give AOL the incentive and ability to use Time Warner's cable 
        systems (e.g., routers and servers) to discriminate in favor of 
        AIM and ICQ and IM-related traffic, thereby further raising 
        rivals' costs of competing with AOL; and
 give AOL the incentive and ability to use its essential IM 
        distribution platform to discriminate in favor of Time Warner 
        content (as well as ``intelligent agents'' and other 
        applications that prefer or sponsor Time Warner content), 
        thereby raising content/aggregation/ intelligent agent rivals' 
        costs; and
    Moreover, it should be understood that approval of the proposed 
merger without conditions means that interoperability becomes an even 
more distant goal. After all, increasing the duration and value of 
AOL's IM market power, as noted above, will increase the incentives for 
AOL to maintain that market power, and thereby further increase AOL's 
incentives to resist IM interoperability.
    While it is easy to see how the merger creates a number of specific 
opportunities and incentives for AOL/TW to unfairly exploit its market 
dominance of IM, these examples are really just representative of the 
larger point; that if one is allowed to control a critical platform, 
one can improperly control a number of markets. The television 
broadcasters, who have a great stake in the future of interactive 
television, understand that for the future of television to be robust 
and competitive, AOL/Time-Warner must not be allowed to maintain walls, 
like they are doing with instant messaging. As the National Association 
of Broadcasters wrote Chairman William Kennard of the Federal 
Communications Commission ``(t)o counteract the natural incentive of 
the combined AOL/TW to continue favoring its own content and services 
over those of the unaffiliated entities, and to protect the interests 
of consumers in receiving services and content from a variety of 
competing sources, the Commission must insure that unaffiliated content 
and service providers are not subject to discriminatory treatment by 
AOL/TW. To achieve this goal, the Commission should extend the basic 
principle of open access beyond Internet access so as to include such 
services as instant messaging, EPG (electronic programming guides) and 
digital and interactive television.'' (Letter from National Association 
of Broadcasters to Chairman William Kennard; October 2, 2000)
   v. the bottom line: can the public trust aol to solve the problem?
    So given how the merger would make matters so much worse, we 
decided we had to raise our voice and point out the problem.
    And we have been gratified that not only have we been joined by 
numerous companies, but leading editorial writers from around the 
country, ranging from Business Week to the Economist, from the San Jose 
Mercury to the Silicon Alley Daily, have joined in the call to open up 
IM.
    Yet the odd thing is that this debate is not really a debate about 
philosophy. After all, we only want openness; we do not want 
regulation.
    And AOL says it agrees. It says it is for interoperability and open 
standards. It says it is willing to let others through the wall it has 
constructed.
    If we had any evidence that AOL was sincere in its statements we 
would not be here. But in business, you look beyond the rhetoric and 
consider performance. Government should do no less. And Congressman 
Dingell wisely said at the hearing last week ``Trust everyone but cut 
the cards.''
    So what has been AOL's performance here?
    15 months ago, in July 1999, members of Congress first started 
expressing concern about AOL blocking competitors. AOL responded by 
promising it would ``fast-track'' its efforts to work with the Internet 
Engineering Task Force. Indeed, Mr. Case came before you and bragged 
that AOL had committed to providing ``leadership'' to the IETF process. 
In response to a question from Congressman Gordon, Case said that he 
had committed AOL to work ``aggressively'' toward interoperability.
    But what has AOL actually done to ``fast-track'' its efforts? What 
kind of leadership has it offered? How ``aggressive'' has it been in 
working toward interoperability?
    The business of the IETF, not surprisingly, is done over the 
Internet. The logs of the discussions are a matter of public record. So 
consider how much AOL has done over the last 15 months by comparing the 
number of its submissions to the IETF to what the rest of the industry 
is doing.

------------------------------------------------------------------------
                                                         AOL    Industry
                                                        emails    emails
------------------------------------------------------------------------
August 1999..........................................       0        147
September 1999.......................................       0        314
October 1999.........................................       0        547
November 1999........................................       0        470
December 1999........................................       0        278
January 2000.........................................       0        345
February 2000........................................       0        193
March 2000...........................................       0        160
April 2000...........................................       0         58
May 2000.............................................       0         65
June 2000............................................       8        235
July 2000............................................       0        197
August 2000..........................................       0        604
September 2000.......................................       0        164
------------------------------------------------------------------------

    Note that the only month AOL had any submissions was in June, when, 
in response to press reports that the FTC and FCC were investigating 
the IM issue, AOL submitted a proposal to the IETF. Mr. Case told you 
about that proposal in an effort to convince you AOL was living up to 
its promise to move along the IETF effort. But what he neglected to 
tell you was that the IETF has already rejected the AOL proposal as a 
``last-minute submission was a general framework for instant messaging 
interoperability rather than a full-fledged protocol.'' (Network World 
Fusion 8/3/2000.) Since that time, AOL has again gone silent.
    At the last hearing, Congressman Greene suggested that AOL had 
indicated that there would be interoperability by June of 2001. 
Unfortunately, while AOL has implied a timetable close to that, it has 
always provided plenty of wiggle room. Given the pace of development of 
the Internet one might have thought fast tracking a solution would take 
less than 15 months. But now, 15 months after making that 
``commitment'' the same AOL official has publicly said that fast 
tracking is a bad idea and AOL needs at least another year.
    If one can look at AOL's record and believe that it represents a 
sincere effort to ``fast-track'' interoperability, if one can believe 
that providing less than one-quarter of one percent of the entries to a 
process constitutes leadership, then one can, perhaps, believe that 
AOL/Time-Warner will honestly work towards interoperability. But that 
would be like believing that the East German Regime built the Berlin 
Wall to protect its citizens.
    But we all know the real reason the Wall was built. The Regime 
wanted to protect itself. And so here, the many excuses AOL gives for 
blocking interoperability are nothing more than the kind of propaganda 
that marked the communications of the defender's of Berlin's Wall.
    Recently, Verizon CEO Ivan Seidenberg noted that the biggest 
communications market in the world is AOL's IM network. There is 
nothing wrong, per se, with a large market. But just as the government 
would not allow Verizon or AT&T to prevent competitors from being able 
to interoperate with their customers, so here, the government has a 
role in protecting the public interest.
    So the choice for the government is clear. It can close its eyes to 
the facts and the public will get interoperability on AOL's timetable 
and on AOL's terms. And if there is one thing we can be sure of it is 
that AOL's timetable will not be on Internet time.
    Or the Government can make AOL live up to its own words and set a 
date certain for interoperability. And then consumers can enjoy the 
benefits of a vigorous, competitive market.
    Thank you.

    Mr. Tauzin. Thank you.
    The Chair is now pleased to welcome Lowell Gray, the 
General Manager of Shore.Net of Lynn, Massachusetts.

