[Senate Hearing 106-1090]
[From the U.S. Government Printing Office]



                                                       S. Hrg. 106-1090
 
                        AOL & TIME WARNER MERGER

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 2, 2000

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation







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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
     




                       C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 2, 2000....................................     1
Statement of Senator Abraham.....................................    38
Statement of Senator Breaux......................................     7
Statement of Senator Bryan.......................................     6
Statement of Senator Burns.......................................     1
Statement of Senator Cleland.....................................     7
Statement of Senator Dorgan......................................     5
Statement of Senator Gorton......................................     4
Statement of Senator Hollings....................................     3
    Prepared statement...........................................     3
Statement of Senator Rockefeller.................................     6
Statement of Senator Stevens.....................................    30
Statement of Senator Wyden.......................................     4

                               Witnesses

Berman, Jerry, Executive Director, Center for Democracy and 
  Technology.....................................................    51
    Prepared statement...........................................    53
Case, Steve, Chairman and CEO, America Online....................     8
    Prepared statement...........................................    11
Kimmelman, Gene, Co-Director, Washington Office, Consumers Union.    64
    Prepared statement...........................................    66
Lande, Robert H., Senior Research Scholar, American Antitrust 
  Institute......................................................    90
    Prepared statement...........................................    91
Levin, Gerald, Chairman and CEO, Time Warner, Inc................    13
    Prepared statement...........................................    16


                        AOL & TIME WARNER MERGER

                              ----------                              


                        THURSDAY, MARCH 2, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:35 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Conrad Burns 
presiding.

            OPENING STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. The Committee will come to order. I would 
like to welcome everyone here today to this hearing, which 
concerns an issue of critical importance to the future 
development of the Internet, the proposed merger of two massive 
players in the Internet access and media content fields, and 
that has to do with America Online and Time Warner.
    The purpose of the America Online-Time Warner merger would 
be, or the proposed merger, I should say, would be the largest 
merger in history. The amount of money involved is staggering. 
The initial price on the January 10 announcement was over $156 
billion.
    This Committee takes its oversight role very seriously, 
particularly when scrutinizing a combination of such 
unprecedented scope. Of particular importance in fulfilling the 
Committee's due diligence duty is a close examination of the 
potential effects on consumers of such an immense company.
    AOL has about 21 million subscribers today, which is about 
six times larger than the nearest competitor for Internet 
service, and that is MindSpring. Time Warner is the Nation's 
second largest cable provider, with a vast array of video, 
music, and print content that pervades America's every-day 
life.
    From the checkout stands in the afternoon to the couch at 
home in the evening, clearly the proposed combined company has 
the potential to use the vast power for the good of America. 
However, while the proposed merger before this Committee has 
the potential to provide consumer benefits, we also know the 
difference between potential and reality. While the combination 
of Time Warner's enormous treasure trove of content and America 
Online's 21 million subscribers could provide exciting new 
services, several serious public policy issues are raised by 
the creation of such a potentially dominant entity.
    In assessing the potential future effects of the proposed 
merger, it is usually most helpful to look at the current 
market behavior of the players involved. With this in mind, I 
am particularly troubled by the recent developments in the 
instant messaging area. Instant messaging is a real time chat 
format which allows users to communicate quickly and cheaply 
with each other.
    America Online alone has over 45 million registered 
subscribers, and after its 1998 purchase of ICQ, the major 
alternative instant messaging system, currently commands over 
80 million messaging users overall. These users generate nearly 
a billion messages a day, far more than the entire mail volume 
of the United States Postal Service.
    The mode of communications is especially popular with young 
people, who favor it over traditional telephone conversation in 
many cases. As we all know, what has made the U.S. telephone 
network the envy of the world, and a tremendous positive 
economic force, it is the fact that it is available everywhere 
to all users. The fact that anyone can access the network makes 
it vastly more valuable to everyone.
    The spectacular growth of the Internet itself was made 
possible by the development of open networks, not closed 
systems. Unfortunately, in the instant messaging area, I fear 
we are headed in the other direction. Just yesterday my 
colleague, Senator Hollings and I were presented with a letter 
from all of the major competitors that offer instant messaging 
services stating that their products are being purposely 
blocked by the dominant provider of such services, America 
Online. This letter was signed by many companies, including 
AT&T, AltaVista, Prodigy, and others too numerous to mention 
here.
    This very Committee heard just last summer that serious 
efforts were being undertaken by America Online to deal in good 
faith with these interoperability problems so that all 
consumers could benefit. In a July statement issued by the 
chairman of the working group designed to solve these problems, 
AOL stated that it, quote, believes that users should be able 
to exchange messages regardless of which product they use.
    AOL also said it was, I quote, fast-tracking these efforts. 
Well, it is 7 months later, and these blocking problems are 
more evident than ever, and I look forward to the testimony of 
the witnesses to clarify these recent events.
    Another issue that many Members of this Committee will be 
interested in, I assume, would be the so-called open access. I 
followed with great interest the announcement on Tuesday of 
this week that AOL and Time Warner committed to give their 
broadband cable customers direct access to Internet service 
providers on a nondiscriminatory basis. While I was never in 
favor of Government intrusion and regulation of the cable 
networks, I applaud the efforts to reach privately negotiated 
settlements.
    I should add that while the memorandum appears to be a 
positive first step, on closer inspection several questions are 
raised about how binding such agreement will be, and I look 
forward to a more detailed description of how this 
understanding would translate into the marketplace with our 
witnesses, and I look forward to your testimony today.
    I would also like to invite Mr. Case and Mr. Levin if they 
would--March 21, we kick off this year's activities in the 
Internet Caucus, and we will invite both of you to be a part of 
that, coming up on March 21. You might have your people put 
that on your calendar, and I thank you for coming today.
    Now I turn to my good friend, Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Thank you, Mr. Chairman. I think I can 
save us time by including my statement in the record here at 
this point. Let me thank the staff for preparing this 
statement, because I am not intelligent enough to prepare one 
on this subject.
    Things are breaking so fast, and we come from a policy of 
open access, and not having control of both content and 
message. That has been constant throughout our history with TV. 
Both of you folks at the table are way smarter than we are, but 
you understand that in the television industry we would not 
even let the networks produce their own programs. That was to 
try, under the First Amendment, freedom of speech, more 
flexible programs than otherwise, and even in the 1996 
Telecommunications Act, I remember we put in there for the Bell 
Companies if they got into video programming that they have 
open access, nondiscriminatory conduct and everything else.
    Now, what I am trying to see is, we have seen the 
tremendous merging of content and delivery, and anybody that 
studied John D. Rockefeller--who did not make his money on oil, 
he made his money on the distribution and delivery of that oil, 
and I see that you smart folks are really producing--and I will 
wait my turn for the questions, but it looks to me you all are 
running down--you all have got the Microsoft book, going right, 
straight down the Microsoft route that has got them in court 
right now, but I do thank you, and I would yield to my 
colleagues.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    The merger of AOL and Time Warner represents the synthesis of old 
and new media, narrowband and broadband, and content and delivery 
systems. It also represents the union of the world's largest Internet 
service provider and the world's biggest entertainment and media 
company. As such, it raises several public policy concerns that require 
significant examination.

         AOL has 23 million subscribers, six times larger then 
        its biggest Internet competitor.
         According to the International Data Corp (IDC), a 
        Massachusetts research and financial data firm, AOL controls 
        more than 40 percent of the Internet services market.
         Time Warner controls the second largest cable system 
        in the country, owns 20 percent of the cable lines and serves 
        12.6 million cable customers.
         Time Warner produces its own content and owns CNN 
        Network News, Cinemax, HBO and TNT, as well as Warner Brothers' 
        movies.
         On the print side, the company publishes numerous 
        popular magazines such as Time, People, Sports Illustrated, 
        Southern Living, Fortune and Money, which are read by 120 
        million people.

    There is tremendous potential for the exercise of undue market 
power and the discriminatory treatment of its competitors by this 
merged company. AOL already has used its market clout to forge 
agreements with top computer manufacturers to have its Internet access 
service bundled on new computers. This of course was the basis for the 
Microsoft anti-trust suit by Justice. In fact, that suit was directly 
tied to Netscape which is now owned by AOL. Now under this new 
agreement, new computers purchased from Dell, Compaq, and Gateway will 
have AOL's software.
    It also is my understanding that AOL has developed a new 5.0 
software that reportedly disables its competitors when installed on a 
user's computer, and is the subject of class action litigation in 
Arizona, Washington and Oregon. In order to rectify the problem 
consumers must call the AOL help line and reprogram their computer. 
While AOL is espousing nondiscriminatory treatment and choice, it is 
using software that makes it difficult to use multiple service 
providers. Will there be other changes in the Internet's architecture 
or AOL's software that will make it difficult for others to compete on 
a level playing field against AOL.
    Finally, this transaction raises the potential for discriminatory 
practices with respect to content delivered over the Internet/cable 
platform that will be deployed by AOL-Time Warner. When we passed the 
cable act in 1992, we were acutely aware of the dangers posed by the 
vertical combination of both content and distribution systems, and the 
inevitable temptation of the owner of both the content and distribution 
system to discriminate against their competitors. Then, in the 
Telecommunications Act of 1996, we included a provision to ensure that 
if the telephone companies provided video programming, they could not 
``unreasonably discriminate . . . with regard to material or 
information (including advertising) provided by the operator to 
subscribers . . . or in the way . . . material or information is 
presented to subscribers.'' Now we have a cable-Internet merger in 
which economic incentives will exist to favor their content, news, 
material, and information, over that of competing content and news 
information providers. The FTC and Congress should seriously consider 
whether this combination should be subject to similar principles of 
non-discrimination.
    I look forward to the testimony of our witnesses today on these 
important issues.

    Senator Burns. Thank you very much. Senator Gorton.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton. Mr. Chairman, in listening to both you and 
Senator Hollings I share many of your apprehensions. This is a 
huge merger. It looks as though it could easily lead us to a 
point where we have only a handful of major providers in the 
most dynamic part of our economy, and I share many of the 
reservations, though not necessarily all of the conclusions of 
the three members of the second panel that is going to appear 
before us here today.
    And I think it is right and proper on your part that we 
should take a very careful view of this merger, and should 
review it with at least a sufficient degree of apprehension 
that we require a heavy burden of proof on the two merging 
partners, and that they are not going to lessen competition and 
openness in the field together, and they play such a dominant 
role in.
    Senator Burns. Thank you very much. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. I will be very 
brief, and I want to pick up on what Senator Hollings said. It 
seems to me that in the 21st Century the money is to be made in 
interactivity, and I think when you look at the vision that the 
two of you have discussed with this merger. I think your vision 
is what we will need to examine. There are two areas in 
particular that I would look at with you.
    First, because of the size of this merger and the number of 
people involved, to a great extent what the two of you are 
doing is going to have enormous ramifications for privacy 
policy in this country. Senator Hollings has a lot of good 
thoughts on this. Senator Burns and I have a bipartisan bill 
with respect to this issue. Senator Kohl has signed on to it.
    Mr. Case, I heard you say a couple of days ago that you 
were essentially ready to back privacy legislation and, given 
the fact that this is perhaps number 2 now in the polls with 
respect to the American people, I would like to see you outline 
your views on privacy this morning. You will be asked about 
what you think the elements of a good privacy statute ought to 
be. That is number 1.
    The second area, so that you two will be aware of what I am 
going to ask, is this question about how to make sure that 
there is no discrimination against unaffiliated content 
providers. As you know, there is great concern in this country 
with respect to all of the other content providers who are not 
affiliated with your system about how they are going to get a 
fair shake, and I would like to have you all outline how it is 
that those folks are going to be treated fairly, so we do not 
end up in a country where, to get some of those content 
providers, people have got to scroll along for eons in order to 
get access to those materials. That is what I will be asking.
    Mr. Chairman, I look forward to working with you and 
Senator Hollings in a bipartisan way.
    Senator Burns. Thank you very much. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. Let me 
thank Mr. Case and Mr. Levin for coming today. I have spoken at 
some length about my concern about concentration. That is not a 
secret. My concern about concentration deals especially with 
the question of how does concentration affect competition?
    When we rewrote the Telecommunications Act our interest was 
in fostering aggressive, robust competition, and that is what I 
am going to be interested in today. How does this merger affect 
competition?
    And let me also say that I think privacy matters a great 
deal. As Senator Wyden indicated, privacy is one of the policy 
areas that we are very interested in.
    And I would also say that I was surprised and also found 
appealing the announcement earlier this week about open access. 
I think that is certainly a step in the right direction, but we 
must be concerned, as all of us proceed, about the competitive 
forces that can exist in the marketplace in telecommunications 
and entertainment. What are the competitive forces that will 
allow the consumer, the best possible product at the best 
possible price? I am interested in hearing all of the witnesses 
discuss today the effect of this proposed merger on those 
issues.
    Again, both of you are very successful businessmen who have 
built interesting and wonderful companies. Let me just say that 
with respect to the $1 billion instant messages, my children 
contribute a lot to that $1 billion a day, regrettably. We are 
working on paring that down just a bit.
    But this is a fascinating time and a fascinating industry. 
I am very interested in your presentations, and the 
presentation of the panel following you.
    Senator Burns. Thank you very much. Senator Bryan.

              STATEMENT OF HON. RICHARD H. BRYAN, 
                    U.S. SENATOR FROM NEVADA

    Senator Bryan. Thank you very much, Mr. Chairman, for 
convening this important hearing, and thanks to our 
distinguished witnesses for appearing here today. I think this 
merger raises some potentially troubling implications in terms 
of public policy, and at least two areas that are of concern to 
me have been mentioned by my colleagues. These areas include 
the impact this merger has on competition, and whether there 
will be open access.
    Mr. Case, you appeared before this Committee last year, 
prior to the merger. At that time you made, I thought, a very 
compelling argument. You urged us to consider having the FCC 
open a rule. I want to explore whether or not, after the 
announcement, you think we need to followup on that with some 
additional action, either at the regulatory level or at the 
legislative level and, as two of my colleagues have mentioned 
previously, the issue of privacy is not just a phantom issue. 
It is not ephemeral. It is an issue that I hear from my 
colleagues and from my constituents virtually every day.
    The Wall Street Journal did an opinion poll sampling last 
year with a focus on the millennium. What are the concerns that 
most Americans have in the next century? It was an open-ended 
poll. The single largest responding category at 29 percent 
expressed a concern about loss of privacy. I want to explore 
those issues with you, as I know a number of my colleagues may.
    Again, I look forward to the opportunity to ask some 
questions, and thank you, Mr. Chairman.
    Senator Burns. Thank you, Senator.
    Senator Rockefeller, I wonder if you might autograph one of 
those books that Senator Hollings was referring to.
    [Laughter.]

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. That is on distribution and not on 
collection.
    [Laughter.]
    I would say to our two witnesses that I do not necessarily 
start out skeptically on this merger. There are a number of 
questions that I need to have answered, and time will help us 
do that as well as this hearing. This whole phenomenon of the 
new economy is moving forward, and I am not inclined to try to 
stop it unless it is unwilling to address certain areas I think 
that you will be, and I have some questions for you about this, 
but you know, the privacy question is huge.
    Senator Hollings has asked me to do some work on that, and 
I am going to because he has asked me to and also because I 
think it is a huge issue. Another important issue is the whole 
question of not undermining consumer choice when it comes to 
broadband.
    But I do not start out skeptically. I start out with an 
open mind, and a willingness to hear how you respond to what 
people have to say because that is what hearings are for, and 
you have both the FTC and the FCC to go through. The FCC 
doesn't ordinarily turn down mergers of this sort. The FTC may 
very well approve it, I do not know, but your presence here is 
important, and how you answer questions will be extremely 
important.
    Thank you, Mr. Chairman.
    Senator Burns. Thank you, Senator.
    Senator Stevens.
    Senator Stevens. I applaud the merger. I am happy to be 
here and hear your statements. I hope my colleagues will let us 
get to that.
    Senator Burns. Thank you, Senator Stevens.
    Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Now, should I say anything?
    [Laughter.]
    Well, I thank the chairman, and I think you can tell the 
scope of this hearing is very important because you have heard 
from every Member of the Committee, and that is what happens 
when the subject matter is as important as this.
    You know, it seems like now more and more we have less and 
less. I mean, it seems like every day we have fewer oil and gas 
companies, fewer airlines, fewer railroads, and fewer 
telecommunications companies in this country, and big is not 
necessarily bad, but this is a country, as all of you know who 
are very competitive in your fields, that has been built on 
competition. The question I think we legitimately need to look 
at is how, when you have less and less, do you have more 
competition? It is a legitimate question. I know you are 
prepared to respond to it, and I look forward to your response.
    Thanks.
    Senator Burns. Senator Cleland.

    STATEMENT OF HON. MAX CLELAND, U.S. SENATOR FROM GEORGIA

    Senator Cleland. Thank you very much, Mr. Chairman. I am 
intrigued at this possibility this morning of our hearing. As a 
Democrat, I do not get a chance to encounter billionaires very 
often, so I just came to sit and stare.
    [Laughter.]
    Additionally, coming from Georgia----
    Senator Breaux. You look at Rockefeller every day. We've 
got one.
    Senator Cleland. But he's ours.
    [Laughter.]
    Knowing the history of TBS in Atlanta, and how it became 
Time Warner, and knowing Ted Turner as I do, I am also 
fascinated to see the guy who attempts to be Ted Turner's boss.
    [Laughter.]
    So we welcome you both today. Let me just say, in 1966 Time 
Warner did purchase TBS in Atlanta. A few months after that 
merger the TBS subsidiaries of Time Warner employed almost 
8,000 employees worldwide, and almost 5,000 in Georgia, and 
today those numbers have risen to over 9,000 employees 
worldwide and over 5,500 located in Georgia, so I think that 
was a good purchase and a good deal.
    As the TBS continues to launch new products, these numbers 
will continue to grow, I am sure, and create growth in other 
segments of our economy in Georgia and in the country. Now the 
merger we are discussing today has the potential, I think, to 
imitate many of these same positive results.
    It involves two dynamic leaders and two powerful 
industries, and it is no coincidence that it was announced just 
hours into what Mr. Levin has coined the Internet Century. I am 
very interested in learning how the merging of TV, movies, 
print media, with the Internet can really help average 
Americans, can help the consumer.
    The proposed merger between AOL and Time Warner, the 
largest in U.S. history, offers a tremendous opportunity to 
help shape the future of the Internet. This understandably 
creates a great deal of interest, speculation, and some 
anxiety. There is really no precedent for the merger of a media 
provider and an Internet provider. It leaves the merger open to 
interpretation of what is likely to happen.
    I personally am looking at this with great optimism and 
hope and faith, and belief in AOL and Time Warner that they 
will take full responsibility in this incredible undertaking.
    From the public interest standpoint, it is AOL and Time 
Warner's responsibility, I think, to handle the future in such 
a manner that your handling of both distribution and content 
will not produce an unfair advantage in the marketplace. Many 
of your competitors are expected to follow your lead in the 
future, so you have a grave responsibility to lead us all 
bravely and courageously and responsibly into the 21st Century.
    Many have already formed opinions on what the future holds, 
but nobody really knows what the future may hold. I am 
particularly interested in this in terms of the bottom line, 
what it does to the life of the average American. Does this 
merger help the average consumer of goods and services and 
information in America? I will be looking forward to your 
responses.
    Thank you very much, Mr. Chairman.
    Senator Burns. Thank you, Senator. Twenty years of 
officiating football, I assume the captains have introduced 
themselves. I will toss the coin to see who gets to kick and 
who gets to receive, but whoever would like to lead, and we 
welcome Steve Case and Gerry Levin, and we appreciate your 
attendance here this morning, as there is quite a lot of swirl 
around this proposed merger, and a lot of information, so we 
thank you for coming this morning, and whoever would like to 
lead.

