[Senate Hearing 106-1003]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1003
THE AOL/TIME WARNER MERGER: COMPETITION AND CONSUMER CHOICE IN
BROADBAND INTERNET SERVICES AND TECHNOLOGIES
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
FEBRUARY 29, 2000
__________
Serial No. J-106-66
__________
Printed for the use of the Committee on the Judiciary
__________
U.S. GOVERNMENT PRINTING OFFICE
72-845 WASHINGTON : 2001
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 5
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisoconsin.. 6
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 3
WITNESSES
Case, Stephen M., Chairman, Chief Executive Officer, America
Online Inc., prepared statement................................ 8
Levin, Gerald M., Chairman, Chief Executive Officer, Time Warner,
Inc., prepared statement....................................... 16
APPENDIX
Questions and Answers
Responses of AOL/Time Warner to Questions from Senator Leahy..... 55
Responses of AOL/Time Warner to Questions from Senator Thurmond.. 61
Responses of Steve Case to Questions from Senator DeWine......... 64
Responses of AOL/Time Warner to Questions from Senator Kohl...... 66
THE AOL/TIME WARNER MERGER: COMPETITION AND CONSUMER CHOICE IN BROAD-
BAND INTERNET SERVICES AND TECHNOLOGIES
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TUESDAY, FEBRUARY 29, 2000
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 1:06 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Also present: Senators Specter, Grassley, DeWine, Abraham,
Leahy, Biden, Kohl, Feinstein, Feingold, and Torricelli.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
Chairman Hatch. If we could have your attention, we will
get this committee hearing started.
Good afternoon, and welcome to this hearing on the proposed
AOL/Time Warner merger and its effects on competition and
consumer choice in broadband Internet services and
technologies.
I first would like to thank sincerely both of our
distinguished witnesses today for their time and cooperation.
It is my hope that with this hearing we will better understand
what this particular merger between one of the premier
entertainment conglomerates and the premier Internet service
provider means for competition and consumer choice for Internet
services and content, including interactive television, and
telephony.
To get a full understanding of the array of issues
implicated by this merger, I believe it will be important to
have the benefit of the views of those affected by this merger,
in addition to the two merging companies. To that end, I intend
to hold at least one additional hearing in the coming weeks to
hear from consumer groups, technology and antitrust experts,
and others with an interest in broadband and the potential
consequences of this particular merger.
As I have said before, competition is essential to both the
future of the Internet and continued innovation in the high-
technology world. It is competition that has created a robust
Internet economy and its constituent enhanced services that we
are enjoying today. Companies and venture capitalists alike
have made unprecedented investments in new Internet products,
services, and technologies. Continued growth in this area is
vital not only to our economy but to our global leadership in
the information technology sector.
Today's hearing is really about the next chapter in the
development of technologies that will liberate individual
consumers to seek and obtain content. High-capacity Internet
promises to allow anyone, regardless of wealth or market power
or viewpoint, to deliver his or her perspective for the world
to see and hear. In short, the Internet's paradigm-shifting
characteristics make it the ultimate First Amendment-enabling
technology. And I will repeat that. The Internet's paradigm-
shifting characteristics make it the ultimate First Amendment-
enabling technology.
Now, two of the readily apparent policy questions we will
explore today are, one, given that AOL will also become the
second largest holder of the cable pipelines in the United
States, is the company in a position to leverage this powerful
infrastructure asset to unfairly compete against competitor
Internet service providers by, ``directing,'' its cable
customers to take AOL service; that is, will consumers have
unfettered freedom to choose who provides their Internet
services?
And number two, given the new company's ownership of the
cable pipelines and status as the dominant Internet service
provider, will consumers be free to choose their content
without pre-selection over the Internet, or will the merged
company's significant Time Warner content holdings be favored
and, ``ushered,'' to the consumer through technical price
discrimination or by requiring users to pass through a
proprietary first screen? In other words, will Internet
consumers be led into content cul-de-sacs owned and operated by
Time Warner? That is a question that has arisen.
These are important and serious questions. They have
implications not only for the technologies we are witnessing
today, but for the environment necessary to the inexorable
development of the next new thing. As I have said before, the
most significant danger to the promise of the Internet is the
possibility that a single company or a handful of companies
control who can access or deliver applications and content for
the Internet or over the Internet.
I believe that this danger exists whether the ownership is
concentrated in the architecture, the hardware, the content, or
operating systems needed to navigate broadband architecture. As
such, I invite both of you to continue your cooperation with
the committee to try and address any market distortions that
would prevent entertainment, software, telephone, or cable
companies from entering the race to bring cheaper, better
technologies to the consumer. In the end, we need to determine
what is best for the American public.
Before I turn to our ranking member for his opening
remarks, I want to comment on the Memorandum of Understanding
between Messrs. Case and Levin, which I learned of last night
and read about in this morning's newspapers. Some of what I
have heard sounds good, but I believe a degree of healthy
skepticism is in order, given what is at stake here.
A cynic could question whether, not unlike vapor-ware, the
promises presented in this document will ever materialize in
the marketplace. Indeed, the first paragraph of this
promotional document makes it clear that it is neither binding
on the parties nor is it definitive.
The committee was informed that this document was developed
and drafted without any input from the competitor ISP's or
consumers the parties profess to be championing. Given that
this document lacks both enforceability and specificity, this
committee remains to be convinced of its value beyond the board
room and public relations offices of AOL/Time Warner.
Doubts concerning the resoluteness to, and vagueness of,
this memo could be overcome should our witnesses agree to
condition the approval of this merger or the transfer of any
licenses by the FCC on AOL/Time Warner's compliance with the
promises made therein and its yet to be articulated terms.
I look forward to today's testimony, and I am particularly
anxious to listen to two of the great leaders in this world in
these areas and people I have tremendous respect for and
naturally would like to help in the process.
So we will turn to our ranking member, Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. The proposed merger
reminds me of A Tale of Two Cities, with the portents of either
the best of times or the worst of times, as yourecall the
opening sentence in Charles Dickens' great classic. So we get to ask
questions today to shed light on this proposal and the future.
I ask whether this merger of the largest online service
provider with a global information and entertainment giant will
give consumers exciting new choices of multi-media content and
e-commerce applications over their combination TV and computer
screen?
To put this in concrete terms, I was trying to think of
some of the things it might mean to me. In fact, right now I am
getting some comments from my office over my wireless laptop
about the hearing and what you have been saying, Mr. Chairman,
and they are very good comments. I will let you read them
after; that is the only kind of comments we would allow.
Chairman Hatch. I often wondered how he stays up on things.
Senator Leahy. Well, as you know, I have always said that
we Senators are merely constitutional impediments to the staffs
and they are the ones who actually run things. You will notice
that the staffs behind us are trying to keep a straight face
after that.
But I am thinking of this. I am at home and I am using a
single screen and I am sitting there with my remote and I might
be watching the latest Batman movie. I pause the movie to check
my e-mails. I might want to coordinate online a family reunion
with my children in Vermont and my son and daughter-in-law in
California. I might simultaneously use instant messaging
technology to find and purchase the cheapest airplane tickets
for everybody to get together for the reunion. Then I can
return to the movie without having lost any spot in it, and
then finish up with a cut from my favorite Grateful Dead album
or Carlos Santana's ``Supernatural.''
Now, all of these things are all very possible, and that
could be the good part, being able to do all these things. The
thing we do worry about is whether the consequences of this
merger will be that consumers will see their choices of
Internet service providers dwindle and their viewing and
listening choices over high-speed cable lines limited or
directed just toward AOL or Time Warner's favorite content.
Will customers of the conglomerate company get a single
bill that will bundle the cost of high-speed Internet access to
AOL, AOL Instant Messenger technology, access to Time Warner's
music and video programming catalogues, but then penalize
purchases from other sources?
If customers want to use an alternative Internet service
provider or listen to a Grammy Award winner who is not a Time
Warner artist, will they have to pay more or wait longer, or
find it more difficult to get them?
As somebody said, together, AOL and Time Warner have the
potential to cross-exploit and cross-promote their assets to
create a media monster. Push the Time Warner content through
the AOL gateway and the AOL content through the TV screen.
Senator Hatch referred to this too--is this the potential?
I cautioned when this merger was announced several weeks
ago that we would all want to see whether this expands the
promise of the Internet age or does it constrain it. That is
why we have to look into the future. And I do want to thank
both Jerry Levin and Steve Case for coming here today to talk
about what they envision for the future, and I appreciate all
the time you have spent with me in preparing for this and
trying to answer the questions that I have raised. So we are
going to ask about what this means to other Internet service
providers. We can find out how it could translate into non-
discriminatory arrangements for Internet service providers,
content providers, and others.
And then lastly, Mr. Chairman, I want to explore the issue
of privacy. As we move ever closer to the time when our TV
watching, our Internet surfing, our electronic messaging and
shopping take place over the same device, kind of like the
scenario I discussed earlier, it is going to be much easier to
track what our personal tastes are and what our activities are
like.
Every time we hit a button, somebody could well know what
kind of films we like, what music we like, what sort of things
we want to buy, what our financial status is, and what we
purchase and don't purchase, and even who we communicate with
regularly. Advertisers would think this is a gold mine. Many
individuals might think it is nobody else's business, and that
is what we have to look at.
So I do want to hear how technology is going to be our
servant and not our master, and how you are going to protect
privacy. Technological progress is good. Conglomeration and
globalization can often be very good, but it should not make us
sacrifice the privacy we all hold dear.
So, Mr. Chairman, I thank you for doing this, and I also
thank our two witnesses for being here.
Chairman Hatch. Well, thank you, Senator.
We will turn to the chairman of the Antitrust Subcommittee,
Senator DeWine, for a short statement, and then we will finish
with Senator Kohl, the ranking member.
STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR FROM THE STATE OF
OHIO
Senator DeWine. Thank you, Mr. Chairman, for holding this
very important hearing.
This merger is valued at approximately $185 billion, the
largest in history, and for that reason alone I believe that it
deserves very careful scrutiny from this committee and from the
antitrust agencies. But it is not the size, Mr. Chairman, of
this deal alone that makes it important. It is the fact that
the deal will bring together two giants from two very different
industries and two very important industries, merging the
dominant Internet provider and the largest media company in the
world.
The conventional wisdom is that this merger also raises no
antitrust problems because AOL is for the most part a company
that provides Internet access and Time Warner is a provider of
information and entertainment. As chairman of the Antitrust
Subcommittee, I agree that the deal at first glance does not
appear to pose the traditional antitrust concerns raised by a
merger between two directly competing companies. But the more I
examine the deal, the more I am convinced that it does raise
very significant competition and public policy issues that must
be thoroughly explored.
The merged AOL/Time Warner, if it lives up to the
expectations of Mr. Case and Mr. Levin, will set the tone for
the Internet of the future. It will help determine which new
applications, products and services will be available online.
It will help determine how the architecture of the Internet
develops, and in some instances it will help determine which
companies are allowed to compete with it.
Competitors will be forced to react to the vast reach and
power of AOL/Time Warner either by working with themerged
company or by finding merger partners of their own. In fact, it is
believed that this deal is merely the opening round in a series of
mergers and acquisitions that will reshape the competitive landscape of
the Internet and of traditional media, increasing the size and
decreasing the number of competitors in each market.
Another important issue raised by this deal is whether it
will limit the give-and-take of the Internet, whether it will
impede the free flow of ideas and expression that has helped
make the Internet a strong counter-weight to the traditional
media outlets. There are some who have expressed concern that
companies such as AOL will steer consumers to their preferred
media outlets, with the effect of slowly squeezing out the many
smaller voices that the Internet has until now allowed to
flourish. We must be careful, Mr. Chairman, to avoid this
result, and work to maintain diversity in the so-called
marketplace of ideas.
The proposed merger also generates some concerns in the
more traditional old media market. As conglomerate media
providers such as Time Warner become larger and larger, it
raises questions about exactly how they will be able to
continue their journalistic tradition of unbiased reporting and
whether the public can safely continue to rely upon the
objectivity of news organizations that have such wide-ranging
business interests. I have discussed this important issue with
both members of the panel in the past and I look forward to
continuing that dialogue today.
Mr. Chairman, as is clear from my statement, I believe that
there are many competition and public policy issues raised by
this deal, and we must carefully examine all of them. But more
than any specific concern, I believe we must work to preserve
the fundamentally open nature of the Internet. The power and
the value of the Internet is that it offers almost unending
choice to those who use it. The Internet is thousands of
different things to thousands of different people, and that is
why it has become such a strong engine for innovation and for
economic development.
Mr. Case and Mr. Levin are here today to sketch for us
their vision of the Internet of the future. As policymakers,
our job is to make sure that they have a fair opportunity to
pursue that vision. But we must be equally careful to make sure
that others have a fair opportunity to pursue their vision as
well. I look forward to hearing the testimony of the witnesses.
Mr. Chairman, that is my opening statement, but I would
like to take just a moment to show how I think Main Street
views this merger and all of the other mega-mergers that have
occurred lately. I think the best illustration of some of the
issues we will face today is by one of my favorite
illustrators, and that is Jim Borgman, of the Cincinnati
Inquirer. I guess some in the audience can read that from a
distance.
The first cartoon shows a toaster saying, instead of you
have got mail, ``you have got toast.'' And the second cartoon
shows a man trying to buy a hamburger at a fast-food drive-
thru, and when he places his order he is asked, ``Do you want
cable with that?'' I think these two cartoons show that many
Americans are a little bit uncomfortable, Mr. Chairman, with
the size and the reach of this deal, and I am sure we are going
to explore many of these issues in a moment.
Thank you very much.
Chairman Hatch. Thank you.
Senator Leahy. I hope you noticed, Mike, than when you put
up the first one, one of the witnesses shook his head ``yes.''
[Laughter.]
Chairman Hatch. Senator Kohl, the ranking member on the
subcommittee.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you, Mr. Chairman. Our hearing today
will be important for Mr. Case and Mr. Levin, but it will be
even more important for the American people. On their behalf,
we will be talking with you about what the merger between AOL
and Time Warner is likely to mean to the development of the
Internet, the telecommunications industry, the media, and most
importantly the American consumer.
Indeed, this may be the only such conversation we will ever
have with regarding the consequences of your merger. So we must
make an extra effort to ensure that we understand this deal,
and you must make an extra effort to help us do that.
Mr. Case and Mr. Levin, less than 2 months ago your two
companies, the dominant Internet service provider with more
than 20 million subscribers and the Nation's leading vertically
integrated media company, stunned the world with your
announcement of the largest merger in American history, a deal
valued at over $160 billion.
To many, this marriage between the old and the new media
signifies a fundamental restructuring of our Information Age
economy. From an antitrust perspective, my sense is that your
merger is likely to pass, in whole or part, at both the FTC and
FCC. After all, your two companies are mainly engaged in
complementary rather than competing businesses, and combining
them has the potential to provide some tangible benefits to
consumers.
Nonetheless, the AOL/Time Warner deal does raise a whole
host of important public policy and competition questions, ones
that need to be addressed before your deal is consummated.
These questions include, number one, how will AOL/Time Warner
maintain its commitment to give other Internet service
providers open access to broadband cable pipe? Is there a
capacity limit, and how many competitors constitutes openness?
Two, will AOL/Time Warner's combined clout create an
incentive to give itself preferential treatment as a provider
of content and programming?
Number three, will television networks, music companies,
publishers, other media companies and Web portals, especially
the smaller and start-up ventures that aren't vertically
integrated, be able to survive without further consolidation?
Four, will placing the Time Warner news outlets under the
AOL corporate umbrella enhance the distribution of news or
could it erode a proud tradition of independent journalism?
And, five, whatever happened to the notion of the Internet
as a competitor to existing media? Will the thousands of
flowers of Internet voices continue to bloom in a consolidated
marketplace?
Finally, this deal appears to continue a troubling trend,
the emerging American keiretsu of interlocking relationships
among the major media, Internet and telecom entities. This
complex web of cross-ownership includes AT&T's significant and
growing stake in Time Warner, itslargest cable competitor;
AT&T's one-third interest in Cable Vision, another large cable company;
and AOL's interest in satellite television provider DirecTV, a service
which competes head-to-head with cable systems.
In my opinion, you will have to sell DirecTV. A cable
company shouldn't have a stake in a direct competitor. And the
FTC and the FCC need to take a long, hard look at what this
high degree of overlapping ownership does for and to consumers.
I recognize that these concerns must be balanced with the
benefits promised by this merger, including improved
distribution of all forms of media and a quicker deployment of
broadband technologies.
But in considering an acquisition like this, we need to pay
attention to its effects on the marketplace of ideas and not
merely the marketplace of money. No less an authority than you,
Mr. Case, has recognized that, ``If we want to continue the
Internet's exciting and explosive growth, the best interests of
consumers must remain our focus.'' Of course, I agree. Our
fundamental concern should always be preserving competition and
the widest array of consumer choices possible, and that is our
focus today, Mr. Case and Mr. Levin. We look forward to hearing
from you.
Thank you, Mr. Chairman.
Chairman Hatch. Well, thank you, Senator.
Today, we have only one distinguished panel of two before
us. These two gentlemen, I am sure, need no introduction, but
let me introduce them anyway.
Our first witness is Mr. Steve Case, Chairman and CEO of
America Online. Since Mr. Case cofounded AOL in 1985, the
company has experienced monumental growth. AOL operates two
worldwide Internet services, with over 21 million members, and
numerous other Internet brands. Under Mr. Case's leadership,
AOL has become the world's leading Internet services company,
and we commend you for that.
Our second witness is Mr. Gerald Levin, Chairman and CEO of
Time Warner. Mr. Levin joined Time, Inc., in 1972 and was the
leading architect of the Time Warner merger. He is recognized
as one of the pioneers of the cable industry. He became CEO of
Time Warner in 1992 and chairman in 1993. Under Mr. Levin's
leadership, Time Warner has become the world's leading media
conglomerate.
I would like to thank each of our distinguished witnesses
for taking time out of their busy schedules to be with us today
because this is an important hearing and I am looking forward
to this hearing, and I am certainly looking forward to what you
both have to say about this. Naturally, I have very high
respect for both of you and for the business acumen and
leadership that you have, and I think everybody on this
committee does. We are concerned about this, but we sure want
to hear what you have to say about it.
Mr. Case, we will turn to you first.
PANEL CONSISTING OF STEPHEN M. CASE, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, AMERICA ONLINE, INC.; AND GERALD M. LEVIN,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIME WARNER, INC.
STATEMENT OF STEPHEN M. CASE
Mr. Case. Good afternoon, Chairman Hatch and Senator Leahy
and all the members of the committee. Thank you for the
opportunity to appear before you today to talk about why this
merger will continue to be in the interest of consumers and
why, Senator Leahy, this will be the best of times.
As you know, on January 10, AOL and Time Warner announced
our plan to join our two companies together, creating the
world's first truly global media and communications company for
what we think will be known as the Internet Century.
I want to start by saying that we see this as more than a
merger of two companies. We really see it as a merger of ideas,
a shared commitment to empower consumers, communities, families
and citizens, expanding their choices, bringing more value into
their lives and building a global medium that benefits society.
I believe that the excitement generated by our announcement
is due to the growing evidence that we really are on the verge
of a second Internet revolution, a transformation of the way we
live our lives. This transformation has already begun in ways
large and small.
The Internet has changed the way we communicate with
friends and family, the way we learn more about the world
around us, even the way we connect to our political leaders. It
has impacted the way companies ship and consumers shop. It is
changing the way we strengthen our communities at home, and
also how we build a world community. And the terrain is
changing before our eyes, from increasingly affordable Internet
services to better, faster connections that make possible a far
wider array of content on line, to wireless and hand-held
devices that make the Internet available anywhere at any time.
This is also a time of incredible innovation and of intense
competition. We welcome that and believe that our new company
will be stronger because of it. The Internet never could have
become a driving force of the new economy, and neither AOL nor
Time Warner could have gotten where we are today without
competition. And going forward, we are committed to ensuring
that our merger creates new choices for consumers and promotes
a diversity of voices in our culture.
We know that change this dramatic and rapid creates new
opportunities, but we also believe that it creates new
responsibilities. So while we work hard at AOL/Time Warner to
make the most of this changing world, there are a fewthings
that won't change: first, our commitment to provide consumers with an
empowering range of choices; second, our commitment to earn their trust
and their confidence; third, our commitment to foster the openness,
competition and innovation that are the Internet's driving force; and,
finally, our commitment to leave no one behind in the Internet Century,
fostering the diversity of voices that is the Internet's greatest
strength.
Let me start with our first and most important commitment
at AOL/Time Warner, which is to serve consumers. In our
business, consumers are the ultimate venture capitalists. They
guide our business models and drive our ideas. This will only
increase in the years ahead.
Let's step back for just a moment. Five years ago, the
World Wide Web barely existed. But as people began to see the
Internet as a tool to improve their lives, not some obscure
realm for high-tech enthusiasts, they started using it. It
happened slowly at first, starting with e-mail and chat groups,
but then rapidly expanded to a range of experiences that are
increasingly indispensable to millions of people's everyday
lives.
To give you just a few compelling examples, AOL provides
200 million stock quotes everyday to help people invest their
money. We handle nearly 900 million messages a day, 50 percent
more than the 600 million pieces of mail handled daily by the
U.S. Postal Service, and that is just AOL.
It certainly doesn't stop there. The e-commerce phenomenon
continues to develop as more and more people go online to buy
an increasingly large number of products and services. Last
year, the numbers spoke for themselves: around $100 billion in
global e-commerce revenues, a figure that is expected to break
$1 trillion by 2003.
And what about education and the world of ideas? Today, a
student in Alaska or Alabama can visit the Library of Congress
online, and so can a young person in Ankara. Anyone with access
to a computer and a modem can visit any one of our 800 million
Web sites, in just about every language, covering every topic
you could imagine.
As consumers have embraced the interactive medium, they
have begun to demand that it meet their needs in new ways.
Technological advances, from cable broadband to satellite and
DSL connections, to a new generation of wireless and hand-held
devices are already increasing the range of online content
people can enjoy and use in their everyday lives. And both new
ideas and new competitors are surfacing everyday, further
driving the medium in a vital process of continuous
improvement.