                  STATEMENT OF LOWELL J. GRAY

    Mr. Gray. Thank you. Thank you for holding this hearing and 
inviting me to discuss the future of the interactive television 
marketplace. I appreciate an opportunity to share my views. As 
the founder of one of the largest Internet service providers in 
New England, I have been fortunate to be actively involved in 
the incredible Internet and telecommunications revolution 
happening around us. I started Shore.Net in 1993 as a dial-up 
Internet provider. My goal was to empower individuals with the 
resources then becoming available, thanks to the public 
Internet. For $9 a month, anyone with a modem and a terminal 
could get an e-mail address, join worldwide discussion groups, 
and access vast archives of information at universities, 
libraries and the government. The Internet was not commercial 
yet. When the NSF then ended its role as supporter of the 
network in 1994, the community debated how commercial presence 
would change the Internet for better or worse.
    To me it was obvious: Getting the Internet into the private 
sector would unshackle it from its limited roots and lead to 
amazing new advances with benefits for everyone. But I also 
agreed with people who said that advertising and unsolicited e-
mail would be harmful to the free and open Internet we knew. In 
hindsight, these discussions seem quaint. None of us could 
imagine then how quickly the Internet would explode throughout 
our society and how soon all these issues would reach critical 
mass.
    Right after the commercial Internet was born in 1994, the 
world soon learned about a new development: the world Wide Web. 
We set up our first Web server and gave all our customers the 
ability to publish their own Web pages. Then we started 
offering domain name registration and virtual Web hosting for 
businesses and other organizations. Our business took off 
beyond our wildest dreams. It was still true to my original 
mission. We empowered the little guy as an equal on the level 
playing field of the Internet. For pennies a day, a small 
entrepreneur could have a presence on the Internet peer-to-peer 
with the largest corporations.
    The whole nature of the Internet is a decentralized peer-
to-peer network. When I think of a free and open Internet, I 
think of it in the sense of liberty, freedom of expression, 
freedom of association, the core values that we hold dear as 
Americans. This does not mean a free ride, which is the spin 
that some parts of the industry are trying to create. ISPs like 
Shore.Net pay retail prices to telecom vendors to carry 
customer traffic. In Massachusetts, we pay millions of dollars 
every year to companies like Verizon and WorldCom and other 
carriers. Along with our other ISP peers, we represent the 
telecommunication companies' fastest growing source of revenue 
nationwide. Each part of the Internet has been built and paid 
for by the community that connected to it.
    ISPs have also been called freeloaders since the earliest 
days of the commercial Internet. The phone companies blamed us, 
their customers, for their inability to keep up with demand. 
They tried to make us pay more for a line just because we 
wanted to use it to carry data. Fortunately, the 
Telecommunications Act of 1996 changed all that. New CLECs 
emerged who gave them real competition and gave consumers more 
choices at lower prices.
    But there have been unfortunate side effects, too. For 
example, our local telephone company has been out of facilities 
in our Lynn central office for most of this year and won't 
deliver more capacity until next year. This is choking the 
growth of our company and other newly emerging inner-city 
businesses in our Lynn cyber-district. We are facing similar 
problems with new CLEC competitors. Endemic lost records, 
missed appointments, finger pointing among the vendors have all 
plagued DSL provisioning.
    However, the advent of DSL is a very positive development. 
If we keep an open competitive marketplace, these problems can 
be solved. Similarly, if ISPs have the choice of buying from 
cable companies as well as CLECs, the competition will 
encourage all carriers to improve service quality. Instead, 
they accuse us of wanting a free ride over cable Internet 
systems. This is simply not true. For years we have offered to 
pay full retail price to lease capacity on two-way cable 
systems, but their owners, without exception, have refused to 
do business with anyone other than their own subsidiaries. 
Cable broadband systems should be subject to the same basic 
open access requirements that any new entrant into the 
telecommunications business is required to meet.
    Why is open access important to the future of interactive 
television and other broadband services? I believe that much 
more is at stake than just the narrow issue of open access to 
cable systems. The real issue here is about ensuring the future 
of the Internet as a free and open marketplace where our 
American constitutional values can survive. Mr. Levin said last 
week that the Internet is the technology of human freedom, but 
it can also be the technology of oppression or control. I 
believe that vertical integration of content and 
communications, combined with the lack of data privacy 
protections, is a grave threat to our Nation.
    It is not the government as Big Brother that I worry about, 
it is the giant, all-seeing corporation with its data base 
marketing and cookies, tracking our every move, selling our 
personal identities to its advertisers and business partners 
and even controlling what information we receive. Imagine a 
monopoly power over the flow of your personal data that goes to 
the heart of who you are, your entire being. That is why 
competition and consumer choice is so essential in our 
telecommunications marketplace and that is why open access 
requirements must be a foundation of converged 
telecommunications networks. I am not suggesting that we apply 
Bell-style regulations to cable television networks.
    Mr. Tauzin. Your time has expired, Mr. Gray. I will give 
you an opportunity to wrap up.
    Mr. Gray. Thank you for the opportunity to testify.
    [The prepared statement of Lowell J. Gray follows:]
    Prepared Statement of Lowell J. Gray, General Manager, Shore.Net
    Thank you for holding this hearing and inviting me to discuss the 
future of the interactive television marketplace. It is an honor to be 
here, and I appreciate the opportunity to share my views on this 
important topic with the members of the Subcommittee.
    As the founder of one of the largest Internet Service Providers in 
New England, I have been fortunate to be actively involved in the 
incredible Internet and telecommunications revolution happening around 
us.
    I started Shore.Net in 1993 as a dial-up Internet provider. My goal 
was to empower individuals with the resources then becoming available 
thanks to the public Internet. For $9 a month, anyone with a modem and 
a terminal could get an email address, join world-wide discussion 
groups, and access vast archives of information at universities, 
libraries and the government. The Internet was not commercial yet. When 
the NSF then ended its role as supporter of the network in 1994, the 
community debated how commercial presence would change the Internet for 
better or worse.
    To me it was obvious: getting the Internet into the private sector 
would unshackle it from its limited roots and lead to amazing new 
advances with benefits for everyone. But I also agreed with people who 
said that advertising and unsolicited email would be harmful to the 
free and open Internet we knew. In hindsight, these discussions seem 
quaint. None of us could imagine then how quickly the Internet would 
explode throughout our society and how soon all these issues would 
reach critical mass.
    Right after the commercial Internet was born in 1994, the world 
soon learned about a new development: the World-Wide Web. We set up our 
first web server and gave all our customers the ability to publish 
their own web pages. Then we started offering domain name registration 
and ``virtual'' web hosting for businesses and other organizations. Our 
business took off beyond my wildest dreams. And it was still true to my 
original mission: we empowered the little guy as an equal on the level 
playing field of the Internet. For pennies a day, a small entrepreneur 
could have a presence on the Internet peer-to-peer with the largest 
corporations.