               STATEMENT OF STEVE CASE, CHAIRMAN 
                    AND CEO, AMERICA ONLINE

    Mr. Case. I will start. We certainly understand the ground 
rules in terms of who is kicking and who is receiving. You get 
to kick, and we are here to respond as best we can.
    [Laughter.]
    Senator Burns, I really enjoyed your opening statement, but 
then you came to the however, and it got a little more 
troubling. I look forward to talking about instant messaging, 
and privacy, and open access, and some of the other issues that 
have been raised, and I apologize to Senator Rockefeller for 
somehow having his family name dragged into this.
    [Laughter.]
    I also am reluctant to go forward with this statement after 
Senator Stevens' comments, but I do think it answers many of 
the questions that have been raised. As a starting point I 
think it would be worth moving through it, and I will try to do 
it quickly.
    We see this merger, as you might imagine, as an opportunity 
to increase consumer choice and to spur new innovation, and to 
build further on notions of consumer trust and confidence and 
to really--I think it is something you all referenced in your 
comments, to extent the benefits of this Internet revolution to 
everybody.
    In a few short years the Internet has already begun to 
transform our every-day lives and our businesses, and our 
schools certainly, and our homes, and also in our Government 
today we are on the verge of what we think will be a second 
Internet revolution, and it is a time of incredible innovation 
and intense competition.
    We welcome that competition, because we believe our 
companies and this new company will be stronger because of it, 
so while we believe the combination of our companies will allow 
us to make the most of what we see as the changing world, there 
are a few things that will not change.
    First, we will continue to provide consumers with the 
broadest, most empowering range of choices, fostering the 
innovation and competition that are the Internet's driving 
force. In the Internet age, companies must constantly innovate 
if they expect to succeed, and history shows that the most 
powerful innovations are created when we find new ways to join 
the emerging technology with existing content.
    We hope AOL-Time Warner will lead a new era of innovation 
within our industry by providing consumers with an ever-
expanding array of content from music, to movies, to 
publishing, to communications, to financial services, and AOL-
Time Warner will never limit content diversity on any of our 
systems. If we did try to do that, consumers would waste no 
time in migrating to other Internet and media services.
    A second commitment is, we will continue working to earn 
consumers' trust and confidence. At AOL, we have put in place 
what we think is the best privacy policy in the industry, built 
on core principles of notice and choice. The same is true for 
Time Warner, a company that is committed to journalistic 
integrity and consumer choice both on and offline.
    I want to thank this Committee for keeping consumer trust 
and confidence at the top of your agenda. Many companies, 
including both Time Warner and AOL, supported legislation to 
put in place protections for information about children using 
the Internet could not be gathered without parental consent.
    We understand the importance of trust to Internet 
consumers. As you know, the FTC is reviewing our industry's 
self-regulatory efforts. Armed with the information the FTC 
report will provide, we can engage in a deliberative process 
among Members of Congress and the industry and consumers which 
will tell us whether other privacy legislation is necessary, 
and I will personally be happy to work with you to try to reach 
the best result.
    One thing is certain, though. We share the same goal, which 
is protecting consumers and their families by establishing a 
new standard of privacy and security for the digital age, while 
permitting the Internet to continue to flourish.
    Third, we will continue to work to implement open access, 
further increasing consumer's choices and enriching their 
online experience.
    Last year, as has been mentioned, I told this Committee 
that history demonstrates that as long as infrastructure on 
which the Internet is built remains open, competition and 
innovation will flourish, and the Government and industry 
should work together to ensure a vibrant Internet marketplace.
    We are seeing real progress in the marketplace on 
implementing open access, and we are proud of the role we have 
played in stimulating that progress. Implementation of open 
access all across the Nation is no longer a question of 
whether, but rather, of when.
    On the day we announced this merger, AOL and Time Warner 
committed to open its cable network for competition through 
multiple ISP's. This week, we took the next step, releasing a 
memorandum of understanding that will form the framework for 
delivering AOL and other ISP's over Time Warner cable, and give 
consumers real choice.
    Let me be very clear about what that framework means for 
consumers. Broadband consumers will not go through AOL unless 
they choose AOL. If they choose another Internet service 
provider, they will not see AOL or its front screen, and they 
will not be blocked from any content they wish to see. That is 
real open access, and it is the right policy grounded in the 
right principles for consumers, for the cable industry, and for 
the growth of the Internet.
    Finally, we will continue to broaden the reach and extend 
the benefits of the Internet, leaving no community behind. Both 
AOL and Time Warner have taken significant steps to help close 
the digital divide, the gap between those who have access to 
these new tools and those who do not.
    At AOL we are helping to launch PowerUP, a private public 
partnership to teach young people the skills they need and give 
them the guidance they need to make the most of their potential 
in this new, connected world. This is not just a problem of the 
inner city. That is why the AOL Foundation created the AOL 
Rural Telecommunications Awards, which awarded grants to people 
who are using the interactive medium to revitalize towns with 
less than 10,000 people.
    We will take this challenge seriously at AOL Time Warner, 
not only as a company, but as individuals with a shared 
personal conviction that we must use our leadership to build a 
better world. These are the issues we all need to address to 
truly build a global medium that empowers people and truly 
benefits society, not just the Internet industry.
    The truth is, as many of you know, without the Government's 
leadership on projects like ARPANET, and without the support to 
the NSF, the Internet would still be a distant dream. Without 
your leadership and support in the future, the Internet may 
never reach its full potential. We have a once-in-a-lifetime 
opportunity to shape this medium while it is still young, and 
there is definitely room for a continuing partnership between 
Government and industry to ensure we do it right.
    I appreciate the time and effort the Committee is taking to 
hear about this important merger, and I thank you in advance 
for the work you will continue to do in the months and years 
ahead. Together, we believe we can build a medium that will 
improve people's lives and a medium we can be proud of.
    Thank you.
    [The prepared statement of Mr. Case follows:]

   Prepared Statement of Steve Case, Chairman and CEO, America Online
    Good morning, Chairman Burns, Senator Hollings and Members of the 
Committee.
    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.
    We see this merger as an opportunity to increase consumer choice 
and spur new innovation, to build consumer trust and confidence, and to 
extend the benefits of the Internet Revolution to every community. We 
intend to make the most of this opportunity.
    In a few short years, the Internet has already begun to transform 
the way we live our lives--changing the way we communicate with 
friends, family and even our political leaders, the way we shop and are 
entertained, the way we strengthen our communities at home and build 
the world community.
    Now, we are on the verge of a second Internet revolution. 
Technological advances are increasing the range of online content 
people can enjoy and use--from cable broadband, satellite, and DSL 
connections, to a new generation of 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 consumer-driven competition.
    Change this fast and far-reaching brings with it new 
opportunities--but it also brings new responsibilities. So, while we 
believe that the combination of our companies will allow us to make the 
most of the changing world, there are a few things we won't change:

         First, we will continue to provide consumers with the 
        broadest, most empowering range of choices, fostering the 
        innovation and competition that are the Internet's driving 
        force.
         Second, we will continue to work hard to earn their 
        trust and confidence.
         Third, we will continue to work to implement open 
        access--further increasing consumer's choices and enriching 
        their online experience.
         Finally, we will continue to broaden the reach and 
        extend the benefits of the Internet--leaving no community 
        behind.

Let me start with our first and most important commitment at AOL Time 
Warner: empowering consumers and encouraging innovation.

    In our business, consumers are the ultimate venture capitalists--
they guide our business models and drive our ideas. 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.
    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.
    And 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.
    HBO combined the idea of cable television and Hollywood movies--and 
transformed the way we think about entertainment. CNN took cable into 
the realm of TV news--and changed the way we learn about the world. In 
the same way, VCRs transformed the movie industry, and CD technology 
transformed the music industry.
    We hope AOL Time Warner will lead a similar new era of innovation--
providing consumers with an ever-expanding range of content across 
industries, across platforms, across media--from music to movies to 
publishing to communications to financial services.
    And, let me be very clear: AOL Time Warner will never 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.

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 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 to 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 consumers' concerns.
    Let me clarify what I mean by this. The Internet will never reach 
its full potential if people don't feel comfortable and secure using 
it--nor will they let their children use it.
    This Committee and others know this, and I want to thank you for 
keeping these issues at the top of your agenda. At AOL, we have put in 
place what we think is the best privacy policy in the industry, built 
on core principles of notice and choice. The same is true for Time 
Warner--a company that is committed to journalistic integrity and 
consumer trust, both on and offline.
    As you know, many companies, including both Time Warner and AOL, 
supported legislation last year to put in place special protections for 
children using the Internet so that information about them cannot be 
gathered without parental consent.
    We understand the importance of trust to Internet consumers--and I 
would be happy to work with any of you to determine if other privacy 
legislation is necessary and when it should be pushed forward. I 
believe that any legislation that this Committee considers should be 
looked at only after the FTC has had a chance to do its review of 
current self regulatory efforts and the FTC's Committee on Access and 
Security has issued its report. This way, we will have the information 
we need to engage in a deliberative process among Members of Congress, 
the industry and consumers--and that is how we will reach the best 
result.
    Our commitment to build consumer trust and confidence doesn't stop 
there. We have also provided ``Parental Controls'' for families and 
teachers to customize their children's experience in cyberspace. I am 
proud that nearly 80% of America Online's members with children in the 
home use Parental Controls today.
    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, we will make open access a reality for consumers--further 
increasing their choices and enriching their online experience.

    Last year, I appeared before this Committee to talk about this 
issue. I said then--and I believe just as strongly today--that the 
history of the Internet has demonstrated that as long as the 
infrastructure on which it rests is open, competition and innovation 
will flourish. I also said that I believed government and industry must 
work together to ensure a vibrant Internet marketplace.
    For the most part, people in government agreed on the goal but 
wanted it to happen in the marketplace. We are now seeing real movement 
in the marketplace--and I'm proud of the role we've played in bringing 
us to this point. Our push on this issue, along with the calls for 
action by consumer advocates and government leaders, has led to 
significant progress in the past year toward consumer choice in cable 
broadband service. Implementation of open access nationwide is no 
longer a question of whether, but of when.
    As you know, on the day we announced our merger, AOL and Time 
Warner committed to making its cable network open for competition by 
multiple ISPs and to provide open access. This week, we took the next 
important step forward, jointly releasing a Memorandum of Understanding 
that will form the framework for delivering AOL and other ISPs over 
Time Warner cable--and give consumers greater choice.
    We are looking forward to putting that framework into practice as 
soon as possible. For now, I would like to be very clear about what it 
means, in simple terms, for consumers.
    Broadband consumers will not go through AOL unless they choose AOL. 
If they choose another Internet Service Provider, they will not see AOL 
or its front screen. And they will not be blocked from any content they 
wish to see.
    That's meaningful open access. I have believed for a long time that 
open access and consumer choice among ISPs is the right policy, 
grounded in the right principles, for consumers and the growth of the 
Internet. I am also convinced it is the smartest business practice for 
the cable industry and the future of cable Internet service.
    And so we are committed to working together with our industry to 
ensure that open access is common practice--and that consumers across 
the country are the real beneficiaries.

Finally, AOL Time Warner will be committed to ensuring that the 
benefits and opportunities of the Internet reach every community--
leaving no one behind.

    The Commerce Department--and this Committee--recognized early on 
that there is a widening gap between people who have access to the new 
technology and know how to use it, and those who do not. This ``Digital 
Divide'' threatens to place the promise of information technology 
beyond the reach of those who stand to benefit from it the most.
    Both AOL and Time Warner have already taken significant steps to do 
our part to close the Digital Divide. I am 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.
    Contrary to common perception, this is not just a problem in the 
inner city. In fact, rural Americans are much less likely than their 
urban counterparts to have computers, e-mail, even basics like phone 
lines. That's why the AOL Foundation, together with the National Center 
for Small Communities, created the AOL Rural Telecommunications Awards. 
Last year, we awarded $10,000 in grants to four winners who are using 
the interactive medium to revitalize towns of 10,000 people or less.
    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. We take this challenge seriously, not only as a company, but 
also as individuals with a shared personal conviction that we must use 
our leadership to build a better world.
    These are the issues we need to address to build a truly global 
medium that empowers people and benefits society.
    And when I say we, I mean all of us. I don't just mean the Internet 
and communications industry. I mean consumer groups and community 
leaders, and I mean government.
    The truth is, without the government's leadership and support--on 
projects like ARPANET and its support through the National Science 
Foundation--the Internet would still be a distant dream. And without 
your leadership and support in the future, the Internet may never reach 
its full potential.
    We have a once-in-a-lifetime opportunity now to shape this medium 
while it still young--and do it the right way.
    So, I appreciate the time and effort the Committee is taking to 
hear about this important merger, and I thank you in advance for the 
work you will continue to do in the months and years ahead. Together, 
we will build a medium that improves people's lives--and one we can all 
be proud of.
    Thank you.

    Senator Burns. Mr. Levin.

 STATEMENT OF GERALD LEVIN, CHAIRMAN AND CEO, TIME WARNER, INC.

    Mr. Levin. Thank you, Chairman Burns and Senator Hollings, 
and all the Members of the Committee. I have to start by saying 
that I feel very comfortable being in this Committee room 
because we have, in fact, been working together for so many 
years, I think with the common goal of delivering to consumers 
the broadest choices in telecommunications and media. We have 
worked together on telephone competition, the satellite 
delivery of broadcast programs, the advent of digital 
television and, of course, cable deregulation.
    I think one common aspect of all of that has been to try 
and do something that makes sense for the consumer in the face 
of rapidly expanding technology, and that is really where we 
are today, so I am proud that we have shared the same goals, 
and actually would like to acknowledge your recent success in 
the Satellite Home Viewer Improvement Act and certainly, of 
course, in what I think was landmark legislation, the 1996 
Telecommunications Act.
    Just a brief word of my history. For almost three decades, 
actually going back to a time when some cable mavericks like 
myself and Ted Turner had what then seemed a quixotic dream of 
overthrowing the stranglehold that the network triopoly had on 
the basic form of communication, television, and I am pleased 
to say that that dream has been realized because today we have 
returned power to the consumer, the viewer, to choose what she 
or he wants.
    I am also very pleased with the array of programming that 
cable has stimulated, from premium services like Home Box 
Office to very significant networks like CNN, Disney, 
Discovery, ESPN, Nickelodeon, CNBC, and of course, C-SPAN, 
which provides a tremendous public service.
    Also, encouraged by a lot of that activity, we built in 
1994 the first true switch digital interactive system in 
Orlando, Florida. We learned a lot from that experience, and 
were encouraged by it, so much so that we now see, with the 
advent of the Internet--and our own expenditure in the last 4 
or 5 years has now passed $6 billion to upgrade our systems--to 
have developed the kind of digital bank account that can 
accommodate so many different opportunities for the consumer.
    I would like to go back and just again commend the 
Committee for the 1996 Telecommunications Act, because I think 
that really was the landmark shift that enabled almost 
everything that has occurred since that time. It was that Act 
which shifted telecommunications policy from relying on 
regulation to a policy fostering competition amongst industry 
players. Let me quote from the preamble of the 1996 Act 
describing your vision ``to provide for a procompetitive 
deregulatory national policy framework designed to accelerate 
rapidly private sector deployment of advanced 
telecommunications and information technologies and services to 
all Americans.''
    With the onset of the Internet, which is by far the most 
profound revolution certainly in any of our history, and 
probably for the republic itself, you have something that is 
wildly democratic (lower case d) with no central control 
whether by a Government agency or by any corporation. Indeed, 
any citizen in any part of the world is free to publish on the 
Internet. It is the most extraordinary event I think in the 
course of human history, because for the first time we have 
truly a networked society.
    So AOL Time Warner was really born to be a new kind of 
company for the 21st Century. I know we have talked about the 
economic size of this transaction, but I can assure you that 
there were three philosophic areas that I had to satisfy myself 
on with respect to this combination that were actually much 
more important than the financial characteristics of the 
transaction.
    The first is something that is a part of our heritage at 
Time Warner, and that is journalistic independence. I feel my 
trusteeship--and now through AOL Time Warner, and confirmed by 
Steve Case, is that we are here to preserve, protect, and 
defend CNN and Time Magazine and the journalistic independence 
that they operate under without fear or favor, or any kind of 
business encroachment. That is the first fundamental principle 
to which we mutually have attested.
    Second, and not just because we are here, or are engaged in 
hearings this week, we have agreed on the principle of 
nondiscriminatory access, and what that means, and I will state 
it flat out, is that with respect to Time Warner cable systems 
no preference will be shown for affiliated services, soon to be 
AOL Time Warner, versus unaffiliated services. We have a long 
history of doing that, not just because it makes good policy, 
but because it absolutely corresponds to what the consumer 
wants, consumer choice.
    On the flip side of that coin, I would also say to you that 
there is no intention that the wonderfully diverse material, 
creative material coming from Time Warner will be exclusively 
distributed through AOL, so these are principles that we both 
agreed to. On Tuesday, as you know, we put out a Memorandum of 
Understanding, to which we are both committed.
    Finally, and probably most importantly, is a sense of 
shared values. I know that the Committee and the Congress is 
the proprietor of the public interest, but in even the history 
of my own company, in Henry Luce's will there was a statement 
that the company is to be operated not just in the interest of 
shareholders, but in the public interest, and in fact both Time 
Warner and AOL share this social commitment.
    So this is not a question of being the largest company. 
This is a question of whether we can use the skills and the 
resources in the private sector, working cooperatively with the 
public sector and foundations and educational institutions to 
make a difference in the public we serve.
    So that we hold the following values to be truly 
significant. The issue of privacy is not for us simply a matter 
of business practice. It's just fundamental to respecting human 
dignity, and we will talk more about that.
    The phrase, the digital divide, is something that we take 
seriously because it is an apt description of the continuation 
of the inequality in this Nation that is now going to be 
unfortunately hastened. AOL has been not only on record but 
Steve Case is personally committed to meeting that challenge, 
so that we do not end up with an information aristocracy.
    And then finally, I would say something that we have not 
heard yet this morning, but that is really the importance of 
education, and what can we do with this combination, with this 
technology. Really, our ultimate responsibility is with respect 
to the young people not only in our country but around the 
world. Frankly we view this, and I view it personally, as a 
moral imperative. When I see the conditions that some of our 
most gifted teachers have to operate under, we are bound and 
determined to make a difference there.
    So I guess I should stop. We have put our full statement in 
the record, Mr. Chairman. I would be happy to answer questions.
    [The prepared statement of Mr. Levin follows:]

Prepared Statement of Gerald Levin, Chairman and CEO, Time Warner, Inc.
    Chairman Burns, Senator Hollings and Members of the Committee, I'm 
very pleased to be appearing before you today. I feel at home in this 
Committee room where we have worked together over many years to deliver 
consumers the broadest choices in telecommunications and media. From 
telephone competition to satellite delivery of broadcast programs to 
digital television to cable deregulation, we've shared a goal of 
creating consumer choice in both content and distribution in the 
context of ever-changing technology. I am proud to share these goals 
with you and sincerely acknowledge your many successes, most recently 
in the Satellite Home Viewer Improvement Act and, of course, the 
landmark 1996 Telecommunications Act. I'm particularly 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.
    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 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. 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.
    In 1996, the Members of this Committee recognized that exciting new 
services could flourish only if the policy paradigm shifted its focus 
from relying on regulation to fostering competition among industry 
players. The preamble of the 1996 Telecommunications Act aptly 
describes your vision ``. . . to provide for a pro-competitive, de-
regulatory national policy framework designed to accelerate rapidly 
private sector deployment of advanced telecommunications and 
information technologies and services to all Americans . . .'' it was 
that historic shift in policy that significantly contributed to the 
growing certainty that something profound was taking place in the 
telecommunications sector. We are grateful for your wisdom in creating 
the policy environment that allowed that to happen.
    From 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 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'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 messaging 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 company wide 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. Our multi-billion 
dollar upgrade also allows us to offer many of the enhanced services 
our consumers are so eager for. These include increased video 
offerings, digital television, interactive services and soon, telephony 
services over the same architecture. As you know, we currently provide 
facilities based telephone service to businesses through our 
competitive local exchange carrier. We intend to provide local 
residential telephone service and, ultimately IP telephony, which we 
are now testing in Portland, Maine.
    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. As you know, America's leadership in deploying 
and using the Internet around the world is unique. However, there 
exists the fierce competitive determination of entrepreneurs across the 
globe to catch and surpass us.
    From my early conversations with Steve, it became clear that we 
both 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 bond 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 Warner 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 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 in the form of a 
Memorandum of Understanding between our companies 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.''
    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 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 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. And all that can be offered to consumers while still protecting 
their privacy, an issue of vital public interest that I pledge AOL Time 
Warner will continue to address in the most serious manner.
    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.
    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.''
    Thank you.

    Senator Burns. Thank you very much, and both of your full 
statements will be made a part of the record. I am also going 
to ask unanimous consent that the MOU will be made a part of 
the record also, and the letter that Chairman Hollings and I 
received yesterday. *
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    Senator Burns. I want to talk a little bit about this 
instant messaging. As you know, as we moved through the 1996 
Act, we knew how difficult it was going to be to deal with the 
incumbent entity in the exchange business, in the telephones. 
We know that was going to be one of the most difficult areas, 
to unbundle and to deregulate. After all, this industry had 
been in the regulatory cocoon for so many years.
    And as I look at instant messaging, I am seeing we have to 
avoid, later on, dealing with this situation here with maybe an 
incumbent in the business of instant messaging.
    I would ask the--so far we have shown very little in the 
area of developing systems that are interoperable, and I wish 
you could bring this Committee up to date, Mr. Case, on where 
we are in that, and sort of the five W's we are asking, and if 
you could bring us up to date, and I may have another question, 
another followup question with that.
    Mr. Case. Sure. I look forward to it. First of all, it is 
interesting to think of ourselves as an incumbent, since in 
1996 I think we had maybe a few hundred thousand customers, and 
we were struggling to just stay in business.
    As it relates to instant messaging specifically, the letter 
that I received--I think it is the same one you said--stated 
the following: our sole concern--this is all the companies 
raising this concern to you. Our sole concern is with ensuring 
that all Internet users can enjoy the immense benefits of fully 
interoperable instant messaging capabilities, and avoid the 
dangers of a balkanized system. That is precisely what we are 
working to achieve, so let me give you some background on this 
and the progress we have made.
    We invented this notion of instant messaging more than 15 
years ago, when we launched our first service in the fall if 
1985. That was at a time when people thought this was just 
about accessing news, or buying things, and maybe getting 
people to talk to each other would be useful. We thought 
building a sense of community was important, and we invested in 
building this notion of instant messaging, and for a decade, 
the only way to get that feature was to subscribe to our 
service.
    Several years ago we thought, because of the importance of 
messaging, that we should not require somebody to be a 
subscriber to AOL to benefit from this instant messaging 
capability, so I think it was about 2 years ago we decided to 
release AOL Instant Messenger as a free product on the Web, 
free to download, and free to use, so that anybody who wanted 
to participate in this instant messaging community could get it 
for free, and use it for free, which was a sort of unusual 
step, people thought when we took that.
    Then, starting about 18 months ago, we started hearing from 
some companies that said, we really want to work with you to be 
part of this messaging community, we do not want a balkanized 
role, we want an inclusive role, and asked if we would make our 
technology, our protocols available to them so they could build 
their own instant messaging software.
    And over the ensuing year and a half, and particularly in 
the last few months, we have signed, now, a dozen agreements, 
including the leaders in the corporate community, including IBM 
and Sun and Novell, and leaders in portals, such as Lycos, and 
leaders in Internet service provisions, such as MindSpring and 
EarthLink, and this week we announced certain wireless 
initiatives with Motorola and Nokia and Bell South, and we 
also--I remember doing a deal with Apple and Real Network, so 
there are many, many companies that we basically allowed to use 
these protocols to build their own products, to call it 
whatever they want. For example, I think it is the Lycos 
Instant Messenger, not the AOL Instant Messenger for Lycos.
    So we have taken a lot of steps to make it an inclusive 
community. We have licensed it broadly. I think the licensing 
policy we have had is quite unusual in the software industry. 
It is not something you see from Microsoft or Sun or other 
companies. I do not know of any other company that has 
basically made its software freely available to users, and 
easily licensed to other companies on a royalty-free basis, so 
I think we have done a number of things to create this 
inclusive community.
    We have not licensed it to everybody. There are some 
companies, unfortunately, that have chosen to hack into our 
servers, as opposed to license this. We think it is very 
important, in the recent spate of problems with cyber terrorism 
and Web sites, to indicate how important it is to protect the 
safety and security and privacy of people, so we have some 
minimal standards.
    People have to agree to participate, and what we are 
talking about is not just software, but also the community, and 
when you use this instant messaging software you actually 
communicate with our servers that we are paying for and 
participate in this community that everybody can be part of.
    So I would say that we should be applauded for innovating 
and creating instant messaging, for then taking the step of 
making it freely available to any consumer anywhere in the 
world. They can get the software for free and the servers for 
free and then licensing it on very straightforward terms to 
most of the leading companies around the world, and we will 
continue to do that, working with other companies and other 
groups to try to make this notion of messaging part of our 
future.
    Senator Burns. Thank you very much. I am going to move on. 
Do you have opening statements? I am sorry, Senator Snowe. 
Senator Abraham. No statements.
    I am going to move right along, and so everybody has a 
chance, Senator Hollings.
    Senator Hollings. Thank you, Mr. Chairman, and right to the 
point, we admire both of you. You are brilliant, and you have 
been very successful. This Committee is not against success, 
and incidentally we are not against innovation. You have got to 
be innovative to keep pace with fast-breaking technology.
    Mr. Chairman, let me ask that you put in the holdings here 
of Time Warner, the Columbia Journalism Review. There are five 
pages of holdings there.
    I would like to also add into the record the Internet 
service providers, a list of those, their rankings, the service 
providers, showing America Online is seven times bigger than 
its nearest competitor and generally 100 times bigger than the 
rest.
    [The information referred to follows:]

            Columbia Journalism Review, Media Owner's Index
Time Warner--Books
    Time Life Books