Consumers drove this quantum leap into the Internet
revolution and they will most certainly drive it into this
Internet Century. Consumers have been empowered and they are
exercising their power everyday, seeking out the Internet
service that meets their needs and the content that matches
their interests, whether it be books, movies, stock quotes,
even polling data. I believe that AOL/Time Warner will only
accelerate this trend.
History tells us that the most profound, life-changing
ideas come to life when people find valuable new ways to join
emerging technology with existing content. Consider this:
nearly 25 years ago, Jerry Levin had an idea that the
combination of satellite and cable technology with movies and
other media could change the way people are entertained. That
idea became HBO, and HBO not only accelerated development of a
new cable medium, it really did change the way we think about
entertainment.
Twenty years ago, Ted Turner wondered what would happen if
he combined the new capacity of cable television to reach
households with a 24-hour news network. That idea became CNN,
and it has transformed the way we think about news and raised
the bar for every news station around the world. In the same
way, VCR's transformed the movie industry and CD technology
transformed the music industry. And these are the kinds of
remarkable combinations and experiences we think AOL/Time
Warner will be able to provide consumers across industries,
across platforms, across media, from music to movies to
publishing to communications to financial services.
We certainly hope to lead a whole new era of innovation in
our industry, but we won't be the only company out there,
especially not in the new converged environment that is joining
the forces of many historically distinct industries and
creating so many new and compelling consumer products and
services.
We have come a long way from the time when all you could
get was three broadcast networks, PBS, scratchy vinyl records,
maybe a department store down the block. Again, consumers have
been empowered and they will shape the market. One thing the
last few years have made crystal clear is that in the rapidly
changing, Internet-supercharged economy, companies must
constantly innovate and continuously remake themselves if they
expect to attract customers.
And let me be clear. We do not intend to limit content
diversity on any of our systems. If we limit content, if we do
not promote a diversity of voices, if we do not maintain
scrupulous journalistic standards, then consumers will waste no
time migrating to other Internet and media services.
The second commitment is that AOL/Time Warner will build on
the consumer trust and confidence that have made our brands
among the most trusted in the world. As I just mentioned, the
media and communications landscape is changing rapidly as all
the new media come together in powerful new combinations that
are increasingly central to people's lives.
If the Internet really is going to empower people in this
new environment, then it is more important than ever for them
to be able to trust that the information they share online is
private and secure. At AOL, we have worked hard to educate
consumers about the special nature of online transactions
because we know it is the best way to build trust and to build
our business. We have also put in place strict privacy and
security standards, and we are working with our industry to
make those standards universal. The same is true for Time
Warner, a company that is committed to journalistic integrity
and consumer trust both on and offline.
AOL/Time Warner will continue to build consumer confidence
and trust by maintaining our efforts to ensure that families
and teachers have the tools they need to guide our children's
experiences in cyberspace. The Internet can open a door into
another world for our kids, a world of imagination and
learning, but it is up to us to determine which doors they open
and to keep them safe.
As separate companies, we have made a commitment to
consumers and we have kept it. As one company, we will continue
to make that commitment and we will continue tokeep it. We will
take building consumer confidence and trust to the next level, working
within our industry and with all of you to craft responsive and
responsible policies that address these concerns. This is something
consumers care about and something we have to work together to ensure.
One thing is certain. We share the same goal, protecting consumers and
their families, and establishing a new standard of privacy and security
for the digital age, while permitting the Internet to flourish in these
changing times.
Third, AOL/Time Warner will build on our commitment to open
access. We have made real progress on this issue over the past
year-and-a-half, and I am proud of the role AOL has played in
getting us to where we are today. AT&T and Time Warner, the two
largest cable companies in the country, have committed to the
principle of providing consumer choice on their systems. And
with other cable companies considering following our lead, I
believe implementation of open access nationwide is no longer a
question of whether, but of when.
We believe that consumer choice is not only the smartest
business practice for both the cable industry and for the
growth of the Internet, it is the right policy, grounded in the
right values, for consumers and for the growth of the Internet.
This committee recognized this early on, and I want to thank
you all for your support of our efforts to push this industry
to act.
Today, we took another step forward, jointly releasing a
Memorandum of Understanding that will form the framework for
delivering AOL and other ISP's over Time Warner cable and to
give consumers greater choice. We look forward to putting that
open access framework into practice as soon as possible.
Meeting the challenge of consumer choice won't happen
overnight, but it is part of our ongoing commitment to
consumers. In fact, we believe that the merger of AOL and Time
Warner puts us in a position to initiate real dialogue about
the best way to offer multiple Internet services over multiple
broadband platforms, from cable and DSL lines to satellite
connections, turning our commitment into real choices for
consumers in the marketplace. And we believe that working
together with our industry and with all of you, we will ensure
that open access is a common practice and that consumers are
the real beneficiaries.
Finally, AOL/Time Warner will be committed to using our
combined resources, assets and experience to build a medium we
can be proud of. Building a medium we can be proud of has
always been core to the vision at AOL, and it will continue to
drive us at AOL/Time Warner. That means empowering people by
giving them a voice and greater choice. It means connecting
people in meaningful ways to their government and helping them
to give back to their communities. It means enhancing
educational opportunities for children. And building a medium
we can be proud of means expanding its reach and its benefits
to every corner of the world, leaving no community and no
country behind.
We all have a responsibility to meet these challenges. At
AOL/Time Warner, we will take this responsibility very
seriously not only as a company but also as individuals with a
shared personal conviction that we must use our leadership to
build a better world. Nowhere is this leadership more important
than driving the crusade to close the digital divide.
You have all heard the statistics. Our public schools are
overcrowded, understaffed, and unprepared to teach the skills
of the future. Seventy-five percent of households with incomes
over $75,000 own computers; 10 percent of our poorest families
do. Yet, more than 60 percent of all new jobs will require
high-tech skills by 2002.
Both AOL and Time Warner have already taken significant
steps to meet this challenge. I am especially proud of the role
we are playing at AOL to help launch PowerUp, a unique public-
private partnership to create a network of community technology
centers that teach young people the skills they need and give
them the guidance they need to make the most of their
potential. One of the things I am looking forward to doing at
AOL/Time Warner is joining our resources and sharing our ideas
to close this digital divide.
Just as important, we intend to devote our personal energy
to finding new ways to help the benefits and opportunities of
this Internet Century to reach developing countries and all
countries in the world. We have to make sure that the World
Wide Web is not worldwide in name only. All of these measures
will bring us closer than ever to fulfilling AOL/Time Warner's
shared mission of building a truly global medium as central to
people's lives as the telephone or the television, and even
more valuable.
Let me close with a comparison. 120 years ago almost to the
day, Thomas Alva Edison patented the light bulb, but it took
nearly 60 years for the power of electricity to reach every
corner of America, bringing light to the farmhouses, connecting
people in remote communities to the radio and to one another,
and transforming life as we knew it.
By comparison, the Internet was invented around 30 years
ago and it has taken us most of the last 15 years to reach just
40 percent of American households. Imagine what we will achieve
when we reach every country, every community, every business,
every family, because in truth we really are just scratching
the surface of a broad and powerful vision that will forever
alter our lives.
It is no surprise really that both the electric light and
the Internet were born in America. Our spirit of innovation and
creativity, our tradition of competition and cooperation, and
our ideal of inclusion and equal opportunity are the driving
force of the Internet and they will be the guiding principles
of AOL/Time Warner.
I appreciate the time and effort the committee is taking to
hear about this important merger, and I thank you all for your
leadership on many important Internet policy issues. I look
forward to working with you in the months and years ahead.
Thank you.
Chairman Hatch. Thank you, Mr. Case.
[The prepared statement of Mr. Case follows:]
Prepared Statement of Steve Case
Good morning, Chairman Hatch, Senator Leahy, and all the members of
the Committee. Thank you for the opportunity to appear before you
today.
As you know, on January 10, AOL and Time Warner announced our plan
to join our two companies--creating the world's first truly global
media and communications company for the Internet Century
I want to start by saying that we see this as more than a merger of
companies. We see it as a merger of ideas: a sacred commitment to
empower consumers, communities, families and citizens--expanding their
choices, bringing more value into their lives, and building a global
medium that benefits society.
I believe that the excitement generated by our announcement is due
to the growing evidence that we really are on the verge of a Second
Internet Revolution--a transformation of the way we live our lives.
This transformation has already begun in ways large and small. The
Internet has changed the way we communicate with friends and family,
the way we learn more about the world around us, even the way we
connect to our political leaders. It has impacted the way companies
ship and consumers shop. It is changing the way we strengthen our
communities at home--and build the world community.
And the terrain is changing before our eyes--from increasingly
affordable Internet services, to better, faster connections that make
possible a far wider range of content online, to wireless and handheld
devices that make the Internet available anywhere, at any time.
This is also a time of incredible innovation and intense
competition. We welcome that and believe that our new Company will be
stronger because of it. The Internet never could have become a driving
force of the new economy--and neither AOL nor Time Warner could have
gotten where we are today--without competition. And going forward, we
are committed to ensuring that our merger creates new choices for
consumers and promotes a diversity of voices in the culture.
We know that change this dramatic and rapid creates new
oportunities--but we also believe that it creates new responsibilities.
So, while we will work hard at AOL Time Warner to make the most of the
changing world, there are a few things wewon't change:
Our commitment to provide consumers with an empowering
range of choices.
Our commitment to earn their trust and confidence.
Our commitment to foster the openness, competition and
innovation that are the Internet's driving force.
And our commitment to leave no one behind in the Internet
Century, fostering the diversity of voices that is the Internet's
greatest strength.
Let me start with our first and most important commitment at AOL
Time Warner: to serve consumers. In our business, consumers are the
ultimate venture capitalists--they guide our business models and drive
our ideas. This will only increase in the years ahead. Let's step back
for a moment. Five years ago, the World Wide Web barely existed. But as
people began to see the Internet as a tool to improve their lives--not
some obscure realm for high tech enthusiasts--they started using it.
It happened slowly at first--starting with e-mail and chat groups,
mainly, but rapidly expanding to a range of experiences that are
increasingly indispensable to millions of people's every day lives. To
give you just a few compelling examples, AOL provides 200 million stock
quotes every day to help people manage their finances. We handle nearly
900 million messages a day--50% more than the 600 million pieces of
mail handled daily by the United States Postal Service. And that's just
AOL.
It certainly doesn't stop there. The e-commerce phenomenon
continues to develop as more and more people go online to buy an
increasing number of products and services. Last year, the numbers
spoke for themselves: around $100 billion in global e-commerce
revenues--a figure that is expected to break a trillion dollars by
2003.
And what about education and the world of ideas? Today, a student
in Alaska or Alabama can visit the Library of Congress online--and so
can a young person in Ankara. Anyone with access to a computer and a
modem can visit any one of around 800 million websites, in just about
every language, covering every topic you can imagine.
As consumers have embraced the interactive medium, they have begun
to demand that it meet their needs in new ways. Technology advances--
from cable broadband, satellite, and DSL connections, to a new
generation of wireless and handheld devices--are already increasing the
range of online content people can enjoy and use in their every day
lives. And both new ideas and new competitors are surfacing every day--
further driving the medium in a vital process of improvement.
Consumers drove this quantum leap into the Internet Revolution, and
they will most certainly drive it in the Internet Century. Consumers
have been empowered, and they are exercising their power every day--
seeking out the Internet service that meets their needs and the content
that matches their interests: movies, books, stock quotes . . . even
polling data.
I believe that AOL Time Warner will only accelerate this trend.
History tells us that the most profound, life-changing ideas come
to life when people find valuable new ways to join emerging technology
with existing content. Consider this: nearly 25 years ago, Jerry Levin
had an idea that the combination of satellite and cable technology with
movies and other media could change the way people are entertained.
That idea became HBO--and HBO not only accelerated the development of
the new cable medium to new heights--it really did change the way we
think about entertainment.
Twenty years ago, Ted Turner wondered what would happen if he
combined the new capacity of cable television to reach households with
a 24-hour news network. That idea became CNN--a killer app if ever
there was one--and it has transformed the way we think about the news .
. . and raised the bar for every news station around the world.
In the same way, VCRs transformed the movie industry, and CD
technology transformed the music industry. And these are the kind of
remarkable combinations and experiences we think AOL Time Warner will
be able to provide consumers--across industries, across media--from
music to movies to publishing to communications to financial services.
We certainly hope to lead a whole new era of innovation in our
industry. But we won't be the only company out there, especially not in
the new ``converged'' environment that is joining the forces of many
historically distinct industries and creating so many new and
compelling consumer products and services.
We've come a long way from the time when all you could get was
three broadcast networks, PBS, scratchy vinyl records, a department
store down the block and your local bank.
Again, consumers have been empowered--and they will shape the
market. One thing the last few years have made crystal clear is that in
a rapidly changing, Internet-supercharged economy, companies must
constantly innovate and continuously remake themselves if they expect
to attract customers. If we limit content, if we do not promote a
diversity of voices, if we do not maintain scrupulous journalistic
standards, then consumers will waste no time migrating to other
Internet and media services.
Second AOL Time Warner will build on the consumer trust and
confidence that have made our brands among the most trusted in the
business.
As I just mentioned, the media and communications landscape is
changing rapidly as old and new media come together in powerful new
combinations that are increasingly central to people's lives. If the
Internet is really going to empower people in this new environment,
then it is more important than ever for them to be able to trust that
the information they share online is private and secure.
At AOL, we have worked hard to educate consumers about the special
nature of online transactions, because we know it's the best way to
build trust and to build our business. We have also put in place strict
privacy and security standards--and we are working with our industry to
make those standards universal. The same is true for Time Warner--a
company that is committed to journalistic integrity and consumer trust,
both on and offline.
And AOL Time Warner will continue to build consumer confidence and
trust by maintaining our efforts to ensure that families and teachers
have the tools they need to guide our children's experience in
cyberspace. The Internet can open a door into another world for kids--a
world of imagination and learning. But it's up to us to determine which
doors they open--and to keep them safe.
As separate companies, we have made a commitment to consumers--and
kept it. As one company, we will keep it. We will take building
consumer confidence and trust to the next level--working within our
industry and with all of you to craft responsive and responsible
policies that address these concerns. This is something consumers care
about--and something we have to work together to ensure.
One thing is certain--we share the same goal: protecting consumers
and their families and establishing a new standard of privacy and
security for the digital age, while permitting the Internet to flourish
in these changing times.
Third, AOL Time Warner will build on our commitment to open access.
We have made real progress on this issue over the past year and a
half, and I am proud of the role AOL has played in getting us to where
we are today. AT&T and Time Warner, the two largest cable companies in
the country, have committed to the principle of providing consumer
choice on their systems. And with other cable companies considering
following our lead, I believe implementation of open access nationwide
is no longer a question of whether, but of when.
We believe that consumer choice is not only the smartest business
practice for both the cable industry and for the growth of the
Internet--it is the right policy, grounded in the right values, for
consumers and the growth of the Internet. This committee recognized
this early on, and I want to thank you for your support of our efforts
to push the industry to act.
Today, we took another step forward, jointly releasing a Memorandum
of Understanding that will form the framework for delivering AOL and
other ISPs over Time Warner cable--and to give consumers greater
choice. We look forward to putting that open access framework into
practice as soon as possible.
Meeting the challenge of consumer choice won't happen overnight,
but it is part of our ongoing commitment to consumers. In fact, we
believe that the merger of AOL and Time Warner puts us in a position to
initiate real dialogue about the best way to offer multiple Internet
services over multiple broadband platforms--from cable and DSL lines to
satellite connections--turning our commitment into real choices for
consumers in the marketplace.
And we believe that working together with our industry and with all
of you, we will ensure that open access is common practice--and that
consumers are the beneficiaries.
Finally, AOL Time Warner will be committed to using our combined
resources, assets, and experience to build a medium we can be proud of.
Building a medium we can be proud of has always been our core
vision at AOL, and it will continue to be at AOL Time Warner. What does
that mean? It means empowering people by giving them a voice and
greater choice. It means connecting people in meaningful ways to their
government and helping them to give back to their communities. It means
enhancing educational opportunities for children. And building a medium
we can be proud of means expanding its reach--and its benefits--to
every corner of the world, leaving no community and no country behind.
We all have a responsibility to meet these challenges. At AOL Time
Warner, we will take this responsibility seriously, not only as a
company, but also as individuals with a shared personal conviction that
we must use our leadership to build a better world.
Nowhere is this leadership more important than driving the crusade
to close the Digital Divide. You have all heard the statistics: our
public schools are overcrowded, understaffed, and unprepared to teach
the skills of the future. 75 percent of households with incomes over
$75,000 own computers--10% of our poorest families do. More than 60% of
all new jobs will require high tech skills by 2002.
Both AOL and Time Warner have already taken significant steps to
meet this challenge. I am especially proud of the role we are playing
at AOL to help launch PowerUp, a unique public-private partnership to
create a network of community technology centers that teach young
people the skills they need--and that give them the guidance they
need--to make the most of their potential. And one of the things I am
most looking forward to at AOL Time Warner is joining our resources and
sharing our ideas to close the Digital Divide.
Just as important, we intend to devote our personal energy to
finding new ways to help the benefits and opportunities of the Internet
Century reach developing countries . . . and all the countries of the
world. We have to make sure that the World Wide Web is not worldwide in
name only.
All of these measures will bring us closer than ever to fulfilling
AOL Time Warner's shared mission of building a truly global medium as
central to people's lives as the telephone and the television . . . and
even more valuable.
Let me close with a comparison. One hundred and twenty years ago,
almost to the day, Thomas Alva Edison patented the light bulb. But it
took nearly 60 years for the power of electricity to reach every corner
of America--bringing light to the farmhouses, connecting people in
remote communities to the radio and to one another, transforming life
as we knew it.
By comparison, the Internet was invented around 30 years ago--and
it has taken us most of the last 15 years to reach just 40% of American
households. Imagine what we will achieve when we reach every country,
every community, every business, every family. Because in truth, we are
really just scratching the surface of a broad and powerful vision that
will forever alter our lives.
It is no surprise, really, that both the electric light and the
Internet were born in America. Our spirit of innovation and creativity,
our tradition of competition and co-operation, and our ideal of
inclusion and equal opportunity are the driving force of the Internet--
and they will be the guiding principles of AOL Time Warner.
I appreciate the time and effort the Committee is taking to hear
about this important merger--and I thank you for your leadership on
many important Internet policy issues. I look forward to working with
you in the months and years to come.
Chairman Hatch. We will turn to you, Mr. Levin.
STATEMENT OF GERALD M. LEVIN
Mr. Levin. Thank you, Chairman Hatch and Senator Leahy and
members of the committee. I too am grateful for this
opportunity to speak to you about the planned merger of Time
Warner and AOL, and obviously both of us will be happy to
answer your questions.
I know our merger announcement came as a surprise to many,
and the truth is, for such a large transaction, it was worked
out in a remarkably short period of time. Even more remarkable,
while I am sure such challenges don't exist here in Washington,
we avoided any leaks. And from my perspective, the AOL/Time
Warner merger was not a bolt from the blue, but actually the
fulfillment of almost three decades spent in the media
business, because I began my career with the quixotic hope, or
so it seemed at the time, of using cable television to
overthrow the stranglehold the broadcast triopoly had on
television.
When you had mavericks like Ted Turner, as well as myself,
we believed that the real power of television would only be
unleashed when it became a medium driven by consumer choice,
with programming alternatives that went far beyond what simply
three advertising-supported networks could deliver. And the
success of that once radical notion, I think, is reflected in
today's premier pay television networks, like Home Box Office,
and the lineup of services that we have on our cable systems of
hugely popular networks such as CNN, Disney--I will repeat
that--Disney, Discovery, ESPN, Nickelodeon, CNBC. Obviously,
the list is very long.
And although we would never claim that this early
experience with cable gave us a clairvoyant glimpse of the
Internet, it was, in fact, profoundly formative for us because
we were left with the conviction that we had barely touched the
potential of technology to empower viewers to become their own
programmers with no limits, no limits, on their options.
Possessed as I was of this belief, I committed my company
in 1994 to the deployment of the world's first fully
interactive digital network in our Orlando, FL, cable system.
Short term, that full-service network, which of necessity was a
closed system that needed to be invented from scratch, did not
lead to any instant rollout of interactive television. But long
term, the risk that we took resulted in our engineers creating
a breakthrough architecture that melded fiber optic trunk lines
with a coaxial connection to subscriber homes to offer a
switched broadband avenue for interactivity.
And so in 1995, Time Warner made a $5 billion commitment to
rebuild its systems with broadband architecture, a commitment
which now stands at more than $6 billion, and we entered into a
social contract, a social contract, with the Federal
Communications Commission. In fact, my faith at that time in
cable's pivotal part in the future of digital interactivity was
so strong that at a time when re-regulation put cable out of
favor with investors, we undertook major acquisitions to expand
our cable footprint.
And at the very moment we were opening the way for
broadband delivery, the first great wave of a truly network
society arrived in the form of the Internet. And today we are
all awash in that wave or, better yet, surfing it, and the sea
change has been so sweeping and so profound that it is hard to
believe that the word ``Internet'' itself didn't enter
Webster's until 1997.
The growth of the Internet over so short a time reflects
the sheer velocity of what is taking place. In 1995, there were
19 million Internet users. Five years later, there are over 200
million, and that number will cross 1 billion by mid-decade.
Led by AOL's easy-to-use, consumer-friendly service, a
constantly increasing number of people are making e-mail,
instant messaging and e-commerce an integral part of how they
live, how they work, and how they communicate.
It would be hard for me to exaggerate the implications of
the Internet revolution because for the first time in our human
history, we have at our disposal a universal, limitless
connection that no government, no corporation or centralized
agency can control, because every user has the ability to
publish and to offer something new. In fact, every Web site
contains the possibility of meeting consumer needs in more
attractive, efficient ways so that the noise that you are
currently hearing across the economic landscape is that of
time-honored, in some cases centuries-old business hierarchies
as they crash to the ground, because 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 have always done business, you need
to think again because thinking again is precisely what Time
Warner has been doing for the last 5 years as we refocused on
achieving a company-wide digital transformation.
I have spoken of what that transformation did for our cable
customers, providing broadband capacity for high-speed delivery
of the Internet, but that was a part of a far larger effort.