    The whole nature of the Internet is a decentralized peer-to-peer 
network. When I think of a free and open Internet, I think of it in the 
sense of liberty--freedom of expression, freedom of association--the 
core values that we hold dear as Americans. This does not mean a free 
ride, which is the spin that some parts of the industry are trying to 
create. ISPs like Shore.Net pay retail prices to telecom vendors to 
carry customer traffic. In Massachusetts alone, we pay millions of 
dollars a year to Verizon, Worldcom, and other carriers. Along with our 
other ISP peers, we represent the telecommunications companies' fastest 
growing source of revenue nationwide. Each part of the Internet has 
been built and paid for by the community that connected to it.
    ISPs have been called freeloaders since the earliest days of the 
commercial Internet. The phone companies blamed us, their customers, 
for their inability to keep up with demand. They tried to make us pay 
more for a line just because we wanted to use it to carry data. 
Fortunately, the Telecommunications Act of 1996 changed all that. New 
CLECs emerged who gave them real competition and gave consumers more 
choices at lower prices.
    But there have been unfortunate side-effects too. For example, our 
local telephone company has been out of facilities in our Lynn central 
office for most of this year and won't add more capacity until next 
year. This is choking the growth of our company and other newly-
emerging inner-city businesses in our Lynn cyber-district. We are 
facing similar problems with new CLEC competitors. Endemic lost 
records, missed appointments, and finger pointing among the vendors 
plague DSL provisioning.
    However, the advent of competition in DSL is a very positive 
development. If we keep an open competitive marketplace, these problems 
can be solved. Similarly, if ISPs have the choice of buying from cable 
companies as well as LECs, the competition will encourage all carriers 
to improve service quality. Instead, they accuse us of wanting a free 
ride over cable Internet systems. This is simply not true. For years, 
we have offered to pay full retail price to lease capacity on two-way 
cable systems but their owners, without exception, have refused to do 
business with anyone other than their own subsidiaries. Cable broadband 
systems should be subject to the same basic open access requirements 
that any new entrant into the telecommunications business is required 
to meet.
    Why is open access important to the future of interactive 
television and other broadband services? I believe that much more is at 
stake than just the narrow issue of open access to cable systems. The 
real issue here is about ensuring the future of the Internet as a free 
and open marketplace where our American constitutional values can 
survive. Mr. Levin said last week that the Internet is the technology 
of human freedom. But it can also be the technology of oppression or 
control. I believe that vertical integration of content and 
communications, combined with the lack of data privacy protections, is 
a grave threat to our nation.
    It's not the government as Big Brother that I worry about, it's the 
giant all-seeing corporation with its database marketing and cookies, 
tracking our every move, selling our personal identities to its 
advertisers and business partners, and even controlling what 
information we receive.
    Our society has faced similar challenges in the past but nothing so 
all-encompassing as this. I think a good analogy is to look at the 
collusion between big oil and the railroads in the 19th century. Data 
is like oil and communications networks are like the railroads. Back 
then, our predecessors created laws regulating common carriers to 
protect the public interest and ensure competition. The railroads were 
prohibited from making special deals with big oil and had to publish 
open non-discriminatory tariffs available to all shippers. Oil is just 
oil, but your data is you. Imagine monopoly power over the flow of your 
personal data. It goes to the heart of who you are, your individuality, 
your entire being.
    That is why competition and consumer choice is so essential in our 
telecommunications marketplace. And that is why open access 
requirements must be a foundation of converged telecommunications 
networks. I'm not suggesting that we apply Bell style regulations to 
cable networks, but I think that the basic open access rules that apply 
to any new entrant offering telecommunications services, such as a 
CLEC, should apply to cable broadband systems. We have to recognize 
that while we would like to have multiple facilities-based providers to 
each home, there are some limits on the number of telephone poles and 
radio towers in each neighborhood. In order to have a competitive 
Internet, we must share these wires. Open access requirements should 
apply to the basic network telecommunications services, and we must 
leave the higher application layers free of regulation.
    Setting common carrier rules uniformly for all networks, whether 
telephony or cable or will benefit consumers with lower prices, better 
quality service and more choice. I believe this will result in an open 
marketplace where information producers and consumers will have the 
most choices and freedom.
    The other critical issue that our society faces is privacy and fair 
trade. Consumers need strong protection of their data privacy and open 
trade practices that they can trust. Very simply, no company should be 
permitted to sell or exchange information about you without your opt-in 
consent. Any holder of information must give you trustworthy means to 
view, correct or delete your information.
    The only meaningful way to give consumers the ability to take 
action to protect their own data or to select the content they choose 
to view, is to give them choice. Separating content from carriage and 
protecting data privacy are hard principles to implement in this ever-
changing technology landscape but I urge you to consider them.
    Think of the converged Internet, telephone and television 
marketplace at our doorstep. I have tremendous respect for large 
companies like AOL and Time Warner who are building it on a global 
scale. I believe Steve Case when he describes the new interactive 
products that his company is bringing to market. Cyberspace is a new 
frontier, let's treat it as one. Where is the line between public space 
and private space? Is there an Internet commons? Let's keep networks 
open to innovation and invention and give others the ability to create 
new content or applications just as AOL Time Warner have the freedom to 
do.
    When I bring the Internet and television together in my home with 
my family, I do not want the experience shaped and subtly controlled by 
some media conglomerate. If I want them to store a profile of my 
viewing habits as a convenience, it should be my informed choice. I 
also want some public space to be off-limits to commercial interests. 
My children should not be a captive audience to advertisers in our 
public schools and public libraries. Open access will ensure that we 
have the choices available to make our own decisions about these 
matters in our homes and communities.
    I greatly appreciate the opportunity you have given me to share my 
views with you today. I look forward to any questions you may have.

    Mr. Tauzin. Good wrap.
    Let me depart from the usual procedure. I understand, Ms. 
Heffernan, that Mr. Markey is going to have to leave, and I am 
going to recognize Mr. Markey while he is here.
    Mr. Markey. Thank you, Mr. Chairman.
    Ms. Heffernan, let me ask you, please, you made reference 
and you have a chart over there, the communications that exist 
between AOL and the rest of the industry in terms of trying to 
resolve this interoperability question on instant messaging, so 
what is the--in your opinion what is the prognosis for this to 
be resolved given that track record in the near term? And if 
you don't think that it can be resolved because the ISP 
revolution, this thing is so central to the opportunity for the 
United States, what role do you see the government playing in 
ensuring that this interoperability is created?
    Ms. Heffernan. Thank you, Mr. Markey. I would like to thank 
you for representing our views when I was a virtual witness 
last week.
    Mr. Markey. And when I become a virtual Congressman in 5 
minutes, you can represent me.
    Ms. Heffernan. The chart does indeed tell an extremely 
interesting story. Since the Internet Engineering Task Force 
worked almost exclusively by e-mail, I think the quality of 
commitment that AOL has brought to their leadership position 
speaks for itself.