        Time--Life International
        Time--Life Education
        Time--Life Music
        Time--Life AudioBooks

    Book-of-the-Month Club
    Paperback Book Club
    Children's Book-of-the-Month Club
    History Book Club
    Money Book Club
    HomeStyle Books
    Crafter's Choice
    One Spirit
    International
    Little, Brown and Company
    Bulfinch Press
    Back Bay Books
    Little, Brown and Company (U.K.)
    Warner Books
    Warner Vision
    The Mysterious Press
    Warner Aspect
    Warner Treasures
    Oxmoor House (subsidiary of Southern Progress Corporation)
    Leisure Arts
    Sunset Books
    TW Kids
    Leisure Arts
Time Warner--Cable/DBS
HBO
    HBO Home Video
    HBO Pictures/HBO Showcase
    HBO Independent Productions
    HBO Downtown Productions
    HBO NYC Productions
    HBO Animation
    HBO Sports
    Cinemax
    Time Warner Sports
International
    HBO Asia
    HBO en Espanol
    HBO Ole (with Sony)
    HBO Poland (with Sony)
    HBO Brasil (with Sony)
    HBO Hungary
    Cinemax Selecciones
Other Operations
    HBO Direct (DBS)
    Comedy Central (50% owned with Viacom)
    CNN
    CNN
    CNN/SI
    CNN International
    CNN en Espanol
    CNN Headline News
    CNN Airport Network
    CNN fn
    CNN Radio
    CNN Interactive
    Court TV (with Liberty Media)
    Time Warner Cable
    Road Runner (high speed cable modem to the Internet, with MediaOne 
Group,
    Microsoft, and Compaq)
    Time Warner Communications (telephone service)
    New York City Cable Group (largest cable cluster in world--over 1.1 
million)
    New York 1 News (24 hour news channel devoted only to NYC)
    Time Warner Home Theater (Pay-Per-View)
    Time Warner Security (residential and commercial security 
monitoring)
    Kablevision (53.75%--cable television in Hungary)
Time Warner Inc.--Film & TV Production/Distribution
    Warner Bros.
    Warner Bros. Studios
    Warner Bros. Television (production)
    The WB Television Network
    Warner Bros. Television Animation
    Hanna--Barbera Cartoons
    Telepictures Production
    Witt--Thomas Productions
    Castle Rock Entertainment
    Warner Home Video
    Warner Bros. Domestic Pay--TV
    Warner Bros. Domestic Television Distribution
    Warner Bros. International Television Distribution
    The Warner Channel (Latin America, Asia--Pacific, Australia, Germ.)
    Warner Bros. International Theaters (owns/operates multiplex 
theaters in over 12 countries)
Time Warner Inc.--Magazines
    Time

        Time Asia
        Time Atlantic
        Time Canada
        Time Latin America
        Time South Pacific
        Time Money
        Time For Kids

    Fortune
    Life
    Sports Illustrated

        Sports Illustrated Women/Sport
        Sports Illustrated International
        SI for Kids

    Inside Stuff
    Money

        Your Company
        Your Future

    People

        Who Weekly (Australian edition)
        People en Espanol
        Teen People

    Entertainment Weekly

        EW Metro

    The Ticket
    In Style
    Southern Living
    Progressive Farmer
    Southern Accents
    Cooking Light
    The Parent Group

        Parenting
        Baby Talk
        Baby on the Way

    This Old House
    Sunset
    Sunset Garden Guide
    The Health Publishing Group

        Health
        Hippocrates
        Coastal Living
        Weight Watchers

    Real Simple
    Asiaweek (Asian news weekly)
    President (Japanese business monthly)
    Dancyu (Japanese cooking)
    Wallpaper (U.K.)
    American Express Publishing Corporation (partial ownership/
management)

        Travel & Leisure
        Food & Wine
        Your Company
        Departures
        SkyGuide

    Magazines listed under Warner Brothers label

        DC Comics
        Vertigo
        Paradox
        Milestone
        Mad Magazine

Time Warner--Music
Warner Music Group--Recording Labels
    The Atlantic Group
    Atlantic Classics
    Atlantic Jazz
    Atlantic Nashville
    Atlantic Theater
    Big Beat
    Blackground
    Breaking
    Curb
    Igloo
    Lava
    Mesa/Bluemoon
    Modern
    1 43
    Rhino Records
    Elektra Entertainment Group
    Elektra
    EastWest
    Asylum
    Elektra/Sire
    Warner Brothers Records
    Warner Brothers
    Warner Nashville
    Warner Alliance
    Warner Resound
    Warner Sunset
    Reprise
    Reprise Nashville
    American Recordings
    Giant
    Maverick
    Revolution
    Qwest
    Warner Music International
    WEA Telegram
    East West ZTT
    Coalition
    CGD East West
    China
    Continential
    DRO East West
    Erato
    Fazer
    Finlandia
    Magneoton
    MCM
    Nonesuch
    Teldec
    Other Recording Interests
    Warner/Chappell Music (publishing company)
    WEA Inc. (sales, distribution and manufacturing)
    Ivy Hill Corporation (printing and packaging)
    Warner Special Products
Joint Ventures
    Columbia House (w/Sony--direct marketing)
    Music Sound Exchange (w/Sony--direct marketing)
    Music Choice and Music Choice Europe (w/Sony, EMI, General 
Instrument)
    Viva (w/Sony, Polygram, EMI--German music video channel)
    Channel V (w/Sony, EMI, Bertelsmann, News Corp.)
    Heartland Music (50%--direct order of country and gospel music)
Time Warner--Online/Other Publishing
    Road Runner
    Warner Publisher Services
    Time Distribution Services
    American Family Publishers (50%)
    Pathfinder
Time Warner--Merchandise/Retail
    Warner Bros. Consumer Products
    Warner Bros. Studio Stores (as of December 1997, 170 stores 
worldwide in over 30 countries)
Theme Parks
    Warner Brothers Recreation Enterprises (owns/operates international 
theme parks)
Time Warner Inc.--Turner Entertainment
Entertainment Networks
    TBS Superstation
    Turner Network Television (TNT)
    Turner South
    Cartoon Network
    Turner Classic Movies
    Cartoon Network in Europe
    Cartoon Network in Latin America
    TNT & Cartoon Network in Asia/Pacific
Film Production
    New Line Cinema
    Fine Line Features
    Turner Original Productions
Sports
    Atlanta Braves
    Atlanta Hawks
    Atlanta Thrashers (NHL team, begin play in 1999)
    Turner Sports
    World Championship Wrestling
    Good Will Games
    Philips Arena
Other Operations
    Turner Learning
    CNN Newsroom (daily news program for classrooms)
    Turner Adventure Learning (electronic field trips for schools)
    Turner Home Satellite
    Turner Network Sales
                                 ______
                                 
               ranking internet service providers by size
    This page is maintained by Nick Christenson, [email protected] It 
was last updated on February 25, 2000.
    The point of this page is to track the relative sizes of the larger 
Internet Service Providers, where size is measured by some notion of 
the extent of their customer base. Very little information has been 
made publically available on this, and as far as I can tell, no attempt 
has ever been made to collate it. The purpose of this page is to make 
this attempt. It will disappear if anyone with real time and resources 
ever decides to track this information and make it public. Since the 
page has been around since the summer of 1998 and this has not yet 
happened, this doesn't look too likely.
    About the only way to gain real information on the size of the 
customer base of any ISP is via their own announcements. Because of 
various ISP's philosophies regarding disclosure, some of this data 
comes from far more accurate and up-to-date sources than others. This 
is an unfortunate necessity. Of course, we have no real idea what the 
methodology is that they are using, nor can we tell whether these 
numbers are in any way accurate. Further, as is especially the case for 
the free service ISPs, it's hard to gain consensus on what these 
numbers mean, or how meaningful they are. Nonetheless, this information 
can show some relative sizes without needing to be horribly accurate.
    The vast majority of the information here is compiled by me as I 
read various sources of ISP news. A sizeable fraction of the data is 
submitted to me by kind souls from around the Internet. This page is 
better for everyone because of their contributions. If you ever hear an 
ISP quote its size in any non-confidential context, please email this 
number to me, the name of the ISP, and information I can use to cite 
the figure. I don't intend to quote a number I cannot verify. Of 
course, representatives of the ISPs themselves are invited to send me 
their numbers when they can be disclosed publicly.
    The goal of this page is to list every ISP doing business in the 
United States that can legitimately claim more than 100,000 subscribers 
and list their actual size as accurately as possible. Some are listed 
that are smaller than this threshold, but I make no commitment to try 
to list these, especially if they do not have a nationwide or at least 
a large regional presence.
    This is the information I have been able to find so far, along with 
a set of ISPs that may also be of sufficient size, but for whom I have 
no information.


----------------------------------------------------------------------------------------------------------------
            ISP                Subscribership         Date                            Source
----------------------------------------------------------------------------------------------------------------
America Online               21,000,000          20000202        CNET News
----------------------------------------------------------------------------------------------------------------
EarthLink                    3,100,000           20000204        CBS MarketWatch
----------------------------------------------------------------------------------------------------------------
NetZero                      3,000,000           20000110        Yahoo!
----------------------------------------------------------------------------------------------------------------
Compuserve (AOL)             2,500,000           20000119        AOL web site
----------------------------------------------------------------------------------------------------------------
Prodigy                      2,000,000           19991122        Yahoo! After taking over FlashNet and SBC's
                                                                  user bases
----------------------------------------------------------------------------------------------------------------
AT&T WorldNet                1,800,000           20000201        Internet News
----------------------------------------------------------------------------------------------------------------
Microsoft Network            1,800,000           19990715        Yahoo!
----------------------------------------------------------------------------------------------------------------
Old EarthLink                1,600,000           19991020        CBS MarketWatch (merged with MindSpring on Feb.
                                                                  7, 2000)
----------------------------------------------------------------------------------------------------------------
Freei.Net                    1,500,000           20000120        Internet News
----------------------------------------------------------------------------------------------------------------
MindSpring                   1,297,000           19991020        CNET News (merged with EarthLink on Feb. 7,
                                                                  2000)
----------------------------------------------------------------------------------------------------------------
[email protected]                  1,000,000           19991206        CNET News
----------------------------------------------------------------------------------------------------------------
WebTV                        900,000             19990707        CNET News
----------------------------------------------------------------------------------------------------------------
Gateway net (AOL)            740,000             20000119        AOL web site
----------------------------------------------------------------------------------------------------------------
One Main                     675,000             20010131        Yahoo!
----------------------------------------------------------------------------------------------------------------
Bell South                   650,000             19991109        Internet News
----------------------------------------------------------------------------------------------------------------
lstUp.com                    550,000             19991018        CNET News
----------------------------------------------------------------------------------------------------------------
RCN                          523,728             20000210        Yahoo!
----------------------------------------------------------------------------------------------------------------
AltaVista                    500,000             19991216        Yahoo!
----------------------------------------------------------------------------------------------------------------
GTE                          491,000             19991129        San Francisco Chronicle
----------------------------------------------------------------------------------------------------------------
Roadrunner                   420,000             19991129        San Francisco Chronicle
----------------------------------------------------------------------------------------------------------------
IBM Global Internet          >400,000            19980421        Computer Retail Week (Acquired by AT&T WorldNet
                                                                  on December 8, 1998)
----------------------------------------------------------------------------------------------------------------
Juno                         550,000             20000110        CBS MarketWatch
----------------------------------------------------------------------------------------------------------------
Netcom/ICG                   400,000             19990107        San Jose Mercury News (at the time of the
                                                                  MindSpring buyout)
----------------------------------------------------------------------------------------------------------------
US West                      350,000             19991122        US West web site
----------------------------------------------------------------------------------------------------------------
Voyager.net                  355,000             20000214        Yahoo!
----------------------------------------------------------------------------------------------------------------
SW Bell/Pacific Bell         300,000             19980515        Pacific Bell Internet press release
----------------------------------------------------------------------------------------------------------------
Espernet.com                 274,000             19991001        CNET News
----------------------------------------------------------------------------------------------------------------
Verio                        260,000             19990630        Yahoo!
----------------------------------------------------------------------------------------------------------------
FlashNet                     244,000             19991007        FlashNet web page (at the time of the time of
                                                                  the Prodigy buyout)
----------------------------------------------------------------------------------------------------------------
Bell Atlantic                200,000             19991129        San Francisco Chronicle
----------------------------------------------------------------------------------------------------------------
Concentric                   l97,000             19991100        Second hand from a Concentric employee
----------------------------------------------------------------------------------------------------------------
Sprynet                      180,000             19990107        San Jose Mercury News (at the time of the
                                                                  MindSpring buyout)
----------------------------------------------------------------------------------------------------------------
Eisa.com                     165,000             19991201        Eisa.com web page
----------------------------------------------------------------------------------------------------------------
Internet America             147,000             20000127        Yahoo!
----------------------------------------------------------------------------------------------------------------
ALLTEL                       133,000             19991115        ALLTEL press release
----------------------------------------------------------------------------------------------------------------
JPSnet                       115,000             19990303        JPSnet press release
----------------------------------------------------------------------------------------------------------------
RMI.net                      107,000             19991216        Yahoo!
----------------------------------------------------------------------------------------------------------------
Slash net                    100,000             19980518        Internet Week
----------------------------------------------------------------------------------------------------------------
IDT                          80,000              19981020        IDT website
----------------------------------------------------------------------------------------------------------------
ViIlageNet                   70,000              19991123        VillageWorld press release
----------------------------------------------------------------------------------------------------------------
BiznessOnline.com            63,000              19991230        BiznessOnline press release
----------------------------------------------------------------------------------------------------------------
Primary Network              60,000              20000124        Primary Network press release
----------------------------------------------------------------------------------------------------------------
First World                  58,700              20000216        Yahoo!
----------------------------------------------------------------------------------------------------------------
Covad                        57,000              20000125        Covad press release
----------------------------------------------------------------------------------------------------------------
PDQ.net                      45,000              19990913        PDQ.net web site (at the time of the Internet
                                                                  America buyout)
----------------------------------------------------------------------------------------------------------------
Teleport                     40,000              19991130        OneMain website (at the time of the OneMain
                                                                  takeover)
----------------------------------------------------------------------------------------------------------------
21st Century                 37,000              19991213        Internet News (at the time of the RCN takeover)
----------------------------------------------------------------------------------------------------------------
BigNet                       35,000              20000202        Email from the BigNet CFO
----------------------------------------------------------------------------------------------------------------
TIAC                         33,000              19990622        Internet News (at the time of the PSI buyout)
----------------------------------------------------------------------------------------------------------------
Log on America               30,000              19991028        Yahoo!
----------------------------------------------------------------------------------------------------------------
Metricom                     29,000              19990729        Yahoo!
----------------------------------------------------------------------------------------------------------------
FIRST                        20,000              20000123        Email from the 1st.net CEO
----------------------------------------------------------------------------------------------------------------
Brigadoon                    7,000               19981102        CNET News
----------------------------------------------------------------------------------------------------------------
Primenet                     ?                   ?               No info on their web site
----------------------------------------------------------------------------------------------------------------
Worldcom                     ?                   ?               No info on their web site
----------------------------------------------------------------------------------------------------------------
Panix                        ?                   ?               No info on their web site
----------------------------------------------------------------------------------------------------------------
Infinet                      ?                   ?               No info on their web site
----------------------------------------------------------------------------------------------------------------