Impelled by the nature of our content businesses, which are
operations intimately involved with artistic and intellectual
expression in every form, we were pioneers in adapting our flow
of creative offerings to this environment because people
throughout Time Warner understood the irrevocable impact of
what was occurring. They embraced the almost inconceivably
broad canvas the Internet provides for expanding the reach of
their minds and imaginations.
The challenge for Time Warner was never facing up to the
historic significance of digital interactivity. We jumped that
hurdle while other media companies were still debating if there
was a race. The challenge was time. The global economy in
general, and the global media industry in particular are on
fast forward. They have entered a new context, and that is
Internet time.
Beginning last September, in Paris, Steve Case and I had
the opportunity to work together as Co-chairs of the Global
Business Dialogue on E-Commerce to help set international self-
regulatory standards for Internet traffic. The next month, at
the Fortune magazine forum in Shanghai, we continued our
conversation about the relentless unfolding of the digital
future.
These locales couldn't help but underline the unique
leadership that America enjoys in deploying and using the
Internet, and the fierce competitive determination of
entrepreneurs across the globe who are trying to catch and
surpass us. Steve and I understood that those who wished to
stay ahead in the instant-to-instant evolution of this medium
did not have the luxury of waiting on events. We saw that the
company of the future, a company with the creative
infrastructure to provide a constant stream of quality content,
plus a genetic appreciation of how to form Web communities and
how to serve them easily and conveniently--such a company had
not yet come into existence.
The solution to that puzzle became obvious to both of us.
By putting together AOL and Time Warner, we could create the
first enterprise not only fully prepared to compete on the
Internet and really a prototype for the 21st century, but a
company that could be a decisive spur to bringing consumers
everywhere the speed and immediacy of broadband across all
delivery platforms, wired or wireless, thus unlocking the
fullest possibilities of interactivity.
For my part, while the economic rationale for this merger
was compelling, it was not sufficient. Before I could take the
step of joining America Online in a merger of equals, I had to
satisfy myself about three basic premises.
First, at the very core, the very heart of Time Warner, the
cornerstone of our global reputation and the enduring basis of
the bond of trust we have created with audiences in every part
of the world is commitment to journalistic independence,
journalistic integrity.
Ten years ago, in a landmark decision that allowed the Time
Warner merger to go forward, Chancellor William Allen of
Delaware's Chancery Court spoke of our journalistic culture as
truly unique and deserving of protection and preservation. The
addition of CNN in 1996 made that culture even richer and more
far-reaching.
I want to assure you that I have always regarded thedefense
of that heritage as utterly central to my responsibilities as CEO. And
in light of the continuing expansion of news and information outlets,
many of which we carry on our cable systems, I have had a heightened
awareness of Time and CNN's role in upholding the standard for
reliable, unbiased journalism. Steve Case has been equally clear about
his unwavering commitment to journalistic independence, and I have to
say that his unprompted offer to have me serve as the CEO of AOL/Time
Warner was a further reaffirmation of that belief.
Second, as a prime mover in the design, development and
deployment of broadband networks, Time Warner assumed the
financial risk, huge though it was, of that investment in the
face of strong competition from DSL, DBS, and other broadband
providers. In building that capacity, we recognized not just
the possibility of consumers having choice among ISP's, but, in
fact, the desirability. This we learned clearly and
historically with HBO because the provision of choice is, in
fact, a boon to the dynamic growth of cable subscriptions and a
prod to the creation of new and better programming.
AOL and Time Warner now have a shared commitment to provide
consumers with multiple ISP's in a genuinely competitive
broadband marketplace. I would like to elaborate on that
commitment because you have before you our announcement of a
Memorandum of Understanding between Time Warner and AOL
regarding our commitment to open-access business practices.
As you can see from a review of this detailed
understanding, we are serious about setting out the framework
that will lead to true ISP choice for Time Warner cable
subscribers. We will obviously answer your questions, but I
just want to outline the key elements of our plan.
First, delivering consumer choice. AOL/Time Warner is
committed to offer consumers a choice among multiple ISP's.
Consumers will not be required to purchase service from an ISP
that is affiliated with AOL/Time Warner in order to enjoy
broadband Internet service over AOL/Time Warner cable systems.
Second, diversity of ISP's. AOL/Time Warner will not place
any fixed limit on the number of ISP's with which it will enter
into commercial arrangements, and it will offer ISP's the
choice to partner on a national, regional, or local basis in
order to facilitate the ability of consumers to choose among
ISP's of different size and different scope.
Three, direct relationship with the customer for ISP's.
AOL/Time Warner is also committed to allow both the cable
operator and the ISP to have the opportunity to have a direct
relationship with the consumer. Accordingly, both the cable
operator and the ISP will be allowed to market and sell
broadband service directly to customers. When an ISP sells
broadband Internet service directly to such a customer, it may,
if it so chooses, bill and collect from the customer directly.
Four, video streaming. AOL/Time Warner will allow ISP's to
provide video streaming. We recognize that consumers desire
video streaming and AOL/Time Warner will not block or limit it.
Now, while today's MOU is subject to existing Time Warner
obligations, such as its contracts with Road Runner, Time
Warner and I are committed to providing a choice of ISP's as
quickly as possible, and we will work with our partners to try
to achieve that goal before current obligations expire. And I
look forward to the rest of the cable industry following this
same path of choice and innovation which I believe will drive
consumer adoption of cable broadband services.
Finally, fundamentally, as to how Time Warner defines
itself, I have to refer to our sense of community
responsibility. This has been basic to who we are from the very
beginning and was best summed up in Henry Luce's formulation
that we would always operate, ``in the public interest, as well
as the interest of shareholders.''
If you look through the biennial report we issued which
details the depth and breadth of community involvement, you
will see the seriousness and effectiveness with which we
continue to live up to Henry Luce's charge. Time to Read, for
example, is the country's largest, most successful corporate-
sponsored literacy program.
But we are under no illusions. Like you, we recognize the
need for a significant increase in corporate involvement
focused on helping equip schools with the resources they need
to prepare students to enter the digital economy. Personally,
as someone who has witnessed firsthand the struggle of
dedicated teachers to overcome the shameful inequalities
embedded in our educational system, I regard this need as a
moral obligation, and feel it is a personal moral obligation.
As the members of this committee have so frequently
articulated, if ever there has been a clear and present danger
to the future of American society, it is in the digital divide
that threatens to aggravate longstanding patterns of
discrimination. From the inception of my discussions with Steve
Case, I have been impressed with the passionate sincerity of
his desire to ensure that his company plans an important role
in bridging that divide, and nothing has been more crucial to
the agreement we have reached to merge our companies than our
vision of AOL/Time Warner's ability to be a catalyst for
meaningful change in the way our country, indeed our world,
offers its children the opportunity for creative expression,
intellectual enrichment, and material success.
As large as our merger may seem, it pales beside the open-
ended expanse of broadband media and the wired and wireless
access available through PC's, TV's, and the burgeoning
multiplicity of hand-held devices. From the consumer's point of
view, the intense competitive struggle to offer everything from
telephony to digital downloading of music and entertainment to
video on demand embodies the best of all possible worlds--more
choice, better value, and lower prices.
I am grateful, obviously, for this chance to express to you
my bedrock belief in the positive implications of our merger.
Although the age we have entered will be brutally unsparing of
companies that can't or won't move fast enough, it will also
empower individual citizens as never before. If we do it
right--and I am profoundly optimistic that a clear
understanding by both the private and public sectors of what is
involved will ensure we do--we will add new dimensions to our
economy and our democracy.
Under your leadership, Chairman Hatch and Senator Leahy,
this committee has demonstrated a bipartisan willingness to
strengthen copyright protection and ensure America's artists
are encouraged to keep producing works of international appeal
and distinction. I applaud passage of the Digital Millennium
Copyright Act, and I pledge our full cooperation in addressing
the vital public interest issues of Internet privacy and the
protection of children.
I think it is obvious that AOL/Time Warner is probably only
the first of many competitive realignments intended to form
enterprises with the agility and array of resources to thrive
on this new terrain. Given the talent, imagination and values
that AOL/Time Warner will possess, I am also confident it will
be the most socially responsible as well as competitively
successful.
Along with my colleagues at AOL and Time Warner, I look
forward to working with you to make sure that individuals and
communities everywhere can use the most powerfully liberating
communications tool in human history to amplify and inspire in
Jefferson's wonderful phrase, ``the pursuit of happiness.''
[The prepared statement of Mr. Levin follows:]
Prepared Statement of Gerald M. Levin
Chairman Hatch, Senator Leahy and members of the committee, I'm
grateful for this opportunity to speak about the planned merger between
Time Warner and AOL and will be glad to answer any questions you might
have.
I know our merger announcement came as a surprise to many, and the
truth is for such a large transaction, it was worked out in a
remarkably short period of time.
More remarkable--while I'm sure such challenges don't exist in
Washington--we avoided any leaks!
From my perspective, the AOL-Time Warner merger wasn't a bolt from
the blue, but the fulfillment of almost three decades spent in the
media business. I began my career with the quixotic hope--or so it
seemed--of using cable television to overthrow the stranglehold the
broadcast triopoly had on television. Mavericks like Ted Turner and
myself believed that the real power of television would only be
unleashed when it became a medium driven by consumer choice, with
programming alternatives far beyond what three advertising-supported
networks could deliver.
The success of that once-radical notion is reflected today in
premier pay-television networks like Time Warner's Home Box Office, and
our cable systems' lineup of hugely popular networks such as CNN, TBS,
Disney, Discovery, ESPN, Nickelodeon, CNBC. . . . The list is long.
Although we'd never claim that this early experience with cable
gave us a clairvoyant glimpse of the Internet, it was profoundly
formative. I for one was left with the conviction that we'd barely
touched the potential of technology to empower viewers to become their
own programmers, with no real limits on their options.
Possessed of this belief, I committed my company in 1994 to the
deployment of the world's first fully interactive digital network in
our Orlando, Florida, cable system.
Short term, that full service network--a closed system that needed
to be invented from scratch--didn't instantly lead to the rollout of
interactive television. Long term, the risk Time Warner took resulted
in our cable engineers creating a breakthrough architecture that melded
fiber-optic trunk lines with the coaxial connection to subscriber homes
to offer a switched broadband avenue for interactivity.
In 1995, Time Warner made a $5 billion commitment to rebuild its
systems with this broadband architecture--a commitment which now stands
at $6 billion--and entered a social compact with the FCC. In fact, my
faith in cable's pivotal part in the future of digital interactivity
was so strong that at a time when reregulation put cable out of favor
with investors, Time Warner undertook major acquisitions to expand its
cable footprint.
At the very moment Time Warner was opening the way for broadband
delivery, the first great wave of a truly networked society arrived in
the form of the Internet. Today, we're all awash in that wave, or
better yet, surfing it, and the sea change has been so sweeping and
profound that it's hard to believe the word Internet itself didn't
enter Webster's until 1997.
The growth of the Internet over so short a time reflects the sheer
velocity of what's taking place: In 1995, there were 19 million
Internet users; five years later, over 200 million. That number will
cross one billion by mid-decade. Led by America Online's easy-to-use,
consumer-friendly service, a constantly increasing number of people are
making e-mail, instant massaging and E-commerce an integral part of how
they live, work and communicate.
It would be hard to exaggerate the implications of the Internet
revolution. For the first time, human beings have at their disposal a
universal, limitless connection that no government, corporation or
centralized agency can control. Every user has the ability to offer
something new. Every web site contains the possibility of meeting
consumer needs in more attractive, efficient ways, so that the noise
you hear across the economic landscape is that of time-honored--in some
cases, centuries-old--business hierarchies as they crash to the ground.
The first lesson of the Internet has already been written: If you
think you can do business in the realm of digital interactivity the way
you've always done business, think again. . . . Thinking again is
precisely what Time Warner has been doing for the last five years, as
we refocused on achieving a companywide digital transformation.
I've spoken of what that digital transformation did for our cable
customers, providing broadband capacity for high-speed delivery of the
Internet. But that was part of a far larger effort. Impelled by the
nature of our content businesses--operations intimately involved with
artistic and intellectual expression in every form--we were pioneers in
adapting our flow of creative offerings to this environment.
People throughout Time Warner understood the irrevocable impact of
what was occurring. They embraced the almost inconceivably broad canvas
the Internet provides for expanding the reach of their minds and
imaginations.
The challenge for Time Warner was never facing up to the historic
significance of digital interactivity. We jumped that hurdle while
other media companies were still debating if there was a race. The
challenge was time. The global economy in general and the global media
industry in particular are on fast forward. They have entered a new
context: ``Internet Time.''
Beginning last September, in Paris, Steve Case and I had the
opportunity to work together as co-chairs of the Global Business
Dialogue on E-commerce to help set international self-regulatory
standards for internet traffic. The next month, at the ``Fortune''
magazine forum in Shanghai, we continued our conversation about the
relentless unfolding of the digital future.
Those locales couldn't help but underline the unique leadership
America enjoys in deploying and using the Internet and the fierce
competitive determination of entrepreneurs across the globe to catch
and surpass us.
Steve and I understood that those who wished to stay ahead in the
instant-to-instant evolution of this medium didn't have the luxury of
waiting on events. We saw that the company of the future--a company
with the creative infrastructure to provide a constant stream of
quality content plus a genetic appreciation of how to form web
communities and how to serve them easily and conveniently--had yet to
come into existence.
The solution to that puzzle was quickly obvious to both of us: By
putting together AOL and Time Warner, we could create the first
enterprise not only fully prepared to compete on the Internet--a
prototype for the 21st century--but a company that could be a decisive
spur to bringing consumers everywhere the speed and immediacy of
broadband across all delivery platforms, wired or wireless, thus
unlocking the fullest possibilities of interactivity.
For my part, while the economic rationale for our merger was
compelling, it wasn't sufficient. Before I could take the step of
joining America Online in a merger of equals, I had to satisfy myself
about three basic premises.
First, at the very core of Time Warner--the cornerstone of our
global reputation and the enduring basis of the bonds of trust we've
created with audiences in every part of the world--is commitment to
journalistic independence.
Ten years ago, in the landmark decision that allowed the Time
Warner merger to go forward, Chancellor William Allen of Delaware's
Chancery Court spoke of our journalistic culture as ``unique'' and
deserving of protection and preservation. The addition of CNN in 1996
made that culture even richer and more far-reaching.
I have always regarded the defense of that heritage as utterly
central to my responsibilities as CEO, and in light of the continuing
expansion of news and information outlets--many of which we carry on
our cable systems--I've had a heightened awareness of Time CNN's role
in upholding the standard for reliable, unbiased journalism.
Steve Case has been equally clear about his unwavering commitment
to journalistic independence, and his unprompted offer to have me serve
as CEO of AOL Time Warner was a further reaffirmation of that belief.
Second, as a prime mover in the design, development and deployment
of broadband networks, Time Warner assumed the huge financial risk of
that investment in the face of strong competition from DSL, DBS and
other broadband providers.
In building our broadband capacity, we recognized not just the
possibility of consumers having a choice among ISPs but the
desirability.
Historically, as we learned so clearly with HBO, the provision of
choice is a boon to the dynamic growth of cable subscriptions and a
prod to the creation of new and better programming.
AOL and Time Warner now have a shared commitment to provide
consumers with multiple ISPs in a genuinely competitive broadband
marketplace, and we will be happy to elaborate on that commitment.
Third, fundamental to how Time Warner defines itself is our sense
of community responsibility. This has been basic to who we are from the
very beginning, and was best summed up in Henry Luce's formulation that
we would always operate ``in the public interest as well as the
interest of shareholders.''
If you look through the biennial report we issue which details the
deputy and breadth of our community involvements, you'll see the
seriousness and effectiveness with which we continue to live up to
Luce's charge. Time to read, for example, is the country's largest,
most successful corporate-sponsored literacy program.
But we're under no illusions.
Like you, we recognize the need for a significant increase in
corporate involvement focused on helping equip schools with the
resources they need to prepare students to enter the digital economy.
Personally, as someone who has witnessed firsthand the struggle of
dedicated teachers to overcome the shameful inequalities embedded in
our educational systems, I regard this need as a moral obligation.
As the members of this committee have so frequently articulated, if
ever there's been ``a clear and present danger'' to the future of
American society, it's in the ``digital divide'' that threatens to
aggravate long-standing patterns of discrimination and injustice from
the inception of my discussions with Steve Case, I've been impressed
with the passionate sincerity of his desire to ensure that his company
plays an important role in bridging that divide.
Nothing has been more crucial to the agreement we've reached to
merge our companies than our vision of AOL Time Warner's ability to be
a catalyst for meaningful change in the way out country--indeed, our
world--offers its children the opportunity for creative expression,
intellectual enrichment and material success.
As large as our merger may seem, it pales the open-ended expanse of
broadband media, and the wired and wireless access available through
PCs, TVs and the burgeoning multiplicity of hand-held devices. From the
consumer's point of view, the intense--and intensifying--competitive
struggle to offer everything from telephony to digital downloading of
music and entertainment to video on demand embodies the best of all
possible worlds: more choice, better value and lower prices.
Members of the committee, I'm grateful for this chance to express
to you my bedrock belief in the positive implications of the merger
between AOL and Time Warner. Although the age we've entered will be
brutally unsparing of companies that can't or won't move fast enough,
it will also empower citizens as never before.
If we do it right--and I'm profoundly optimistic that a clear
understanding by both the private and public sectors of what's involved
will ensure we do--we will add new dimensions to our economy and our
democracy.
Under your leadership, Chairman Hatch and Senator Leahy, this
committee has demonstrated a bipartisan willingness to strengthen
copyright protection and ensure America's artists and encouraged to
keep producing works of international appeal and distinction. I applaud
passage of the Digital Millennium Copyright Act, and I pledge our full
cooperation in addressing the vital public interest issues of Internet
privacy and the protection of children.
I think it's obvious that AOL Time Warner is only the first of many
competitive realignments intended to form enterprises with the agility
and array of resources to thrive on this new terrain. Given the talent,
imagination and values that AOL Time Warner will possess, I'm also
confident it will be the most socially responsible and competitively
successful.
Along with my colleagues at AOL and Time Warner, I look forward to
working with you to make sure that individuals and communities
everywhere can use the most powerfully liberating communications tool
in human history to amplify and inspire, in Jefferson's wonderful
phrase, ``the pursuit of happiness.''
Chairman Hatch. Well, thanks to both of you, and we are
very grateful that you are willing to come and explain this to
us. I think it is something that has to be done. It is in your
best interest to do so, and I think both of your statements
were very good statements under the circumstances.
Now, we will begin with the observation that this merger is
attractive to both companies, for the following reasons, among
others. Time Warner can deliver its vast content holdings to
half of the Nation's online users, AOL's 22 million
subscribers. I think the next closest provider is 3 million in
one company, so you clearly have a dominance in this field. And
AOL gets access to high-speed distribution, as well as access
to popular content essential to advertising revenue. So there
is much to be said of why you two would like to, of course,
have this merger be totally completed.
Of course, both of you are interested in maximizing the
value of your stock to your stockholders, and that is a
legitimate thing. The combination of Time Warner's vast content
holdings with AOL's dominance as an access provider gives me
some concern regarding the true potential of consumers' access
to content from varying sources.
Mr. Case, I know you are aware firsthand of the value of
the first screen when a subscriber turns on the computer. In
fact, this is so important to you that AOL uses an alternative
browser as AOL's default browser even though AOL now owns
Netscape.
I think that is right, isn't it?
Mr. Case. Yes.
Chairman Hatch. OK. Now, as you recently testified in a
Federal court proceeding, it was more important for you, AOL,
to have your icon on the first screen of the computer than it
was for you to try to distribute your own product. Moreover,
consider last week's USA Today article which reported on AOL's
strategy to be the start page for Internet access, and
recognizing that as one of the big reasons for the merger.
So I guess having stated all that, please tell the
committee whether AOL/Time Warner will require viewers to
access competitors' content through a proprietary start-up
page.
Mr. Case. A number of points. First of all, I think, as you
know, the Internet is an extremely competitive business. There
are many thousand ways, actually, that people can connect to
the Internet. We are delighted that lots of people have chosen
AOL, but in almost every city there are dozens, if not
hundreds, of choices. That will continue. Indeed, we have seen
rapid, increasing competition in the past year, even free
Internet service providers emerging. So there is more and more
choice out there.
Similarly, at every level of the value chain, if you will,
there are many new competitors emerging. Five years ago, for
example, Yahoo was two students in a dorm at Stanford, and now
it is one of the world's largest portals where a lot of people
go to get access to information. So there are many, many
companies participating in this, and many new companies forming
everyday. So I think it is somewhat bizarre to imagine any one
company, certainly AOL/Time Warner, somehow being a controlling
influence here that really limits choice in any way.
The main issue specifically on the browser actually had
related to our concern to make sure our software was carried on
the Windows Operating System. We thought that was very
important. We wanted to give consumers an opportunity to use
our service and have it there.
On the Internet, everybody has carriage. There is
essentially universal carriage. Everybody can create a Web
site. You don't have to ask for permission, you don't have to
get capacity on a cable system or on a newsstand. Everybody has
a shot of making their service available to people, and that is
why so many thousands of companies have emerged in the past
years, the vast majority having no relationship with AOL.
And many, many very successful companies, including Yahoo,
benefit from AOL because we help drive people into the
Internet. And companies like Yahoo, even though they have no
relationship with us, they are not promoted within our
service--the number one source of traffic to Yahoo is AOL
customers, and that will continue. We are not going to do
anything to limit choice because the bedrock principle of the
Internet and the thing that consumers expect is that they have
access to everything wherever they want and in whatever form
they want.
Chairman Hatch. But then the question was, would you set up
a proprietary start-up page, and if so, would the start-up page
tend to usher the subscribers or the consumers to AOL/Time
Warner-owned content?
Mr. Case. Well, I would be happy to demonstrate AOL for
anybody who is interested. The way it works is that when you
first sign on to the service, you have a bar at the top of the
screen and you can type in that bar and go anywhere on the
Internet, whether it be to Yahoo or Amazon or e-Bay or go.com.
Anything is available from that front screen.