    We have certainly had no indication that this is going to 
change. Indeed, after a certain amount of reporting that the 
FCC and the FTC had some interest, you see this blip in June 
2000, and then nothing further after that. So I am afraid that 
I have seen nothing either in the IETF interactions or in 
industry interactions that AOL can be taken at its word that it 
is going to fast-track or even track creating a standard for 
the industry.
    As a consequence, we have been forced to look to the 
government to ask that as a condition of the merger, AOL commit 
to a hard date by which either the IETF protocol is implemented 
or de facto interoperability is allowed to occur.
    Mr. Markey. Mr. Gray, you tried to negotiate open access. 
You have not been able thus far to reach any agreement. In the 
absence of effective rules in this area, do you think that 
there would be as bright a future as we hope for this entire 
ISP revolution? There are 8- or 9,000 in the country.
    Mr. Gray. I think the open evolution of a competitive ISP 
industry will be greatly thwarted. The continued waves of 
consolidation are going to get worse. I think we are going to 
lead to a dismal future where AT&T and AOL/Time Warner, if we 
are lucky the two of them will compete; but it might be one.
    For example, in Massachusetts back this spring, a 
representative of AT&T came to visit me because of the ballot 
initiative, and a memorandum of understanding was signed 
between a Massachusetts coalition and them. But that has no 
teeth in it and I think it is just empty promises. I don't see 
them moving forward to live up to their commitment to hold 
trials by next year.
    Mr. Markey. What does that mean for you and the thousands 
of companies like you?
    Mr. Gray. It means that future broadband markets are going 
to be off limits to us.
    Mr. Markey. Mr. Froman, very briefly, the 1996 
Telecommunications Act has a provision, so-called navigational 
devices which include set-top boxes. In that provision we built 
into the law an antisubsidy provision to help unbundle and 
promote competition and open standards. Can you elaborate on 
whether these antisubsidy provisions are working effectively 
and what the FCC needs to do to promote greater competition?
    Mr. Froman. I believe that the antisubsidy provisions are 
not working effectively, Mr. Markey, and it is because today 
cable companies, under section 623 of the Telecommunications 
Act, are allowed to aggregate the cost of all of their 
equipment and spread it over their entire network. What this 
means in practice is that some cable systems, like the one in 
Lincoln, Massachusetts, are fully analog. Those customers are 
now paying much more for their analog obsolete boxes than other 
customers in the same cable vision system, perhaps in New York. 
And section 623 allows this cost aggregation and allows cable 
companies to take a box that we are told costs $400 and charge 
their digital customers $3.50 a month, and that is pretty 
compelling. It is an 11-year payback in that case.
    I believe what Congress and the FCC needs to do is work 
out--eliminate that provision. And there are several other 
things, a reasonable license that I mentioned earlier. The 
quickest way to make this all work is to have the elimination 
of cost aggregation and have an open standard that competitive 
entrants can compete with the same standard as the MSOs are 
providing.
    Mr. Markey. We will try to work on that. I would like to 
ask one final question. Mr. Meisinger, you are Disney. You are 
huge, and you represent a big company and you are testifying 
before us today. I think it would be helpful for us to 
understand what you think consumers will never see, will never 
see in terms of a couple of services that you think might be 
stifled without open systems and nondiscriminatory access? Can 
you paint a quick picture for us?
    Mr. Tauzin. The gentleman's time has expired. Please 
respond to the gentleman.
    Mr. Meisinger. It is hard to say because I am not part of 
our programming contingent, but there is no question that the 
type of content that has been forthcoming from the Walt Disney 
Company for many decades will be foreclosed unless we have 
access to the AOL/Time Warner platform and to the platforms of 
other competitive ISPs because that is ultimately where 
consumers will derive a choice.
    Our concern as a large company is that even our content may 
be foreclosed from the marketplace. That is a rather daunting 
prospect when you consider how desirable and appealing our 
content has been historically. But we are not asking this 
committee to mandate the carriage of our content. Our objective 
is to make sure that if AOL/Time Warner chooses to place our 
content and make it available to their customers, that we will 
have nondiscriminatory treatment. It may very well be said that 
people don't have that much of an interest in seeing Who Wants 
to be a Millionaire or watching ABC Monday night football; but 
as my colleague said, nor do we want to see for our news only 
Ted Turner or Peter Jennings. We want the consumer to have a 
broad choice of content. That is our objective.
    Mr. Markey. Thank you, Mr. Chairman. Thank you.
    Mr. Tauzin. The Chair will recognize Mrs. Cubin.
    I understand that Mr. Dingell got caught up in the votes, 
and he is on crutches right now and is having a little slower 
time getting around. I am going to recognize him after this to 
make his full opening statement and then recognize him for a 
round of questions, but I will now recognize Mrs. Cubin.
    Mr. Dingell. I will put my opening statement in the record. 
It is an excellent one. Rather than to say anything, I think I 
would want to commend you for holding this hearing. You have 
honored a commitment that you have given us. We have to lot to 
do to make sure that the results of these events now ongoing in 
the telecommunications industry are both fair, and quite 
honestly, to all of the people in that industry, fair to the 
consumers, and that they establish the best possible 
telecommunications system in the world.
    Mr. Tauzin. Without objection the gentleman's opening 
statement will be put in the record in its entirety.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, thank you for holding this second day of hearings on 
issues related to the proposed AOL-Time Warner merger and its effect on 
the future of interactive television. I appreciate your willingness to 
allow parties who have concerns about the merger to share their views 
with the Committee today. I must say, however, that I believe a truly 
``interactive'' hearing last week--with all parties represented--would 
have been more productive.
    Some charge AOL and Time Warner with seeking to create a so-called 
``walled garden'' around their own content. I find it ironic that the 
Committee created a similar environment last week when it only 
permitted these two companies' views on their own merger to be 
presented.
    As I said then, I have not prejudged the merits of this merger or 
its effect on the American public. But there is no question that real 
public issues exist that must be addressed. The legitimacy of consumer 
and competitors' complaints over the impenetrability of this walled 
garden should be thoroughly vetted.
    It gives me great pause if dominant players in the market are able 
to discriminate against unaffiliated programmers and effectively hinder 
the free flow of information to the public. Likewise, the use of so-
called ``sticky'' applications without clear and enforceable 
interoperability standards may leave consumers with limited choices in 
the future world of interactive TV. That too, is a cause for concern.
    At the same time, however, the notion of government-imposed 
mandates on one industry player--imposed in the context of a merger 
transaction--may itself lead to anti-competitive results in the 
marketplace. I have long argued against imposing these lopsided 
requirements that compromise the level playing field this Committee has 
always sought to achieve.
    Clearly there are no easy answers to these questions, which simply 
heightens the need for a fully informed debate before this Committee. 
In my view, such a debate is most productive when all players are given 
equal opportunity to participate in an ``interactive'' exchange.