    Senator Hollings. Now, having said that, what I am looking 
for is your statement here about open access, and I see that on 
open access there are two references here, one with respect, 
Mr. Case, to AOL 5.0. Can we call--this has just come out, just 
get along with AOL 5.0.
    If America Online is your only route online, sure, but 
people who juggle multiple Internet providers have had a 
different story to tell, after having their other accounts 
incapacitated by the new version of America Online's software.
    Then they say, for example, when you call and reference 
them, AOL spokesman Tricia Primrose said we have seen very few 
problems like the ones you describe, but, says this individual, 
we called AOL--this was a Washington Post reporter, and I will 
give you a copy of the story. When we called AOL technical 
support instead we waited on hold for 55 minutes and then were 
quizzed as to why we would want to have another ISP.
    But AOL's representative did eventually come through with 
repair instructions. I am seeing that. All the emphasis about, 
yeah, we have access, but that does not amount to access, and 
then when you intimidate even the powerhouse Disney--you 
recently moved the cartoon network of your own entity from 
Channel 67 in New York to Channel 22, but you took the Disney 
Channel from 33, and you put it up to 66. The Disney people are 
afraid to come and testify, because we don't want to irritate 
the Lone Ranger.
    You have gotten powerful enough now where they say, good 
gosh, we just changed, whereby you favored your own content and 
repositioned everything, and if we come up and we say what we 
are really afraid of, we will get cutoff further.
    In the past year, America Online has entered into strategic 
relationships with Gateway, Compaq, and just last month Dell, 
and then you have deals with Hewlett-Packard and Ace. Now, 
these manufacturers constitute over 50 percent of the market. 
That is why I said in my opening comment that I was worried 
that you were going down the same road as Microsoft. There is 
nothing wrong with having a monopoly. It is whether you use the 
monopoly to abuse the process and withstand competition, and 
that is what we are looking at here in this Committee.
    We do not want to have to legislate and mess up the 
wonderful communications and electronics explosion, but when we 
see these trends, when we see you have already got four class 
actions and everybody moving, and you keep moving, you talk 
access but you have to wait 55 minutes to even get it 
explained; when you see that you are powerful enough to take 
even again the more powerful and get them afraid to come and 
even testify because they might get put off the channel, much 
less a bad spot on the channel--let me hear your comments, both 
of you. That is what this Committee is worried about.
    Mr. Case. I would be happy to respond. Gerry can add to it. 
First, in our industry there are all kinds of data. Some of it 
is more accurate than others, but I think if you look at the 
recent statistics we are not seven times bigger than our next 
largest competitor. There have actually been some mergers with 
MindSpring and EarthLink.
    That we are the leader by far, and we are grateful so many 
consumers have agreed to subscribe to us, but you said 
something like 100 times bigger than the rest, and that is not 
really the dynamics. We are the leader in our market. Time 
Warner is the leader in several markets. We are not dominant in 
anything, and I think any comparison to Microsoft is not an 
accurate one.
    As it relates to AOL 5.0, there is a number of points 
there. We integrate the Microsoft Windows dialer protocol 
within our software because it runs on top of the Windows 
operating system. It is the same thing that almost all the 
ISP's do, including AT&T and Microsoft and MindSpring and 
Earthlink. 95 percent of our customers do not use another ISP, 
and for them this is a more seamless experience.
    If you are in the 5 percent that want to use a multiple ISP 
you are able to do that, and if you call us we will explain how 
to do it. We have recently posted some information online. I am 
sorry to hear anybody had to wait 55 minutes. We actually have 
7,000 people and spend quite a bit of money to make sure if 
people do have a problem they can get a response quite 
promptly. I think that has been helpful in terms of growing our 
business and the loyalty of our members.
    As it relates to Disney, certainly Gerry understands Disney 
better. I am surprised to hear that Disney is intimidated. We 
have discussions with them on many things. I do not think the 
debate over channel placement is going to be quite the same in 
the future that perhaps it was in the past.
    If you have a world like the Internet with almost infinite 
choices, there is not a notion of channel placement. They make 
their own decisions about what content goes on their own ABC 
Network and things like that, so I am surprised to hear them 
apparently suggesting privately to you that there is some issue 
there, but maybe I should talk directly with them about that.
    As it relates to Gateway and Dell, we do have agreements 
with many PC manufacturers, as do almost all the ISP's out 
there. Consumers have many choices in terms of PC's, and that 
is why that business is so darned competitive and prices have 
come down so rapidly, and we are happy to work with PC 
manufacturers, but there are many that do not work with us, and 
many that provide many options to their consumers.
    So hopefully that is responsive to your question. We do 
believe that we are doing a lot of good things in terms of 
creating great services. We are not always perfect. Sometimes 
we make mistakes. We make mistakes, we try to correct them and 
move on, but I think the fact that we have grown so rapidly in 
the last few years is really consumers voting, in a world of 
7,000 ISP's out there to choose from, that AOL is providing 
something unique, and we do spend a lot of time and a lot of 
hard work to try to make that the case, and part of what we 
provide our members is access to everything.
    We really do believe that the Internet should be an open 
platform, and if you sign on to AOL you can go anywhere you 
want and do anything you want, and the notion of carriage that 
existed in the traditional world of television, for example, is 
not really relevant on the Internet, because in a sense it is 
universal carriage.
    Nobody has to do anything to get carried. Everybody has it 
instantaneously, and millions of people have created Web sites, 
so it is really a new world. I think it requires a fresh 
perspective, and we are trying to bring it through our company, 
and this combination I think will allow us to do some more 
interesting things for more customers in more ways.
    Mr. Levin. Why don't we have just a brief conversation 
about channel positioning. I think, Senator Hollings, someone 
must be referring to the cable system in New York City. It is 
just a factual misrepresentation.
    The Disney Channel in New York City is a paid television 
channel, and so the consumer actually pays for that channel, so 
the channel positioning as it is with HBO or Cinemax, or the 
Stars, and Encore, I mean Stars I think is on Channel 90. I 
have never heard a complaint from them because the consumer 
knows exactly where to go, because he pays separately for it.
    The Cartoon Network, in fact, does not compete in that 
sense with the pay Disney Channel. It really competes with 
channels like Nickelodeon and, in the City of New York, 
Nickelodeon is on Channel 6, and the Cartoon Network is on 
Channel 22.
    Having said that, a lot of these channels are basically 
moved around to really accommodate, for example, companies like 
Disney. Disney has ESPN and ESPN-2, and in many systems they 
have asked to have their channel moved to a higher position so 
that the two could be together.
    And besides, I think we are obviously living in a world 
where for broadcast stations, where this Committee has--and 
Disney should certainly be following the public interest. 
There, you want to keep the channel positioning that people are 
used to with over-the-air television. But in the case of cable 
channels you look at the cable channels and the satellite, they 
could be at 292 or 653. That era has long passed, so I honestly 
believe this is a spurious issue.
    Senator Burns. Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Let me start off by saying I think you 
have changed the lifestyle of our country. Having a freshman in 
college out on the West Coast, we thought we would be an empty 
nest, but we really find that we are capable of having instant 
communication throughout the day, and it really has changed a 
lot, and I cannot thank you enough for what you have done so 
far.
    I do want to have just one question, and it sort of has 
several facets. Sometime ago you announced with your merger 
that you intended to provide telephony over cable lines. I 
would like to know if you can give us an update on that, and 
particularly when that might commence. When we visited 
previously I asked the question about the concept of universal 
service, and paying into that fund if you do have interstate 
telecommunications.
    We would also like to know a little bit about what you have 
in mind further--you mentioned just briefly, Mr. Case, about 
improving access to rural areas. I think that is one of the 
real problems about the future. The speed with which we access 
your system in rural Alaska is a lot different from here in 
Washington, D.C., and I think we are liable to be behind the 
curve for a long time if we do not find some way to have 
greater access to rural areas, but that is sort of a broad 
question. I would appreciate if you would comment on those 
issues.
    Mr. Levin. Senator, with respect to telephony over cable 
facilities, since the passage of the 1996 Act we have a very 
robust competitive local exchange carrier, a CLEC that serves 
many cities around the country using a cable platform, and with 
telephone switches principally serving for both telephony and 
high-speed Internet access small businesses.
    At the same time, we have what I will call residential 
circuit switch telephony in Rochester, for example, serving 
homes and apartments, and then in Portland, Maine, we have the 
beginnings of a new phase in telephony, what we will call 
Internet protocol telephony, IP telephony, which really rides 
on top of the high-speed cable modem that cable systems are now 
putting in, and which is the subject of our memorandum of 
understanding.
    You can ride on top of the digital routing that goes into a 
computer. You can plug in a plain old telephone and use the 
Internet for, in this case it is called packet switching, as 
opposed to circuit switching, for the normal telephone system. 
So that is the next development we will see, and what this 
really suggests, and even going back to the discussion of 
instant messaging and e-mail, the whole concept of 
communications is really rapidly emerging.
    So that there are so many different ways to communicate 
with your family, and even in remote areas in Alaska, every 
facility needs to be used, particularly in that case satellite, 
and it is one thing we should keep clear. It is not just cable 
that is providing broadband access. It can be provided through 
what is called DSL, through a telephone line. It has certain 
limitations. But definitely by satellite, and AOL has been very 
active with Hughes, so that this new form of--I will call it 
telephony, but it is really a new form of communication, can be 
delivered almost universally.
    The issue of making sure that for plain old telephone 
service, the universal service charge, you know, that there is 
an adequate way of financing the system, I think we all need to 
work on that. Everyone acknowledges the objective.
    Mr. Case. If I could just add, I was born and raised in 
Hawaii, and actually a little known fact is Hawaii became a 
State the day I was born, so I understand what it is like to be 
not part of the continental United States.
    When I was growing up, all the television shows came a week 
later, and if you had to make a long distance call it was 
extremely expensive, and the leadership you provided, and 
Senator Inouye and others, on bringing Hawaii and Alaska into 
the rest of the United States was appreciated when I was 
growing up, but we do recognize it is important to have an 
inclusive system.
    As we think of this digital divide, the economic divide is 
a real concern, but a rural divide is as well, so we will do 
what we can to try to bridge that.
    Senator Stevens. What about the contributions to a 
universal service system? I hear you, Mr. Levin, and I think 
you are right, the current law really does not cover some of 
the things you are going to develop here. I hope we can work 
together and find some way to assure that that pool that is 
needed to assure adequate access from the rural areas to 
whatever system they choose is properly funded.
    I am disturbed a little bit, but I do not know if the 
Members here know, but there is some indication the 
Administration may want to convert the universal service fund 
into the Treasury. It does not belong there. It is not 
taxpayers' money, it is ratepayers' money, and it ought to be 
preserved, as well as the postal service system preserves 
ratepayers' money, but to me, if we have these developing new 
communications systems, and rural America is locked into the 
old twisted payer telephone lines, we cannot come into the 21st 
Century with everyone else.
    So I want to work with you, and I am sure the whole 
Congress will want to work with you to try to find some way 
where we are not accused of taxing the Internet if the Internet 
is in fact being used to piggy-back a new communications 
system.
    But the contribution should be there to assure that there 
is a fund similar to the old interstate rate pool that is 
really the genesis of the universal service fund, and I do 
think that it should be managed by industry, not managed by the 
Government, but we should find a way to assure--as we did in 
the 1996 Act, we should find some way to assure that as you 
develop new communications systems you will proceed to provide 
funds of that type.
    Now, I do not know how to do it. You will have to tell us 
how to do it. I hope you will tell us how to do it. We do not 
want Government regulation. We do not want Government ownership 
of that fund--at least, I do not--but we want the fund to exist 
to assure that people who want access to any one of these 
systems can be assured of that if they live in rural American.
    Mr. Levin. Senator, this is a perfect example of I think 
what is necessary, and that is, if we just went by the previous 
law, which established the universal service fund and then 
tried to automatically applying to Internet telephony, I could 
say to you, well, there is no FCC requirement today for 
contributions because of Internet telephony. That would be a 
poor statement for me to make.
    What we should be doing now is to try and figure out with 
respect to a whole range of communications how can we finance, 
because this is really another aspect of the digital divide, 
but we need to cooperatively think about it not in any 
adversarial position where we are trying not to be regulated, 
and this is an area that we feel very strongly about, that 
there should be some way of preserving the concept that you 
have established when all we had was the twisted pair.
    Now we have all of this explosion of opportunity, so there 
must be some way, and it should not appear as if it is a 
taxation of the Internet, so I am simply agreeing with you and 
saying, we can work up something. I am not stating that we 
would not pay into a universal service fund. I am saying there 
is a way of shaping this that could be mutually beneficial, and 
we ought to work on it.
    Mr. Case. If I could just add quickly two points, one is 
that as we think about the rural areas, it is not just about 
cable and about the telephone lines. We do think satellite and 
wireless is going to become increasingly important, 
particularly in rural areas. That is why we made a fairly 
large, for us, investment in Hughes, to stimulate the DIRECTV 
and direct PC broadband service development, and we continue to 
work with them and others. We want to support cable and DSL and 
wireless and satellite and give everybody as many choices as 
possible, particularly in rural areas that I think ultimately 
can only be served through satellite or wireless solutions, at 
least some areas.
    The second point is, the IP telephony concept is an 
interesting one, and having more competition leveraging the 
facility-based operations I think is an intriguing one. It is 
still, frankly, more of a concept than a reality. There are 
still not many people who are really using this, so we should 
recognize that. At the same time, we should figure out how to 
achieve the same goal, and maybe there is a different way to 
come at it as we think about this new medium and think about 
these new technologies.
    Senator Stevens. Thank you both. We stand ready to work 
with you. I hope you agree it should not be Government mandate. 
It should come from the industry itself.
    Mr. Levin. We can all agree on that.
    Senator Burns. Senator Wyden.
    Senator Wyden. Gentlemen, a number of us on this Committee 
have been heavily involved in the development of privacy 
legislation, and it seems to me that earlier in the week, Mr. 
Case, you were essentially in your testimony on the precipice 
of supporting Federal privacy legislation. I think it is very 
sensible for you to stake that ground out.
    I mean, my sense is that if there is an EXXON VALDEZ of 
privacy, a major, major crisis with respect to personal data 
getting out, that would go a long way to destroying your vision 
of what interactivity is all about. I think what would be 
helpful this morning is to just have you outline for the 
Committee what you think the key elements would be of a privacy 
bill that we could go forward with.
    Mr. Case. I would be happy to. First of all, I should say 
that as I have said in the beginning, for us, privacy is about 
trust, and trust really is the underpinning of building this 
whole medium.
    Everybody has some concerns about sort of this big brother 
world, and we need to make sure that we put in place policies, 
procedures, safeguards, what-have-you, to make sure people's 
privacy is protected so they feel comfortable using this 
medium, which we think is the right thing to do from a policy 
standpoint, but also the right thing to do from a business 
standpoint, because if there is a major incident and people do 
decide they cannot trust this medium, that would have a very 
negative impact, obviously, on the growth of the medium.
    Our approach here is to recognize there are different 
layers of this. Last year, for example, we did support the 
legislation related to children's privacy because we thought 
that required a different standard, and you had to be extra 
careful as it relates to children.
    In the last couple of years, we have been very active in 
trying to establish within our own service a clear policy, 
where it is really about making sure people understand exactly 
what information is being collected and how it is being used. 
They have the ability to opt out, and so it really is about 
notice and choice and trying to encourage other companies 
within the industry through the Online Privacy Alliance and 
other initiatives to be on that band wagon.
    Actually, I have been pleased with the progress we have 
made. I remember one of the reports a year ago that said very 
few Web sites had privacy policies. When the study was done a 
few months ago, I think it was 65 percent had policies, so that 
is real progress, and I would like to believe we could continue 
to make progress through these kind of industry initiatives.
    At the same time, I do recognize that there are likely to 
be some companies on the outskirts, on the fringes, who do not 
embrace these policies. I actually think, as Tom Friedman of 
the New York Times has written, that the real risk here is not 
big brother, the big companies, it actually may be little 
brother, the little companies trying to skate by on the edges, 
and so it may require some legislation.
    Our only concern about legislation is, if it is something 
that does deal with this issue in a direct way, and provide 
what we think is the core principles which would be about 
notice and choice, it is something that in theory we are 
supportive of. There always is the fear, when that good idea 
gets going, by the time the legislation is actually passed, it 
gets to be something well beyond what would be striking the 
reasonable balance, and so that is really our fear walking down 
that path.
    Our hope has been industry initiative would be sufficient. 
At the same time, as I said the other day, we do not have an 
allergic reaction to any form of privacy legislation. We think 
if it is the right legislation, it strikes the right balance, 
it gives the consumers notice and choice, it is something that 
would be good.
    It would be better if the industry could do that on its 
own, but because of the fact there may be some companies on the 
fringes, and there is always, as you said, the risk of some 
EXXON VALDEZ kind of incident, that maybe legislation is 
necessary, and we look forward to having a dialog and finding 
out where things stand and what we could do to be helpful.
    Senator Wyden. Let me tick off, then, some of the elements. 
I gather that you will support a notice requirement that there 
be a conspicuous policy statement. You will support at a 
minimum opt-out, so that consumers are empowered with respect 
to being able to make their choices.
    With respect to personal data that is very, very sensitive, 
financial issues, touching on medical questions, how would you 
deal with extremely sensitive personal data?
    Mr. Case. Well, I must say I am not an expert on these 
privacy issues. I probably should spend a little more time 
before I am too precise, but it is not just something we 
support in terms of notice and choice. It is something we are 
doing and trying to get the rest of the industry's support, so 
the only real issue is whether legislation may be necessary to 
get everybody to support it, or whether there is a market 
solution to achieve that.
    In general, we recognize that there are differing kinds of 
data, medical data, for example, being one that probably does 
require a different kind of approach. Exactly what that is, I 
am not smart enough to say, but just as you recognized on the 
children's side, there are different classes of information, 
some that require different kinds of treatment, but in general 
we think the principles should be notice and choice.
    Senator Wyden. One other, if I could, just because the 
clock is running. What about the question of consumer access, 
and the consumer's access to information that is compiled and 
sold or transferred? You all are going to have this enormous 
amount of personal data, so the position that you all take with 
respect to privacy legislation as it relates to consumer access 
I think is going to be very key, and I would especially like 
your position on that.
    Mr. Case. Well, first of all we have a lot of information 
to be sure, but may have less than you might think, because our 
policy actually does not result in us tracking individual 
navigational data, things like that. We do not believe that is 
an appropriate thing to do, so there is some information, but 
we perhaps have less than people might fear that is being 
tracked.
    Again, it is a matter of balance. We would be reluctant to 
agree to something that requires us to collect data that we are 
not presently collecting simply to make it accessible to people 
in data bases and things like that, but we recognize that the 
fundamental issue here is protecting privacy and building 
trust, and from a business standpoint whatever we can do to 
stimulate that is something we would be willing to look at.
    Mr. Levin. Senator, if I could interrupt just to make a 
statement, I do not think it is a question of whether there 
should or should not be legislation. We should not overthrow--
there is over 75 years of history in the direct marketing 
business offline and online now, where the issue of privacy has 
been front and center, and in fact there is a DMA privacy 
promise that all of the companies subscribe to that deals with 
many of the issues that you are identifying.
    And in fact there is something called a global business 
dialog that Mr. Case and I are the current cochairs of 
companies around the world, because this is a global issue, 
trying to deal with some of these issues, most particularly 
privacy and trust, because recognizing that this is not an 
America-only issue, so that there is some spirit of cooperation 
and not just blind self-regulation.
    The other thing I would say is that this is again an area 
where it is absolutely in the interest of the companies to have 
the kind of trust from the consumer. That is why the history is 
relevant, because the importance of brands that people will 
rely on for information in transactions will fall away if there 
is this issue of privacy.
    Senator Wyden. I would hope, gentlemen, that you could 
furnish the Committee in writing your thoughts with respect to 
how we would go forward in this privacy area. I am sympathetic 
to the last point, for example. What we did in the Internet tax 
area, for example, is make it very clear that we wanted to 
coordinate what we do in this country with respect to Internet 
taxes with what we do around the world. We really need to have 
you flesh out your position on these questions.
    We do want to make sure that we have got a realistic 
enforcement tool. I happen to share the view that Mr. Case 
articulated, that the problem areas are likely to be those 
companies that we do not know much about, but they can also do 
a great deal of damage. If you would furnish to the Committee, 
because of the heavy involvement from Senator Hollings and 
Members on both sides of the aisle. We would like to have you 
flesh out your privacy positions because I think a merger like 
this with the number of people that are going to be involved 
gives us a chance to almost walk through, using your merger, 
what an appropriate piece of privacy legislation ought to look 
like, and we would welcome having that.
    Thank you, Mr. Chairman.
    Senator Burns. Thank you, Senator Wyden. Senator Bryan.
    Senator Bryan. Thank you very much, Mr. Chairman. Let me 
just follow on the line of questioning that Senator Wyden has 
begun. Mr. Case, as the author of the Child Online Privacy 
Protection Act, which is the only piece of legislation that has 
been enacted by the Congress to protect privacy over the 
Internet, you were extraordinarily helpful, you and AOL, in 
providing leadership.
    We got a report back from the Federal Trade Commission, as 
you may recall, within a matter of 90 days, which is an 
extraordinary occurrence in the Congress. We were able to work 
with you, the Web sites, and a whole host of consumer and 
public interest groups to get a piece of legislation on the 
President's desk in about 90 days. Now, I am not suggesting 
that to do a privacy piece of legislation in a broader sense 
will be as easy, but let me reemphasize the point my colleague 
has made.
    We are reaching a critical mass in terms of public opinion. 
This privacy train is about ready to leave the station. My 
preference would be to encourage people like yourself and Mr. 
Levin to take a leadership role, not just to simply say we do 
not have an objection to it. It may be necessary. It is going 
to happen. It is a concept whose time has come, and to make 
historical references, with great respect, Mr. Levin, to direct 
marketing, we are talking about a potential level of intrusion 
in terms of privacy, in the ability to disseminate information. 
As the two of you know, it is unprecedented. It is 
extraordinary, and the public is beginning to understand that, 
and they are apprehensive.
    So let me just encourage you to take a leadership role in 
that. I think it is in your best interests, and it is clearly 
in the public interest, and it will occur. It may not occur in 
this Congress because we have a relatively short period of 
time, but it is going to happen. If you look at the history of 
public response, when the public is demanding action be taken, 
the Congress, imperfect as it is, tends to respond, and this 
Congress or a future Congress is going to respond, so I think 
for you to get on board and to help shape that could be 
extraordinarily helpful.
    Mr. Levin, let me ask you a question if I may, sir. You 
lauded the Committee for its action in passing the 1996 
Telecommunications Act, and you and Mr. Case have earlier this 
week issued this memorandum of understanding. First, an 
observation. As one who practiced law in a previous life, to 
get corporate lawyers to draft a memorandum of understanding 
for companies of your size in three pages is itself a 
considerable achievement, and I congratulate you on that 
effort.
    But as each of you know, this memorandum of understanding 
has no real legal efficacy. I do not impute your good faith in 
any way, or impugn your good faith in any way, but it is 
subject to all of the corporate vagaries. Six days from now, 
six weeks from now, six months from now you could make a 
determination to change it.
    Now, Mr. Case, when we did the Telecommunications Act of 
1996, one of the things we did with respect to telephone 
carriers was incorporate a provision that prohibited 
discrimination. What is wrong with the Congress enacting a 
similar provision as it applies to cable?
    Mr. Case. Well, actually, I think Congress has enacted some 
provisions as it relates to cable in terms of programming, as I 
recall.
    Senator Bryan. We are talking about nondiscrimination in 
terms of access. In effect, the policy that you have announced 
is good, so what is wrong with protecting it and incorporating 
it into a legislative act?
    Mr. Case. As you may recall, a year ago, when we met in 
this very room, I suggested this was a good cause for 
legislation. I made an impassioned case about preserving the 
openness and competitiveness of the Internet.
    Senator Bryan. And you persuaded this Senator, Mr. Case.
    Mr. Case. Unfortunately not enough. I also made the case 
that Internet regulation is generally not a good thing at this 
stage. Sort of what I call the light touch, which would be 
nondiscriminatory provisions, would strike me as being 
appropriate, and at that particular point in time, since the 
cable companies were not doing it voluntarily, maybe the 
Government should step in.
    Although I appreciate your support, there was not a 
cacophony of voices welcoming that. Nothing happened in the 
Congress, nothing happened in the FCC, but something did happen 
in the marketplace, so maybe it shows Congress and the FCC were 
smarter than I, because AT&T did announce the principles a few 
months ago, after spending a couple of years explaining why it 
was not technically possible or financially feasible. I thought 
that was a step in the right direction.
    Then when we announced this merger, we committed both 
companies to this principle of open access. Six weeks later, we 
went beyond our principle and detailed some very specifics in 
terms of video streaming and direct billing relationships for 
RSP's, and things that went well beyond what had been discussed 
in the past. In the weeks and months ahead, we are going to put 
that into the marketplace, put that into action, not just 
between our companies but hopefully other cable companies will 
join us and other ISP's will have agreements with Time Warner, 
so we will achieve what I was hoping to achieve a year ago 
through this light touch through a marketplace solution.
    Senator Bryan. What is wrong, I am not sure I have heard an 
answer although I do applaud your effort. I do not impugn your 
sincerity, but what is wrong with incorporating this. This is 
simply a policy declaration. As you know, you could change it 
tomorrow. You could change it this afternoon. It has no sense 
of permanence at all in terms of any legal requirement or 
efficacy.
    If it is good policy, and I believe it is, and I compliment 
you for it, then what is wrong with a light touch to simply 
incorporate this concept into a piece of legislation?
    Mr. Levin. Senator, if I could respond, I think there is 
something even higher than a binding memorandum of 
understanding, and that is a sense of values. As I indicated in 
my opening statement, one of the premises of this merger--there 
were several, but one related to a respect for privacy as a 
shared value that we would incorporate into the conduct of our 
business. The second was nondiscriminatory access for 
nonaffiliated ISP's, because that is actually a fundamental 
principle as to how we operate.
    I think the pragmatics are as follows. You normally need 
such legislation when there is a real, perverse need for it, 
because the marketplace is not operative. We are talking about 
switched digital systems that only within the last year have 
even come into operation. There is now at least an 
understanding on the digital capacity, what we are now calling 
the digital bank account in broadband cable.
    There is now flourishing competition from DSL telephones, 
DBS, and soon fixed wireless. To me, having grown up in this 
industry, it is very similar to what happened in the early 
seventies. We had the startup of pay television. There was 
limited capacity. You could only get HBO and cable systems that 
happened to be owned by HBO's parent.
    As soon as the capacity was there, other services started. 
The consumer demand was there. You now have a very robust form 
of multiple access, and we do not discriminate against any 
service that is not owned by the company.
    The same thing is now happening today, and in fact to me it 
is just like privacy. This is a very smart thing to do. The 
consumer really wants more choice, other than an AOL service on 
Time Warner cable systems, and that is what we are going to do, 
and this statement for a lot of reasons, because of preexisting 
obligations, had to be stated in the form of an MOU, but I 
guarantee you there will be multiple ISP's on Time Warner 
systems with private commercial arrangements that will be 
tracked through the industry.
    Mr. Case. If I could just add, I think this is an important 
issue. It is something that I have been talking about for some 
time. I just want to make sure it is very clear that we 2 years 
ago in AOL--and I personally was basically making the case that 
all of these infrastructures, particularly as you move to 
broadband, but wireless, the same thing is true, needed to be 
open so consumers had choices and ISP's could compete. My hope 
early on was that would happen voluntarily.
    Indeed, when AT&T announced this merger with TCI, that day 
we put out a statement saying we look forward to working 
together on this, and it was only when that marketplace 
approach did not appear to be getting momentum that we argued 
for Government intervention.
    What has happened in the last few months, partly, I think, 
through our initiative, is a marketplace solution that now goes 
well beyond what I called for in this room a year ago, which 
was a light touch, nondiscrimination regarding affiliate ISP's.
    We have also talked about direct billing relationships. We 
have talked about there being no fixed limit on ISP's. We have 
talked about video streaming and other sorts of things, and 
this is an MOU that was signed six weeks after announcing a 
merger which I think is significant progress, that will be 
followed in the months ahead by a definitive agreement between 
our companies, and I would expect a definitive agreement 
between our company and other cable companies and other ISP's 
and the Time Warner system.
    If that fails, if this does not turn into a definitive 
agreement, it would be perfectly appropriate for you to relook 
at this, but at this point a marketplace solution seems to be 
working, and I am pleased to report that some of the progress 
was not seen a year ago we are seeing today.
    Senator Bryan. What a difference a day makes. Thank you 
very much, Mr. Chairman.
    Senator Burns. Senator Abraham.