We also do try to simplify the process of getting people
around the Internet, so we do have, for example, a politics
channel or an election channel, really trying to put the best
resources in one place. We think that adds a lot of consumer
simplicity and we think that is very important. But anybody on
AOL can get to any service from that front page.
Chairman Hatch. Well, the questions I have asked really
deal with the access to content, not to the Internet itself. I
acknowledge that you can get into anywhere you want to with
that top bar.
Will your users have to go through a start-up page to
access non-Time Warner-affiliated content? I think maybe that
puts it a little more clearly.
Mr. Case. You do not have to go through a start-up page to
access non-Time Warner content. Number one, they can, from the
first screen that they see when they sign on, go anywhere they
would like. All content is available to everyone, so there is
this aspect of universal carriage which is very different than
the world of traditional media.
We also then promote certain sites, so everybody is there
and some sites are promoted. We will not just promote AOL/Time
Warner properties. We don't do that today. There are many
services that compete with us that we promote because we think
that is the best consumer experience and that ultimately is
what drives our success.
Similarly, Time Warner has a similar heritage. This isn't
something we are talking about conceptually. It is something we
have been doing for many years. Home BoxOffice, as Jerry Levin
mentioned, is a leading movie channel. Most of the movies are not
coming from Warner Brothers; they are coming from all the studios. The
reason for that is if you had a movie service that only had Warner
movies, with all due respect to Warner Brothers, not that many people
would subscribe. They want all the movies.
Similarly, Time Warner owns the Book of the Month Club.
Guess what? Most of the books carried by the Book of the Month
Club are not owned by Time Warner. Again, the principle has to
be diversity and choice. Otherwise, these services wither and
die. So it would be foolish for us to try to limit choice. We
don't do that today and we won't do that in the future.
Mr. Levin. I should respond, Chairman Hatch, because it is
in our historical DNA, both understanding the importance of
networks and delivering consumer choice. It operates both ways.
There won't be exclusivity; that is, the material coming from
Time Warner will not be exclusively available through AOL. And,
likewise, the material that we have will be made available on
all forms of distribution. Let me give you the analog examples.
Today, CNN or HBO are aggressively pursuing distribution on
every form, in addition to cable. That has always been true.
And even any of our networks, including our cable networks,
take programming from everyone because ultimately it is all
about getting the most creative material and delivering
consumer choice.
So we should probably stipulate up front that this merger
is not about the exclusive coopting of Time Warner's content on
AOL. Nor is it simply capturing AOL on one form of
distribution, and that is cable; quite the opposite. And I also
want to reinforce the commitment that we have expressed today,
which is AOL will get no preferential treatment as it relates
to Time Warner's cable systems and as it relates to other
ISP's. And this has been historically true, including the
development of pay television in the cable business or the
development of additional 24-hour news services.
Chairman Hatch. Let me ask you, Mr. Levin, many view the
Internet as a means of leveling the playing field for artists
and as a way to expand consumer choice and competition in the
recording industry, for instance. With the proposed union of
Time Warner and EMI, AOL/Time Warner is poised to take over the
world's largest music label and will own approximately maybe as
much as one-half of all music publishing copyrights worldwide.
Now, we understand that AOL recently purchased Win Amp, the
most popular MP-3 software player, and spinner.com, the
Internet's most influential Web radio property. Moreover, Time
Warner has taken a significant equity position in
artistsdirect.com and listen.com.
All of this occurs amidst criticisms by some that the major
labels are seeking to maintain undue control of the music
distribution system by buying out their Web-based competitors
at the expense of artists and consumers. At the press
conference announcing the proposed merger, you yourself
referred to these properties as key parts of AOL's music
strategy.
What assurance will there be that independent artists and
unaffiliated Internet music companies will have access to these
key properties on a level playing field with AOL/Time Warner
for the delivery of music to Internet users? And a follow-on
question: do any other Internet companies have access to these
properties today, and if they do, under what terms?
Mr. Levin. Well, first of all, Chairman Hatch, I share with
you a great love of music as probably one of the most
fundamental art forms. And, in fact, what we are seeing in the
music business is what has been referred to as massive
disintermediation; that is, the ability for a musician or an
artist to deliver her or his work directly to the consumer is
quite available.
When you look at the current state of the music industry,
the fastest growing part of the music recording industry
happens to be the independent labels. I mean, right now they
have the second largest market share, and that continues and is
assisted by the availability of the Internet now so that an
artist can reach a much broader audience.
So I am very comfortable with the fact that the Internet
provides for the music business the opportunity to be
discovered, unlike the more restrictive period when, in order
to promote music, you had to go through either the radio or
music videos where there was a selection, there was a
gatekeeper. The wonderful thing about the Internet is there is
no gatekeeper. I can post any creation of mine, whether that be
a song or some textual material.
With respect to musical copyrights, I think this is an area
where on a worldwide basis it is highly regulated with
performing rights societies. And, in fact, in many countries
there is ease of entry in terms of securing those musical
copyrights. So we don't see any real difficulty with respect to
the combination of EMI and Warner Music. In fact, there is
something quite nice about it since it reunites Natalie Cole
with her father, Nat King Cole, among others.
Chairman Hatch. Now, that was really hitting below the belt
there. [Laughter.]
We will turn to Senator Leahy at this time.
Senator Leahy. Does his answer mean that each member of
this committee, Mr. Chairman, will always be able to get our
hourly fix of your music?
Chairman Hatch. I am trying to uplift him, but it is a big
job is all I can say.
Senator Leahy. There is always hope for redemption.
Let me follow up a little bit on the question that the
chairman was asking because I think the MOU that you have
entered into is a good start in addressing these concerns about
open access in cable broadband systems.
I am thinking of a practical question. If I were to become
a subscriber of AOL/Time Warner's broadband cable service, but
I want to get my Internet connection through an alternative
ISP, does that mean AOL and Time Warner still control what my
screen looks like? In other words, if I come in, will my other
server be shrunk and then have AOL/Time Warner advertising
wrapped around it?
Mr. Levin. No, no. In fact, let me state it not simply
because we are here today----
Senator Leahy. I mean, you could do that, technically.
Mr. Levin. Well, you could do it, but let me tell you
precisely why we won't do it and shouldn't do it, and it is not
only a matter of good public interest policy. The consumer is
really looking for as much choice as possible,and we saw this--
let me use an analogy again of the early days of pay television.
You used to only get Home Box Office exclusively in a cable
system. You couldn't get another pay service, and then Showtime
was only available in its services. It became increasingly
clear when the capacity was there and the ability to manage it
that it was a consumer benefit to have these multiple services,
so today we have a very thriving marketplace.
The same thing should apply with multiple ISP's. They all
have a different approach, a different screen, and in this case
we are talking about an approach that enlivens broadband
capability. And so one of the reasons I am actually quite
excited--this is not simply a public relations statement; this
is a commitment because it is very healthy for the cable
systems which are in a competitive race with DSL by the
telephone companies, with DBS, as well as wireless and MMDS, to
provide as much choice as possible. So you will be able to get
something that doesn't say AOL on it because it will be an
alternative ISP.
Mr. Case. Let me just add that as I think you know, I have
been sort of the Paul Revere on open access calling for some
time for the principle of openness that is so fundamental to
the Internet to be preserved as the market migrates to
broadband. In that process, we have been very clear about some
of the key principles that need to be in place to make sure
there really is consumer choice and there really is ISP
competition.
And one of them was exactly this issue, allowing ISP's to
maintain a direct relationship, including a billing
relationship, with consumers and allowing them to offer a
complete service not constrained, for example, by limitations
on video streaming and things like that. The Memorandum of
Understanding we released today addressed those issues head-on.
So we have really been, I think, the prime advocates of why
open access is so important, and we have worked hard in the
last 6 weeks since we announced this merger to make sure that
the approach that was put in place was not just in the interest
of AOL and Time Warner, but also the interest of ISP's in
general, and most specifically consumers.
Senator Leahy. Actually, we are very glad you have reached
the Memorandum of Understanding, and I am still looking through
it. Obviously, some questions have been addressed here, and we
will probably even have some questions after this hearing based
on answers from different people, which I will submit. And I am
sure, Orrin, you probably will, too.
Chairman Hatch. Sure.
Senator Leahy. But in that MOU you say that the combined
company will negotiate arms-length commercial agreements with
both affiliated and unaffiliated ISP's, and the terms of those
agreements and operations of broadband cable systems won't
discriminate between affiliated and unaffiliated ISP's. Will
this remain the same no matter if the proposed merger is
approved, disapproved, or what might possibly happen, approved
with conditions?
Mr. Levin. Absolutely.
Senator Leahy. This is your policy.
Mr. Levin. I am expressing commitment and excitement that
this is a very good thing to have multiple ISP's with access to
our consumers providing broadband services. They will be
marketing, they will be very aggressive. That has to be a good
policy. So, again, I have to repeat it is not----
Senator Leahy. I think it would be a good policy, but I
just----
Mr. Levin. It coincides with good public policy, but it is
also a smart thing to do with respect to consumer choice. And,
frankly, I would like my colleagues in the cable industry to
also respond in a way because this should be helpful in
delivering streaming video, a more robust service, to
consumers.
Senator Leahy. Can I take that a step further. In your
company, you have an enormous library not only of entertainment
products, but also information; I mean, Time and Life, for
example, just the archives contains everything from photographs
to articles written. In entertainment, you could rattle off the
catalog of that far better than I. But will there be the same
kind of non-discriminatory practices with respect to that
access?
Mr. Levin. Well, for example, in addition to our movie
library with all the Batman films, with some distinguished
Senators who played a role in those films, we have close to 20
million photographs.
Senator Leahy. In some places, that is more popular than
others, let me tell you right now.
Mr. Levin. We have 20 million photographs in the Time-Life
Building, really a remarkable collection--Alfred Eisenstaedt,
Margaret Bourke-White. Indeed, some of the photography in
Fortune in the 1930's, Fortune just celebrating its 75th
anniversary, is truly stunning in the early days of photo
journalism.
We have digitized a portion of that, and I can assure you
that that material will be available to anyone on the Internet.
It will be available through AOL, but it is available to
everybody because in a sense all of that material requires the
broadest form of distribution. So a lot of the material, the
content, the heritage of Time, Inc., and Time Warner is going
to find multiple expression.
Senator Leahy. Mr. Case, what about AOL? Will the same kind
of non-discriminatory practices be providing access to the
products and information of others that might not be affiliated
with Time Warner and its family?
Mr. Case. Oh, sure. We do that now and we will do that in
the future. We provide access to everything. That is really
what people are expecting, and we think it is the right thing
to do in terms of building this medium. It is also the right
thing to do in terms of building our business. If we were
constraining choice, we would wither as a service.
All of these businesses, you really need to look at as
separate opportunities. As Jerry Levin just said, if you are in
the music business or in the movie business, you are looking
for the widest possible audience. If a movie company only
distributed its movies through specific channels, it would be
making a big business blunder.
Similarly, if you are aggregating content, whether it be
Home Box Office or the Book of the Month Club or an AOL kind of
service, you need the widest diversity of choices. That is why
people will migrate to your service. So that principle has been
in place for both companies for a long time and will continue
to be in place. It is critical to continue to build these
businesses.
Senator Leahy. Somebody might ask, though, ifaffiliated and
unaffiliated are being treated the same, why bother to merge?
Mr. Case. Because we do think there is an opportunity to
build some new kinds of products and services; that if we have
all these different people in the same tent, we can do some
very interesting things, such as what we call AOL TV, trying to
make TV a little bit more personalized, a little bit more
interactive; things like an electronic jukebox trying to not
just talk about it, but do it so that consumers really have a
more convenient way to get music. So we believe there are some
significant business advantages to this merger, but none of
them get in the way of continuing to have these bedrock
principles of consumer choice and diversity of content.
Mr. Levin. You know, you have asked a question that we have
certainly received from Wall Street. Why not enter into a
certain number of joint ventures? And, frankly, stepping back,
there really as an intention to try and create a new kind of
company, one that is not only outfitted for this cyber speed of
this particular century, but one that recognizes its
responsibilities and wants to play a role in the formulation of
public policy with a very common social objective.
So we felt that this had nothing to do with size or with
conventional business metrics, but really trying to do
something quite different. And, frankly, this merger came
together because of a shared sense of values. Now, I know it is
unusual to state that, but I don't think we would have
proceeded otherwise. And it is also a profound statement about
the reality of the Internet.
You know, with some amusement, I don't mind the
characterization of old media. But, in fact, what this is is a
statement that we are living through a revolution and if we can
on some kind of cooperative basis play a role not just as a
vested interest but also as a company that cares about the
formulation of public policy, we would like to do that.
Senator Leahy. I know my time is up, Mr. Chairman, and I am
going to another hearing and I will come back. If not, I will
submit questions, if I might. Thank you.
Chairman Hatch. If I could just before I turn to you, Mr.
Case, just to clarify a point, if I want to access content on
the Web over Time Warner's broadband pipes, will I have to pass
through AOL's or Time Warner's start-up page even if I choose
to use another ISP? And do unaffiliated ISP's in your plan
share the first screen, get their own first screen, or do they
even get on the first screen? I know that is a tough question
because you can't put 800 million Web pages on the first screen
or a huge number of ISP's on the first screen.
Mr. Case. The way AOL customers today get the service is
when they sign on to the service, they will see, ``Welcome, you
have got mail,'' things like that. At the top of the screen,
you can type in that box to get to any service you want or you
can go through our menus and go to the services that we are
recommending.
In a broadband world, if the customer of a Time Warner
cable system or some other cable system opts to subscribe to
AOL, they would see that screen, similar to what they are
seeing today. If they subscribe to some other service from
EarthLink or a local ISP or Microsoft or whomever, they will
see that company's screen, not ours.
Mr. Levin. We tried to make that clear, Mr. Chairman, that
that is the true meaning of having alternative ISP's. So this
isn't a roundabout way of just providing AOL auspices for other
ISP's. Non-discriminatory access means that the consumer can
have a direct relationship with another ISP, including from the
time connectivity is established.
Chairman Hatch. Senator DeWine.
Senator DeWine. Thank you, Mr. Chairman, very much.
Mr. Levin, some time ago Time Warner and AT&T announced
that it was their intention to conclude an arrangement that
would allow Time Warner's cable subscribers to receive AT&T
branded telephone service over Time Warner's cable facilities.
Since so many Ohioans are served by Time Warner, this appeared
to me at the time to be an excellent way to offer many Ohioans
a choice of local service providers.
Let me ask you a couple of questions. Does this merger
impact on your arrangement with AT&T, and what exactly is the
status of the arrangement and when do you anticipate that you
will conclude an agreement with AT&T or some other provider
that will enable cable customers to benefit from a choice of
local telephone providers?
Mr. Levin. Well, obviously we think this is an important
service to be provided. First, with respect to business
customers, including in the State of Ohio, we are using the
cable platform for CLEC, a competitive local exchange carrier,
called Time Warner Telecom, which is serving in a very robust
fashion a lot of small businesses in many communities indeed
around the country.
Second, with respect to AT&T, while there has been some
distraction on their part during the past year as it relates to
the MediaOne transaction and a lot of developments have
occurred, I am quite optimistic that the relationship remains
as true and as strong as it always has been, so that in terms
of several different levels of service, be that cooperative
marketing, the provision of what is called circuit-switched or
facilities-based telephony, and now the opportunity to present
IP, or Internet protocol telephony, all of these opportunities
are actually broader today than they were at the time we
announced our understanding last year.
So I remain optimistic about provision of now even more
expansive services that take into account what we have just
been discussing, including broadband ISP's, where there is
another form of telephony that can accompany e-mail and instant
messaging.
Senator DeWine. Obviously, we have a special concern about
residential customers.
Mr. Levin. Yes, and that is why I said from a residential
customer point of view there are several levels of relationship
with respect to AT&T or other telephony providers. One is to do
cooperative marketing to provide a bundle of services to
residential customers. Two, where necessary, is to use the
circuit-switched, facilities-based telephone that can ride on
our cable pipes. And three is a new opportunity which we are
currently testing, and that is to use the Internet connection
as a way of providing residential telephony. So I think, in
fact, the passage of time has actually helped us because there
is a much wider array of services, and I think our interests
are quite aligned with Mr. Armstrong.
Senator DeWine. Let me ask you another question now.As you
know, Time Warner is involved in ongoing retransmission consent
negotiations with the Ohio News Network in Ohio over the issue of
whether and how Time Warner will carry the Ohio News Network on its
cable systems. You and I have discussed this before, and you know that
I am very concerned about it and I hope that you can work out some
reasonable settlement very soon.
On a general note, though, I would like to state for the
record that I am very concerned, Mr. Chairman, about how these
retransmission consent negotiations have been deteriorating
recently. Several months ago, Fox and Cox had a dispute that
resulted in Fox being dropped from several local markets for
some time, including some markets in the State of Ohio. Now,
Time Warner and ABC are apparently having problems with a
negotiation in the Houston market. I understand that one of the
issues in that retransmission consent discussion is how the new
AOL/Time Warner is going to treat ABC with regard to some
Internet issues.
While the details of all these negotiations obviously
differ, I am concerned that we are seeing more and more
situations where the parties are not coming to terms and the
customers are the ones that are being harmed. These
retransmission negotiations are going to become more and more
important in light of the developments in digital television,
satellite service, and broadband Internet service. And if the
parties are unable to work constructively together, I think
that some of the members of this committee are going to need to
seriously reexamine the retransmission consent mechanism to
make sure that it is working to protect the consumer. I look
forward to working on this issue with Chairman Hatch should
that become necessary.
So just a general comment about that, Mr. Chairman.
Mr. Levin. Well, if I could say to the distinguished
Senator from Ohio, you know, I share your concern. What was
intended to provide mandatory carriage, must carry, for our
over-the-air, free broadcast system, there was an addition
called retransmission consent, and up until recently I think
that system was working.
What we are seeing now is, I think, an abuse of that
provision in the law designed to provide a lot of leverage for
business purposes that really have nothing to do with serving
the citizens through this public license. In this case, I have
to say I am quite concerned with respect to ABC because here
the citizens of Houston have been singled out amongst all of
the communities where we have cable systems and ABC has
television stations. For what purpose, I am not sure.
There was an agreement in place at the end of last year
which, after the announcement of our merger, seemed to
disappear. And we have assured Messrs. Eisner and Eiger that
nothing has really changed in terms of the ability for Disney
material to be captured. So I share your concern about what is
really a perversion of this system, and I would hope that our
colleagues would recognize their public service obligation with
their broadcast license for the citizens of Houston.
Senator DeWine. Mr. Case, although AOL and Time Warner have
agreed to provide the so-called open access to the cable
network, you have indicated that there are some technological
barriers that might limit the number of ISP's able to use your
systems. Some people claim that the cable network could be
built so that it is completely open, just like the phone
system. And they are concerned that you may intentionally
design your system to limit the amount of competition that you
will face. These are obviously very complicated technical
questions and issues with important implications.
As policymakers, we certainly don't want to discourage
investment in broadband by diminishing its effectiveness, and
we don't want to regulate the Internet, but there are obvious
benefits to having a system that is as open as humanly
possible. Under these circumstances, does it make sense to
consider using a group of independent private industry
technical experts to help create industry protocols for open
design of the broadband architecture, for example, something
like the IETF, the Internet Engineering Task Force, or maybe
some other group?
This way, if an independent industry group were to find
that only a certain number of ISP's can effectively share a
network, there would be no question as to the validity of that
particular assessment. Would you like to comment on that?
Mr. Case. Well, as you know, we have been an advocate for
open access for some time, and in that process we actually have
done a lot of work with outside organizations to try to
understand some of the engineering issues. And we are very
committed to supporting a wide array of ISP's. We think it is
in the interest of the cable system.
I have believed this for some time. I guess I was not very
effective in communicating it until recently. I have believed
for some time that if you run a cable system, the best way to
maximize the profit generated from that cable system was to
have many companies essentially reselling that capability as
opposed to forcing those companies to find some other path,
whether it be a phone system or a satellite system or what have
you.
So it is in the best interest of the cable industry, as
Jerry just said, to encourage as much competition as possible,
as many people essentially selling your services as possible,
and that is our intent.
Senator DeWine. Thank you very much. Thank you, Mr.
Chairman.
Chairman Hatch. Thank you, Senator DeWine.
Senator Kohl.
Senator Kohl. Thank you very much, Mr. Chairman.
Mr. Levin, Time Warner is one of the biggest media
powerhouses existing today, with a large interest in virtually
every aspect of media, including movies, cable television, book
and magazine publishing, and music. As you know, now you seek
to combine with AOL, linking this content to the enormous
promise and reach of the Internet. I believe that media mergers
such as this one should be looked at differently than more
conventional mergers like, say, oil or cereal, because these
mergers affect diversity of expression in the marketplace of
ideas.
Mr. Levin and Mr. Case, do you agree? Do you believe that
mergers involving media companies should receive greater
scrutiny?
Mr. Levin. Well, I think it is very clear that particularly
the dissemination of news is fundamental to our democracy, and
therefore I would agree on the one hand that there should be
scrutiny. On the other hand, I think it is important to
recognize that the pillar of this society happens to be the
free exchange of ideas registered in theFirst Amendment.
When I referred before to the revolution that is taking
place in the Internet, I would suggest that this is not like a
traditional media merger where you have two players who are
currently engaged in traditional media joining together. In
fact, this is taking the Internet space and forging a merger
with a more traditional media company, and kind of the true
recognition of what the Internet can provide.
As I indicated before, from a business point of view, most
companies are feeling this disaggregation that is taking place.
So while I agree with you that the dissemination of news in the
marketplace of ideas is absolutely central to our democracy, I
am not sure what we might refer to as antitrust scrutiny would
do when you have almost an incalculable easy of entry. Let me
give you one example and then I will stop.
Everyone can be a source of news today, sent instantly
around the world. What was an interesting example is during the
war in Kosovo, when it was very difficult for any journalist to
be in Pristina, there was a young teenager operating with a
computer who was simply describing what was happening right
outside her house. This was going around the world. In effect,
this was the most profound source of news, and to me she was a
heroine, actually.
This is a symbol that today--actually, you know, when you
have the marketplace of ideas, I am not saying every source of
information has equal standing. But, in fact, there is no
gatekeeper. So, to me, that puts a new perspective on the
traditional antitrust scrutiny of this particular merger.