    I look forward to hearing from the witnesses, and thank them for 
their patience in waiting for this day to present their views. Again, 
Mr. Chairman, I thank you for agreeing to make today's hearing 
possible.
    I yield back the balance of my time.

    Mr. Tauzin. Mrs. Cubin.
    Mrs. Cubin. Last week when I was questioning Steve Case 
about interoperability and the task force and AOL's 
participation in it, I was under the impression that AOL wasn't 
actually participating very much. But Mr. Case's answer to me 
was this: ``We are a member of the committee. We are active 
participants in the process. Perhaps this can be explored in 
your subsequent hearing next week. Maybe some of those 
companies on the record can talk about what AOL has or hasn't 
done. I think there is a lot of misinformation on this topic, 
and when people really look at the facts, they will see that 
AOL has done a lot already and is committed to doing more 
through the proper Internet standards bodies.''
    Obviously Mr. Case opened the door to this question. I 
would like a couple of you to tell the committee what your 
company's experiences have been in dealing with AOL on this 
subject.
    I have this report here which is a history of AOL's support 
or lack of support on the task force. In a USA Today news 
article, it says that--this is a statement from AOL, that they 
are--that they oppose fast-tracking of the process of 
interoperability, and then I have a letter from Barry Shuler 
that says that AOL is fast-tracking our efforts.
    These are--this is the report of the task force, and as I 
have looked through it and read the statements, they are 
contradictory. I want you to tell me what your experience has 
actually been and what you would want me to ask Barry Shuler or 
say to him.
    Ms. Heffernan. I will take that first. I think there are a 
couple of things. First of all, since obviously our message 
isn't very appealing, Mr. Case is trying to shoot the messenger 
by claiming us to be misleading. I think the facts of the chart 
speak for themselves. That shows the quality of engagement that 
AOL has brought to their relationship with the IETF, and it is 
important to remember that in July 1999, Mr. Case committed to 
a leadership position in developing this standard for 
interoperability.
    Mrs. Cubin. I think what I am talking about more than what 
they did on the task force is what your companies have actually 
dealt with in trying to work out interoperability of instant 
messaging with AOL.
    Ms. Heffernan. I can certainly speak from firsthand 
experience in that regard. When they first began to block the 
iCaster, we called up AOL and said, What are you doing? Maybe 
it is a mistake, maybe it is a misunderstanding. And I should 
emphasize here that the technical protocol that we used to 
interoperate with AOL is one that AOL has published and 
validated itself.
    AOL senior executives confirmed that they were blocking us. 
They confirmed that it was deliberate. They confirmed that they 
would continue to do so.
    I said, well, gee, I thought you guys were on the record as 
being committed to interoperability. They said, we believe in 
it, but we really want to work with the IETF to make it happen.
    I said we all know that is going to take a lot of time and 
if you really want to work with them, why don't you work with 
them? And they said, well, that's a matter for another part of 
AOL.
    Mrs. Cubin. Excuse me?
    Ms. Heffernan. That is a matter for another part of AOL.
    So I said okay, even if we all recognize that creating the 
standard may take some time, how about as a gesture of good 
faith to show you mean this, you allow us to continue to 
interoperate with you until such time as the IETF standard is 
produced; to which their simple response was, we don't want to 
do that. That was essentially the end of the discussion.
    I think actions speak louder than words, and we have had a 
lot of public statements about commitment. We have also had, as 
you said, contradictory statements about we want to fast-track 
it or slow-track it, whatever. I have seen nothing firsthand or 
through the many other companies that I have talked to----
    Mrs. Cubin. I just have a couple of seconds. I want to ask 
each and every one of you, are you advocating that the 
government condition or mandate open access to both ISPs and 
cable networks for this merger? Is that what every one of you 
are advocating? Yes or no?
    Mr. Tauzin. If you can quickly go through the line.
    Ms. Wilderotter. No.
    Mr. Meisinger. Yes, we are advocating open access for ISPs.
    Mr. Froman. We believe in open access broadly for the 
navigation devices as well as the service cable providers.
    Mrs. Cubin. As a mandate by the government?
    Mr. Froman. Yes.
    Ms. Heffernan. And we are asking that the government 
mandate interoperability on the subject of instant messaging.
    Mr. Gray. We are not in favor of mandating it as a 
condition of the merger, but we believe that open access should 
be a requirement across the industry.
    Mr. Meisinger. We are asking for that as a condition of the 
merger, not in a national policy sense at this time.
    Ms. Wilderotter. And the ``no'' is geared around a 
government mandate. I think the marketplace needs to work it 
out.
    Mr. Tauzin. The Chair recognizes Mr. Dingell.
    Mr. Dingell. Mr. Meisinger, I heard your comment, but I 
want to reinforce the record here on this matter, so I am going 
to ask you questions about it. If the FTC or FCC were to impose 
open access conditions on AOL/Time Warner, as you propose, 
would that give other cable companies such as AT&T the ability 
to demand such access on Time Warner's systems but to refuse 
identical access on its own systems? If so, is that a fair 
result? Should these rules apply to all companies in the 
industry, and does the public have any say or concern in this 
matter?
    Mr. Meisinger. I believe that open access is open access.
    Mr. Tauzin. Let me ask you each to pull the mike close to 
you.
    Mr. Meisinger. We are not advocating a differential 
treatment. Our concerns at this juncture pertain to this 
specific transaction that we have a problem with----
    Mr. Dingell. Let's address that, because I get the 
impression that you are talking about this specific 
transaction. If that is all that happens, this will give you 
the privilege of equal access to AOL/Time Warner, but your 
company will not be compelled to give equal access to others. 
And/or to--or to other cable companies or, for that matter, to 
AOL/Time Warner.
    Mr. Meisinger. Equal access to what?
    Mr. Dingell. You know what equal access is.
    Mr. Meisinger. We are advocating that other ISPs have equal 
access to the Time Warner cable platform. Our product, to the 
extent that we are a content provider, is accessible to all 
companies as far as I know. We do not discriminate at this 
juncture.
    Mr. Dingell. We are talking about equal access to the 
services so that everybody can have the same access and 
transmission and things of that kind. I am trying to 
understand. You are kind of giving me the unfortunate 
impression that you get equal access, but others don't. Or that 
equal access will be imposed on AOL/Time Warner, but not on 
certain others. That leaves us with--for example, like AT&T. So 
you get this rather curious result where some folks are at a 
disadvantage, some folks are at a fine advantage, and the 
public doesn't get a break. That is how I understand what you 
are telling us. I want you to say yes, I am right in my 
appreciation or not.
    Mr. Meisinger. I believe in connection with----
    Mr. Dingell. You want a fair advantage?
    Mr. Meisinger. We believe to give the consumer the broadest 
range of choice, other ISPs have to have the ability to create 
competitive platforms. That is our position.
    Mr. Dingell. Let me ask this question going across.
    Ms. Wilderotter, how many of you favor or oppose the idea 
that there should be fair rules that should apply equally to 
all providers and participants in the industry?