              STATEMENT OF HON. SPENCER ABRAHAM, 
                   U.S. SENATOR FROM MICHIGAN

    Senator Abraham. Thank you very much, Mr. Chairman. I 
actually also sit on the Judiciary Committee, so this is the 
second time we have had a chance to have a hearing that I have 
been part of with respect to this issue, and I want to again 
commend Mr. Levin and Mr. Case. I think their expressions of 
support for consumers and broadening consumer choice and open 
access and so on is in the right direction, and I treat very 
seriously what they have said, and I think we should focus on 
it as we consider going forward.
    I mentioned the other day, and I just want to reiterate, in 
this Committee that I think as we evaluate whether it is this 
merger or others in the high tech context we really do have to 
look at issues, because of the new economy, in a new way, 
issues like barriers to entry. Are there barriers to entry? 
Does it seem to be the case?
    As I mentioned the other day, it appears by the end of this 
year there will be something in the vicinity of one billion Web 
sites. That strikes me as a lot of diversity. Are there cost 
problems for consumers? Well, not much evidence of that in 
terms of most computer equipment costs, software costs, access 
costs, even now that we have people offering free Internet 
service. It seems to me we have a lot of competition, and so it 
seems to me just from an innovative point of view, and so on, 
that we are doing well.
    What I want to do is just ask a couple of questions, one 
maybe just to follow on to Senator Bryan, and that is this. 
Obviously, the question of deployment of broadband technology 
is one that you testified here before on, Mr. Case, and I am 
interested in knowing whether there are any legislative 
actions, or regulatory changes that you think would be in order 
at this time to accomplish the goal that I think you have set 
out in your testimony on Tuesday of establishing as quickly as 
possible the full deployment of broadband services across this 
country.
    Whether it is the proposal you had a year ago, or others 
that might affect other potential providers, what are your 
thoughts, and I would throw that out to both of you.
    Mr. Levin. If I could just start, because it follows on 
from the 1996 Act. We have the most robust form of competition 
taking place right now. It has been a wake-up call for the 
cable companies, for the telephone companies, and for the 
satellite companies, and now I would add the wireless and fixed 
wireless. In fact, there is a real competitive race going on 
between, on the wire line side DSL, and high-speed Internet 
access on cable. While that is happening, the DBS side, 
particularly Hughes, with a very high-speed computer service, 
and now we have the fast development of wireless.
    So what the marketplace is telling us, and the capital 
markets are supporting this, that there has been a wake-up 
call, and frankly, the wake-up call came because cable within 
the last year started to deploy these cable modems. DSL and 
ADSL has been around for a long time, and all of a sudden it is 
being heavily marketed, and capital is flowing to four 
different communications systems, or infrastructures, to 
deliver high-speed Internet access.
    So it is not because--I am not speaking as a vested 
interest, but I am simply saying that the marketplace is 
proceeding in ways that we probably could not have predicted a 
couple of years ago, and now with this statement of 
nondiscriminatory access, what it will do is encourage not only 
the cable industry but the development of services, so you 
could have streaming video and move well beyond the text and 
pictures where we are, by and large, today.
    So I do believe it is working, and I think there would be a 
chilling effect if there were some intervention at this point, 
because it is working.
    Mr. Case. First of all, I would like to followup with a 
closing remark on what Senator Bryan made, what a difference a 
day makes. I hope he did not intend to suggest that based on 
this merger suddenly we have changed our tune. I have been very 
consistent on this issue, and I would like to reiterate again 
my view.
    I have been calling, I think as vigorously as anybody for 
open access. I have been stating, as best I can, the importance 
of continuing to have consumer choice, and continuing to have 
competition in every forum that was available, and always 
preferred a marketplace solution from day one, as I have always 
preferred on most of these issues a marketplace solution.
    It was only when a marketplace solution did not appear to 
be possible that I suggested Government involvement was 
necessary, and even then suggested a light touch, specifically 
related to a nondiscriminatory provision in terms of the 
affiliated ISP's, which we have now achieved in the marketplace 
through AT&T's effort, and now through Time Warner's effort.
    When the No. 1 and No. 2 cable company are on record with 
this, and actually go well beyond this light touch I was 
talking about, that also put some specificity into play, I 
think that is significant progress. I do not think it is what a 
day makes. It is really what a year makes. Progress has been 
made. I believe progress will continue to be made.
    I believe cable companies are likely to get on this band 
wagon partly because they think it is good business, partly 
because they think it is good policy, partly because they think 
there is some real momentum to it, and one thing I have learned 
is that they and others tend to want to participate when they 
think it is in their interest as opposed to when they are 
forced to do it.
    So as long as we are successful and continue to build this 
band wagon, we will achieve precisely what I and many others 
have advocated for some period of time through a marketplace 
solution. If that fails, if we turn out to be the only cable 
company that really makes this work in the way that we think is 
important, then it would be perfectly appropriate for you to 
step back in, but right now it is working, and I think people 
should take a look at the broadest perspective and not focus so 
much on the process, and more on the progress, and on the 
progress we have made, and I think we have provided some 
leadership on, to make sure consumers do have choice and ISP's 
can compete.
    Senator Abraham. Are there any other regulatory or 
statutory barriers, maybe not related to cable, whether it is 
related to other phone companies or to wireless providers, 
satellite providers that you think need to be altered to create 
the diversity you are talking about?
    Mr. Case. The principle is the same, that all these 
different communications platforms, satellite, wireless, would 
certainly be included. Mobile wireless is becoming a very 
popular service all around the world. All those communications 
infrastructures we believe should be open so consumers will 
have choices, and ISP's and others will be able to compete.
    Our hope continues to be that there will be marketplace 
solutions, but if any of them try to move to a closed model, 
try to be a bottleneck, try to be gatekeeper, I think if the 
marketplace is not working then it is appropriate for the 
Government to step in, but at this particular juncture I do not 
believe any further Government action is necessary.
    Senator Abraham. Let me just ask one last question, even 
though my light is on, since part of the time was spent 
answering Senator Bryan. I would be interested in following up. 
On Tuesday you indicated, and I know you have again today, that 
you believe maintaining content diversity on the broadband 
network is in the best interest of this merger, and I am just 
interested if you would perhaps elaborate on why you believe 
maintaining that diversity and offering nondiscriminatory 
access would be in your self-interest.
    Mr. Levin. Well, again, this is a part of the history of 
what the consumer wants, and we are ultimately responsive to 
consumer choice, whether it is multiple ISP's, because this is 
such a dynamic new area, and our consumers are going to want to 
have many different perspectives on that.
    The same thing applies to programming. If we have a network 
called Home Box Office, it does not only play the movies from 
Warner Brothers, and similarly, when we have a lot of this 
content, we do not just put it on our cable. CNN and TBS are 
aggressively active on TBS, any form of distribution and, in 
fact, given the breadth of material at Time Warner, it is not 
going to appear exclusively on AOL, because AOL is in the 
business of providing lots of different information.
    So again we have, I think, a profound statement that 
diversity of consumer choice, where the consumer is, in fact, 
the programmer and it is not some centralized company that is 
deciding what you want, when you want it, and then delivers it, 
that is the big change. That is what the Internet provides.
    But we have had that lesson. As I indicated in my remarks, 
starting with HBO, the video cassette, all of these things 
taught us that you are better off providing, let the consumer 
decide, and now you have the ultimate capability to get what 
you want, when you want it, totally customized. That is what 
the Internet is.
    Senator Abraham. Thank you.
    Senator Burns. Senator Rockefeller.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Steve Case, you and I have had some conversations about the 
so-called last mile. That was a different conversation then. 
Now, because you have a merger, that problem has been resolved 
from your point of view.
    We have had a very interesting situation. I remember going 
to the Bell Atlantic facility near here, and they have these 
cages downstairs which are highly protected for which we are 
greatly overcharged, and almost inaccessible for those who want 
to disburse out from the Bell Atlantic basement using their 
lines. It is sort of a hostile, tense situation, which is 
amusing in a sense.
    What I want to be sure of is that--and I guess, Gerry 
Levin, this would be partly to you, that in the case of Time 
Warner that others who want to be able to interconnect and get 
into broadband services, that they are not going to have those 
same kinds of problems in your, quote, basement. They will not 
have to buy cages with security, or electrify the cages. In 
other words, that you are going to have a different approach to 
that than the FCC has had to battle out with the telecoms.
    Mr. Levin. Let me just start. Part of the principles we 
established in the MOU do really relate to a form of 
interconnection by ISP's, which we would welcome, and again it 
is built into our DMA, because we welcome the interconnection 
now from hundreds of program services that deliver by satellite 
or microwave, or whatever way they can. They come into what is 
called our head end, or our central switching.
    And so this has been our history, and now we welcome not in 
any closed cage, but we welcome that interconnection, and in 
fact the cable industry has been trying to continue to 
establish standards of interoperability, particularly now with 
packet switching, as we have moved away from analogue video, so 
that everything is transparent in terms of the interconnection.
    Senator Rockefeller. I want to ask one more question, one 
more point, and thank you for that.
    On the privacy issue, AOL would store, let us say, an 
enormous amount of information, and that is as the world works. 
I think the critical question is, and I hope your answer to 
this is no, is, will you, either of you, take that information 
and sell it to a third party?
    Mr. Levin. Well, first of all, again, I do think the 
history even offline is relevant in terms of never doing that 
unless the consumer is aware, there has been notice, and the 
consumer has had the opportunity to opt out.
    These principles are built into our business, because we 
have had at Time Warner a data base for over 75 years, so we do 
not do that. We do not practice that. That is a value that I 
think is embedded now, and will be at AOL Time Warner, in the 
practices of AOL.
    Senator Rockefeller. When you say, when the customer is 
given notice, and customers we all are, are often in a hurry to 
transact what it is we are doing and do not read all the 
notices. If we do, we do not know exactly what their full 
implications might be, so is that a conditional no about 
selling to third parties?
    Once you start selling to third parties, that is where 
people up here start to get very nervous, and that is why sort 
of a declarative no would be a lot simpler.
    Mr. Levin. Well, in fact, let me turn it around. Of course, 
in principle it is no, but on the other hand there are certain 
areas, assuming the consumer is aware, where in fact it is a 
benefit because of the ability to receive what I will call 
customized services, and that does take place.
    We are not in the business of selling consumer information. 
That is not what we are about.
    Senator Rockefeller. What we need to know more about, and 
not now, is how that consumer gets informed, and does that 
consumer have a chance to opt out.
    Mr. Levin. Again, I should indicate it is over a course of 
many years where all of this has been worked out, not only in 
the private sense through the various associations, and I 
mentioned the DMA's privacy promise, but we have also been 
working with the FTC for many years now to make sure that all 
these things--and doing that as an industry, not just as Time 
Warner in this case, and so I am satisfied that we could 
present to you the form of practice here that does not violate 
or invade the consumer's privacy.
    Mr. Case. Let me just clarify that. We do not sell 
information based on what people are doing, so for example, if 
people are going to some service about cancer, for example, we 
do not then aggregate that cancer target list, then sell it to 
people who want to sell to that audience. We just do not think 
that is appropriate.
    At the same time, we do make our overall list available for 
rent, but not based on what people are doing, so the privacy 
concern--and people can opt out of that if they would like to. 
The privacy concern I think really relates to what information 
are you collecting and how are you aggregating it, and then how 
are you using it. Our decision is to make sure that we do not--
essentially, a lot of people target people based on specifics 
that really are not their business.
    Senator Rockefeller. Mr. Case, I have one other point I 
have to make. The word opt out also means that we have some 
clarification, because opting out is a positive act, and a 
knowledgeable act on the part of the consumer, and if you do 
not opt out, then you are in, so the question of how does one 
opt out, how easy is that, and the dynamics of all of that, 
becomes important. That can be discussed.
     I just want to make a final point. I think that Ted 
Stevens made this point. You grew up in Hawaii. My life is 
defined by going to West Virginia as a VISTA volunteer. 
Nineteen percent of our households have access to Internet. 
Twenty-one percent of our households have computers.
    So I think the whole digital divide thing as we discussed 
it, you at the Potomac Conference, where I think you had some 
frustrations about some of the results, we generally in public 
policy and private conversations, we talk about the digital 
divide. It comes out of our mouths easily. It comes out of our 
souls easily. But the solution to it is infinitely larger and 
more complicated than any of us can possibly imagine.
    Shareholders have their requirements, and I am not 
attacking that, but that means that companies have to go to 
certain places before they go to others.
    On the other hand, Gerry Levin knows that my daughter until 
recently was teaching at Jackie Robinson Junior High School at 
106th Street in New York, in Harlem, and the equipment there 
was not suitable. She was only 27 at the time, highly computer 
literate, but it had nothing to do with the fact that she was 
able to teach sociology or mathematics at a level that a 
teacher should be able to, beyond that, but she did have 
access, and then there are board of education problems in New 
York.
    When you get into rural parts of the country, it becomes 
really enormously difficult. There are vast swaths of people 
that simply have no possibility at the present time, so the 
digital divide is something that we in the Government cannot 
do. The e-rate does not cover all of these issues because it is 
just the discount for the phone line and the wiring up, and 
that is it. We don't have computers software, much less teacher 
training, nor the dispersion, except after another 10 or 12 
years.
    So I think the whole question is of the private sector, not 
just individual companies operating on their own, or as 
responsible corporate entities. My sense of both of you is that 
you are genuinely responsive socially on these issues, as you 
individually seek to do things. I think it is going to take a 
much larger effort on the part of the industry as a whole. I 
worry deeply about the digital divide and the cost to America 
on that. I think it is very much, in fact, the new civil rights 
movement.
    Mr. Case. If I could just quickly respond, first on the 
opt-in, opt-out, we look forward to talking to you further 
about these issues, but it should be noted that when you 
subscribe to AOL there is a lot of things we tell you. You set 
up your screen and so forth, you are essentially opting in by 
deciding to subscribe to AOL and set up certain preferences.
    It is a little bit different for some Web sites where you 
may not even know it, but somebody is dropping a cookie and 
keeping track of what you are doing, and you never even knew 
somebody was watching, so I think there are a little bit 
different approaches, but the bottom line is, we all recognize 
that we need to build trust and security and privacy to build 
the medium.
    I agree on the digital divide issue. I think it is 
something that individuals and companies need to do working in 
conjunction with Government and nonprofits. Part of what we are 
trying to do through this PowerUP initiative is build a public-
private partnership. Companies like AOL have made commitments. 
Gateway, for example, has donated 50,000 computers to it.
    We are working with the Boys and Girls Clubs, and the YMCA, 
and Americorps VISTA is providing the volunteers, and America's 
Promise is a partner, the Department of Education is a partner, 
so it really is trying to work together to deal with this, and 
there actually is a role for Government and leaders of 
legislation that Senators Biden and Specter have introduced 
related to this, and I urge you to support that.
    Mr. Levin. Obviously the issue goes beyond the technology 
and really relates to the state of our schools, the respect and 
dignity we give the teachers. We started this conversation 
about instant messaging; if we could ever plant enough of this 
capability in homes so that there can be communication between 
teachers and parents or surrogates, whoever is home, and take 
advantage of that technology for a form of influence and 
motivation, we could transform the educational system.
    So that is why there is so much promise in this technology, 
if we can work together to make it more accessible.
    Senator Burns. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman.
    Mr. Levin, Mr. Case, welcome. Thank you for your being with 
us to discuss this very important issue. I wear another hat, as 
we all wear in this business, in different committees. And the 
other committee I serve on is the Senate Finance Committee, so 
I would like to ask you a tax-related question.
    In Louisiana, if I have a constituent, Mr. Boudreaux, who 
goes down to the local boot store and buys a pair of boots, he 
pays a local sales tax, a county, or parish, tax in Louisiana, 
and the city sales tax. When he buys that same pair of boots 
over the Internet from a seller who has no presence in the 
State of Louisiana, he does not pay the city tax. He does not 
pay the county tax, and he does not pay the State tax.
    I am not suggesting that if we do not do anything in that 
area that grass will grow in the streets of downtown America, 
but I am concerned that local services, like police and fire 
protection, schools, roads, and other local services that are 
principally financed through a State sales tax will 
dramatically suffer. And it seems to me that by not requiring 
both sellers of the same product to pay the same legally 
established sales tax that we are in effect giving a tax 
subsidy to one seller and not to the other.
    Do you think Congress should do anything to correct it?
    Mr. Case. Well, I think we actually have representatives, 
both Dick Parsons of Time Warner, and Bob Pittman of AOL, on 
this tax commission, and it sounds like they are having very 
vigorous debates from what I hear.
    Senator Breaux. They are having a lot of fun.
    Mr. Case. Our view is we do not want or expect or need the 
Internet to be some kind of tax haven. At the same time, we 
think it would be a mistake to band-aid the sales tax system 
yet again and deal with this as an Internet issue. It seems to 
us that there is an opportunity here for a fresh look and 
particularly an opportunity for simplification. So whether you 
buy it from Main Street or buy it from a catalog or buy it on 
the Internet, there is a consistent approach.
    So we will really argued for viewing this through the prism 
of it is a new opportunity to do this overall sales tax issue 
in a better way, and let us take the time to do it right. And 
if we need to extent the moratorium to do it right, fine; but 
we are not trying to stall the resolution. If smart people can 
get together and figure out how to simplify things now so it 
really, truly is neutral, then that is something we would be 
supportive of.
    Mr. Levin. Senator, may I just add one thing?
    Senator Breaux. Mr. Levin.
    Mr. Levin. This is a real opportunity. So any moratorium is 
not designed to be permanent. But it really suggests that we 
have a hodgepodge today, even before the Internet, in terms of 
catalog sales and the way different things have been treated. 
And now, you put in e-commerce, it is a global issue, because 
where this originates and who is really buying gets to be 
something--and that is why, if we can think this through in a 
way that provides some kind of justice in the system, if I 
could use that word, then we should do that. But certainly not 
to disparage the requirement for local government to have its 
revenue base hampered.
    Senator Breaux. I appreciate that. I get the gist of it, 
that you are both talking about tax equity and a level playing 
field and you can compete and your sellers can compete over the 
Internet. I appreciate that. Let me ask one other question.
    The FCC, when it testified before this Committee on 
telecommunications issues, talked about voice telephone 
service, transmission, and high-speed broadband services over 
the telephone service operations are what they have called 
operationally and technological distinct types of services and 
need to be regulated differently.
    My question is, would you agree that that same distinction 
applies between the traditional cable video programming 
services and the high-speed broadband services delivered over 
cable? Do you think that the FCC's determining that they are a 
distinctly different services would apply both to cable 
delivering broadband the same as it is with telephone lines 
delivering broadband services?
    Mr. Levin. Certainly, with respect to telephony, Internet 
telephony is very different from your classic circuit-switched 
telephony. The whole packet switching technology means it runs 
through a very different technology. And the opportunity for 
many people to provide it is so vastly different from the in 
place local exchange carriers.
    Similarly, with respect to video streaming, that is, the 
opportunity to deliver video through the Internet as opposed to 
the normal analog system, creates a whole new opportunity. And 
this is another case of rapid innovation. Almost every day 
there are new sources of, right now, because of limitations, 
usually, what we call short attention span theater, it is 
rather snippets of video. But, over time, the Internet will 
enable people to publish video just as they now can public text 
and words.
    And so, without taking a position on what the FCC should or 
should not do, this is the most creative area I have ever seen.
    Senator Breaux. It is a huge question, though. You are 
going to have to start taking positions on it. Because, No. 1, 
when you deliver it over the telephone wires, they have a whole 
set of rules and regulations that the FCC requires, that are 
pages. Whereas if you are delivering it over your cable system, 
the same broadband Internet services, the regulatory 
requirements are vastly different, I mean vastly insignificant 
compared to if you are doing it over telephone lines. And the 
FCC says, well, they are distinctly different services, that is 
why.
    Mr. Levin. Well, certainly, what is different is everything 
that an ISP happens to be delivering, which is essentially what 
is out on the Internet. And by talking about video, remember, 
these are all the same. The routers that take this material and 
send it around the world, they do not whether it is text, an E-
mail, an instant message, a nice picture that some journalist 
has taken, or music, or video. It is all being digitally 
routed. So the system is totally different. It is all done 
through packets that have little addresses on it. It has 
nothing to do with the old analog cable system or the old 
twisted pair telephone system.
    I guess all I am suggesting is I do not see right at the 
moment what regulatory regime is really necessary at this 
point, because it is totally democratic. There is no 
centralized control. And I think that is one of the elegant 
benefits of this network.
    Senator Breaux. Just a final point. You are making the 
point, Gerry, I take it, that delivering the broadband Internet 
services over your cable network is different from delivering 
those same type of services over a telephone line?
    Mr. Levin. No. In fact, I think to the extent that over a 
telephone line you can deliver broadband ISP's, it is 
essentially the same.
    Mr. Case. Let me just add something here, a couple of 
things. First of all, there are some distinctions between 
technologies and markets that exist today that do merit 
different kinds of approaches. For example, a concern in cable 
television has always been there is really only one cable 
provider, there is no real competition. There is now some 
competition from satellite, so that is an improvement. And then 
there is limited cable capacity, so there is an issue of making 
sure content diversity exists.
    In the Internet space, there are thousands of Internet 
service providers people can choose from, including free ones, 
and unlimited choice in terms of content, because essentially 
there is an aspect of universal carriage. So those are 
different and should be treated differently.
    At the same time, I think it is the point that Gerry is 
making, we are moving into a world that is converging. And it 
is a little bit like the tax issue. Looking at these as 
Internet issues I think is not the right approach. Looking at 
these as a new opportunity to re-look at what we are doing and 
what is the best way to do it going forward is going to be 
necessary at some point, no matter how complicated that might 
be to break down some of these walls and kind at it from a 
clean slate.
    I think there will be a need for that in the years to come. 
In the meantime, there are some clear differences between some 
of these markets and technologies.
    Senator Breaux. Thank you, gentlemen.
    Senator Burns. Senator Cleland.
    Senator Cleland. Thank you very much, Mr. Chairman.
    This has been a fascinating day for me. But hearing the 
jargon of the Internet century makes me feel like the train has 
already pulled out of the station, and I am sitting there 
eating popcorn and that I am on the wrong side of the digital 
divide here. So I will say, Mr. Levin, that one of the things I 
have strongly identified with is what I think is transferable 
from the 20th century to the 21st century that people can 
understand. And that is your commitment to what you might call 
shared values. And that is one of the things I am searching 
for.
    I may not understand all the technology, and I may not be 
able to track all the mergers and acquisitions and changes in 
this quicksilver business that you all are engaged in, but what 
I am looking for is some, shall we say, first principles by 
which this kind of business, this world of communications, is 
run. What are the first principles? What are the bedrock 
concepts out there that we can build on, that maintain not only 
our economy but the trust of people in our businesses?
    I really appreciate your ticking some of these off, Mr. 
Levin, that your company is committed to the public interest. 
We all here are. And that is what we are here today to explore. 
What is in the public interest?
    Secondly, journalistic independence, a powerful shared 
value that I can certainly identify with. Nondiscriminatory 
access. Opening up your shopping center and say, come one, come 
all, to the fair. Privacy, rooted in respect for human dignity. 
That is something I think people can really understand. And, in 
many ways, that is the business we are all in. If people do not 
trust me, I do not get elected. If they do not trust you, you 
are not in business. Whatever it is we are selling, however, we 
are selling it.
    The whole concept about the digital divide, this new world, 
that we do not want to create an information aristocracy, as 
you pointed out. Which is your wonderful emphasis on education. 
The more people, the more citizens that we can get well through 
education in our country, the more consumers you have, the 
better our country is going to be. Which is one of the real 
powerful, positive parts of this Internet world, that it 
challenges us all to get better and smarter, and put an 
emphasis on education.
    Universal service, the fact that we do not leave any 
community behind, is powerful as we move forward in the 21st 
century, as we move across the digital divide. So I really 
appreciate you are helping to kind of clarify for me some of 
the first principles that you operate on.
    And I think what you all have done here is acted as 
precursors of other companies so that other entities follow. 
And you all laying down some solid first principles I think 
will be in the public interest as we move forward.
    I am fascinated, too, Mr. Case, about your understanding of 
how government can ebb and flow in its actions. Sometimes it is 
required to be involved. Sometimes it is not required to be 
involved. One of the things that I have been struggling with 
is, when is a government action triggered? In other words, I 
understand from my Internet friends that the Hippocratic Oath 
should be taken first, that government should do no harm. In 
other words, this is a good thing; let us not screw it up. Let 
us not mess this thing up here by a chilling effect of the 
heavy hand of the bureaucracy of government on this incredible 
part of our commerce.
    But at the same time, your understanding that from time to 
time, a light touch might be needed is important. I will look 
forward to your recommendations as we go along. And, finally, 
Mr. Case, we are both a fan of Tom Friedman, who has written 
that great book, ``Alexis and the Olive Tree.'' His 
understanding of the difference between big brother and little 
brother--sometimes government, acting as big brother, may come 
in and protect the public interest from rogue little brothers. 
We will be looking, and I will be looking, for your guidance on 
these issues.
    I just wanted to say that your articulation of first 
principles here has helped me immensely deal with this whole 
world of e-commerce, as we take commerce, this being the 
Commerce Committee, as we come out of the industrial age into 
the information age, that there is a new technology out there, 
new words, and new acronyms. But some things transfer, in doing 
business in America, that we all support. And your articulation 
today of your values of your company and the values you bring 
to the merger have been very helpful to me.
    Mr. Levin, any comment on that?
    Mr. Levin. Yes.
    Senator Cleland. You articulated the shared values concept.
    Mr. Levin. Obviously I am deeply appreciative, Senator, 
because, as you have articulated, our deeply felt sense of 
values, that obviously resonates. And let me just put it 
briefly in historical perspective, because I do think we have 
an opportunity. Every time there has been an advance in this 
country--I will go back to radio--radio was originally going to 
be a place where we could deliver classical music to Americans, 
and then it evolved in a slightly different way.
    When television began, this was a hope that it would 
basically be an educational medium. It has not exactly turned 
out that way.
    So being somewhat of a student of history, my excitement 
about where we are and this kind of merger, and the emphasis on 
values, is I do think we have an opportunity. Because, for the 
first time, this technology does interconnect everyone, if we 
can just make it happen. It is a fact that most of the people 
in this world never even made a telephone call. And half the 
world lives on $3 a day. So it is not the technology per se, 
but the fact that it represents a form of community and 
interconnectedness, that we have just never had that at our 
disposal before.
    So the second thing I would say is that maybe this is also 
an opportunity--and a lot of that has come in the interchange 
here--to redefine the role of government and the role of the 
private sector in some new way, which, I admit, it sounds 
fuzzy, but to try and get away from the traditional rhetoric 
and also the assumption that there is an adversarial position 
of vested interests to make money and government interest to 
protect the public good. That is what we are trying to get at.
    There are some cynics who challenge that. But I guarantee 
you, we are sincere about it. But it all proceeds from one 
thing: we have at our disposal a technology like no other 
generation has had available to it.
    Mr. Case. If I could just add. I certainly agree with 
everything you have said and everything Gerry has said. I think 
it is very important to recognize, as we move into this new 
century, that some things are going to be different and some 
things can be different if we try to make them different. This 
notion of more of a partnership between government and business 
I think is an important notion.
    I do think it is unfortunate, as Gerry just said, that the 
sense is that if you go into business, you are there to make 
money and take advantage of consumers and get away with as much 
as you can. If you go into government, you are there to protect 
consumers and try to rein in those robber barons, who are going 
to certainly do bad things if not reined in.
    Our goal is to try to create this new medium and change the 
way people get information and communicate and buy products and 
learn things. And if we are successful, hopefully build the 
most valuable company, but also build the most respected 
company, and shaping this in a positive way is key to that. And 
trust, as you say, is key to that. We certainly have a 
responsibility to our shareholders, just as you have a 
responsibility to voters in Georgia. But we both have a greater 
responsibility to try to do what we can to build a better 
world.
    And I would support more, and I think others would too, 
light touch sorts of things, as long as there is some 
confidence that they would indeed be light touches. The fear of 
business always is that--at least some people in business--is 
that what seems like a good idea and starts out with a light 
touch somehow ends up being unwieldy and a heavy touch. And so 
maybe it is better not to support anything because then you do 
not have to worry about that, at the finish line, something bad 
happening.
    I think that is a mistake. And I would hope that there is 
more of a dialog, there is more of a partnership, and that we 
can deal with issues, privacy being a good example, in a 
responsible, balanced way.
    Mr. Levin. Senator, if I could just add. There is one thing 
I think we can take from the past century into this century, 
and for the citizens of Atlanta, and that is to deliver a World 
Series to Turner Field.
    [Laughter.]
    Senator Cleland. And that is a good note on which to close, 
Mr. Chairman. Thank you very much.
    Senator Burns. I thank Senator Cleland.
    I only have one followup question. I was noting in your 
memorandum of understanding, you state that the new corporation 
will negotiate commercial agreements with unaffiliated Internet 
service providers. However, it further states, and I quote: 
``Pursuant to such commercial agreements, AOL-Time Warner will 
partner with ISP's to offer consumers a choice.''
    Now, I come from Montana. And sometimes we get in trouble 
because we do not define terms and we do not operate. How do 
you define ``partner''?
    Mr. Levin. Well, the word is actually used to indicate that 
there are many different kinds of ISP's who play a very 
different role from what AOL does or EarthLink does. There are 
some who are national. There are some who are regional. There 
are some who are local. So it is simply meant to communicate 
that we want to work with several different kinds, that there 
is not one template. And we want it to be in the form of a 
partnership.
    For example, there are certain ISP's who have the 
capability of marketing and billing. And so we say in the 
memorandum that they should have access to the Time Warner 
cable customer to be able to do that.
    There are others who cannot do that. So, in a partnership 
way, we would offer to do the billing if they require that. 
That is simply what the word is meant to communicate.
    Senator Burns. I just wondered, because every time we have 
disputes it sometimes boils down to definitions more than it 
does anything else.
    I want to thank Mr. Case and Mr. Levin today for coming 
before this Committee. And I have been reminded that there are 
some Senators who have further questions. We will forward those 
questions to you. If you could respond both to the Committee 
and the individual Senators, I would appreciate that very much. 
And I thank you for coming today and spending this 2 hours with 
us. We did set a record today, by the way. And I think it is a 
credit to you that the opening statements of 10 Senators on the 
Commerce Committee, we got through them in 25 minutes. That is 
a new record.
    Thank you for coming today, and we appreciate your 
attendance here.
    Now we will move to the next panel.
    Mr. Case. Thank you.
    Mr. Levin. Thank you.
    Senator Burns. Thank you.
    We move now to Mr. Jerry Berman, who is Executive Director, 
Center for Democracy and Technology; Mr. Gene Kimmelman, Co-
Director of the Consumers Union; and Robert Lande, Senior 
Research Scholar, American Antitrust Institute, for the 
testimony and questions today.
    Usually, when it gets down to this time of day, your 
competition is usually a bowl of soup. And it looks like the 
soup won again.
    [Laughter.]
    Thank you, gentlemen, for agreeing to come today. We are 
interested in your comments. And understanding the testimony 
you have heard preceding your panel, your comments are very, 
very important to this Committee, I want to tell you that.
    And we will start with Mr. Berman, who is Executive 
Director, Center for Democracy and Technology.
    Mr. Berman.