Mr. Case. Let me just add I think you should take this very
seriously because I think what we are talking about here in
terms of how people get information and communicate and buy
products is a very serious business. And we are talking about
an acceleration of the pace and having people living more and
more in a connected world, and there are many issues related to
that, including privacy and taxation and copyright, and so
forth, that merit attention. I think the good news is it is
getting attention.
But I think Jerry makes a very important point that from a
consumer standpoint, which I think is the best way to look at
this, there is an unparalleled level of diversity of voices.
When I was growing up, as I was referencing earlier, there
really were just three broadcast networks. And the challenge
there if you were a program producer was good luck trying to
get your program on the network, particularly getting your
program on the network in a good slot.
That has given way to now dozens of cable channels, in some
cases on satellite systems or digital cable systems hundreds of
channels, and there is a diversity of choice that is really
quite unparalleled. The Internet, as I think you all know,
takes that to a much greater extent because now there are
millions of choices and anybody can create a new site, and
millions of people have created new sites.
So I think it is very different. We don't feel like we are
putting these two companies together just to be kind of bigger,
and bigger is better. We think better is better, and we think
these companies can do some innovative things for consumers.
But we don't for a moment think that we have any lock on any of
these services, any of these businesses. We are going to have
to come in everyday and compete vigorously.
And some of the things we talked about which we think make
sense from a public interest standpoint also make sense from a
business standpoint. We have to do everything we can to build
confidence and build trust because that is the bedrock of all
these different services.
Senator Kohl. I think both of you are arguing the
legitimacy of your deal, and I am not disputing whether it is
or isn't. I am just suggesting that people like Mr. Pitofsky,
for example, who, as you know, is over at the FTC and is going
to be looking at your merger, believes that a merger of this
sort deserves even closer scrutiny because we are talking about
the industry that you are part of which is so basic to our
society.
Mr. Levin, your company has an unparalleled history and
tradition in journalism going back to the days of Henry Luce
and the founding of Time magazine, and it has only been
enhanced by CNN, one of today's preeminent cable news
organizations. However, some observers are concerned about what
this merger will mean for news and public affairs programming,
and worry that AOL's business interests might constrain the
reporting found on the various Time Warner's news outlets.
For example, I was struck by both of these themes as I
watched the CNN-sponsored Democratic presidential debate last
week in New York City. I noticed that you were in the audience,
Mr. Levin. Now, all members of the panel of journalists asking
the candidates questions were part of the Time Warner
organization, from either Time or CNN, as was the moderator, as
you know, Bernie Shaw, of CNN.
The program was broadcast only on CNN. The debate format
allowed questions from the Internet, but only those that came
through either AOL or the Time Warner Web site. And the debate
took place in the historic Apollo Theater, which has been
endowed by Time Warner. In addition to all of that, the New
York Observer has reported that no journalist not affiliated
with Time Warner was even permitted in the Apollo Theater, a
venue with a capacity of over 1,400 people.
So, Mr. Levin, the exclusion of outside journalists was a
mistake, wasn't it? I assume it wasn't company policy. And,
second, in light of all of this, will you pledge to us that the
independence of Time Warner's news organizations will be
preserved and that Time Warner's corporate owners will in no
way interfere with the news coverage found on CNN, Time,
Fortune, and its other outlets?
Mr. Levin. Senator Kohl, I will refer to my statement.
There is nothing more important to my trusteeship at Time
Warner, now AOL/Time Warner, than journalistic independence. We
have a deep tradition at our company of the separation of
church and State, which means there is no business interference
at all with the quality of our journalism, and I will make that
commitment to you. It is at the core of my being. I was raised
in this company and that is what I intend to do in the new AOL/
Time Warner. And as I indicated, Steve Case understands that
this is a part of our heritage and we would not have moved
forward if there were any other understanding.
Let me refer to the Apollo Theater. This was a moment I was
extremely proud of. I think it was the first time there has
been any kind of political debate in the village of Harlem
where the community leaders had a chance to address issues that
relate to the African American communitythat are just not
otherwise addressed.
Now, in fact, the Apollo Theater does not have sufficient
space for a press room. So, at our expense, we established one
across the street above a Krispy Kreme donut shop and enabled
250 journalists to have full access to the feeds that were
available. And at the conclusion of the debate, we made sure
that everyone who was in attendance, from Phil Jackson to
Whoopi Goldberg, could have a chance to address the assembled
press.
In fact, I would say that the quality of the questions
which came from the community leaders as well as from Bernard
Shaw or Jeff Greenfield--that anyone on the Internet could have
asked a question by just dialing up any of the chat rooms that
we had available. So this, I think, was a proud moment. It also
is something that again exemplifies this political season,
where I believe we are seeing, because of the more intense
coverage, more engagement, more voter turnout, more interest in
the issues.
And, in fact, one of my intentions by swearing off of soft
money was to provide money available so that our journalists,
whether it is CNN or Time or New York One News, could provide
more issues coverage of this campaign, and I am very proud of
what they are doing.
Mr. Case. Let me just add that I did see an article this
morning in the Washington Post talking about this, sort of
suggesting that the motive for scheduling a debate like this is
sort of to build the brands and things like that, almost being
cynical about it.
I actually am very proud of what Time Warner did and I
think it is an example of what AOL/Time Warner wants to do,
which is not just build our businesses, but also try to serve
the public interest. I think CNN and other Time Warner networks
have done many debates in the past few months that have given
consumers and citizens much more of a sense of the issues in
these elections.
AOL has done the same thing, investing a lot of money and
time in election coverage. It is not the best thing to do
commercially. Doing a knock-off on ``Who Wants to Be a
Millionaire'' probably would generate more revenue than a
debate from the Apollo Theater. But it is the right thing to do
and it is the kind of thing these companies are going to
continue to do, and I think you should be appreciative of the
fact that we are both committed to the public interest and
using these different TV networks or Internet services to serve
the public interest.
Mr. Levin. I guess I should add in the sense of full
disclosure, yes, our annual meeting will be at the Apollo
Theater. We are going to produce a documentary on the history
of the Apollo Theater so that the young people--and this was
what was encouraging to me that evening, is to see young
citizens in that community who had some measure of pride that
we were bringing these issues and this campaign to their
community.
Chairman Hatch. Well, I have to say as somebody who has
participated, after listening to Senator Kohl's recitation, I
didn't realize how much control you had over presidential
politics. I should have held this hearing in January.
[Laughter.]
We will turn to Senator Abraham now.
Senator Abraham. Well, thank you very much, Mr. Chairman.
Chairman Hatch. By the way, I thought that was an excellent
format compared to some of the others that I was in.
Senator Abraham.
Senator Abraham. Thank you, Mr. Chairman. I just want to
begin by saying that I very much have appreciated hearing today
the commitment that both of you have expressed with respect to
the issue of consumer choice and the issues of open access. And
I hope that all of our colleagues will take note of that, as
will others who have an interest in this merger. To me, those
are really the central questions, or at least two of the most
central questions that ought to be focused on. And I just want
to draw attention to that here today and to applaud the obvious
commitment that has been expressed in the Memorandum of
Understanding that we heard about earlier today.
I also want to just say, Mr. Chairman, that I do think in
the age of the technology revolution that we are currently part
of, it is very hard to apply existing regulatory or statutory
analysis when we try to assess things such as whether or not
antitrust issues are applicable, whether it is this merger or
any other. When we are dealing with technology that is changing
so fast, I think it changes the way we should look at business
mergers.
Mergers in today's 21st century information age Internet
economy are, by definition, different than mergers that
occurred in the industrial smoke-stack industry age of a
century ago. Are there significant barriers to entry in today's
information age technology and economy? Well, we can look at
dollars and cents exclusively, but there don't certainly seem
to be very many barriers to the start-up of new enterprises.
Anyone with a PC and a good idea can start an Internet company
pretty darn quickly, and nothing about this merger is going to
change that.
Are new ideas and new innovations being stifled? Well, pick
up the business section in any newspaper in the country and
what you will find are stories about new and very exciting
innovations every single day. Just last week, in our State, the
Big 3 auto makers announced a very innovative and exciting
initiative to put all of their auto parts procurement processes
online, and I suspect we will see some of the major parts
providers joining in in some way in that enterprise.
Are consumer prices rising and consumer choices being
limited or reduced? Again, I don't see that happening. Consumer
prices generally have remained in check, and prices for
software, hardware and Internet services have essentially
declined throughout the 1990's.
And on the issue of consumer choice, here is an interesting
fact. By the end of this year, 2000, there will be
approximately 1 billion Web sites on the Internet offering a
mind-boggling array of information products and services. It
seems like an ample amount of choices to me, although I have
got two 6-year-old daughters who are already finding themselves
so literate at using the computer that maybe within a few years
that won't be enough for them and their peers.
In my judgment, I think we need to examine mergers against
that backdrop and focus not exclusively on the size of the
companies or what they do today, but on the broader backdrop of
the sector that they are part of and what the slightest
development or new innovation can do to change the whole world
in which they operate. That is why I think this merger,
certainly what I know about it, constitutes anexciting marriage
in a sense of both the new as well as traditional media.
By bringing together print, video and online media, I think
the merger can open a number of possibilities for applications
and cross-applications that we can only begin today to foresee.
So I very much appreciate what I have heard.
I also, because I am going to also see you both on
Thursday, I guess, in the Commerce Committee, want to ask a
question here that is a little more within Judiciary's
jurisdiction and perhaps a little less in the jurisdiction of
my friend Senator DeWine's subcommittee, and that is in my
Subcommittee on Immigration.
You talked, Mr. Case, in particular about the digital
divide and the commitment that you have made, and I know Time
Warner has likewise tried to make and Mr. Levin mentioned just
a few minutes ago. One of the things that we are confronting
this year is yet again an enormous shortfall in the number of
IT and high-tech workers available to fill slots and
assignments that we have in this country.
I don't believe immigration can be a permanent solution or
a long-term solution to those problems, and I know neither of
you do as well. Therefore, as a result, we just are looking at
legislation that would increase at least for a couple of years
the number of high-tech worker visas that would be permitted to
be issued.
Those who are not immediately supportive of that idea have
argued that the private sector is not doing very much with
respect to training and education, and that instead of
immigration visas we should crack down on industry because they
are not pulling their fair share.
I would like to ask both of you to comment, at least within
the context of AOL/Time Warner, what you all are doing so that
we might at least partly address some of those criticisms, and
then also for any comment you might have with respect to the
high-tech worker needs and then the issues that relate to high-
tech worker visas and whether or not you see them at this point
as a positive versus a negative piece of legislation.
Mr. Case.
Mr. Case. We think it is terrific legislation, and we
support and appreciate your leadership on this issue. We think
it is great for this Nation to continue to be the beacon for
talent around the world, people wanting to come here and
participate in this phenomenon of the Internet, and that
stimulated development of a lot of new companies in this
country has been the beneficiary of that. So anything that is
supportive of that process of getting the best and the
brightest into this country so they can help us stimulate this
economy and create these new companies and new services for
consumers I think is a healthy thing.
In terms of training specifically, we have had to do a lot
on training because when we started our company 15 years ago,
we started with a couple of dozen people. Even 5 years ago, we
had less than 1,000 people, and now we have over 12,000 people.
So we have grown very rapidly and we have had to do a lot of
things internally to train our people to make sure they have
the right skills going forward.
And we also are taking on a very active role to try to
stimulate training, new ways to even think about education,
marrying these new technologies with educational systems. We
have an initiative called AOL at School, for example, that is
precisely designed to do that. So we think it is very important
to invest in education, to invest in training, and to recognize
that this new medium creates new opportunities, and to try to
embrace those new opportunities so we do have a better educated
society, not just people when they are going through school,
but people throughout life.
Mr. Levin. Just to connect two points, the underclass and
the digital divide, we have a program that we put into 10
public schools in New York City where we have been training
teachers to take young people who are in the 11th and 12th
grade to give them a certificate so they can become digital
software engineers.
In the past, they might have certainly not gone on to
higher education, might have gravitated toward auto mechanics.
And we do this in our own facility where we are training people
at Time Warner because these jobs are actually--a high school
graduate with this 2-year program can fill--there are 50,000 or
60,000 jobs going unfilled at a very decent salary.
And we have picked obviously 10 disadvantaged schools in
the City of New York. It is a program started by Cisco
Academies, but in this case we are trying to expand it. So it
is just coming at it from another direction and it is another
way of saying that the skill base in our companies, including
AOL and Time Warner, that we ought to make those skills
available not only for our own purposes--that is, training for
our own company--but also to supplement what the schools are
unable to do.
Senator Abraham. Ten school districts. Approximately how
many----
Mr. Levin. Ten schools within New York City.
Senator Abraham. Approximately how many people will be a
part of that program?
Mr. Levin. Well, at any one time we have put--we are
training the teachers, who then train the students. So we
probably train 20 teachers at a time. It is a several-month
program, and then they go into each of their schools. This
program is now in its third year, so we had the first class
graduating, and it has probably been one of the most successful
programs because we broke through some of the difficulty in the
school governance system to do it.
Senator Abraham. Great. Well, my time is up, but I would be
interested in getting more information about what each of you
and your companies are doing. Thank you for being here today.
Chairman Hatch. Thank you, Senator.
Senator Feinstein, we will turn to you.
Senator Feinstein. Thanks very much, Mr. Chairman.
You know, gentlemen, as I sit here and listen to this, I
just cannot fathom the enormity of this. I am led to believe
that this is the largest combination of businesses in the
history of this Nation.
I am concerned with three things and I would like to
contain my comments and questions to those. The first is your
Paul Revere aspect, Mr. Case, and that is open access. The
second is really a narrowing of journalistic sources, and the
third is privacy.
Before the merger was announced, AT&T answered your demands
about open access by pointing to contracts with At Home that
required exclusivity for a number of years. Open access was an
impossibility in the near term, they said, because the
contracts could not be broken. And yourcompany, as you know,
did not agree with that.
I have looked through the Memorandum of Understanding. I am
not a lawyer, but it doesn't appear to me to be binding. In
point 11, ``All of the foregoing is subject to all preexisting
obligations of Time Warner, including, without limitation, Time
Warner's agreements with,'' and then it mentions some
companies, or Road Runner, ``and its fiduciary and other
obligations to its partner.'' Now, I have no idea of what that
is.
``However, Time Warner will endeavor to reach agreements
and accommodations with third parties to whom preexisting
obligations are due that would permit the full implementation
of the commitments described herein as quickly as possible.'' I
mean, this does not seem like a binding commitment to me of
open access. Could you respond?
Mr. Case. Sure. Let me give you a little bit of the history
of the Paul Revere ride. It was several years ago when it
became clear that the Internet was about to move into another
phase, that broadband was going to become more important, and I
and others made the point that it is critical that the kind of
openness and competition that exist in today's Internet
continues to exist and flourish in tomorrow's Internet.
Therefore, it is critical that all broadband networks be open
and consumers have choice.
We initially were hoping that companies in the cable
industry would just voluntarily do that because we thought it
made good business sense. When AT&T announced that they were
acquiring TCI, we actually, I remember, put a statement out
that day saying this is great, we look forward to working
together to help build broadband.
And what we found is at that point in time there was not a
willingness to embrace this idea of consumer choice. The only
way to get broadband access from an AT&T system was going to be
if you bought the AT&T ISP, which was At Home. And that
disappointed us. We therefore said, well, if it is important
from a consumer standpoint and a policy standpoint and at this
point in time the cable companies aren't willing to do it
voluntarily, then it does seem like this is a need for
Government involvement, and we said the Government needs to
take a look at this.
And I testified in a variety of hearings and talked to a
lot of people, and the general reaction was we agree with you
that this is a matter of concern, but our sense is we should
see if the market will work on this before the Government needs
to step in. And we said, well, OK, that is not exactly what we
would have liked at that time, but we understand.
Then two things happened really in the last few months. The
first was AT&T, which up until then had said that open access
was not technically possible nor financially feasible, issued
some principles stating they were committed to open access. And
we said that was a major step forward, but there are some
details that needed to be looked at. We had some questions
about billing relationships, we had some questions about video
streaming, we had some questions about timing, but we thought
it was a step forward.
The second big thing was we announced the merger of AOL and
Time Warner. We committed on that day that Time Warner systems
would embrace the concept of consumer choice and that we would
work as quickly as possible to achieve that. Today, we put out
a Memorandum of Understanding that I think goes a major step
ahead of where AT&T was, adding clarity on video streaming,
adding clarity on billing relationships, and saying that we
will move as quickly as possible to achieve that.
That specifically references the Road Runner agreement.
Road Runner is a partnership of Time Warner and AT&T. They are
the principal owners, as well as Microsoft and Compaq, and
there are some cable partners that have an interest in
different cable systems. The present agreement for Road Runner
in terms of exclusivity expires at the end of next year, the
end of 2001, and the commitment that we have made is that we
will move as quickly as possible to accelerate that. So instead
of having to wait until the end of next year, the hope and the
expectation is that this open access would happen faster.
And an important point to point out is AOL will not get
this open access. AOL will not be distributed on Time Warner
systems until this exclusivity is renegotiated and Time Warner
has the flexibility to work with us and also work with others.
So I think we have done a lot in the past couple of years to
take the issue, make it a major priority, build momentum for
it, and now get several of the major companies, we hope all the
cable companies, to embrace that notion of open access which we
think is good for our business, but most importantly good for
consumers.
Senator Feinstein. Let me ask you both, do you regard this
as a binding agreement?
Mr. Levin. Well, here I think we are talking about a legal
nicety. We are appearing today and asserting a commitment, and
that commitment is as strong a statement as we can make by
putting these principles out. So I don't think it is a lawyer-
like question. I think this is a personal commitment that we
are making, I am making, with respect to the cable systems that
we have.
Also, the principles that are embedded here do go much
beyond some of the general outlines that have occurred before
and are designed to send a signal that this is very healthy
opportunity for the cable industry. I can't turn back the
history where there were exclusivity agreements entered into
both with respect to Road Runner and Excite At Home because
this was an untested area for high-speed broadband access.
No one truly knew the opportunities or the difficulties,
and now that we have had experience over the past year it is
clear that there is capacity in this digital bank account. And
the principle that is being articulated of non-discriminatory
access is a fundamental principle really for, I think, the
cable industry. Therefore, I think today's commitment has real
significance.
Senator Feinstein. Could I respond to that? I am not
doubting that it has significance. Let me tell you one of the
problems. I have been on this committee for 7 years. This is
the biggest thing I have ever sat through. I have not had one
letter or one phone call. I reached over to my staff and said
have we had anything that has come in on this. He said we
usually get a lot of stuff--my Judiciary counsel--not one
thing. Senator Torricelli was sitting over here. I reached over
and I said have you had any input? Not a thing.
So this huge combination of companies is happening for us
at a point where there is very little input as to exactly what
means what. So I am not trying to in any way question you. I am
trying to understand it and I am not an attorney, so I am
pressing for that understanding. So please bearwith me.
The situation Senator Kohl outlined to you was one--and the
issue wasn't the Apollo Theater; the issue was a narrowing of
journalistic interests, the ability to participate. And I am
trying to figure out how much of the American public this
merger will actually affect. I suspect it is almost close to
half. I mean, it has got to be enormous in its impact.
Therefore, trying to think 5 years, 10 years down the line,
what does this do to the kind of input one gets in a
decisionmaking process if most of the input into that process
is controlled by one combination of companies.
Mr. Levin. Well, Senator, I actually feel as deeply as you
do about the importance of the dissemination of news and
information in our Republic. In fact, I think the evidence is
crystal clear that in more conventional terms, the amount of
news and information before we turn to the Internet as a result
of the multiple channels, particularly what has occurred
through cable and through DBS, in this political season there
is more opportunity for consumers to receive a diversity of
voices and news on issues that really affect our society than
ever before in the history of our Republic.
Now, we add to that the Internet, and by definition the
Internet is a wildly democratic, chaotic network with no
central control. We have never had anything like that in our
human history. Therefore, no matter what AOL or Time Warner may
do, you can't prevent these billion Web sites from being sent
around the world with as much information as possible. There
isn't a subject available either that is happening today or
relates to lifestyle information.
You know, it is somewhat like having the old dream of the
central library in Alexandria where all human wisdom would be
recorded in a place that people would have access to. That is
essentially what we are living in, and so the old concept that
anyone could control this source of news just really is turned
on its head.
In addition, I have to return to the heritage of our
company. I would like you to have some comfort that our company
has been built on this separation of church and State,
immunizing the news sources from any business input. And, in
fact, in this era when some have cut back on the number of
bureaus, in our case on a worldwide basis we have been adding
to the opportunity particularly with respect to international
news. So I feel deeply about this issue. It is at the
cornerstone of our company. I would not have proceeded with the
AOL/Time Warner merger if I thought that this would be either
interfered with or narrowed.
Mr. Case. If I could just add on this open access because I
think it is very important, I think you should take some
comfort in the fact that 6 weeks ago we announced the merger
and today we are announcing a fairly detailed Memorandum of
Understanding that addresses in a very direct way the precise
concerns we and others have had over the years about open
access, saying that it is important that video streaming be
permitted, it is important that ISP's really be able to build
directly with customers, it is important that there be no
technical limits on the number of ISP's.
And we have done that in a relatively rapid period. We have
understood all along, because we were on the other side of this
issue for so long, what was necessary to really ensure open
access, and we have been working in a relatively brief period
to achieve that and that is what we announced today. What we
will be doing in the months ahead is putting that into
practice, make it binding not just between our companies but
between Time Warner and other cable systems, and between Time
Warner and other cable systems and many other Internet service
providers.
So I think we have made tremendous strides here, really I
think demonstrating that the commitment we have had to open
access is a real commitment and it is not just about talk, it
is about action.
Chairman Hatch. Well, if I could just follow up more
quickly on Senator Feinstein's concern here, Mr. Case, you were
so concerned about the AT&T-TCI merger's possibility of
suppressing competition that you urged an open access policy or
requirement should be adopted as a matter of policy.
Of course, you have both now attempted to address this
through your Memorandum of Understanding between your two
merging entities. As you have heard here today, some do appear
skeptical about this voluntary pronouncement while the mergers
are pending. To show your commitment, would you agree to have a
more definitive version of the MOU, or Memorandum of
Understanding, be a further on condition on regulatory approval
of your proposed merger?