    Ms. Wilderotter. I do agree that there should be fair rules 
to all providers in the industry.
    Mr. Dingell. Mr. Meisinger, apparently you don't subscribe 
to that.
    Mr. Meisinger. No, that is an absolute perfect prescription 
for the Walt Disney Company.
    Mr. Dingell. Are you advocating equal access and open 
access to all or just Time Warner?
    Mr. Meisinger. Well, eventually when the issue becomes 
broader than the merger we would consider that. But at this 
juncture I am proposing equal access to, on behalf of all ISPs, 
to other cable platforms as well.
    Mr. Dingell. But at this time I guess the answer to the 
question is no.
    Mr. Froman.
    Mr. Froman. I am very much for fairness to all participants 
in the industry and all consumers.
    Ms. Heffernan. We absolutely believe that interoperability 
should be required of all instant messaging companies, not just 
ours and not just AOL's.
    Mr. Dingell. I agree. Go ahead.
    Mr. Gray. I believe that fair rules should apply to all 
participants in the industry.
    Mr. Dingell. So I think I would infer from the comments of 
all except Mr. Meisinger, who seems to have a unique view here 
on this matter, that you would generally favor having the FCC 
then to set up fair rules that would apply equally to all 
persons in the industry, is that correct?
    Mr. Meisinger. Mr. Dingell, respectfully, we have testified 
about our support for open access and equal treatment.
    Mr. Dingell. At some future date--I find that impressive, 
and I would simply remind you that in the orderly passage of 
time all of us will be dead and perhaps none of us will then 
have to confront----
    Mr. Meisinger. We believe it is timely now, and we have 
testified specifically on that subject.
    Mr. Dingell. Are you reviewing then your position?
    Mr. Meisinger. No I am not. I wanted to make it clear that 
the position we are advocating this morning is with respect to 
the proceedings being conducted by the FTC or FCC. We have no 
problem with fair treatment for all participants in the 
business, no problem whatsoever.
    Mr. Dingell. Do you then believe the FCC should come 
forward with rules that would cover everybody?
    Mr. Meisinger. I think that would be a prudent thing to do 
at some point in time, and I know it is being studied now.
    Mr. Dingell. Just yes or no to all. I think I am getting 
close to the borders of my time, Mr. Chairman. Am I not fair 
then in assuming that the notion of government mandates on one 
industry player imposed in the context of a merger transaction 
may lead to anti-competitive results in the marketplace?
    Mr. Tauzin. I would ask you all please to answer that, 
hopefully in the affirmative.
    Ms. Wilderotter. So what do you really mean, chairman?
    Absolutely, I think it has to be a level playing field for 
all the participants in the business.
    Mr. Dingell. I have this curious view that level playing 
field is the fairest way. So I gather you accord with my view 
now, Mr. Meisinger.
    Mr. Meisinger. Yes.
    Mr. Dingell. You have been giving me some rather ambiguous 
answers, but I will give you time to set them out with 
sufficient----
    Mr. Tauzin. But not a lot of time. Proceed, sir.
    Mr. Meisinger. I regret the confusion. We believe in the 
concept of open access. We also believe in the particular 
imposition of conditions on this particular transaction, and we 
believe that this committee and others should study the issue 
along with the FCC, and I know that is being done.
    Mr. Froman. Yes, we agree, Mr. Dingell.
    Ms. Heffernan. Equality is absolutely at the heart of 
interoperability.
    Mr. Gray. Yes, I agree that we need to apply this fairly 
across the board or it would be anti-competitive.
    Mr. Tauzin. Thank you very much. Thank you. Mr. Dingell.
    Mr. Dingell. Your patience is appreciated.
    Mr. Tauzin. Indeed. Although I would suggest that if 
somebody is going to make these rules we might want to do it 
right here, Mr. Dingell, instead of at the FCC. I think you 
have some similar feelings about that.
    The Chair recognizes the gentleman from Illinois, Mr. 
Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Let me ask Mr. Meisinger--this is kind of a follow-up to 
the ranking member. Disney Corporation, what are the major--do 
you have major cable holdings in direct or part holdings in 
direct satellite or any of those pipes that I referred to in my 
opening statement?
    Mr. Meisinger. No, sir.
    Mr. Shimkus. That is where I was a little bit confused. 
Because I think the question--and I don't dare try to speak for 
the ranking member--but the question was, you seek equal access 
to--if AOL/Time Warner develops an exclusionary rule, and I 
have thought the intent--the discussion was if you had pipes 
would you not allow--would you want the opposite of what you 
are asking for for AOL and Time Warner?
    Mr. Meisinger. If that was the question which I now 
understand you to be asking, the answer to that is we would 
obviously be compelled to follow the same paradigm as the rest 
of industry.
    Mr. Shimkus. Thank you. And that helps clarify the debate 
and discussion for myself.
    Help me out on--in my opening statement, I mentioned 
multiple pipes, multiple choices. To have that, doesn't that 
rely on consistent industry standards? Isn't that a 
requirement? And if you would just start and answer across the 
table. I am just a layman. I am just a simple country boy from 
southern Illinois. So we are trying to handle this high tech 
issue, and I think this does speak to consistent standards, and 
I wanted to see if you all agree.
    Ms. Wilderotter. Well, I do think it requires consistency 
in order to deliver multiple products and services into the 
home. I do think that every pipe has a different paradigm 
associated with that to optimize how a consumer experiences 
interactive television in the home. So I think if you look at 
the cable pipe and there are a number of efforts going on in 
the cable industry today on interoperability and there are 
services being delivered where we deliver our service of 
enhanced broadcasting, we are co-existing with video on demand 
companies, with electronic program guides, with Internet access 
capability, all in one box in the home. So we have a number of 
constituents on the vender side that are providing multiple 
services in a very competitive environment delivering services. 
So, too, on the satellite side. So I do think that whether it 
is a standard or not it is less important than the 
interoperability really works to what is the consumer 
experience going to be in the home from a user interface 
perspective.
    Mr. Shimkus. Thank you.
    Mr. Meisinger.
    Mr. Meisinger. From our perspective we are interested in 
standards which make it clear that our content will be equally 
accessible to our consumers across all platforms on which we 
can distribute our product.
    Mr. Froman. We believe standards, open standards, 
consistent standards are the most important thing to a 
competitive marketplace; and it is the one thing that threatens 
to negate competition in the cable marketplace today. For 
example, competitive navigation devices, set-top boxes with pod 
interfaces, are not being made available to competitive 
entrants. The specification for these devices is different than 
the specification for the devices that the MSOs are able to 
provide on their own.
    The date which the FCC has set for those standards to be 
the same is January 1, 2005. In private conversations with 
executives from specific MSOs, they have told us that as long 
as they have the ability to have a different standard and use a 
proprietary box in their system and aggregate the cost and sell 
it for much cheaper than the market value for a sustained 
period of time, they are interested in doing that; and they are 
not interested in changing it. Open standards is the solution, 
and it is the easiest thing the Commission can do to make this 
work.