   STATEMENT OF JERRY BERMAN, EXECUTIVE DIRECTOR, CENTER FOR 
                    DEMOCRACY AND TECHNOLOGY

    Mr. Berman. Senator Burns, thank you for this opportunity 
to testify today on what I think are critical issues facing the 
future of the Internet.
    CDT is a civil liberties organization and an Internet 
policy organization. We work tirelessly, or we try to work 
tirelessly, to protect free speech on the Internet and privacy 
for consumers. And we think those issues are gravely involved 
and affected by the AOL-Time Warner merger. It is absolutely 
important to understand why I am going to emphasize first the 
first amendment and then privacy.
    We have had an open narrow-band Internet. Anyone can 
connect to it. Anyone can be a publisher. The Internet Caucus 
that you head has spearheaded the education people about the 
ability of unaffiliated ISP's to set up low barriers to access. 
And when the Supreme Court decided the Reno case, which we 
helped to wire the Court and educate the Court about the 
Internet, they said this is the most free and open 
communications media of all time, and it is entitled to the 
highest first amendment protections because anyone can be a 
publisher.
    We want to make sure that the ability to publish, to be a 
consumer, to reach content, to speak, translates into the 
developing broadband Internet. There are two things--the 
Internet is a network of networks with no gatekeepers. It has 
been working off a facility, the telephone network, which is a 
common carriage network, which makes the ability to connect and 
access and to become part of the Internet easy. We are now 
moving to broadband platforms. Hopefully, in time--and we have 
been studying this through a broadband access project--we will 
have not only cable broadband, but we have DSL in parts of the 
country but not everywhere, wireless, and so forth.
    But, for the foreseeable future, the major deliverer of 
broadband is going to be the cable facilities. And that is why 
it is absolutely critical that openness principles be brought 
to the cable network. That is not there the way their 
architecture is designed. It has been channeled. It is a 
gatekeeper network traditionally.
    And so, first of all, the announcement by AT&T-MindSpring, 
and then the MOU announced by AOL and Time Warner, are 
absolutely critical, because they are committing their 
companies to the Internet paradigm. Which is that to the extent 
feasible, they are going to open up their network to 
unaffiliated ISP's who can carry their own content and do not 
have to seek permission from the cable network to run on that 
network and to do the applications that they want to do.
    There is great devil in the details. Because unlike the 
telephone network, which we hope will keep going and be out 
there as a common carrier, there is limited capacity on a cable 
network. It can only carry so many ISP's. It cannot just 
connect up everyone. It would degrade the signal.
    It has problems. But the feasibility of multiple ISP's is 
there. But nondiscriminatory access by unrelated ISP's, the 
ability to do streaming video, those principles which are at 
the core of the MOU, and most of them incorporated, at least by 
implication, in the AT&T-MindSpring, signal that the intent is 
to open up and to be nondiscriminatory. The implementation will 
be critical. A lot of the details have to be spelled out.
    And there are two ways of going. One is you bring in the 
government and say, let us write these rules and make sure that 
nondiscrimination occurs. I think, in this area, that is 
premature. First of all, I watched the legislative fight last 
year, which pitted giants against giants. There is gridlock. It 
puts everyone into a bunker. They start a war.
    It does not create the open standards dialog that we need. 
The Internet has developed mostly by the industry, the 
community, coming together and figuring out how to do a 
standard. And there is a real opportunity here for the cable 
industry, the public interest community, policymakers, and the 
computer industry to work out the details of this MOU and to 
make sure that it is open.
    And if that does not work, there is always the role of 
government. A couple of words about this, and it is critical. 
So there are forums that we would like to see facilitated by 
congressional oversight to make sure that the industry works 
toward openness and that, if legislation becomes necessary and 
it fails, that will become clear.
    The privacy issue, AOL-Time Warner does not change the 
equation. Privacy, we all know, is a major issue on the 
Internet. I think we should view it as an opportunity. It does 
not qualitatively change it. AOL already has a lot of 
information. Time Warner already has a lot of information. They 
have both been leaders in the self-regulatory effort on the 
Internet, trying to build best practices and track onto the 
Internet.
    That self-regulation will be the cornerstone of any 
legislation, because it will establish what the best practices 
are. I think that the recognition by Mr. Case that legislation 
is necessary because of bad actors, little brothers, is 
something to build on. Because it says there is possible 
ground-floor notice, consent, opt out, and then we can cover 
the bad actors. That is the basis for, I think, your 
legislation and other legislation. So there is room for 
reaching a consensus there.
    The Internet is also driving consumers to ask for privacy. 
There are also technologies that facilitate privacy, that make 
it possible for Web browsers and consumers to read the fine 
print of every Web site about their privacy policies and 
negotiate consent. And AOL and Time Warner have been active in 
trying to facilitate the bringing of that technology to the 
market.
    So I think that there is a chance here to work together 
across lines, bring everyone together, and try and achieve a 
new social contract for the broadband age that will protect 
both free speech and privacy. Thank you.
    [The prepared statement of Mr. Berman follows:]

        Prepared Statement of Jerry Berman, Executive Director, 
                  Center for Democracy and Technology
    Mr. Chairman and Members of the Committee, the Center for Democracy 
& Technology (CDT) is pleased to have this opportunity to speak to you 
on the short and long-term implications of the AOL-Time Warner merger 
on consumers, and on the Internet itself. CDT is a non-profit, public 
interest organization that is dedicated to developing and implementing 
public policies to protect civil liberties and democratic values on the 
Internet. CDT has been at the forefront of efforts to establish and 
protect the very high level of constitutional protection that speech on 
the Internet has been afforded by the United States Supreme Court in 
the Reno v. ACLU decision. CDT led the coalition that wired the trial 
court in Philadelphia in that case, and CDT has undertaken a major 
project to ensure that the open and democratic characteristics of the 
narrowband Internet--so central to the Reno decision--are carried over 
into the emerging broadband world.
    Mr. Chairman, the Internet is at a critical junction in its 
evolution. Although as a popular mass medium the Internet is less than 
ten years old, it is already entering into a period of significant 
transformations. These transformations are threatening to undermine the 
fundamental characteristics that make the Internet such a unique and 
dynamic means of communication. We would like to address two different 
threats to the Internet--threats to openness and threats to privacy--
and the implications of the AOL-Time Warner merger on those issues. For 
both of these issues, the critical starting point is to look at the 
vital characteristics that make the Internet what it is today.
                             i. open access
A. ``Open'' Characteristics of the Narrowband Internet
    In the first comprehensive assessment of the Internet by an 
American court, the trial court in the Reno case in 1996 found what it 
termed ``a unique and wholly new medium of worldwide human 
communication.'' \1\ The narrowband Internet developed into this 
dynamic medium in large part because it has been ``open'' at virtually 
all levels of its existence. The ``network of networks'' operates using 
open and freely available technical standards, allowing literally 
millions of different (and often incompatible) computers to communicate 
seamlessly. The open protocols used for Internet traffic allow startup 
companies and individual software designers to create and distribute 
new modes of communication over the Internet. Speakers, large and 
small, rely on the openness of the Internet to speak easily, 
inexpensively, and without significant restriction or limitations on 
the form or content of the speech.
---------------------------------------------------------------------------
    \1\ American Civil Liberties Union v. Reno, 929 F. Supp. 824, 844 
(E.D. Pa. 1996), aff'd, Reno v. American Civil Liberties Union, 521 
U.S. 844 (1997).
---------------------------------------------------------------------------
    As one judge put it, the ``Internet is a far more speech-enhancing 
medium than print, the village green, or the mails.'' \2\ That judge 
concluded that ``[f]our related characteristics of Internet 
communication have a transcendent importance'' to the conclusion that 
the Internet deserves the highest levels of constitutional protection:
---------------------------------------------------------------------------
    \2\ Id. at 882 (Dalzell concurring).

        First, the Internet presents very low barriers to entry. 
        Second, these barriers to entry are identical for both speakers 
        and listeners. Third, as a result of these low barriers, 
        astoundingly diverse content is available on the Internet. 
        Fourth, the Internet provides significant access to all who 
        wish to speak in the medium, and even creates a relative parity 
        among speakers.\3\
---------------------------------------------------------------------------
    \3\ Id. at 877 (Dalzell concurring).

    The ``openness'' of the narrowband Internet translates into an 
unprecedented ability of speakers to speak and listeners to receive 
content, free from governmental or private interference. Internet users 
have a wide range of choices as to how to access the Internet and what 
to do with the communications medium once online. Users can speak to 
the entire world with little or no investment. Listeners can access a 
vast wealth of content quickly and easily, without significant 
governmentally- or privately-imposed limitations. In short, the 
Internet offers individuals, communities, non-profit organizations, 
companies, and governments an unprecedented ability to speak and be 
heard.
    The infrastructure in which this open, narrowband Internet exists 
is the telephone system, which operates with full common carrier 
obligations. Thus, Internet Service Providers (ISPs), with very little 
investment, could offer services within a community, free from 
interference by the telephone company providing the ``last mile'' 
connection to the ISP's customers. Internet users, in turn, could 
easily reach any of the often hundreds of ISPs in any given community, 
and could do so without facing any telephone-company-imposed 
restrictions (other than bandwidth limitations inherent in an analog 
telephone line). The common carrier requirements in the telephone 
system have led to a great diversity of ISPs, and to a great deal of 
competition and innovation in the provision of Internet service.
    As the Internet moves into the broadband world, it moves away from 
the mandated openness of common carriage. It is now clear that 
broadband service over the telephone network--in the form of Digital 
Subscriber Line, or DSL, service--will be a significant avenue for 
users to obtain broadband access to the Internet. It is also clear, 
however, that broadband service over cable networks will for the 
foreseeable future be the leading method to deliver broadband Internet 
access. Cable operators are not subject to common carriage 
requirements, and are thus not required to allow multiple ISPs to offer 
a diversity of Internet service options to cable Internet users. This 
difference has raised the very real possibility that the open, dynamic, 
and democratic Internet might come to be dominated and in part 
controlled by a small number of private companies that own the critical 
``last mile'' cable connection into users' homes.
B. CDT's Broadband Access Project
    As this Committee is well aware, these concerns have led to the 
often bitter--and often loud--debate over the past eighteen months over 
whether cable systems should be forced to permit unaffiliated ISPs to 
offer broadband services over the cable systems. When confronted with 
the competing arguments and claims in early 1999, the Center for 
Democracy & Technology decided that it simply did not know enough about 
the issues to be able to take a position. Instead, CDT undertook its 
Broadband Access Project to conduct a neutral, balanced assessment of 
the factual and policy issues surrounding the emergence of broadband 
technology.
    CDT sought and obtained support for the Broadband Access Project 
from a broad cross section of the emerging broadband industry. The 
Project's participants include cable operators AT&T and Time Warner, 
ISPs America Online and MindSpring, local exchange carriers Bell 
Atlantic and SBC Communications, interexchange carrier MCI WorldCom, 
and technology companies such as Microsoft. Although these broadband 
companies were fiercely fighting in the marketplace, on Capitol Hill, 
and elsewhere, they decided that it would also be worthwhile to 
participate in a dialogue to discuss the issues raised by broadband 
technology. In addition to these and other companies, the Project has 
also included working closely with the public interest advocacy groups 
that have been at the forefront of the open access debate.
    Our consultations and analysis are continuing, and we expect to be 
able to release the results of the project within the coming months. 
But two very significant developments in the broadband world have led 
us to conclude that it is appropriate now to share with this Committee 
the current draft (as of late February, 2000) of one of the documents 
our Project is preparing--a clear and careful statement of openness 
principles that we believe should be applicable to the provision of 
broadband services over the Internet.
    These principles--attached as Attachment A--do not represent any 
agreement by any company or public interest participant in CDT's 
Broadband Access Project, but instead reflect CDT's efforts to craft a 
set of principles that respond to the concerns and views raised by the 
project participants. These principles are expressly silent on the 
critical question of whether any governmental action should be taken to 
enforce the principles--our initial intent was to attempt to articulate 
what our common goal is, before addressing how to reach that goal. 
Moreover, these principles are continuing to evolve as we continue to 
work with the project participants.
    The two developments that have led us to release the draft 
principles at this time are both statements by leading cable operators 
of their own sets of principles to govern open access on their cable 
systems. First, in December of 1999, AT&T and the ISP MindSpring sent a 
joint letter to Chairman William Kennard of the Federal Communications 
Commission, outlining a set of principles that AT&T stated would guide 
its dealings with unaffiliated ISPs seeking to provide broadband 
service over AT&T's cable networks (Attachment B). Second, and what of 
course prompts this hearing, is the announced merger of AOL and Time 
Warner, and the ``Memorandum of Understanding'' that those two 
companies released earlier this week (Attachment C).
    Both of these corporate statements of principles represent very 
significant and positive steps towards open access. CDT offers its 
draft principles in the hope that they may assist this Committee and 
other policymakers in assessing AOL Time Warner's Memorandum of 
Understanding, as well as the AT&T/MindSpring statement of principles. 
A summary and side-by-side comparison of the three sets of principles 
are offered below. Although the sets of principles use different words, 
many of the points are common to all three sets.