Mr. Case. Well, I think we have made a lot of progress in
the last 6 weeks and I think you will see us making a lot of
progress in the coming weeks and months. And I think you will
find that it will be unnecessary because we will actually have
done in the marketplace precisely what consumers need and other
ISP's need, which is stimulate choice and competition.
So I understand there is always going to be some cynicism
about this, and it is sort of the concept, I guess, of trust
but verify. And I think you will find in the months ahead that
we are dead serious about this and there will be no need for
Government involvement because our companies, and we believe
other cable companies, will get on this bandwagon.
If that is not what happens in the marketplace, if there is
not real definitive open access not just with our company, but
with other companies, it would be certainly fair for you to
readdress it at that particular point in time. I don't think
you will find that that is going to be a concern.
Chairman Hatch. Senator Feingold, I am sorry to delay your
questioning.
Senator Feingold. Thank you, Mr. Chairman.
Mr. Levin and Mr. Case, welcome to both of you. We
appreciate your coming and how generous you have been with your
time.
First, I would like to commend you, Mr. Levin, for your
announcement back in November that Time Warner would no longer
make soft money contributions to the political parties.
You have obviously been in the news a lot in more recent
months as a result of this merger, but I believe that the
decision I have just referred to was very significant, and you
deserve a lot of credit for it not only from me and others in
Congress who support campaign finance reform, but also from the
public. So I want to make sure that your important contribution
to political reform is part of the record of this hearing.
I would like to give you an opportunity to tell us about
your decision and why you made it in a moment, and Iwould like
Mr. Case to comment as well. But, first, I just want to tell you and my
colleagues that I just came from a somewhat extraordinary event that
bears upon this discussion.
A few minutes ago, a 90-year-old great grandmother named
Doris Haddock--many across the country know her as Granny D--
took the final steps in an extraordinary journey that started
back in January 1999 at the Rose Bowl Parade in Pasadena.
Granny D literally walked across the country; she walked across
the country from the Rose Bowl to the Capitol steps, 10 miles a
day, 6 days a week, through the rain and snow, relying on the
kindness of average people who walked with her and took her
into their homes. And she did this to call attention to the
specific issue of banning soft money.
So here we have this 90-year-old woman from New Hampshire
doing her part, and I want to say again we have here sitting
before us a powerful CEO of a major media corporation doing his
part to address the problem. I think it is noteworthy that you
made this decision in a changing and challenging regulatory and
political environment for your business when many of your peers
in the information technology industry are becoming more
involved, not less involved, in trying to influence the process
through huge political contributions.
So again I want to commend you for what you have done. I
would like to give you a chance to elaborate on your reasons
for doing it and explain the other components of your plan to
revise Time Warner's participation in the political process. I
would also like to ask you and Mr. Case if AOL/Time Warner will
continue these policies if and when the merger is consummated.
Finally, if I could squeeze one more question in before
turning to you, have you had any response, positive or
negative, to Time Warner's new policy from others in the
industry?
Mr. Levin.
Mr. Levin. Well, thank you, Senator. We have had some
response from some people in the industry applauding it, not as
much as I would have liked, and it is not a singularly popular
decision here in Washington.
Just to turn the clock back, Time Warner was built over
several years, an aggregation of several companies having
disparate views on political contributions. We finally reached
a point where it became clear to me as a result of almost
personal principle that the insidious effects of soft money
were obviously--to me, it taints the underbelly of the
electoral process because it is subject neither to regulation
and therefore to real abuse. Also, what is the bargain being
struck?
So with some pain because of past practices by several of
our constituent companies, it became clear to me that we
couldn't really hold ourselves out with the journalism that we
have discussed with Senator Feinstein before and maintain this.
So we spent some time analyzing it, and in making the decision
I decided to make one other statement, and that is I wasn't
going to benefit from the reduction in expenditures from any
business point of view.
We would take that money which would otherwise have gone
into soft money contributions and redeploy it. And it has been
redeployed, I am pleased to say, including at several of the
debates, in what we simply asked for more issues coverage in
this political season. So with no strings attached, the money
was dispatched to CNN, Time, and the five 24-hour news services
that we have on our local cable systems. And I am pleased to
say that, in fact, I think that has occurred.
As an example, if I look at Time magazine--and by the way,
I have no input in anything that is published there--there has
been continuing coverage, first of all, in very specific terms
of the rather lengthy piece that isn't necessarily the most
commercially appealing piece, but had to do with the effects of
one particular large contributor and what that did to the
political process.
At the same time that campaign finance reform is an issue
that I think our journalists are holding before our country,
they are also trying to keep the political focus on education.
So there have been many reports to try and make sure that that
issue gets addressed in this political season, including just
this past week a pretty interesting piece in Time on a more
structured, disciplined curriculum. So my own feeling is that
this has succeeded.
In the case of New York One News, there will be a lot to
cover in the upcoming senatorial campaign. So I am really
satisfied. I can't say that there is a bandwagon effect because
I think that this is still a controversial issue both within
corporations and certainly here in Washington. But I think it
is absolutely essential, and the new AOL/Time Warner will
follow the same policy.
Mr. Case. Yes, I think that is very important. We share
your concern about some of the issues related to the campaign
financing process, and I have enormous respect for Jerry taking
this bold, sort of controversial position as the leader of a
major media company to stop soft money. Indeed, that, along
with some other things, was one of the factors we considered in
thinking about merging together because we really do want to be
part of a company that is not just the most valuable in the
world but also the most respected in the world.
And being willing to lead on some of these controversial
issues is part of that. So this combined company will embrace
that notion that there are lots of things we can do to
stimulate the political process, but we will not do anything
related to soft money.
Senator Feingold. Well, I will leave it at that. I really
appreciate those answers. Thank you very much for being here.
Chairman Hatch. I would like to wrap this up, but Senator
Leahy has a question or two left.
Senator Leahy. Thank you, Mr. Chairman. Senator Feingold
mentioned about the soft money. Of course, the most relieved
person with your position on that was Tim Boggs because instead
of getting 300 phone calls a day, he now only gets about 100
phone calls a day.
I know there has been some discussion about the Apollo
Theater. I was pleased in that debate to hear the question
about the way the death penalty is handled in this country and
the number of people on death row who, in some cases just hours
before execution, they found they had the wrong person, and the
need to do a better job of making all evidence available.
Let me just ask one question and it relates to a question I
have raised with both of you over the years, but especially
since this happened. Mr. Case, you have got 21 million
subscribers at AOL and Time Warner has 13 million-or-so cable
subscribers, and then you have got millions ofpeople with
subscriptions to your publications, and so on.
Now, you have made no secret about the fact that you want
to cross-promote and distribute your products and services, and
nobody questions that that is a good corporate thing to do.
What we do worry about is what happens about the databases that
are there. How does that get shared? If somebody goes on AOL to
buy something and they put their credit card in, everybody
knows about that. They buy a sports magazine but don't want
another magazine and all these things that could be done.
How much information should be shared, how much should be
sold, how much can be sold? As Double Click and others go into
these questions, what are you doing to form a corporate policy
and one that can evolve as technology evolves on privacy?
Mr. Case. I will start, if you like. We think privacy is a
key issue in this new Internet Century. As we move to a more
connected society, I think it is critically important that
people feel like their privacy is protected. If they don't,
they won't use these services and the medium will not flourish.
So it is the right policy decision and it is also the right
business decision.
At AOL, we have established a policy several years ago that
really said that people should know what is going on, have
notice of what information is being tracked, and also have the
ability to opt out if there is anything they do not want to
participate in. And we have encouraged others within the
industry through the Online Privacy Alliance and other
initiatives to join with us, and we are pleased to say in the
last 2 years we have gone from a situation where very few
Internet sites posted a privacy policy now to a majority of
sites do. So that is progress, but there is still work to be
done.
We are in continuing discussions with companies and with
people in Congress about what is the right balance to strike
here. We do think that privacy needs to be protected. We don't
have an allergic reaction to any legislation related to
privacy. If there is something that really deals with the issue
in a focused way so that every consumer has the kind of basic
principles of notice and choice, we would be supportive of
that.
Time Warner--Jerry could speak to this--also has policies
in place for many decades and it is part of building these
brands and building this trusting relationship. So this
combined company hopes to be a leader in really defining how
privacy should work in the future and being protective of
privacy in any way we possibly can.
Mr. Levin. This is a fundamental concern of ours that is a
historic concern that we share because the direct marketing
business in advance of the development of the Internet has
involved issues of privacy. And we have--this is 75 years--
supported what today are known as the DMA's privacy promise,
and that is we make sure there is notice, there is choice,
there is the ability to opt out before any information is used.
I mean, this is really ingrained in the direct marketing side
of the development of our businesses because you have a special
bond of trust with the consumer.
And now fast forward to our relationship. Steve and I are
Co-chairs of something called the Global Business Dialogue, and
here we are trying to establish on a worldwide basis a set of
standards that relate to privacy for companies around the globe
so that there can be the form of consumer confidence and trust.
And this also is an issue where our own communication with you
is to work through where is that line between self-regulation
and is there any necessity to do something about it. We are
really very open because we really share the same concern.
There is no dissimilar interest here.
Mr. Case. I think one point to add is although I understand
why there would be sort of a natural concern about big
companies with all these databases, and so forth, I think the
real concern is less likely to be the big companies and more
likely to be the smaller companies. As Tom Friedman in the New
York Times has said, it is not the fear of Big Brother, it is
more a fear of Little Brother.
I think the big companies, certainly ours, really recognize
the importance of privacy and the importance of trust and the
importance of putting principles in place that do make sense.
It may be some of those kind of smaller companies on the
fringes of the Internet where the real risks are, which is why
some kind of legislation may be necessary. I think you will
find companies like ours really leading the charge in trying to
protect privacy, working with you to try to do the right thing
in the right way.
Senator Feinstein. Mr. Chairman, would you allow me a
follow-up on that?
Chairman Hatch. Sure.
Senator Feinstein. This has to do with another subcommittee
of this committee, which is the Technology Subcommittee. Mr.
Levin, you mentioned the words ``opt out/opt in,'' which is
something that we are looking at in this subcommittee. I happen
to believe very strongly that all of our Social Security
numbers and our drivers' licenses shouldn't be used for
commercial purposes without our permission, nor should our
personal financial or our personal medical data.
Now, opt in/opt out touches on that. My belief is very
strongly that the company ought to get the permission of the
individual before they use that personal information. Would you
agree with that?
Mr. Levin. Just to get beyond some of the rhetoric that
sometimes invades this issue, it really is a question of notice
and choice so that consumers will understand and know exactly
what is intended, and they have the ability to choose, to make
a decision, as opposed to somebody----
Senator Feinstein. Just say yes or no. In other words, they
have notice first?
Mr. Levin. Yes. I would use the----
Senator Feinstein. In other words, if you wanted to use my
personal health information or my personal financial
information, what mortgage I had, where, you would agree that
you would need my permission?
Mr. Levin. We would need to--I will use these words. Notice
should be given and the choice should be left to the consumer.
Mr. Case. But I would add that I think there are different
aspects of this that require different approaches. For example,
last year we were supporters of the legislation trying to
protect children's privacy. We think the standards should be
higher for children. We think the standards should be higher
for medical information, for example.
At the same time, we need to strike the right balance,
making sure consumers know what is being done withinformation
and if they don't like it, say I don't want that to happen, balancing
that with trying to make sure the Internet continues to flourish and
some of the benefits to consumers of personalized information are real
as well.
So ultimately it is about consumers knowing what is
happening and feeling in control of their own information. That
is the principle that we support, but we agree that there are
some situations that require a higher standard and children
being the highest of all.
Senator Feinstein. Well, I would very much like to discuss
this with you because we have a hearing on identity theft
coming up and this relates exactly to that issue.
Mr. Case. I look forward to it.
Chairman Hatch. Well, let me just say that I really
appreciate your views on online privacy. Senator Leahy and I
are working very hard to try and come up with some solutions
here and we could use your advice and your counsel in helping
us to know how to do it because I think you are right. The
major companies--this is something they are really concerned
about and want to do something about. It is the fly-by-nighters
that you have to be concerned about and that is a fact.
Now, let me just ask a couple of last questions. Gentlemen,
your MOU, your Memorandum of Understanding, does not address
the issue of emerging Internet telephony. I think I would like
to ask the question this way. Will competitor ISP's that have
access to your cable pipes be able to offer Internet telephony
services without any restrictions?
Mr. Levin. Yes.
Chairman Hatch. OK, that is all I wanted to know on that.
Now, Mr. Case, you were quoted last July by the New York
Times as saying--and I am sorry to bring these things up, but I
want to get it cleared up, and I think it is better we do it
here in these hearings to give you a chance to clarify it.
Mr. Case. I appreciate that.
Chairman Hatch. You were quoted as saying in the New York
Times, ``Windows is the past. In the future, AOL is the next
Microsoft.'' Now, I understand that you later clarified that
quote.
Mr. Case. Particularly with Microsoft, which did not
appreciate it, I assure you. [Laughter.]
Chairman Hatch. Listen, that is not a bad goal to have in
mind is all I can say.
However, the committee has received a number of consumer
complaints that installing the new AOL 5.0 access software
disables other ISP's that the consumer might have on his or her
computer. Now, this happens even if the consumer chooses
through the AOL 5.0 prompts to have another ISP as his or her
default first screen.
Can you explain why this happens and the steps, if any, you
have taken to address this technical problem that, in my
opinion, would clearly eliminate consumer choice?
Mr. Case. Well, first of all, I would like to clarify that
I never said we wanted to be the next Microsoft or expected to
be the next Microsoft. It would be presumptuous for me to say
that and I am not a presumptuous person. We have said that we
do hope that someday we could be the most valuable company in
the world, and we also said that we hope to be the most
respected company in the world. I would just leave it at that.
As it relates to the AOL 5.0 issue, we and other companies
try to simplify the process of installing and using our
services. There are a lot of things built into operating
systems such as Windows that encourage people to set defaults,
whether it be for their audio program like real networks or for
many other features related to the Internet. If you set those
preferences properly, then the software will work faster and
more seamlessly.
So when people install AOL 5.0, it asks them would you like
us to set this up so that AOL is your primary service. If you
say yes, we set it up that way. If you say no, we don't set it
up that way. And if you say yes and then change your mind, you
can turn back those settings. So we do tell people what we are
doing. We are doing it because it is better for consumers, and
indeed for 95 percent of our members they only use AOL. They
don't use other Internet service providers, so this isn't even
an issue. It is only an issue for the 5 percent or so that have
multiple ISP's and they have the choice about whether they want
AOL to be the default ISP.
Chairman Hatch. But I have been informed that even those
that have been selected have been disabled with other ISP's.
Mr. Case. When you ask the question, if you say you do not
want AOL to be set up as a default, it will not be set up as a
default. Or if you say yes and then change your mind, you can
change the settings. And we do that, as I say, as many
companies do, simply because that results in a seamless
software interface. So when you access certain sites, it will
happen faster than having to ask you or find the right software
on your hard drive.
Chairman Hatch. Recently, some have raised the idea of
granting compulsory copyright licenses to Internet service
providers to retransmit broadcast signals similar to those
granted to cable and satellite. As you well know, Mr. Levin, I
am generally skeptical of compulsory licenses for intellectual
property, except perhaps as a stop-gap measure to remedy
antitrust violations or compelling marketplace failures.
Indeed, I fully endorse longstanding trade policy to curtail
such practices by foreign governments.
Now, do you believe such compulsory licensing is
appropriate for broadband Internet services given the
interactive nature of the service, and do you believe that with
the advent of broadband Internet, with its a la carte program
selection possibilities, it might allow us to move away from
the need for compulsory licensing of programming altogether in
favor of more fluid market relationships?
Mr. Levin. Well, I certainly don't think compulsory
licensing is necessary in the Internet environment, either
narrow band or broadband. In fact, you have a very thriving
marketplace in the licensing of material that is really quite
dynamic, with a whole source of new suppliers, new companies
emerging everyday with commercial arrangements for Internet
distribution. So I am comfortable at this point that that would
really be a mistake because it is just not necessary. It would
be nice at some point with respect to compulsory license
throughout the rest of our regulations as to whether at some
point it might be necessary. I don't think we are at that point
yet.
Chairman Hatch. Do you have any comments on that, Mr. Case?
Mr. Case. No, not really. There was some concern afew
months ago about this issue, but that related more to it being appended
to something else in the wee hours of the night without really having
any discussion about the issue. We just think there should be a
discussion about any of these issues.
We do think the Internet is going to become more and more
important and we need to look at these issues in a serious way.
I am actually encouraged that as people move more and more
toward the Internet, there are going to be some benefits to
consumers, particularly parents in terms of how parental
controls work not just on your PC but maybe on your television
or your music jukebox, things like that.
And some of the debates we have in the television world
that I am starting to learn about about retransmission consent
and must-carry and things like that is different in the
Internet world because everybody gets carried. There is no
debate about must-carry. So I think in this new world, this
more converged world, it will require us to look at a lot of
these issues from a fresh perspective. The good news is
consumers are getting more choices through more different kinds
of systems.
Chairman Hatch. Well, Mr. Case, let me ask one more
question. We understand that start-up companies sign agreements
with AOL in order to provide access by the start-ups to
consumers accessing the Internet through AOL. These agreements,
according to what I have been told, typically involve tens of
millions of dollars in cash payments to AOL and the granting of
equity in these companies to AOL, presumably due to the strong
market power and subscriber base.
As Mr. Levin is familiar, in 1992, due to abuse by cable
companies, Congress overwhelmingly passed legislation limiting
the ability of cable companies to extract equity in programmers
as a condition of carrying programming signals to the consumer.
Now, do you think that these cable restrictions are applicable
to AOL/Time Warner's ability to equally extract equity in
independent content providers who wish to be indiscriminately
accessible to AOL Internet subscribers, and without such
restrictions will this new merger not tend to thwart the
ability of alternative voices to reach the vast AOL subscriber
base?
Mr. Case. Well, as I was just referencing, I think is
really is apples and oranges. The world of television is really
a world of scarcity, where the debate is can you get your
channel carried on systems that have limited channel capacity.
There is no issue of scarcity on the Internet. There really is
an issue of abundance where everybody can be carried. There
really is universal carriage in that sense.
So we do not have to enter into any relationship with any
company for their software, their service to be available to
all of our subscribers. And we are not playing any role in
terms of trying to block access to certain things, even direct
competitors. People can go through AOL or go through Netscape,
Net Center, and get to anything they want and do anything they
want.
All we really do is for some of our services in the
entertainment area or the sports area, we will promote some
sites. And we are compensated for promoting those sites much as
a grocery store is compensated for promoting Kellogg's cereal
at the end of the aisle. But nobody needs to pay us to be on
the system. Everybody is on the system instantaneously. And
some start-ups have asked to give us some equity as opposed to
some dollars because they don't yet have the dollars and
therefore want a shot.
So we talk to all kinds of companies. We are willing to
enter into relationships with all kinds of companies, but this
is really about getting more promotion. It is not in any way,
shape, or form about getting carriage, which was the issue in
the television world. So I think it is apples and oranges.
Mr. Levin. If I could add that unlike the situation with
the 1992 Act, part of the genius of the American capital system
that is operating now is the various ways of financing start-
ups who would otherwise be capital-starved have this
opportunity. So that is why we are seeing so much innovation
and so many new, young companies getting started. Very
different from the cable situation.
Chairman Hatch. Now, I have had a number of calls from the
music industry, as you can imagine. I am not going to ask you
this question. I would like you to think it through and then
write to me and tell me how you are going to handle this, but
many in the music industry, with your acquisition of EMI, are
very concerned that it will give you such leverage that you
will be able to dictate whose music will be used for filming,
for television shows, et cetera, et cetera, because you control
about 50 percent of the copyright publishing rights in the
world.
Mr. Levin. That figure is not correct in terms of music
publishing. We will respond appropriately.
Chairman Hatch. If you would. I don't expect a definitive
answer here today, but it would be good for you to respond to
that in writing to us so that it will alleviate the concerns
that some people have, if they can be alleviated.
Mr. Levin. I will acknowledge that we own the musical
copyright to ``Happy Birthday.''
Mr. Case. Also, on the music issue I think I should point
that the Internet really is going to transform music. And new
companies have emerged, including many that are public with
multi-billion-dollar valuations, that are trying to change the
paradigm of music. There are lots of electronic distribution
issues and copyright issues related to that. So I think if you
are a music company, the focus should really be on the Internet
and how it is going to transform the experience and some of the
risks in terms of protecting copyright. I don't think there is
anything to fear with EMI getting together with Warner.
Chairman Hatch. Nobody even has a beginning understanding
of how that is going to splurge and, it seems to me, just
develop. It is going to be a terrific area, and I think, done
right, it will open up opportunities for many people in the
music industry.
Well, this has been a very interesting and productive
hearing, and I would like to thank both of our distinguished
witnesses for their time and cooperation. The issues raised
today affect not only e-commerce, entertainment, and the next
generation communications services, but these issues have a
deeper social impact due to the Internet's powerful liberating
effect.
As this merger is reviewed, we need to ensure that proper
public policies are in place at the outset that will ensure
that no single company acts as the, ``gatekeeper,'' of the
Internet, limiting or influencing consumer choice or adversely
impacting the pace of innovation. Doing so will ensure that we
will not findourselves in the position we were in in the early
1990's, when the public called for, and Congress overwhelmingly imposed
regulations on cable operators to ensure that owners of the cable
infrastructure do not abuse their distribution power by discriminating
against competitor programmers.
These are very important issues that have been raised today
and I will have a few additional questions which I will submit
to you in writing, and I think the distinguished ranking member
will do the same. And we would appreciate your responses, if
you could, within 2 weeks of receipt. I think it is to your
advantage to do that. We are making sure we are covering this
issue.
I and the ranking member and our colleagues on this
committee look forward to working with you as we both examine
the multiplicity of issues that are involved here. So I really
want to thank you both for your time and the answers to all of
our questions that we have had here today, and we will submit
some others to you and I hope that we can help to resolve this
matter in a way that is pleasing to everybody.
