[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?
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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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