----------------------------------------------------------------------------------------------------------------
                                                  AOL Time Warner  2/29/00       AT&T/MindSpring 12/6/99 Letter
      CDT's Draft Openness Principles            Memorandum  (the ``MOU'')          to FCC  (the ``Letter'')
----------------------------------------------------------------------------------------------------------------
Choice Among Competing Internet Service Providers (ISPs)
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should permit     Yes. (See MOU Paragraph 2)         Yes. (See Letter first and
 both affiliated and unaffiliated ISPs to                                        seventh bullet points)
 offer broadband service. (See CDT
 Principle L)
----------------------------------------------------------------------------------------------------------------
A broadband user should be able to obtain    Yes. (MOU Paragraph 2)             Yes. (Letter second bullet
 service from an unaffiliated ISP without                                        point)
 having to also pay anything to an
 affiliated ISP.  (CDT O)
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should permit     Unclear. The MOU only states that  Unclear. The Letter only states
 any qualified ISP to offer service,          AOL Time Warner will support       that AT&T will support
 constrained only by legitimate technical     ``multiple'' ISPs, and that        ``multiple'' ISPs. (Letter page
 limitations on the number of ISPs            users will have a ``broad          1)
 supported. (CDT M)                           choice'' of both national and
                                              local ISPs. (MOU Paragraphs 2,
                                              4, 8)
----------------------------------------------------------------------------------------------------------------
If the number of ISPs supported is subject   Unclear. The MOU is silent on      Unclear. The Letter is silent on
 to technical limitation, facility owners     this point.                        this point.
 and the industry should work to maximize
 the ISPs that can be supported. (CDT M)
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should offer      Generally yes. The MOU states      Generally yes. The Letter states
 service to unaffiliated ISPs on a            that financial terms and           that financial terms and
 nondiscriminatory basis with regard to (at   functionality will not be          functionality will be
 a minimum) (a) financial terms, (b)          discriminatory (MOU Paragraph      reasonably ``comparable''
 technical functionality, and (c)             5), but is silent on support       (Letter sixth and seventh
 operational support systems. (CDT N)         systems.                           bullet points), but is silent
                                                                                 on support systems.
----------------------------------------------------------------------------------------------------------------
An unaffiliated ISP should not be required   Yes. (MOU Paragraph 7)             Yes. The Letter indicates that
 to utilize the Internet backbone services                                       any connections directly into
 of the facility owner.  (CDT P)                                                 AT&T's facilities shall be
                                                                                 provided by AT&T (Letter eighth
                                                                                 bullet point), but in
                                                                                 subsequent discussions AT&T has
                                                                                 clarified that this paragraph
                                                                                 does not require the use of
                                                                                 AT&T backbone services.
----------------------------------------------------------------------------------------------------------------
A facility owner should not permit an ISP    Yes. (MOU Paragraph 8)             Unclear. The Letter is silent on
 to offer service only to select portions                                        this point, but to our
 of a community served by the facility. (A                                       knowledge this issue has not
 desirable point that is not included in                                         yet been raised to AT&T for any
 principles prepared by CDT)                                                     reaction.
----------------------------------------------------------------------------------------------------------------
A facility owner should allow an ISP to      Yes. (MOU Paragraph 9)             No. The Letter indicates that
 control the billing relationship for all                                        AT&T intends to bill users for
 Internet services (``last mile'' access                                         the ``last mile'' access
 and ISP services). (A desirable point that                                      services that it provides.
 is not included in principles prepared by                                       (Letter tenth bullet point)
 CDT)
----------------------------------------------------------------------------------------------------------------
A facility owner should attempt to modify    Yes. (MOU Paragraph 11)            No. The Letter indicates that
 existing exclusive contractual                                                  AT&T intends to provide open
 relationships to permit open access as                                          access after its current
 soon as possible. (A desirable point that                                       exclusive contractual
 is not included in principles prepared by                                       arrangements expire. (Letter
 CDT)                                                                            page 1)
----------------------------------------------------------------------------------------------------------------
Access to Internet Content
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should not        Probably yes. The MOU is silent    Yes. (Letter fourth bullet
 restrict users' ability to access            on this point, but in other        point)
 constitutionally protected content on the    contexts AOL Time Warner has
 Internet. (CDT C, D)                         made clear commitments that
                                              access to content should not be
                                              restricted by a service
                                              provider.
----------------------------------------------------------------------------------------------------------------
The Internet industry should maximize the    Unclear. The MOU is silent on      Unclear. The Letter is silent on
 ability of users to access a diverse range   this point.                        this point.
 of broadband content. (CDT E, F)
----------------------------------------------------------------------------------------------------------------
Ability to Speak on the Internet
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should not        Probably yes. The MOU is silent    Probably yes. The Letter is
 restrict users' ability to speak or post     on this point, but AOL Time        silent on this point, but AT&T
 constitutionally protected content on the    Warner have in the past            has in the past supported
 Internet. (CDT G, H)                         supported users' ability to        users' ability to speak on the
                                              speak on the Internet.             Internet.
----------------------------------------------------------------------------------------------------------------
The Internet industry should maximize the    Unclear. The MOU is silent on      Unclear. The Letter is silent on
 ability of a diverse range of broadband      this point.                        this point.
 speakers to distribute broadband content
 widely and at reasonable cost. (CDT I, J).
----------------------------------------------------------------------------------------------------------------
Ability to Use the Internet to its Fullest
----------------------------------------------------------------------------------------------------------------
A broadband facility owner should not        Unclear. The MOU commits to non-   Unclear. The Letter (Letter
 impose any limits on the functionality       discrimination on this point,      sixth bullet point) commits to
 that an ISP can offer to its users, unless   and to allow streaming video       non-discrimination on this
 technically required and equally applied     (MOU Paragraphs 5, 6). In          point, but is silent on
 to all ISPs. (CDT A)                         testimony before the Senate        possible restrictions on the
                                              Judiciary Committee, AOL Time      use of the facility. The Letter
                                              Warner committed to allowing       does commit to allow
                                              ISPs to offer IP telephony over    unaffiliated ISPs to offer
                                              the broadband facility.            ``advanced applications'' over
                                                                                 the facility. (Letter eleventh
                                                                                 bullet point)
----------------------------------------------------------------------------------------------------------------
The industry should work to remove any       Unclear. The MOU is silent on      Unclear. The Letter is silent on
 current technical limitations on broadband   this point.                        this point.
 users' ability to use the Internet. (CDT
 B)
----------------------------------------------------------------------------------------------------------------


C. Moving Forward on Open Access: The Next Steps
    As the above comparison suggests, the AOL Time Warner Memorandum of 
Understanding represents a very positive step towards open access. AOL 
Time Warner has made a positive commitment on many, but not all, of the 
points articulated in CDT's draft principles. A number of key points 
remain unclear, including, for example, the number of ISPs that will be 
supportable on a typical Time Warner cable system. As AOL Time Warner 
acknowledges, the Memorandum of Understanding is only the first step 
toward open access. Looking at both AOL Time Warner and the broadband 
industry more broadly, there are at least three critical and 
independent steps toward open access that policymakers must consider:
    1. A set of open access principles and goals must be refined and 
further articulated. No matter which set of principles serves as the 
starting point (CDT's, AOL Time Warner's, AT&T's, or another set), 
there must be further discussions and, hopefully, consensus on what 
exactly will be necessary for a broadband facility to be considered 
``open.'' Consensus on these key threshold principles and goals must 
include policymakers, the public interest community, and the Internet 
industry.
    2. The entire U.S. cable industry (beyond AT&T and Time Warner) 
must be brought into these discussions about open access principles, 
and ultimately must undertake to implement open access on their 
systems. Even if all currently pending mergers are approved and AOL 
Time Warner and AT&T both implement open access on their systems, there 
are many major cable systems that have not yet made a commitment to 
open their cable systems.
    3. Finally, any set of open access principles must be fully and 
effectively implemented. As is often the case with policy and 
technology, the devil will be in the details. This is all the more true 
given the significant technical complexity that will be inherent in any 
implementation of open access on a cable system. Open access 
commitments by AOL Time Warner and AT&T are certainly positive 
developments, but until actual contracts are signed with unaffiliated 
ISPs and open access is actually implemented, there will unavoidably be 
uncertainty and concern about the true prospects for open access.
    Remaining is the critical question of how these next steps are 
implemented. The traditional pre-Internet approach to this type of 
policy situation has called for governmental action to require and 
oversee these and other steps toward open access. In the context of the 
Internet, however, a variety of policy issues have been addressed in 
the first instance not by governmental action but by private self-
regulatory efforts. Public interest organizations fighting for open 
access have strongly argued that there must be a federal government 
policy, and federal oversight, to ensure that AOL Time Warner, AT&T, 
and other private companies in fact implement true open access. These 
public interest advocates assert that the democracy and free speech on 
the Internet are so fundamentally important that they cannot be left to 
private negotiations between Internet companies.\4\
---------------------------------------------------------------------------
    \4\ Until the announcement of its proposed merger with Time Warner, 
America Online also advocated government action. Since the merger 
announcement, however, AOL and Time Warner have adopted the approach 
taken by AT&T in December, by effectively asking everyone to trust them 
and allow them to implement open access voluntarily, without government 
fiat.
---------------------------------------------------------------------------
    From CDT's perspective, the most significant problem with the idea 
of a government mandate of open access is that such action would lead 
(and in some cases already has led) to extensive litigation and, 
ultimately, prolonged delay. With the recent movement toward open 
access by AT&T and Time Warner, it appears possible that the cable 
industry as a whole is in fact moving on its own towards open access. 
CDT believes that these efforts toward consensus and voluntary 
implementation of open access should be given an opportunity to 
succeed.
    Critically, however, the details of open access cannot be 
determined and implemented without direct and continuing public 
interest involvement in the decisions. The public interest advocates 
are correct in concluding that free speech and democracy on the 
Internet are critically important, and require public participation in 
the development and evolution of the Internet. The Internet industry 
has frequently sought to keep government out and allow the industry to 
solve problems without governmental mandate. In most situations, this 
voluntary approach is desirable, but for it to succeed when free speech 
and the First Amendment are at stake, there must be a way for public 
interest voices to take part in the network and infrastructure design 
decisions that will be necessary to implement open access in the 
broadband Internet.
    There may also be a role short of legislation that Congress can and 
should play. Hearings of this type serve to focus attention--attention 
of the industry, the media, and the public--on the issues raised here. 
If the industry is going to succeed in addressing the critical issues 
of open access, it should do so with the participation and input of 
policymakers at all levels of government. Ultimately, however, if this 
effort fails to address these critical issues and fails to implement 
meaningful open access, the government may at that time need to take 
action.
                              ii. privacy
    As with the open access issue, the critical starting point on the 
privacy questions is the current state of privacy (and citizens' 
expectations of privacy) and the ways in which the evolution of the 
Internet may threaten privacy principles. As many of you know, the 
Center for Democracy & Technology has long been an advocate for 
protecting privacy on the Internet, and we have previously had the 
privilege of addressing this Subcommittee on privacy issues.\5\ We will 
only briefly summarize our analysis of privacy issues on the Internet, 
and then consider how the proposed AOL Time Warner merger might impact 
the privacy issue.
---------------------------------------------------------------------------
    \5\ See, e.g., Testimony of Deirdre Mulligan, Staff Counsel of the 
Center For Democracy & Technology, Before the Subcommittee on 
Communications of the Senate Committee on Commerce, Science, and 
Transportation, July 27, 1999.
---------------------------------------------------------------------------
    CDT believes that a key privacy consideration should be 
individuals' long-held expectations of autonomy, fairness, and 
confidentiality, and policy efforts should ensure that those 
expectations are respected online as well as offline. These 
expectations exist vis-a-vis both the public and the private sectors. 
By autonomy, we mean the individual's ability to browse, seek out 
information, and engage in a range of activities without being 
monitored and identified. Fairness requires policies that provide 
individuals with control over information that they provide to the 
government and the private sector. In terms of confidentiality, we need 
to continue to ensure strong protection for e-mail and other electronic 
communications.
    As it is evolving, the Internet poses both challenges and 
opportunities to protecting privacy. The Internet accelerates the trend 
toward increased information collection that is already evident in our 
offline world. The trail of transactional data left behind as 
individuals use the Internet is a rich source of information about 
their habits of association, speech, and commerce. When aggregated, 
these digital fingerprints could reveal a great deal about an 
individual's life. The global flow of personal communications and 
information coupled with the Internet's distributed architecture 
presents challenges for the protection of privacy.
    The proposed merger of AOL and Time Warner does highlight both the 
increased risks for privacy problems as the Internet evolves, and the 
great potential for self-regulatory efforts to enhance privacy 
protection. Both AOL and Time Warner have access to significant amounts 
of personal data about their subscribers. For AOL, this includes for 
example, information about online service subscribers, AOL.COM portal 
users, and ICQ and instant messaging users. Time Warner has access to 
information about ranging from cable subscriber usage to magazine 
subscriptions. The specter of the merged companies pooling all of their 
information resources, and then mining those resources for marketing 
and other purposes, should be cause for concern.
    Fundamentally, however, the AOL Time Warner merger does not alter 
the equation for a privacy solution. Protecting privacy on the Internet 
requires a multi-pronged approach that involves self-regulation, 
technology, and legislation.
    On self-regulation, we must continue to press the Internet industry 
to adopt privacy policies and practices, such as notice, consent 
mechanisms, and auditing and self-enforcement infrastructures. We must 
realize that the Internet is global and decentralized, and thus relying 
on legislation and governmental oversight alone simply will not assure 
privacy. Because of extensive public concern about privacy on the 
Internet, the Internet is acting as a driver for self-regulation, both 
online and offline. Businesses are revising and adopting company-wide 
practices when writing a privacy policy for the Internet. Efforts that 
continue this greater internal focus on privacy must be encouraged.
    On the technology front, while the Internet presents new threats to 
privacy, the move to the Internet also presents new opportunities for 
enhancing privacy. Just as the Internet has given individuals greater 
ability to speak and publish, it also has the potential to give 
individuals greater control over their personal information. We must 
continue to promote the development of privacy-enhancing and empowering 
technology, such as the World Wide Web Consortium's Platform for 
Privacy Preferences (``P3P''), which will enable individuals to more 
easily read privacy policies of companies on the Web, and could help to 
facilitate choice and consent negotiations between individuals and Web 
operators.
    Finally, we must adopt legislation that incorporates into law Fair 
Information Practices--long-accepted principles specifying that 
individuals should be able to ``determine for themselves when, how, and 
to what extent information about them is shared.'' \6\ Legislation is 
necessary to guarantee a baseline of privacy on the Internet, but it is 
not one-size-fits-all legislation. Privacy legislation must be enacted 
in key sectors such as privacy of medical records. For consumer 
privacy, there needs to be baseline standards and fair information 
practices to augment the self-regulatory efforts of leading Internet 
companies, and to address the problems of bad actors and uninformed 
companies. Finally, there is no way other than legislation to raise the 
standards for government access to citizens' personal information 
increasingly stored across the Internet, ensuring that the 4th 
Amendment continues to protect Americans in the digital age.
---------------------------------------------------------------------------
    \6\ Alan Westin. Privacy and Freedom (New York: Atheneum, 1967) 7. 
The Code of Fair Information Practices as stated in the Secretary's 
Advisory Comm. on Automated Personal Data Systems, Records, Computers, 
and the Rights of Citizens, U.S. Dept. of Health, Education and 
Welfare, July 1973:
    There must be no personal data record-keeping systems whose very 
existence is secret.
    There must be a way for an individual to find out what information 
about him is in a record and how it is used.
    There must be a way for an individual to prevent information about 
him that was obtained for one purpose from being used or made available 
for other purposes without his consent.
    There must be a way for the individual to correct or amend a record 
of identifiable information about him.
    Any organization creating, maintaining, using, or disseminating 
records of identifiable personal data must assure the reliability of 
the data for their intended use and must take precautions to prevent 
misuse of the data.
    The Code of Fair Information Practices as stated in the OECD 
guidelines on the Protection of Privacy and Transborder Flows of 
Personal Data http://www.oecd.org/dsti/sti/ii/secur/prod/PRIV_EN.HTM:
      1. Collection Limitation Principle: There should be limits to the 
collection of personal data and any such data should be obtained by 
lawful and fair means and, where appropriate, with the knowledge or 
consent of the data subject.
      2. Data quality: Personal data should be relevant to the purposes 
for which it is to be used, and, to the extent necessary for those 
purposes, should be accurate, complete and kept up-to-date.
      3. Purpose specification: The purposes for which personal data is 
collected should be specified not later than at the time of data 
collection and the subsequent use limited to the fulfillment of those 
purposes or such others as are not incompatible with those purposes and 
as are specified on each occasion of change of purpose.
      4. Use limitation: Personal data should not be disclosed, made 
available or otherwise used for purposes other than those specified in 
accordance with the ``purpose specification'' except: (a) with the 
consent of the data subject; or (b) by the authority of law.
      5. Security safeguards: Personal data should be protected by 
reasonable security safeguards against such risks as loss or 
unauthorized access, destruction, use, modification or disclosure of 
data.
      6. Openness: There should be a general policy of openness about 
developments, practices and policies with respect to personal data. 
Means should be readily available of establishing the existence and 
nature of personal data, and the main purposes of their use, as well as 
the identity and usual residence of the data controller.
      7. Individual participation: An individual should have the right: 
(a) to obtain from a data controller, or otherwise, confirmation of 
whether or not the data controller has data relating to him; (b) to 
have communicated to him, data relating to him:
        --within a reasonable time;
        --at a charge, if any, that is not excessive;
        --in a reasonable manner; and,
        --in a form that is readily intelligible to him; (c) to be 
given reasons if a request made under subparagraphs (a) and (b) is 
denied, and to be able to challenge such denial; and, (d) to challenge 
data relating to him and, if the challenge is successful to have the 
data erased, rectified completed or amended.
      8. Accountability: A data controller should be accountable for 
complying with measures which give effect to the principles stated 
above.
---------------------------------------------------------------------------
    In all of these areas, the positions of AOL and Time Warner are and 
will be critical to achieving increased privacy protection. Both 
America Online and Time Warner have strong privacy policies, have 
generally been quick to respond if lapses or violations are 
identified,\7\ and have been strong supporters of P3P and other 
privacy-enhancing technology. CDT welcomes the acknowledgement by AOL 
CEO Steve Case (before the Senate Judiciary Committee earlier this 
week) that some legislation will be necessary to incorporate best 
privacy practices on the Internet.
---------------------------------------------------------------------------
    \7\ See Testimony of Deirdre Mulligan, Staff Counsel of the Center 
for Democracy & Technology, before the Subcommittee on Courts and 
Intellectual Property of the House Committee on the Judiciary, March 
26, 1998, at 11-13 (concerning disclosure of subscriber information to 
the U.S. Navy).
---------------------------------------------------------------------------
    In evaluating the merger, it will be critical to ensure that the 
merged company will continue a strong commitment to privacy. Just as in 
the broadband area AOL Time Warner committed to requiring arms length 
negotiations between different business units within the merged 
company, the business units of the merged company should continue to 
maintain their subscriber information separately and in conformance 
with clearly stated privacy practices.
                             *  *  *  *  *
    The history of the Internet, and the history of telecommunications 
reform in general, is that policy regimes are first created by 
consensus among a broad cross section of the community. CDT is 
committed to participating in any process that helps to build a new 
social contract embodying democratic values in the emerging broadband 
world.
                  working draft--defining ``openness''
Open Access Principles for the Broadband Internet, The Center for 
        Democracy & Technology, February 2000
    One of the most prominent--and hard fought--public policy debates 
over the last year has been whether cable television systems should be 
forced to permit unaffiliated Internet Service Providers (``ISPs'') to 
offer high-speed ``broadband'' Internet service over the cable system 
wires. As this ``open access'' battle has been waged, many participants 
in the debate have used, and laid claim to, the concepts of 
``openness'' and ``open access.'' Many ISPs and public interest 
advocates have demanded that the cable industry ``open'' their cable 
systems, and that the government take action to force such 
``openness.'' Some cable companies have in turn asserted that their 
systems already are ``open,'' in that their customers can reach any 
content on the Internet without restriction. Recently, some leading 
companies have stated that they intend to ``open'' their cable networks 
voluntarily, by allowing some number of unaffiliated ISPs to offer 
service over the networks.
    Throughout this entire debate, however, a critical element has been 
missing--consensus on what exactly ``openness'' is. The debate has been 
about the ``how'' (market forces, Congressional statute, federal 
regulatory rule, or other governmental action) without first making 
clear the ``what.''
    This paper focuses exclusively on the ``what,'' and attempts to 
define ``openness'' and ``open access'' in the context of the debate 
over broadband access to the Internet. The paper first looks briefly at 
the critical and unique characteristics of the low-speed ``narrowband'' 
Internet, and then maps those characteristics into the broadband world. 
Based on the principles established in the narrowband world, the paper 
then identifies specific steps that the Internet industry in general, 
and broadband providers in particular, must take for the broadband 
Internet to remain as ``open'' as the narrowband Internet has been. The 
principles and specific steps identified are not focused solely on the 
cable industry, but are intended to be principles and actions 
applicable to the entire broadband Internet industry.
    This paper does not address the ``how''--whether broadband Internet 
market should be allowed to try to take the identified steps on its 
own, or whether a governmental body should step in and force the 
networks to be open. This paper also does not attempt to address every 
public policy issue and concern raised by the evolution of the 
broadband marketplace today. The paper does not, for example, discuss 
whether undue market power arises from the aggregation of simultaneous 
ownership of content and access pipes. Nor does the paper address 
whether a competitive market is threatened by bundling or other market 
actions taken by the owners of access facilities.
``Open'' Characteristics and Principles of the Narrowband Internet
    Before defining ``openness'' for the broadband Internet, it is 
critical to understand what that term has come to mean in the 
narrowband world. In the first comprehensive assessment of the Internet 
by an American court, a federal court in Philadelphia in 1996 found 
what it termed ``a unique and wholly new medium of worldwide human 
communication.'' \1\ The narrowband Internet has been ``open'' at 
virtually all levels of its existence. The ``network of networks'' 
operates using open and freely available technical standards, allowing 
literally millions of different (and often incompatible) computers to 
communicate seamlessly. The open protocols used for Internet traffic 
allow startup companies and individual software designers to create and 
distribute new modes of communication over the Internet. Speakers, 
large and small, rely on the openness of the Internet to speak easily, 
inexpensively, and without significant restriction or limitations on 
the form or content of the speech.
---------------------------------------------------------------------------
    \1\ American Civil Liberties Union v. Reno, 929 F. Supp. 824, 844 
(E.D. Pa. 1996) (available at http://www.ciec.org/victory.shtml).
---------------------------------------------------------------------------
    As judge put it, the ``Internet is a far more speech-enhancing 
medium than print, the village green, or the mails.'' \2\ That judge 
concluded that ``[f]our related characteristics of Internet 
communication have a transcendent importance'' to the conclusion that 
the Internet deserves the highest levels of constitutional protection:
---------------------------------------------------------------------------
    \2\ Id. at 882 (Dalzell concurring).

        First, the Internet presents very low barriers to entry. 
        Second, these barriers to entry are identical for both speakers 
        and listeners. Third, as a result of these low barriers, 
        astoundingly diverse content is available on the Internet. 
        Fourth, the Internet provides significant access to all who 
        wish to speak in the medium, and even creates a relative parity 
        among speakers.\3\
---------------------------------------------------------------------------
    \3\ Id. at 877 (Dalzell concurring).

    The ``openness'' of the narrowband Internet translates into an 
unprecedented ability of speakers to speak and listeners to receive 
content, free from governmental or private interference. Internet users 
have a wide range of choices as to how to access the Internet and what 
to do with the communications medium once online. Users can speak to 
the entire world with little or no investment. Listeners can access a 
vast wealth of content quickly and easily, without significant 
governmentally- or privately-imposed limitations. In short, the 
Internet offers individuals, communities, non-profit organizations, 
companies, and governments an unprecedented ability to speak and be 
heard.
    Some of the ``open'' characteristics of the narrowband world may be 
threatened by the technological and business developments in the 
broadband world. This paper seeks to identify the key characteristics 
of the narrowband world, and ``map'' them into the developing broadband 
Internet. The paper then offers specific steps that companies and the 
Internet industry can take to ensure that the openness of the Internet 
will continue with broadband technology. In considering the issues 
raised by broadband technologies, this paper should help in defining 
the goals that any public policy strategy (whether governmentally 
imposed or privately implemented) should pursue.
Open Access Principles for the Broadband Internet
Ability to Use the Internet to its Fullest Potential
        In the narrowband world, Internet users are generally free to 
        use their Internet connections to access any part of the 
        Internet and to run any Internet-related application, so long 
        as such use does not harm the operations of the network or the 
        use of the Internet by others. On certain facilities in the 
        broadband world (those where the ``last mile'' connection to 
        the user is a shared resource \4\), there is greater potential 
        that an individual user could harm the ability of other users 
        to access the Internet, and thus facility owners may (but may 
        not) need to impose restrictions on use. This increases the 
        risk that a facility owner might impose restrictions for 
        anticompetitive reasons.
---------------------------------------------------------------------------
    \4\ The term ``last mile'' is commonly used to refer to the 
physical connection (e.g., telephone wire for DSL service and fiber and 
coax cable for cable service) between an end user's home or business 
and the ``central office'' or ``headend'' facilities of the service 
provider. In a typical cable facility, the total capacity to carry 
Internet data is shared among many customers of the cable system, and a 
single customer using an overly large portion of that capacity could 
harm the ability of other customers to access the Internet.

        Internet users should he able to use their Internet connection 
        to access any part of the Internet and to run any Internet-
        related application, so long as such 
        use does not harm the operations of the network or the use of 
---------------------------------------------------------------------------
        the Internet by others.