Senator Leahy. Mr. Chairman, if some of the e-mails that
have been coming through here this afternoon are an indication,
there is a great deal of interest not only in this hearing, but
I suspect in having similar follow-up ones subsequently. It is
an interesting time.
Chairman Hatch. Well, as you know, we respect both of you
and we appreciate your willingness to come and inform the
public and inform the committee of what is going on here.
Thanks so much, and we will adjourn until further notice.
[Whereupon, at 3:49 p.m., the committee was adjourned.]
A P P E N D I X
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Questions and Answers
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Responses of AOL/Time Warner to Questions From Senator Leahy
Question 1. The commitments in the Memorandum of Understanding
between AOL and Time Warner are conditioned by reference to phrases
like ``consistent with providing a quality consumer experience'' and
``consistent * * * with any technological limitations'' and
``consistent with technological capacity.'' In addition, Time Warner
has made the entire MOU subject to all of its pre-existing obligations
and its fiduciary and other obligations to its partners while
indicating that it will endeavor to reach accommodations with third
parties to whom pre-existing obligations are due. What is meant by
those conditions and what progress have you been able to make to allow
Time Warner to fulfill the commitments to ``open access business
practices'' for Internet service?
Answer. As your question indicates, the conditions referred to in
the Memorandum of Understanding (``MOU'') between Time Warner and AOL
relate principally to Time Warner's fiduciary and other pre-existing
obligations with respect to the provision of the Road Runner cable
modem service to Time Warner Cable subscribers and to the technical
issues associated with the offering of multiple ISPs over Time Warner's
broadband cable platform. In the MOU Time Warner committed itself to
addressing both of these conditions and we are pleased to report that
progress is being made in this regard.
More specifically, with respect to Time Warner's fiduciary and
other pre-existing obligations, Time Warner is working with its Road
Runner cable partners (namely AT&T and Advance/Newhouse) to achieve an
early termination of contractual provisions that give Road Runner the
right to be the baseline provider of cable modem service to Time Warner
Cable subscribers for a specified period of time (typically through the
end of 2001). While Time Warner's fiduciary and other obligations to
its partners preclude Time Warner from unilaterally terminating such
provisions of these binding contracts, we are highly optimistic that we
will be able to achieve an early termination. Indeed, there is growing
evidence of a recognition in the cable industry that a multiple ISP
approach to cable modem service is good business. See Communications
Daily, ``Leading Cable MSOs Quietly Shifting Toward Open Access,''
April 6, 2000 at 4-5 (copy attached). We also wish to bring to your
attention the fact that AT&T, in connection with its acquisition of
Road Runner partner MediaOne, has entered into a consent decree with
the Department of Justice requiring it to divest its interest in Road
Runner and requiring Justice Department approval (for two years
following divestiture) of certain agreements between AT&T and AOL Time
Warner relating to the provision of cable modem or residential
broadband service in order to ensure that such agreements do not lessen
competition.
AOL and Time Warner also are dedicated to resolving the technical
and operational issues associated with the creation of a multiple ISP
environment for cable modem service. The language quoted in the
question above was merely intended to reflect the fact that, whenthe
MOU was agreed to, the extent of any technical, operational, or other
issues in offering a multiple ISP environment over cable systems was
largely unknown. The reference to possible limitations reflects the
parties' recognition that as the Internet has evolved, promises of
boundless capacity and virtually instantaneous response times have
sometimes run up against a surfeit of demand that can slow or otherwise
impede use of the Internet. Maintaining a high-speed connection, after
all, is the principal basis by which cable modem service can provide
``a quality customer experience.'' Indeed, the MOU embodies a pledge to
work to overcome any technological barriers so that the goal of
consumer choice among multiple ISPs, without sacrificing the quality of
service, can be achieved as quickly as possible.
It would be premature, however, to attempt to describe with any
particular specificity what, if any, limitations might be necessary on
the way that the cable platform is used for high-speed Internet access
as demand, capacity, and the number of providers grow. A ``white
paper'' prepared in May 1999 for the White House National Economic
Counsel concluded that there could be substantial technical costs
associated with the offering of multiple ISP access on cable systems.
Some of the issues identified in this white paper included: quality of
service (e.g., delay, jitter, error rate, etc.), subscriber and service
provider containment (i.e., limiting the extent to which the use of the
system by one subscriber/group of subscribers or one service provider
interferes with the use of the system by other subscribers/groups of
subscribers or other service providers), link privacy, and content
preservation.
Neither AOL nor Time Warner necessarily subscribe to the specific
assumptions and/or conclusions found in the aforementioned white paper,
and the companies intend to conduct their own technical and operational
tests in order to identify and resolve any technical impediments to the
provision of multiple ISP choice. AT&T has announced that it too will
be conducting field tests, and it is expected that other cable
operators will follow suit. Indeed, it has just been announced that
Charter Communications intends to conduct a test of multiple ISP
carriage this Fall. Through these efforts, AOL and Time Warner intend
to find and implement solutions to any technical or other issues that
may arise. In any event, AOL and Time Warner stand by the commitment
made in the MOU not to place arbitrary limits on the number of ISPs
which they will offer over their cable facilities and to enable cable
modem customers to exercise broad choice in a meaningful way.
Time Warner has developed a ``Multiple ISP Program'' to address the
technical and operational issues associated with consumer choice among
multiple ISPs. As part of this program, Time Warner and AOL are
cooperating in a technical and operational trial being conducted using
Time Warner's Columbus, Ohio broadband cable facilities. These efforts
will involve the participation not only of Road Runner and AOL, but
also of other ISPs, as well. In addition, AOL has been invited and
intends to participate in the trial that AT&T has scheduled to take
place in Denver.
Question 2. Paragraphs 3, 8 and 10 of the MOU refers to partners
and ``partnering.'' Is use of those terms meant to suggest that the
only ISPs with which AOL Time Warner will enter into arm's length non-
discriminatory agreements for Internet service are companies willing to
enter into partnerships agreements and share their profits with AOL
Time Warner?
Answer. We do anticipate that deals between Time Warner Cable and
ISPs, including AOL, will include an element of revenue sharing as
those deals relate to revenue generated from services provided over
Time Warner Cable systems. However, no ISP will be required to share
profits and AOL will be treated the same. We are also not using the
term ``partner'' in its legal sense of the word. By ``partner'' and
``partnering,'' we mean that we will work with other ISPs to offer
consumers broad choices in gaining access to the Internet and the rich
content available through broadband access to it. While the terms of
each deal will be individually negotiated, we will not discriminate
based on affiliation with AOL-Time Warner.
Question 3. In documents submitted to the Committee by AOL to
explain its instant messaging technology, AOL has said that it
``strongly supports open standards--in fact, we think the future of the
medium depends on them, and we're working with other companies to
develop those standards.'' Yet, AOL has in the past aggressively
blocked competitors with instant messaging services from communicating
with users of AOL's instant messaging software. In light of the fact
that the future of the medium depends on interoperability, what
progress has been made to develop standards that will result in such
interoperability?
Answer. We are committed to extending the benefits of instant
messaging technology to as many consumers as possible. In an effort to
permit all Internet users to communicate by means of instant messaging
whether or not they subscribed to the AOL online ISP service, we made
our AOL Instant Messenger client software available for free to anyone
on the Internet. In addition, we have entered into more than a dozen
royalty-free licensing agreements to allow industry leaders to include
instant messaging features in their products with their own brand
identification. Indeed, today consumers have more than 40 choices of
instant messaging services, all of which are free; and consumers are
able to communicate with anyone by means of instant messaging,
regardless of which system they are using, by downloading free instant
messaging software from the Internet.
Over the past two years, we have participated in industry
discussions through the Internet Engineering Task Force about how to
achieve the goal of interoperability among instant messaging networks.
In doing so, we have resisted efforts by certain of our competitors to
impose a ``quick fix'' system that would jeopardize our members'
privacy and security and risk the proliferation of spam which is a
pervasive problem in the e-mail environment where interoperability came
early. Throughout this effort, we have been guided by a bedrock
commitment: to provide consumers with a secure, private, and convenient
online experience.
Indeed, we remain committed to achieving real interoperability
consistent with those fundamental principles. To that end, on June 15
we submitted to the co-chairs of theInstant Messaging and Presence
Protocol Working Group of the Internet Engineering Task Force our
proposed architectural design for a worldwide instant messaging system.
(A copy of our proposal is attached.) While our competitors have tried
to use the political process to their business advantage, none have
submitted a proposal to the IETF for the kind of world-wide
interoperability we have or shown that their proposals would not result
in consumers being deluged by a new barrage of a spam by instant
messaging.
Question 4. Progress in distributing music online has been bogged
down in disputes over standards--whose are more secure, whose can be
easily adapted to recording devices, and so on. With the AOL reach into
different distribution channels, combined with the Time Warner music
catalogue, this merger raises the possibility that AOL Time Warner may
be able to impose digital music standards not just one industry, but on
several: copyright owners, online distributors, and hardware
manufacturers. What assurances can you give that you will move forward
as a partner with these interests.
Answer. Recognizing the value of the digital music revolution, the
combined company will remain committed to maximizing the market
potential for distribution of music over the Internet and through other
electronic means. The company will have no interest in imposing a
single technical solution for digital distribution of music, whether
downloading or streaming, over the Internet, nor will it have the
ability to impose such a solution. It should be noted that AOL's Winamp
player does not make use of standards or protocols that are proprietary
to AOL and the Winamp player supports all of the popular music formats.
AOL Time Warner would lack the ability to successfully promulgate some
kind of music standard, even if it wanted to. Imposing a standard would
require the cooperation of all of the various parties at the different
levels of the online music distribution chain--including music labels,
industry associations, and the various firms that provide the relevant
encryption, downloading, streaming, digital rights management and
compression technology (none of which technology AOL Time Warner owns
or controls). The Company could not possibly impose a standard without
the assent of all of these powerful representatives from all these
areas.
As a business matter, whether looked at from the perspective of
Time Warner's music business, or of AOL's Internet business, the
combined company will have compelling interests in supporting multiple
technologies and modes of distribution and making any contribution
necessary to ensure growth in the marketplace for digital music
distribution.
Time Warner, through the Warner Music Group, is engaged in the
business of selling music. Just as Time Warner currently seeks to
maximize its sales of compact disks by selling through as many outlets
as possible, it will seek to maximize it sales of online music by
selling through as many digital outlets as possible. The company will
not be able to reach its goal of maximizing sales by supporting a
single technology, because no single technology (or set of
technologies) works with all digital music players. In light of this
overriding goal, AOL Time Warner will have no incentive to support a
single technical solution, but instead will have powerful incentives to
support multiple technologies.
Thus, AOL Time Warner will support technologies that maximize the
outlets for its music, while providing a secure, technically sound,
easy-to-use, and affordable means of downloading or streaming. This is
fully consistent with Time Warner's past practice. To date, Time Warner
has generally provided downloads as a promotional device. In so doing,
Time Warner has supported a variety of technologies, including those of
Liquid Audio, Microsoft, and Mjuice; and it recently entered into a
licensing arrangement with MP3.com for digital downloading.
Question 5. Music is one of the experiences revolutionized by the
Internet. MP3 and other digital technologies are revolutionizing the
music business, and giving consumers access to many more groups, and
giving many aspiring musicians a chance to get noticed by both music
fans and music companies. The companies have indicated that the
prospect of a huge market in digital music one of the forces driving
this merger.
(A) Do you acknowledge that AOL Time Warner would have enormous
financial incentives to drive customers to music within its own
proprietary labels?
(B) What assurances can you give that musicians who are not
affiliated with the newly expanded Warner Music-EMI venture, will be
treated equitably with affiliated musicians?
Answer. To be successful, the joint company will be driven to offer
the best listening experience it can. To that end, the company's
overriding financial incentive is to give subscribers access to the
broadest possible array of music in the most easy-to-be affordable
digital format. We will never accomplish that objective if we limit the
online experience of our members to listening to albums in the Warner
Music and EMI collections. Rather, we must provide our subscribers with
the broadest array of content produced by the broadest possible group
of musicians, including musicians who are not affiliated with either
Warner Music or EMI which is the corollary to Warner Music's need to
serve its music through the broadest array of digital and non-digital
outlets.
Question 6. AOL has retreated from its early pro-active position
for statutory or regulatory requirements for open access and will now
rely on the marketplace. How long do you think is reasonable for
Congress to give the marketplace to ensure open access before we step
in, as we have in other contexts, to mandate the opportunity for
consumer choice?
Answer. It is true that with steps being taken by AT&T, AOL-Time
Warner and other MSOs, AOL believes that government intervention may
not be necessary to bring choice and diversity to consumers in the
cable broadband marketplace. However, we remain as committed as ever to
the importance of open access as an end result. Indeed, even with AOL's
merger with Time Warner, Time Warner's cable systems will only pass
about 20 percent of the cable households. As a national service, AOL
needs access to cable systems throughout the country. We are therefore
committed to working with other members of the industry to achieve open
access and believe it is in the entire industry's interest to get
there. We certainly believe that Congress' vigilance in monitoring the
industry's progress in reaching this goal has helped the marketplace
move to where it is today and such activity shouldcontinue. With AT&T
committed to offering multiple ISP services over its cable plant by
July 1, 2002, with AOL Time Warner committed to achieving that goal
before the scheduled expiration of its RoadRunner agreement at the end
of 2001, and with the announcement by Microsoft and Juno of broadband
services over DirectTV, we believe that the multiple ISP model is
already taking hold in broadband. Indeed, Time Warner took another step
in this regard by announcing a deal in principle with Juno to offer
broadband ISP services to Juno's customers ISP service over the Time
Warner cable plant and the company looks forward to announcing
additional deals with unaffiliated ISPS soon.
Question 7. The FCC has mandated open access and nondiscrimination
requirements for DSL services provided over telephone lines, and
Internet Service Providers have flourished in a highly competitive
market. Should the same requirements be authorized for cable broadband
access and, if not, please explain why?
Answer. Over the past two years, the FCC has repeatedly concluded
(most recently in its order approving the AT&T/MediaOne merger), that
the imposition of mandatory broadband cable requirements is not
necessary and that the marketplace can and should be relied upon to
ensure that consumers are offered the greatest diversity of choice of
service options. While we had proposed a ``light touch'' approach that
would move the cable marketplace toward a multiple ISP model, the FCC
decided to rely on marketplace developments to achieve that result.
With the AOL Time Warner announcement, we have been able to move the
marketplace toward that model without FCC intervention. Given the steps
that AOL and Time Warner have taken to move the market toward an ``open
access'' model, and given the increased competition among differing
broadband platforms, it would be surprising were the FCC to reverse
course and determine that government intervention were needed to move
the marketplace.
Question 8. Mark Lemley, a law professor at the University of
California at Berkeley, thinks federal regulators should approve
mergers such as the proposed merger between AOL and Time Warner--and
any similar mergers involving broadband access issues--only if the
companies agree to adhere to open-access standards. In light of the MOU
and the strong arguments AOL and Time Warner have raised in favor of
open access to broadband delivery, would the companies oppose such a
conditions?
Answer. AOL Time Warner has announced that it intends to adopt a
strategy of competing in the market, by offering its users a choice of
multiple ISPs. This strategy is consistent with AOL's widely publicized
pre-merger views that such an approach would accelerate the development
and deployment of advanced broadband services. Indeed, evidence of
marketplace growth in DSL deployment is already emerging, in part, as a
result of these announcements. Given our public commitment, which is in
our financial interest, we see no reason for the Commission to
condition our merger in this respect. We share the same commitment to
consumer choice as Professor Lemley, and hope to achieve them quickly.
As we indicated in our MOU, AOL Time Warner will not place any fixed
limit on the number of ISPs with which it will enter into commercial
arrangements to provide broadband service to consumers. AOL Time Warner
will provide its consumers with a broad choice among ISPs, consistent
with providing a quality consumer experience across the entire nation
and any technological limitations in providing multiple ISPs on its
broadband cable systems. To the extent necessary to achieve this level
of access and quality experience, we will work with the rest of the
industry to achieve any necessary standards. Moreover, given the
decision of the FCC and the Department of Justice not to impose open
access conditions when approving the AT&T/Media One or AT&T/TCI mergers
and its announced decision to initiate a proceeding to examine the
issue on an industry-wide basis, it has become clear that policy
questions surrounding the issue of open access should not be resolved
in the context of this merger review.
Question 9. Open access sometimes means different things to
different people. Under the MOU, does ``open access'' mean open access
to all ISPs, so that consumers can get the full benefit of unlimited
competition over Time Warner cables, or just to a select group?
Answer. The MOU is intended to establish a framework whereby
consumers will be able to select among multiple ISPs for the delivery
of cable modem service. AOL Time Warner will seek to provide a wide
array of choices and will not establish an arbitrary limit on the
number of ISPs with which it will be willing to negotiate cable modem
service relationships. We will try to reach agreements with a diverse
group of ISPs, without regard to affiliation with Time Warner. The
precise number will depend on a variety of technical and other factors
and will vary by region and by demand. None of them will discriminate
based on affiliation with Time Warner.
Question 10. The International Federation of Journalists has
warned that the proposed merger ``could threaten democratic values and
freedom of speech unless editorial independence was protected. Unless
action is taken to ensure journalistic independence some argue that we
face a dangerous threat to media diversity.'' How do you respond to
these concerns and what specific steps do you intend to take to assure
this journalistic integrity?
Answer. As we explained in our appearance before the Committee, we
are absolutely committed to maintaining the highest levels of
journalistic integrity. We cannot hope to grow our business and serve
our customers if they lose confidence in our integrity. We at AOL and
Time Warner deeply respect the tremendous legacy of Henry Luce, to
operate ``in the public interests as well as the interests of
shareholders'' and fully expect that proud tradition to continue.
Apart from our deep commitment to and legacy of journalistic
independence, it is important to recognize that the very nature of the
Internet answers the question posed about the impact of the merger on
media diversity and freedom of speech. The Internet is the ultimate
``open forum''--literally millions of users, representing every
conceivable view point on every conceivable subject, are able to
express themselves. There is no entity--not any government nor any
corporation--that can control this unbridled explosion of speech.
Question 11. David Rubin, Dean of the Public Communications School
at Syracuse University, has commented that ``what could happen is that
users could be sufficiently lazy that their behavior could be
essentially circumscribed by Time Warner/AOL-type deals'' making it
``really, really easy'' to get to Time Warner and AOL content and
``really, really difficult to get anywhere else.'' Even if it is as
easy to get to other content, accessing it may take more time. How do
you respond to these concerns and what do you plan to do to make it as
easy and as fast to get to other content as to AOL or Time Warner
content over the cable broadband system?
Answer. Ever since the widespread consumer deployment of the
Internet, AOL has been built on the fundamental proposition of giving
people access to everything on the Internet in the most easy-to-use,
user-friendly way. Nothing about the merger will change that approach.
We cannot block the access of users to the Internet without denying
them the value for which they subscribe. Efforts to deny users access
to non-Time Warner content would be self-defeating and would merely
cause users to go to competing Internet service providers, of which
there are many. We do cache material coming from Internet sites in
order to provide a faster, more compelling user experience, and we do
so based on user demand and not affiliation. Often the sites we cache
are those of our largest competitors like Yahoo. In addition, AOL does
not determine what is cached, our subscribers do. We cache whatever
they go out to retrieve, subject to the constraint that websites have
the ability to set their own caching frequency and duration of cached
pages. If we do not give our users what they want quickly and
efficiently, we know (and they know) they have other ways to access the
Internet. Any technological ploys that affect the user experience--like
selective caching, slowing the return path on certain networks, or
slowing downstreams on competitors' content--will drive our members to
competitive services. We want them to stay with us.
As we remind ourselves everyday, our members are volunteers.
Nothing requires them to visit our site or to maintain an account with
us. We will only keep them coming back and staying with us if we meet
the challenge of providing them with content from a variety of sources
in easily accessible format through simple tools.
Question 12. The companies have made no secret about their plans to
cross-promote and distribute their products and services, which raises
the specter of the huge databases held by both companies being combined
in powerful and valuable ways for the merged company's own commercial
purposes, or for resale to their parties.
(A) Does either company currently resell to third parties
information about their subscribers and, if so, what kind of
information?
(B) AOL states in its posted privacy policy that it does not
disclose personal information to ``outside companies.'' After the
merger, will AOL share information about its Internet service
subscribers, including their names, addresses, phone numbers, credit
card numbers, email addresses and web viewing habits, with affiliated
companies as diverse as Rhino Records, New Line Cinema, Fortune
Magazine, and Time-Warner Cable, and will AOL have access to personal
information gathered by those other companies?
Answer A. Both AOL and Time Warner have made commitments about
respecting customer privacy and those commitments will continue in the
merged company. Consistent with our respective privacy policies, AOL
and Time Warner only make select information available to third parties
after providing our customers with an opportunity prevent us from doing
so, in other words a choice about the use and disclosure of their
information. Both companies' commitment to notice and choice for all
consumers as it relates to personally identifiable information will
remain the bedrock principle of the combined company. Of course where
Time Warner has statutory obligations surrounding the collection, use
and disclosure of personally identifiable information in the case of
the Cable Act privacy requirements, the company currently complies with
the letter of the law and the combined company will continue to do the
same with respect to its cable properties.
Answer B. In the case of AOL, we never share any personal
information about our members with outside or affiliated companies
beyond their names and addresses and, even then, only after providing
them with the choice not to have us make such disclosures. We do not
share phone numbers, credit cards or email addresses with anyone and we
do not even use personally identifiable ``web viewing'' practices
internally and most certainly do not make that information available to
anyone.
As for Time Warner, as a general proposition, we are looking for
ways, and indeed are beginning, to cross-promote our magazine and other
products with AOL just as we do with our current affiliates such as HBO
and Warner Bros. But we again do not do so, nor will we with AOL,
without first offering each consumer notice and an opportunity to say
no--an opt out--not only for affiliate-sharing, but for all internal
uses.
Question 13. Concerns have been raised about a few online services,
such as DoubleClick and Abacus, that combine personal information,
financial information, web purchasing behavior and web browsing records
to get a fairly complete personal profile of individuals. Since many
people pay for AOL Internet service by credit cards, browse using AOL's
web browser, and shop online through their AOL connection, is AOL
currently in a position to do what Double Click has been criticized for
doing.