    Mr. Shimkus. Ms. Heffernan.
    Ms. Heffernan. Yes, absolutely, industry standards are 
essential. Let me give you one interesting example.
    Net Nanny builds filtering software so parents can protect 
what kind of information they get through instant messaging 
devices. What they have said is we don't have the resources to 
write specific software for 10 plus standards today. Writing 
for one standard, we could provide multiple products that would 
filter different things for different parents according to the 
ages of their child and the preferences of their parents. So 
this is a perfect example of where an industry standard would 
provide more choice to consumers of a kind that they can't 
access today.
    Mr. Gray. I have got to use an old joke. The great things 
about standards is that there is so many to choose from.
    Mr. Tauzin. That is an old joke.
    Mr. Gray. But the standards process in the Internet, first 
of all, the whole Internet has become a success because of the 
standardization of the Internet protocol in interoperability. 
But if you look at the IATF process it is not paper standards 
that count. What is great about IATF is that what makes a 
standard accepted is that when there are real world solutions 
that implement it. That is what makes a standard.
    Mr. Shimkus. I will just close. I will not follow up with a 
question, Mr. Chairman.
    I think we can all agree with that, but we need to be 
cautious about who sets the standards and is it a standard that 
you then lock in and you do not allow for new advancements, 
especially when government gets involved. We see it at FCC all 
the time. So it has got to be dynamic somehow. And if we get 
involved legally based it is no longer dynamic. It is a 
monumental overcoming to try to change.
    With that, Mr. Chairman, I yield back.
    Mr. Tauzin. I thank the gentleman for identifying that 
tension. It does exist in all these areas.
    The Chair will recognize himself. I will give you some 
additional time if any of our colleagues on this side want to 
have additional time. You might want to let them know that if 
they want another round.
    Let me first try to set the stage for the question I will 
ask. This is almost very Yogi Berra ``deja vu all over again'' 
in a sense that there was a time when AT&T was the big 
telephone company, a common carrier. We broke it up at some 
point, and now there are a lot of attempts to put it back 
together in a lot of different forms. But when the competitors 
to long distance AT&T began to arrive, a lot of similar 
problems, interconnection and interoperabilities and complaints 
about meetings missed and contracts not signed and technical 
difficulties and all sorts of problems like that. So there is a 
sort of sense of deja vu.
    But the difference here is that we are dealing primarily 
with a cable structure which is not a common carrier which is 
essentially deregulated. In the world of AT&T, Sprint, MCI, et 
cetera, we are dealing with basic telephone service which was 
heavily regulated, subsidized with universal service 
obligations and heavily impacted with open access requirements, 
common carrier requirements. But here we are dealing with a 
cable structure. Satellite is not a common carrier and yet 
satellite carries Internet services. Wireless services can be 
telephone or not, so they can be common carriage or not 
depending upon the form of the service.
    We know the Internet is carried on all four of those forms, 
and before too long perhaps on some new ones, perhaps on 
electric lines, perhaps with some new concepts such as Time 
Domain recommends to us and ultra broadband wireless 
technology.
    The question I am asking is, if in fact we are to avoid 
what Mr. Dingell has cautioned against, that is, government 
regulations subjectively on some companies but not on their 
competitors, which I have complained about as much as I believe 
Mr. Dingell has, of FTCs and FCCs that simply get you in the 
room when they got you and make you agree to regulations and 
conditions or else you do not get out of the room, which I 
think is where we find ourselves too often in these merger 
decisions.
    If we are to make policy for the new world--broadband, 
interactive, converged--Internet services over all these forms, 
some common carriers and some not, what is the right policy? 
Should we take the telephone model and begin allowing the FCC 
to dictate the terms of interoperability and common carriage, 
open access if you want to call it that, technical 
nondiscrimination issues, and issues of cost aggregation, all 
the incredible ways in which the government has intricately 
regulated the common carriage of telephone service? Or should 
we find a different model? Did the 1996 act point us in a 
different direction or did it point us in the direction that 
some of you are asking us to take, to gin up the regulators to 
begin regulating this new world of broadband service, 
interactive television? Come back to me. Mr. Froman.
    Mr. Froman. Fundamentally, we believe, as we said earlier 
in the case of navigation devices which will receive the 
interactive television, what we are asking for is a common 
standard. And when we saw level playing field, the MSOs and the 
competitive entrants, the Sonys and the Panasonics, consumer 
electronics manufacturers just need to have the same standard 
that they are working off of. The MSOs just need to be playing 
on the same field. I think you can avoid regulation if you were 
to just say by January 1, 2002, these industries need to have 
this standard.
    Mr. Tauzin. Just do it on your own. Come up with some 
standards.
    Mr. Froman. Just set a date.
    Mr. Tauzin. Anybody else? I see Ms. Wilderotter.
    Ms. Wilderotter. Yes, Mr. Chairman. I thought that was very 
eloquent in terms of the complexity of what we all have to deal 
with in this environment. But I think it is extremely important 
that we make sure that markets are able to develop to the point 
of really knowing if there is a necessity of regulation. By 
putting the consumer in the middle of this and making sure that 
there are services and choices for consumers is really what the 
most important thing is. I truly believe that the broadband 
environment today is a competitive environment. I think there 
are multiple choices for consumers in terms of how they get 
interactive television.
    Mr. Tauzin. Let me stop you there. We have another vote 
again.
    Do you think it would be competitive enough? Is AOL/Time 
Warner going to be such a dominant player that we will end up 
having to write rules for AOL/Time Warner with reference to all 
of these concerns?
    For example, are we going to really have to go in and 
dictate the terms of the contracts that Disney signs with AOL/
Time Warner for the carriage of ESPN to make sure that they are 
technically equal, that they have the same rights to their 
consumers as any other program? That is essentially what Disney 
is asking the regulators to do, to try to enforce right now 
through this process on this company, on this merged company.
    Are we going to find ourselves doing that? Will there be 
enough competitive pipes fully capable, available to consumers 
to choose from so we have less need for us to use the old 
telephone model of heavy government regulation and more 
reliance upon the Internet model of free-flowing competition?
    Ms. Wilderotter. I definitely think there is enough 
competition and there is enough free flow to give choice in the 
marketplace.
    Mr. Tauzin. Anyone else?
    Mr. Gray. I respectfully disagree a bit.
    Mr. Tauzin. Tell me why you disagree.
    Mr. Gray. I totally agree on the content side. And if you 
look at a company like Disney the Internet model is great. 
There is no need for regulation at all at the content level, 
the Internet level. But in the real world there is a limited 
number of pipes. And so if you are looking at the physical 
media there is only so many telephone poles and radio towers 
that people want in their neighborhoods.