Answer. Our commitment to our members not to follow them around
online or use personally identifiable online information to target
market to them is a core principle of our privacy policy. We have not
and will not link the web surfing habits or interests of our members
with personally identifying information about them.
______
Responses of AOL/Time Warner to Questions From Senator Thurmond
Question 1. Mr. Levin and Mr. Case, many experts have suggested
that this merger is the beginning of a rapid trend of mergers between
Internet and more traditional companies. Do you agree with this view?
Answer. There can be no doubt that the Internet Century will
provide tremendous opportunities for traditional media companies to
reach their existing audiences and to find new audiences. Technology is
transforming not just the global media industry but the global economy
in general and the merger of AOL and Time Warner represents a prototype
for the 21st Century--a company prepared to meld quality content and a
creative infrastructure with the evolving Internet culture. The
question of whether our merger will mark the beginning of a trend is
dependent upon whether others believe that such combinations can offer
value to their customers. We are starting to see some that do, but the
future remains hard to predict.
Question 2. Mr. Case, broadband Internet access is very important
to the future of the Internet. Do you believe that this merger will
accelerate the availability of broadband access for consumers,
especially in rural areas?
Answer. I do believe that our merger will accelerate the deployment
of broadband services and certainly hope that broadband availability
will increase for all consumers, particularly in rural areas and other
under-served markets, as quickly as possible. You can be assured that
we will do our part to accelerate the rollout of broadband services. I
do not want to see anyone left behind in the Internet Century, and have
committed numerous resources, both corporate and foundation, to
ensuring we bridge rather than widen the existing digital divide.
Question 3. Mr. Case, clearly AOL will promote Time Warner's
products. How far will it go in this area? For example, will AOL refuse
to accept advertisements from Time Warner's competition or refuse to
display a competitor's content?
Answer. As I have reiterated on numerous occasions, the key to the
success of AOL's online service and to Time Warner's distribution
businesses is that we both deliver consumers the best content from
whatever sources they demand. As an online service, we will distribute
Time Warner content and products and we will distribute that of others.
We will not block Internet users from obtaining any lawful material
that resides on the Internet. As for Time Warner's content businesses,
we will seek distribution from both AOL and its other online brands and
from a panoply of other content distribution networks. Through
diversity on both the content and distribution side the combined
company will maximize consumer benefits and our company's success.
Question 4. Mr. Case and Mr. Levin, the Internet and television
provide great access to programs and information. However, much of the
content is not suitable for young children. Do you have plans for
giving parents more effective tools for controlling children's access
to inappropriate material?
Answer. We are absolutely committed to providing parents with the
most effective tools possible so that they can control access to
inappropriate material on the Internet by their children. At both
companies, we in fact are quite proud of what we have developed to help
parents. We will continue to refine the tools we have developed as
technology changes and as we introduce new services. AOL's parental
controls functionality which has been such an important benefit to
AOL's 23 million online subscribers is, for example, an integral
element of our recently launched AOLTV service. These and other tools
will continue to be refined as technology and content demand.
Question 5. Mr. Levin, clearly traditional media companies will
need their content to be available on the Internet in the future. Do
you believe that these companies can be successful without merging with
Internet providers?
Answer. There is no doubt that the Internet will provide tremendous
opportunities for traditional media companies to reach their existing
audiences and to find new audiences and our merger with AOL will help
us achieve that goal. However, the combination of Time Warner and AOL
is not just about finding an outlet for Time Warner's content. It is
about finding means to competitively distribute others' content as
well. As I pointed out in my testimony, as large as our merger may
seem, it pales beside the open-ended expanse of broadband media and the
growing array of wired and wireless distribution systems. In such an
environment, no content owner need fear that it will be unable to find
distribution. Indeed, while we obviously believe that combining the
assets of Time Warner and AOL affords us with the flexibility to
compete in the new global market, we recognize that the open protocols
of the Internet make it possible for anyone, traditional media company
or upstart, large corporation or individual, to establish a worldwide
platform for their messages.
Question 6. Mr. Levin, Time Warner has always had strict separation
between its advertising and editorial departments. Some new articles
have suggested that AOL does not have such a strict separation. Will
this merger put pressure on the new company to ease this strict
separation?
Answer. No. At Time Warmer, the independence of our editorial staff
has been at the core of our value system, and the most revered
component of our corporate heritage. Our ``church/state'' system of
complete separation of editorial from business operation has served us
well, both assuring purely journalistic decisions about editorial
matters and in creating confidence that we are safeguarding the
public's trust to accurately report and comment upon the news and other
information. Moreover, it is in our business interest. If the
independence of our editorial operations is eroded, public trust in our
journalism willbe undermined, and our subscribers/viewers will turn to
other more objective competitors. Steve Case personally and explicitly
embraced our journalistic ethics, and articulated support of our policy
of ``church/state'' separation.
Question 7. Mr. Case, privacy is certainly an important issue with
the Internet today. What steps will AOL Time Warner take to ensure a
consumer's privacy?
Answer. Based on our discussions, we are confident both companies
share an overriding and mutual desire to ensure the privacy of our
members and our subscribers. We have set a very high standard at AOL
and we will maintain it once the merger has been completed, through the
implementation of clear user-friendly privacy policies and practices.
Question 8. Mr. Case, after the announcement of the merger AOL
stock price dropped. What do you believe is the main reason investors
did not initially appear enthusiastic about the merger?
Answer. We had anticipated that it would take time for investors as
a whole to understand the value proposition underlying the merger. As
we have had an opportunity to explain our shared vision about creating
enhanced shareholder value, we have found increasing support among
investors in their support for the company and had an enormously strong
vote in favor of the merger in June by the shareholders of both
companies. Their positive recommendations confirm that they recognize
the tremendous value represented by the merged company.
Question 9. Mr. Levin, I understand that Time-Warner has entered
into a transaction concerning the combination of its Warner music
division with EMI, essentially combining the first and second largest
music publishing companies in the world (i.e., Warner/Chappell Music
and EMI Music publishing). The combination of these companies would
provide Time-Warner and presumably AOL, with control over nearly one-
half of all copyrighted songs in the United States. Why do these
companies need to combine to compete in the music publishing market? Is
there a risk that the combination of these music publishing companies
reduce competition in the payments of advances to aspiring songwriters
for their copyrighted songs? Please explain.
Answer. Your question raises three issues. First, in terms of the
number of copyrights, as you may know, the music publishing industry
does not track this type of information. So, to address this issue, we
asked ASCAP and BMI, which are the two principal U.S. performing rights
organizations, to provide us with information so that we could estimate
the combined entity's share of copyrights. BMI and ASCAP have informed
us that, together, they have 10.25 million to 12.25 million registered
compositions. We estimate that the combined entity would own (or even
just administer) well under 10 percent of the copyrights registered to
ASCAP and BMI.
Second, as for the reasons underlying the proposed transaction, we
estimate that the combination of our businesses will save approximately
$400 million per year, largely from the consolidation of back-office
functions on both the recorded music and music publishing sides of the
business. These savings will better enable the combined entity to
discover new songwriters and singers, to promote their work, and to
transition our traditional bricks-and-mortar music businesses to the
Internet world. This should benefit not only songwriters and artists,
but also consumers.
Third, the proposed transaction will not reduce competition for
aspiring songwriters and their compositions. Just like today, after the
transaction, there will be hundreds of music publishing companies, not
only those associated with the large record companies (sometimes called
the ``majors''), but also numerous significant independent music
publishing firms. In addition, it is easy to enter and prosper in the
music publishing business--indeed, many songwriters from novices to
Paul McCartney, do not hire a music publisher, but choose to self-
publish. Further the Internet is making it even easier for individuals
and smaller music publishing companies to promote their works on a
global basis.
Question 10. Mr. Levin, what assurances can you provide that this
music will be licensed to other companies to permit the digital
downloading of popular music recordings over the Internet on the same
basis as will be available to Time-Warner recordings and the AOL
properties?
Answer. There are many reasons that, after the merger, Time
Warner's music will continue to be available online through a diversity
of outlets. First, and perhaps most importantly, it has and will
continue to be in the company's economic interest to do so. As a music
company, Time Warner can succeed only if it makes its music as widely
available to as many people as possible through as many outlets as
possible. It would be economic suicide to limit the distribution of its
music to subscribers of a single Internet provider. It would, of course
reduce music sales of the company's existing artists. Even more
importantly, no artist would want to sign with a record company that
would only distribute its music to AOL subscribers, when any other
record company competing for the same artist could distribute music
online to everyone connected to the Internet in the world.
Second, Time Warner's past experience in making music available
online demonstrates that it has consistently sought broad distribution.
Time Warner's records are sold widely through all ``brick and mortar,''
``click-and-mortar'' and exclusively online retailers. Indeed, Time
Warner has made digital downloads of its songs available through the
online sites of retailers such as Amazon, CDNow, and Barnes & Noble.
That is also consistent with our practices in other areas such as our
cable networks. for example, on HBO over 80 percent of the programming
is owned by parties other than Time Warner or one of its subsidiaries.
Third, the proposed transaction between Time Warner's music
business and EMI would create Warner EMI Music, which would provide
additional assurance that its music would be available through many
outlets. Under the proposed combination agreement with EMI, any
dealings between Warner EMI and AOL Time Warner would need to be on an
arms-length basis. This will further guarantee that the independent
interest of Warner EMI Music, as a record company, in broad
distribution would be protected.
Question 11. Mr. Levin, Warner/Chappell and EMI Music both sit on
the board of directors of ASCAP, the National Music Publishers
Association. Will this provide AOL with disproportionate influence over
the licensing policies of these organizations to the disadvantage of
other music publishers and songwriters? Please explain.
Answer. Combing Time Warner's and EMI's music publishing businesses
will not provide the resulting partnership with disproportionate
influence over either ASCAP or the National Music Publishers
Association (``NMPA''). Indeed, in certain respects, the combined
entity will have a smaller role than the two companies now have
separately.
As for ASCAP, Warner/Chappell and EMI each currently has a
representative on the board of directors. After the transaction, the
combined entity will have only one board member. In addition, Warner/
Chappel land EMI both currently vote as members of ASCAP. After the
transaction, the combined entity will represent less than 10 percent of
the votes of ASCAP's music publisher--and music publishers as a group
represent a minority of the votes of ASCAP, with songwriters
representing a majority of votes. Thus, the combined entity will have
only a small stake within what is itself a minority group is ASCAP.
Similarly, for NMPA, Warner/Chappell and EMI each now has a
representative on the board, but the combined entity will have only one
member. Further, after the transaction, the combined entity would
represent less than 10 percent of the votes of NMPA.
Question 12. Mr. Levin, I understand that AOL recently purchased
WinAMP, the most popular MP3 software player, and Spinner.com, an
influential web radio property. At the press conference announcing the
proposed merger, Mr. Levin referred to these properties as key parts of
AOL's music strategy. What assurances will there be that content owners
and other Internet music companies will have access to these key
properties on a level playing filed with AOL/Time-Warner for the
delivery of music go Internet users? Do any other Internet companies
have access to these properties today and under what terms?
Answer. Both the Winamp MP3 software player and Spinner.com are
very successful Internet offerings with a loyal online following of
music fans. They are, however, very different products with equally
different business models. Nullsoft's Winamp MP3 player is a software
player that can be used to play any MP3, regardless of the label or
musician who produces it. The player is available for free on the
Internet to anyone who wishes to download and use it. The joint company
is not likely to change this policy of making the Winamp player freely
available online.
Spinner.com is an Internet site, also available for free, that
streams Interent radio, including a wide diversity of music genres. As
part of its commitment to music diversity, Spinner has developed the
Spinner.com Music Partern Program to expand content on its music
channels, simultaneously providing a more effective distribution
mechanism for record labels. The Spinner.com site currently represents
over 350 labels (independent and otherwise), including Rykodisc, High
Tone, Matador, Bloodshop, Rounder, Ubiquity, Touch and Go, Arhoolie,
and 4AD. Unsigned artists are also encouraged to submit their music to
the site. Following the merger, Spinner will continue to make available
the music of a diverse group of artists and labels or as with our other
Internet properties our consumers would go elsewhere. Again, we will
never accomplish our objective of giving subscribers access to the
broadest possible array of music if we limit the online experience of
our Spinner. com users to listening to albums in the Warner Music and
EMI collections. We are committed to providing our subscribers with the
broadest array of content produced by the broadest possible group of
musicians.
Question 13. Mr. Case, AOL has shown great agility in the
marketplace. Some analysts have stated that this merger will force AOL
to loose some of its agility. How do you respond to these suggestions?
Answer. In short, we disagree with these suggestions and intend to
demonstrate our agility and our ability to bring our members the best
possible online experience. To succeed in the Internet Century, we will
have to move faster and smarter. As a combined company, we are
confident that we can meet that challenge.
Question 14. Mr. Case, AOL is rapidly growing with many
acquisitions and investments. However, some analysis have stated that
your company has taken on too many new business ventures recently. How
do you respond to these charges?
Answer. We intend to demonstrate that we are able to continue to
create value for our shareholders and our members. We make acquisitions
and undertake new business ventures for the sole purpose of meeting
that twin objective. We are confident of our ability to continue to do
so.
______
Responses of Steve Case to Questions From Senator DeWine
Question 1. Mr. Case, at the hearing I asked if you believed it
would make sense to consider using a group of independent, private
industry technical experts to help create industry protocols for open
design of the cable broadband architecture. You responded that AOL has
supported similar groups or efforts in the past. It was not clear to me
whether you would be in favor of such an independent group to
specifically examine the questions of open design for cable broadband
architecture. Do you believe such an organization would be useful in
addressing some of the concerns that have been raised about the
openness of the cable broadband architecture with an eye toward
establishing industry protocols?
Answer. We believe the industry will soon be able to make the
necessary technical adjustments to ensure consumers have real choice of
multiple ISPs in cable broadband. We certainly do not have all the
answers, and recognize that private technical experts may be able to
contribute to our efforts to achieve this shared objective. At this
point, however, we are making great progress, in particular with our
trial in Columbus, Ohio, and it does not appear that a specific group
of independent experts is needed.
Question (A). If you do believe such a group would be useful, what
are your recommendations concerning participants, structure and purpose
of the group?
Question (B). If you do not believe such a group would be useful,
why not? How would you recommend addressing concerns that many have
that individual cable companies will have the ability to design cable
broadband systems in ways that favor themselves and limit competition?
Answer. We have been looking forward to being able to provide
consumers with a choice of multiple ISPs, and thus have been making
engineering and design decisions that would allow us to take full
advantage of the availability of expanded broadband access throughout
the country. We are quite confident that other companies similarly have
been working towards this goal. We have not designed in and will not
place any artificial barriers in the paths of ISPs connecting their
customers to our broadband networks, and would hope that other industry
members would see problems with attempting to do so themselves. We
certainly are prepared to address company-specific problems as they
arise, and to work with the entire industry should systemic problems
need addressing by the industry as a whole.
Question 2. Regardless of the number of ISPs that are eventually
able to provide services on AOL Time Warner's broadband system, some
have expressed concern that your combined company will have the ability
to discriminate against competitors by manipulating the technology or
format of the system. While all cable broadband providers may have this
ability, the concern is particularly acute when the cable broadband
provider is also an ISP, Internet content provider and/or traditional
media content provider because of the numerous opportunities for
preferential treatment in such a vertically integrated company.
For example, AOL Time Warner could seek to assign more favorable
channel positions to its own content, the combined company might favor
its own content with ``front screen'' positioning or better menu
placement, or it could provide local caching of only their own content
leading to superior response time and performance. Will you commit not
to use technological or formatting control of the system in such a way
as to burden your competitors? In other words, will you compete on the
merits, and not use your ownership of the cable broadband system to
give you an unfair advantage?
Answer. AOL Time Warner will absolutely compete based on the merits
of its services and will not use its ownership of cable broadband
platform as a means of obtaining an unfair advantage over competitors.
We note that the amount of unaffiliated programming that Time Warner
offers on its cable systems is far, far greater than the amount of
vertically integrated programming and includes programming, such as the
Showtime movie channel, that directly competes with Time Warner content
(e.g., HBO). Time Warner's willingness to deal with competitors also is
reflected by the fact that Time Warner programming is available to DBS
providers and wired multichannel distribution systems that compete
head-to-head with Time Warner cable systems. Time Warner's program
networks buy programming content from a variety of sources and Warner
Bros. sells programming to various broadcast networks. In short, Time
Warner has allowed marketplace forces to dictate its business
practices.
With respect to the Internet, marketplace forces will similarly
ensure that AOL Time Warner non-discrimination prevails. For example,
AOL Time Warner has made clear, consistent with the commitments
embodied in the MOU, that consumers electing to obtain cable modem
service on AOL Time Warner cable systems from competing ISPs will not
be required to ``click through'' AOL's first screen. And even AOL
broadband Internet customers can elect any other web page as their
default first screen. AOL clearly understands the value of attracting
subscribers to its front page. But with so many alternatives available
to consumers. AOL has every incentive to make its front page consumer
friendly, easy to use, and to highlight that content of greatest value
to subscribers. Otherwise, consumers will simply go elsewhere. Thus,
marketplace forces are fully adequate to protect consumers in this
area.
On caching, AOL has always cached content on the basis of member
activity alone. We have never engaged in discriminatory caching and
never would. It would ruin our member experience. Competitive
marketplace forces are the most effective safeguard against any
discriminatory caching practices. In its recent order approving the
AT&T/MediaOne merger, the FCC analyzed the caching issue as follows:
[B]oth Excite@Home and Road Runner use ``caching''
technology, a technology that places certain content at
regional distribution centers to allow faster access by their
customers. Excite@Home and Road Runner cache (a) the content
most often accessed by customers as determined by mathematical
algorithms and (b) the content for which content providers have
negotiated for preferred caching. MediaOne Group, Inc., FCC 00-
202 (June 6, 2000) at para.112.
After full consideration, the FCC rejected concerns that the merged
firm could use its control over caching technology ``to discriminate
against unaffiliated providers:''
Given the nascent condition of the broadband industry and the
foregoing promises of competition, we find it premature to
conclude that the proposed merger poses a sufficient threat to
competition and diversity in the provision of broadband
Internet services, content, applications, or architecture to
justify denial of the merger or the imposition of conditions to
supplement the Justice Department's proposed consent decree.
The evidence of growing competition from both alternative
broadband providers and unaffiliated ISPs gaining access to
cable and other broadband networks indicates that any action
taken by the merged firm to disfavor unaffiliated broadband
content and applications providers is likely to threaten the
networks' ability to attract and retain customers. Id. at
para.123.
______
Responses of Gerald Levin to Questions From Senator DeWine
Question 1. Mr. Levin, the Cable Act of 1992 prohibits cable
companies from selling data about subscribers' viewing habits, but it
permits using the information for internal purposes. After the merger,
Time Warner may legally be permitted to provide information about its
cable subscribers to AOL, and alterntively, AOL might legally be able
to transmit its information about 20 million subscribers to Time
Warner.
Question (A). Given the consolidation that we are seeing, and the
creation of huge companies that serve separate markets and have vast
customer bases, does it make sense to distinguish between selling
customer data to outside companies and sharing it between separate
departments within the same company?
Questions (B). How will AOL Time Warner use information concerning
the television viewing and Internet usage habits of its millions of
customers? And specifically, how will you ensure that consumer rights
are protected by your use of such information?
Answer (A). At both AOL and Time Warner we have long given our
consumers the most robust notice we can about our data collection, use
and disclosure policies and have provided them with choices when
information is to be shared with people outside the company for
marketing purposes. We believe this practice is an important one that
recognizes the needs of consumers in the commercial marketplaces in
which both companies operate. Regardless of this merger or others, we
continue to believe that this is an important commitment to make to our
customers and we will continue to do so.
Answer (B). Neither AOL nor Time Warner uses information about
television viewing habits or Internet usage habits in a personally
identifiable manner. Any use of such data is only on an aggregated
basis to determine general usage habits of consumers as a whole. For
example, while AOL's system may automatically collect online usage
information, such information is only used or stored in a non-
identifiable manner to help us determine the aggregate behavior of our
members, including the most popular areas on our service and where we
might make changes to better serve consumers. As a result, we believe
that there is no risk to the privacy of any of our members today, nor
will there ever be in the future.
______
Responses of AOL/Time Warner to Questions From Senator Kohl
Question 1. We've heard that Cisco Systems makes ``routers'' than
can speed up broadband to one web site and slow it down to another.
There may be some valid uses for this--but this technology raises some
troubling questions. It might be possible to use this technology to
give quicker access to Time Warner web sites. For example, you could
slow down traffic to the ESPN/Disney site while speeding it up to your
own CNN/Sports Illustrated site. Do you plan to give preferential
treatment to Internet sites owned by, or affiliated with, AOL Time
Warner, Mr. Case and Mr. Levin?
Answer. No. We reiterated our commitment to non-discrimination in
traffic management in our April 29th letter to Senators DeWine and Kohl
and attach it here as our response.
Question 2. After this merger, your combined company will be a
true media and telecom powerhouse, offering both an enormous range of
content, from news and entertainment, cable television networks, movie
production, book and magazine publishing, and also offering the means
to deliver this content over the Internet as the largest ISP.
Mr. Case and Mr. Levin, won't your merger cause your competitors--
both content providers and ISPs--to follow your example? That is, won't
the major media and entertainment companies need to find an Internet
partner, and the major Internet companies a content partner, in order
to compete with AOL Time Warner? And won't independent producers of
content be in a very disadvantageous situation if they are left outside
of this system?
Answer. There will certainly be new alliances and other
combinations among our competitors. But we disagree with the premise
that independent producers of content will find themselves in a
disadvantageous situation if they are not part of a larger entity. In
fact, as is our history at AOL, we can serve as a great enabler of
independent producers of good content. Today, a majority of the
programming on Time Warner Cable system is provided by unaffiliated
programmers. Similarly, Time Warner programming is available to DBS
providers and wired multichannel distribution systems that competes
head-to-head with Time Warner cable systems. Together AOL/Time Warner
can offer content providers the combined audience of AOL members and
Time Warner subscribers. Independent producers of the best content
should be excited about the prospect of reaching so many potential
homes. We remain committed to providing our members with the best
content, irrespective of who produces it.