    Mr. Tauzin. You say the content level, but Disney will say 
wait a minute. Even if government doesn't give us a right to be 
on the AOL/Time Warner system, we saw Mickey Mouse roar. We 
know Mickey Mouse has some leverage and managed to get back on. 
We can do that in the private sector. We can take ABC off, and 
Time Warner realized consumers want ABC programs so they will 
get back on.
    But the point I am making is we might get back on, but we 
might be differently treated. The consumers may not interact 
with our programming the same way they can interact with other 
programming. Does the government really have to get in all that 
or can't this be negotiated in a competitive marketplace of 
broadband interactive services?
    Mr. Gray. I think if you openly route IP packets, Internet 
packets, across the network that we will be fine. But cable 
still has that head end which they control. So if they 
discriminate on how they carry packets across their network, 
that is the limited resource that does need----
    Mr. Tauzin. Do you have one you want to get in before we 
leave?
    Mrs. Cubin. No.
    Mr. Tauzin. I want to ask you this. Assuming that either 
the agencies involved with this merger or the agencies after 
this merger or this Congress begins writing rules, as Mr. 
Dingell suggested, to apply to all the players in this new 
field on interoperability, on open access, on technical non-
discrimination, on elimination and cost aggravation--and I can 
think of about eight or ten others--pole locations, agreements, 
price terms, conditions of fairness, we do a lot of that stuff 
around here. Assuming we entered into all of that activity, 
would that be reregulating cable? Yes or no.
    Ms. Wilderotter. Absolutely, it would be. No doubt about 
it. And again I just want to make a comment as a small company 
in a very new business of interactive television that does not 
have a big parent behind us. We are a public company, and we 
have built this company from scratch. We are working within the 
existing model, and we will be deployed in 12 million homes 
over the next couple years.
    Mr. Tauzin. I commend you for that. I want to see more of 
that, frankly.
    Mr. Meisinger. There is no question under your hypothetical 
that would be regulating cable. Our concern is in the absence 
of free market solutions----
    Mr. Tauzin. You want government pressure?
    Mr. Meisinger. We think and in the case of this particular 
instance it was clear that that would not work, that there are 
times when regulators need to intervene.
    Mr. Tauzin. Mr. Dingell made the case and I sympathize with 
some of the problems you are having, I really do. I think he 
does, too. But we are left with this case-by-case business and 
the government sort of makes a case-by-case rule and then it 
doesn't apply to the other competitors. And he made the point 
very well that we didn't want to do it that way.
    Mr. Meisinger. That is a timing issue. The problem is that 
Time Warner/AOL did not wait for the regulators to complete the 
process.
    Mr. Tauzin. The point I am making is we can't put them all 
in the room at the same time unless we do rulemaking or a law. 
So you only have one in the room at a time and then you 
regulate him selectively. You understand the concern we have 
with that.
    Mr. Meisinger. Of course I do. And you need to have a 
rational system of regulation if you have one. But the Clayton 
Act contemplates that the FTC and public interest requires that 
the FCC take a look at individual transactions. That is being 
done here. But that doesn't supplant the need or the potential 
inquiry into need for further regulation so that everybody has 
equal access and consumers are not denied choice. I think that 
is objective.
    Mr. Tauzin. I just caution you to be careful what you ask 
for.
    Anyone else?
    Mr. Froman. Mr. Chairman, it strikes me that the issue we 
are talking about here has several component parts. And when 
you ask the question is the pipe is big enough for everybody, 
is it the only pipe, well, there are competitive access for 
ISPs. You have satellite, you have DSL, you have dial up, even 
though it is not broadband----
    Mr. Tauzin. The point is, if there are enough competitors, 
do we need to regulate each one?
    Mr. Froman. Absolutely. And we agree with the point----
    Mr. Tauzin. I want to stop you. Your answer is, yes, we 
should regulate each one.
    Mr. Froman. No, sir. I do not believe that. I think we need 
to have broad guidelines established by the FCC to keep us 
moving in the right direction.
    The video side is a little different. There are not the 
competitive entrants on video cable. DBS has done remarkably 
well, and we are very enthusiastic supporters of DBS. But it is 
not for everyone. There are antennae issues, dish issues on 
homes, line of sight, multiple dwelling units, so cable has--
the cable companies today have the ability to block more 
content than just Internet access. There are electronic program 
guides that customers buy in televisions that can be blocked. 
So we need some broader guidelines so the industries can keep 
it moving forward.
    Mr. Tauzin. Please proceed.
    Ms. Heffernan. I would like to make one point very clear. 
We are not asking that the Internet be regulated. I think the 
notion that interoperability is a principal but industry bodies 
like the IATF figure out details and the protocols, I think 
that works.
    Mr. Tauzin. Ms. Heffernan, just quickly. So you work them a 
lot. You have the protocols and what operability is required 
but somebody doesn't want to sign you up. Do you need 
government to force them to?
    Ms. Heffernan. I don't need government to force people to 
use my application. Apparently, I need government to help AOL 
live up to its public commitments, the commitments it has made 
to the government, the public----
    Mr. Tauzin. What you are saying is, if AOL/Time Warner 
behaves in a way that allows for a real interoperability and 
works out your problems in the marketplace, that the government 
can to away and so can we, and of course that is true--if you 
get what you want in the marketplace. But suppose you don't is 
the big question. Suppose you don't get it? Would you still be 
up here asking us to come in and order all the players, not 
just AOL/Time Warner, but all those pipes to treat you the 
same? I don't know yet. We have to think about that.
    Mr. Gray.
    Mr. Gray. The cable systems are a de facto monopoly today. 
If you look at the future of my business, I need to deliver 
high-speed broadband services to our customers. There is simply 
no choice of what is available to us. DSL has an insignificant 
market share. It is really not a true competitor.
    Mr. Tauzin. You see, Mr. Gray, I am glad we have you on 
each end of the table because that is the range of opinion that 
we are forced to work in. I have got about 3\1/2\ minutes so we 
have to wrap.
    I just want to point out to you that that is exactly the 
struggle that we have to face in trying to philosophically 
think this through in a real world, not a virtual world, the 
real world of consumers trying to get these services and 
companies, trying to form up and build the assets that Time 
Warner and AOL are obviously trying to put together to deliver 
these interactive services.
    At the same time, we are also facing a world where very 
soon the video side and the data side and the telephone side 
are going to be just one anyhow. It will not make a lot of 
difference how they are coming to us or where they are coming 
to us. What is really going to be the question is can we get 
everything we want in an easy, useful, affordable way from 
enough different companies so that we feel like we are going 
shopping? There are a lot of stores out there; and if we don't 
like what the Giant is carrying, we can move over to the 
Safeway, whatever it is. If we have don't have that same 
marketplace we will be back here talking about reregulating 
cable and satellites and wireless services again. I just hope 
we can avoid that.
    Thank you very much for your contributions. The hearing 
stands adjourned.
    [Whereupon, at 12:56 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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