    A. A facility owner should impose no limits on the content, 
applications, or functionality that an ISP can make available to its 
customers. In situations where the last mile connection to the 
individual users is a shared resource, a facility owner may impose 
reasonable limitations or restrictions on the data flow rates 
(including burst rates and packet sizes or volumes) that can be 
provided and supported by an ISP, so long as (a) the limitations arise 
out of reasonable technical and engineering concerns, and (b) the 
limitations apply equally to all ISPs providing broadband 
service.
    B. To the extent any technically-required limitations are placed on 
users' ability to use the Internet, facility owners and the Internet 
industry in general should engage in research and development efforts 
to maximize the functionality available to user and thus to minimize 
any technically-required limitations.
Access to Speech of Others
        In the narrowband world, Internet users can access any publicly 
        posted constitutionally protected speech on the Internet free 
        from interference or restrictions imposed by their ISP or 
        facility owner. In the broadband world, this critical feature 
        of the Internet should continue.

        Internet users should be able to access any publicly posted 
        speech on the Internet free from interference or restrictions 
        imposed by their ISP or facility owner.

    C. A facility owner should impose no limits on the constitutionally 
protected content that an ISP can make available to its customers 
(except technically-required limitations, if any, as discussed above), 
and should allow ISPs and their customers to reach--or filter--any 
Internet content.
    D. In contracting with ISPs, facility owners should ensure that all 
Internet users on their facilities have access to at least one ISP that 
offers unrestricted and unfiltered access to constitutionally protected 
content on the Internet.

        In the narrowband world, all speech is available to all 
        Internet users essentially equally, without any particular type 
        of speech (such as commercial speech) being easier or faster to 
        access. In the broadband world, selected high-bandwidth content 
        will be delivered more quickly to users than other content, 
        creating the risk that types of speech will be favored and 
        others disfavored.

        The broadband Internet infrastructure should not favor 
        particular types of content over other types.

    E. Broadband providers and the Internet industry in general should 
maximize the ability of broadband users to access a diverse range of 
broadband, high-bandwidth content, including content of individuals, 
non-profit organizations, and community entities.
    F. Broadband providers within a geographic area should work with, 
and interconnect with, each other, so as to maximize the ability of 
broadband users to reach broadband content quickly.
Ability to Speak and Be Heard
        In the narrowband world, Internet speakers can post essentially 
        any constitutionally protected speech in any form free from 
        interference or restrictions imposed by their ISP or facility 
        owner, and can do so for relatively little expenditure. In the 
        broadband world, this critical feature of the Internet should 
        continue.

        Internet users should be able to post any constitutionally 
        protected speech in any form free from interference or 
        restrictions imposed by their ISP or facility owner.

    G. A facility owner should impose no limits on the constitutionally 
protected content that an ISP can permit its customers to post to the 
Internet (except technically-required limitations, if any, as discussed 
above).
    H. The Internet industry should strive to maximize the ability of 
individual speakers to post speech to the Internet with relatively low 
expenditure.

        In the narrowband world, all speakers can reach all Internet 
        users essentially equally, without any particular type of 
        speaker (such as commercial entities) better able to reach 
        listeners. In the broadband world, as indicated above, selected 
        high-bandwidth content will be delivered more quickly to users 
        than other content, creating the risk that types of speech will 
        be favored and others disfavored.

        The broadband Internet infrastructure should not favor 
        particular types of speakers over other types.

    I. Broadband providers and the Internet industry in general should 
strive to maximize the ability of a diverse range of broadband 
speakers, including individuals, non-profit organizations, and 
community entities, to reach listeners as quickly and efficiently as 
can commercial speakers, and to do so at a reasonable cost.
    J. Broadband providers within a geographic area should strive to 
maximize interconnections among providers, so as to maximize the 
ability of broadband speakers to reach broadband listeners.
Choice of Methods and Providers to Access the Internet
        In the narrowband world, most Internet users have a wide range 
        of choices among ISPs offering access to the Internet, and ISPs 
        are able to operate under a wide variety of business models and 
        offer a wide variety of services to users. In the broadband 
        world, users' choices may be much more limited.

        Internet users should have choice among broadband facilities 
        (e.g., cable, DSL, wireless, etc.) and, within each facility, 
        among broadband service providers, and both facility owners and 
        the Internet industry should strive to maximize the available 
        choices.

    K. Individuals should be able to obtain broadband service over a 
variety of competing ``last mile'' facilities.
    L. Within each type of last mile broadband Internet access 
facility, broadband users (whether individuals or businesses) should be 
able to obtain broadband service from a range of Internet Service 
Providers (ISPs), including both affiliated and unaffiliated ISPs. A 
last mile broadband facility owner should allow access to such facility 
by both affiliated and unaffiliated ISPs.
    M. A last mile broadband facility owner should permit third party 
access by any qualified ISP, constrained only by legitimate technical 
limitations (if any) on the number of ISPs that can reliably be 
supported by the facility. To the extent any such limitation exists, 
facility owners and the Internet industry in general should engage in 
research and development efforts to maximize the number of ISPs that 
can be supported over any particular type of facility.
    N. A last mile facility owner should permit access by both 
affiliated and unaffiliated ISPs on a nondiscriminatory basis, 
specifically (but without limitation) with regard to (a) financial 
terms, (b) physical access and technical capabilities, and (c) 
operational support systems.
    O. Broadband users should not be required to pay for service from 
an ISP affiliated with the facility owner in order to obtain service 
from an unaffiliated ISP.
    P. A facility owner should permit unaffiliated ISPs to interconnect 
into the communications system at one or more reasonable and efficient 
points, and an unaffiliated ISP should be permitted to transport its 
customers' Internet traffic from the interconnection point(s) onto the 
ISP's facilities for delivery to the requested destinations.

    Senator Burns. Thank you, Mr. Berman. And I also want to 
thank you for your energy and leadership in the Internet 
Caucus. You have put a lot of time and energy into that and I 
think it is paying off. There is a lot of interest still in 
this. And as these issues evolve, there will always be a place 
for that caucus and to freely discuss these kind of issues.
    It is my pleasure now to introduce Gene Kimmelman, who is 
Co-Director of Consumers Union. Thank you for coming this 
morning.

 STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, WASHINGTON OFFICE, 
                        CONSUMERS UNION

    Mr. Kimmelman. Thank you, Mr. Chairman, on behalf of 
Consumers Union, publisher of Consumer Reports. We appreciate 
the opportunity to testify on the AOL-Time Warner merger.
    Mr. Chairman, as I listened to Mr. Case and Mr. Levin, I am 
just wowed. All those new services combined over cable TV, with 
Internet, their commitments, open access, worrying about the 
digital divide, this sounds like a panacea. And maybe if we 
wanted one company to provide everything to us, these would be 
the two individuals that we might want to pick to run it. But 
usually in our marketplace, we do not choose monopoly or 
dictatorship. And even if it is benevolent, we have concerns.
    They describe their DNA and their sense of values and their 
long history. But I recall, Mr. Levin's company working with 
TCI, having leveraged NBC, which testified about this leverage 
before this Committee in the eighties. Time Warner and TCI did 
not want a news channel from NBC on cable that would compete 
with their CNN. And the end result was CNBC. It did create 
diversity. CNBC is different from CNN. Levin and Case are all 
for diversity. But it was under their control, under their 
guidance.
    And they talk about open access. Mr. Case says he always 
wanted the marketplace. His open access commitment has no 
enforcement mechanism. He does not want the government 
involved. There is no enforcement even if it is a contract with 
an independent Internet service provider. He does not want to 
state any commitment, so that if somebody has a complaint there 
is no right to a remedy. What is a right without a remedy?
    So I urge the Committee to look very carefully at the 
substance of these commitments and the details of this merger. 
Because the underlying market structure raises some significant 
antitrust and competition concerns.
    In my testimony, Mr. Chairman, I show the relationship 
between AOL-Time Warner and AT&T. AT&T serves more than 40 
percent of all cable customers, with its merger with MediaOne, 
and through MediaOne, will own more than 10 percent of AOL, 
which through Time Warner's cable systems serves another 20 
percent approximately of American consumers. Almost two-thirds 
of all consumers are within this tight web of companies. More 
than half of the most popular cable programming, more than half 
of the narrow-band Internet access, more than three-quarters of 
today's broadband Internet access market is in this corporate 
web, not to mention publishing--more than 33 magazines, 
records, books.
    Is that a problem? Well, yes, just look at the new services 
being developed by AOL-Time Warner. I have appended a USA Today 
article to my testimony, about AOL TV, which is fabulous. This 
is point and click Internet access. It is channel surfing on 
your television with an AOL icon, channel 4, AOL icon, channel 
7, just like hitting a channel, you get into AOL, you get into 
the Internet, you get anything you want from AOL.
    Is that subject to open access? I have not heard them say 
anything like that. That is a unique, new set of services, 
combining television and broadband Internet, that is not 
comparable to anything else in the marketplace or foreseeable.
    Can a telephone company do it with digital subscriber line? 
No, they cannot do the video quality. They cannot do the speed.
    Can MMDS, can satellite do it? No. They might be able to do 
one-way video, but they cannot do the feedback loop as quickly. 
No one else can offer this kind of service except over the 
cable wire. It is unique. It is wonderful. But if it is tied up 
with a company controlling lines into almost two-thirds of 
homes and no one else can do it, we have an enormous problem.
    So we believe there is a significant antitrust problem with 
this merger. The concentration of power in transmission and 
content mean that everyone else in the programming industry for 
television, in the Internet service industry needs to be on 
AOL-Time Warner systems, and probably AT&T's systems. Otherwise 
they cannot reach the public. They cannot get in front of the 
eyeballs that draw investment capital, that draw the advertiser 
revenue to make them viable.
    You can offer other services. You can go to yesterday's 
Internet and you can offer a lot of old-fashioned services that 
may be very popular to a smaller market. Businesses that 
predominently need data services, can use telephone wires. But 
the mass consumer market that likes to just channel surf and 
point and click will have a wonderful opportunity from, 
unfortunately, possibly only one company. We want that to 
change. We want that to be an open system. We want that to be 
subject to nondiscrimination and open access.
    Now, Mr. Chairman, at the announcement of this merger, the 
news reports indicated that there was one major theme that kept 
coming from the CEOs and the other top officials at AOL-Time 
Warner. And that was that this deal ``was all about shaping 
people's lives.'' And we have heard an awful lot about the good 
things that they are committed to in terms of their values.
    Now, is that what the American people want from even the 
best corporation? Do we want a $350 billion company that is 
shaping our lives? Is that what a business is supposed to do? 
Or is it supposed to be responding to consumer demand, 
responding to consumer needs, not shaping them?
    We are very concerned, Mr. Chairman. And I will conclude by 
saying that this merger involves interlocking relationships in 
the cable industry and the Internet community that are very 
dangerous to consumers. So we believe this merger should be 
substantially restructured under our antitrust laws, and under 
the oversight of the Federal Communications Commission. And if 
the companies will not allow it to be restructured, if they 
will not allow their open access deal to be subject to real 
enforcement in the marketplace, their merger should be 
rejected.
    Thank you.
    [The prepared statement of Mr. Kimmelman follows:]

 Prepared Statement of Gene Kimmelman, Co-Director, Washington Office, 
                            Consumers Union
    To protect consumers' interest in the development of competitive 
markets for all communications services, Consumers Union \1\ believes 
that the Federal Trade Commission (FTC) and Federal Communications 
Commission (FCC) should reject or seek substantial modification of the 
AOL-Time Warner merger. Coming on the heels of massive consolidation in 
the cable television industry,\2\ the proposed merger of AOL with Time 
Warner poses enormous dangers for the preservation of vibrant Internet 
competition in a broadband environment, and threatens the emergence of 
broad-based competition to the cable TV industry.
---------------------------------------------------------------------------
    \1\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about goods, 
services, health, and personal finance; and to initiate and cooperate 
with individual and group efforts to maintain and enhance the quality 
of life for consumers. Consumers Union's income is solely derived from 
the sale of Consumer Reports, its other publications and from 
noncommercial contributions, grants and fees. In addition to reports on 
Consumers Union's own product testing, Consumer Reports with 
approximately 4.5 million paid circulation, regularly, carries articles 
on health, product safety, marketplace economics and legislative, 
judicial and regulatory actions which affect consumer welfare. 
Consumers Union's publications carry no advertising and receive no 
commercial support.
    \2\ Consumers Union, Consumer Federation of America and Media 
Access Project, ``Breaking The Rules: AT&T's Attempt to Buy a National 
Monopoly in Cable TV and Broadband Internet Services,'' August 17, 
1999.
---------------------------------------------------------------------------
    This merger should not be viewed in isolation. AT&T has already 
purchased all of Telecommunications Inc.'s (TCI) cable properties. If 
the proposed merger of AT&T with MediaOne is approved, AT&T would own 
about 25 percent of Time Warner Entertainment--most of Time Warner's 
cable systems, plus some of its programming and studio properties.\3\ 
Through Time Warner's previous merger with Turner Broadcasting Systems, 
AT&T already owns a nine percent ``passive'' stake in Time Warner.\4\
---------------------------------------------------------------------------
    \3\ In the Matter of Applications for Consent to the Transfer of 
Control of Licenses, MediaOne Group, Inc., To AT&T Corp., Applications 
and Public Interest Statement of AT&T and MediaOne Before the FCC, July 
7, 1999; and ``Breaking The Rules,'' op. cit.
    \4\ Federal Trade Commission, In the Matter of Time Warner Inc., 
Turner Broadcasting Systems Inc., Telecommunications Inc. and Liberty 
Media Corp., Complaint, File No. 961-0004, Sept. 1997.
---------------------------------------------------------------------------
    These joint holdings form the basis of a tight-knit cartel that 
could dominate and control distribution of the broadband and television 
services that the vast majority of consumers want to see and use. 
Figure 1 illustrates the AT&T/Time Warner ownership links that, with 
AOL, account for:

        1. almost two-thirds of all U.S. cable or multichannel video 
        households;
        2. nearly one-half of the most popular cable television 
        stations/networks; \5\
---------------------------------------------------------------------------
    \5\ In the Matter of Annual Assessment of the Status of Competition 
in Markets for the delivery of Video Programming, CS Dkt. No. 99-230, 
Sixth Annual Report, FCC, Jan. 14, 2000.
---------------------------------------------------------------------------
        3. more than one-half of narrowband Internet users; \6\
---------------------------------------------------------------------------
    \6\ ``Breaking the Rules,'' op. cit.
---------------------------------------------------------------------------
        4. more than three-fourths of broadband users; \7\
---------------------------------------------------------------------------
    \7\ Id.
---------------------------------------------------------------------------
        5. publishing of more than 10 percent of the nation's books and 
        33 magazines read by 120 million people; \8\
---------------------------------------------------------------------------
    \8\ Saul Hansell, ``AOL Agrees to Buy Time Warner for $165 Billion; 
Media Deal is Richest Merger,'' New York Times, Jan. 11, 2000.
---------------------------------------------------------------------------
        6. sale of 119 million records last year, about one-sixth of 
        the market; \9\ and
---------------------------------------------------------------------------
    \9\ Id.
---------------------------------------------------------------------------
        7. movies produced by Warner Brothers and New Line Cinema, 
        about one-fifth of the domestic market.\10\
---------------------------------------------------------------------------
    \10\ Id.
    
    
DESCRIPTIONS OF RELATIONSHIPS AND IDENTIFICATION OF SOURCES:

1                        =                        $1.5 billion breakup fee (10)
2                        =                        Large minority (12); 12% (16)
3                        =                        Minority (6)
4                        =                        QVC Joint venture (16)
5                        =                        Programming joint venture through Liberty (22); Investment
                                                   (19)
6                        =                        Joint venture (20)
7                        =                        TCI MSO Joint ventures (4)
8                        =                        Programming joint venture through Liberty (22)
9                        =                        Set top box joint venture (15)
 
a                        =                        10% Ownership of Time Warner (23)
b                        =                        exclusive deal for telephony (6)
c                        =                        25% (6)
d                        =                        exclusive deal for telephony (5)
e                        =                        26% (1) (16)
f                        =                        25% (1) (4)
g                        =                        3% ownership (3) (5)
h                        =                        up to ten million set tops guaranteed (3)
i                        =                        Majority (5); 25% (6)
j                        =                        39% (6)
k                        =                        25% (6)
L                        =                        Exchange of systems is likely to be consummated with a stock
                                                   swap (2)
m                        =                        Microsoft gets to buy MediaOne's European cable systems (9)
n                        =                        Windows NT in @Home solutions network (13)
o                        =                        Minority (6)
p                        =                        11% ownership (5) (12) (17)
q                        =                        Wireless Internet (8)
r                        =                        Through Comcast (5) (12); Direct (18); 10% (16) (20)
s                        =                        5% NTL, 30% Telewest, 30% Cable & Wireless (14)
t                        =                        Minority (5) (12)
u                        =                        small ownership (25)
v                        =                        34% via MediaOne (1)
w                        =                        Cable systems are primarily owned in TWE; TBS is owned by Time
                                                   Warner; Entertainment is split between Time Warner and TWE
                                                   (24)
x                        =                        Manager of AT&T owned systems (7) (11)
y                        =                        4% (8)
z                        =                        Wireless Internet (8)
 


SOURCES:
    (1) ``AT&T Household Reach to be Issue in MediaOne Merger Review,'' 
Communications Daily, May 10, 1999.
    (2) ``War Ends: AT&T and Comcast Cozy up in Solomon-Like Deal,'' 
Broadband Daily, May 5, 1999.
    (3) ``AT&T Comes Out on Top in Microsoft Deal,'' Broadband Daily, 
May 10, 1999.
    (4) ``FCC to Scrutinize AT&T MediaOne Deal,'' Broadband Daily, May 
10, 1999.
    (5) ``AT&T Poised to Regain Long Reach, Via Cable,'' Washington 
Post, May 5, 1999.
    (6) ``AT&T Goes Cable Crazy,'' Fortune, May 24, 1999.
    (7) ``AT&T Chief's $120 Billion Plan Capped by Deal for MediaOne,'' 
Washington Post, May 6, 1999.
    (8) ``Microsoft to Buy A Stake in Nextel,'' Washington Post, May 
11, 1999.
    (9) Allan Sloan, ``AT&T-MediaOne Soap Opera Has Just About 
Everything,'' Washington Post, May 11, 1999.
    (10) ``Pact Ends MediaOne Bid War,'' Washington Post, May 6, 1999.
    (11) ``Comcast, in AT&T Accord, Abandons MediaOne Bid,'' Wall 
Street Journal, May 6, 1999.
    (12) ``As Worlds Collide, AT&T Grabs Power Seat,'' Wall Street 
Journal, May 6, 1999.
    (13) ``Microsoft, @Home Make Broadband Pact,'' ZDNet, May 13, 1999.
    (14) ``A Contest Is On In Britain to Revolutionize Cable TV,'' New 
York Times, May 13, 1999.
    (15) ``Rogers Communications and Microsoft Announce Agreements to 
Develop and Deploy Advanced Broadband Television Services in Canada,'' 
Microsoft Presspass, July 12, 1999.
    (16) Schiesel, Seth, ``Concerns Raised as AT&T Pursues a New 
Foothold,'' New York Times, May 6, 1999.
    (17) Fabrikant, Geraldine and Seth Schiesel, ``AT&T Is Seen Forging 
Link to Microsoft,'' New York Times, May 6, 1999.
    (18) Markoff, John, ``Microsoft Hunts Its Whale, the Digital Set-
Top Box,'' New York Times, May 10, 1999.
    (19) ``ACTV Gets Boost from Liberty Digital,'' Broadband Daily, May 
17, 1999.
    (20) Wolk, Martin, ``Microsoft Poised for Major Role in New 
Industry,'' Reuters, May 6, 1999.
    (21) Fabrikant, Geraldine and Laura M. Holson, ``Key to Deal for 
MediaOne: Keeping the Losing Bidder Happy,'' New York Times, May 6, 
1999.
    (22) Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, CC Docket No. 98-102, Fifth Report, Table D-6.
    (23) Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, CC Docket No. 98-102, Fifth Report, Table D-1.
    (24) ``Transfer of Control Application,'' Transfer of Control of 
FCC Licenses MediaOne Group, Inc. to AT&T Corp., July 7, 1999.
    (25) ``Transfer of Control Application,'' Transfer of Control of 
Licenses Time Warner Inc. and America Online., to AOL Time Warner Inc., 
February 11, 2000.

    Most significantly, AOL and Time Warner are developing AOLTV--a new 
generation of easy-to-use, combined television and broadband Internet 
access services--that virtually no one else in the market could 
challenge in the foreseeable future:

        ``The service [AOLTV], expected this summer, could be 
        profoundly important,'' says Merrill Lynch's Internet 
        specialist Henry Blodget. If the service is a hit, the 
        company's clout over interactive communications might become 
        ``analogous to Microsoft's control of the PC operating 
        system.''

        ``The more ways a subscriber interacts with AOL,'' Blodget 
        says, ``the less likely the subscriber will be to pull up 
        stakes and go with a different provider--especially when the 
        entire family has programmed the service with individual buddy 
        lists, calendars and e-mail accounts.'' What wows observers is 
        the proven appeal of the services AOLTV harnesses. AOL 
        subscribers, now 21 million, wouldn't have to boot up their 
        computers to access e-mail, instant messaging, chats, 
        calendars, and online shopping or investment services.

        People could use them while watching, say, ``Who Wants to Be a 
        Millionaire'' by pointing a remote or wireless keyboard at a 
        set-top decoder that splits the screen to show online content 
        and the TV show.

        Initially, people wanting AOLTV would need a special set-top 
        box to connect the TV to a phone line.

        But the deal with Time Warner, the No. 1 cable operator with 
        more than 13 million customers, opens the way for AOLTV to 
        dominate interactive TV. It could become a seamless part of the 
        cable TV package, eliminating the need for a separate set-top 
        box and a phone line.\11\
---------------------------------------------------------------------------
    \11\ See Attachment A, David Lieberman, ``AOL angles for TV 
viewers,'' USA Today, Feb. 24, 2000.

    Although this particular set of services is not yet available, the 
unique ability to offer consumers a ``point-and-click'' TV-based 
service, guided by remote control, illustrates the potential danger of 
allowing so much distribution capacity and content to be locked up in 
one corporate entity.
    For example, no companies have been more eloquent than AOL and AT&T 
at describing how other distribution technologies--like phone 
companies' Digital Subscriber Line (DSL) services, satellite and other 
wireless services (e.g., MMDS)--cannot offer comparable television-
quality services or the interactive speed of broadband services offered 
over a cable wire. We provide a lengthy presentation of this persuasive 
argument and market analysis in Attachment B. And other independent 
analyses support the conclusion that these technologies will not be 
able to compete effectively, for the foreseeable future, with cable for 
mass-market consumer services that combine television with broadband 
Internet services.\12\
---------------------------------------------------------------------------
    \12\ Sanford C. Bernstein & Co., and McKinsey & Co., ``Broadband!'' 
January 2000; ``The ISP Directory,'' Washington Post, Oct. 29, 1999; 
and David Lieberman, ``Bridging the Digital Divide,'' USA Today, Oct. 
11, 1999.
---------------------------------------------------------------------------
    When these technical advantages are added to enormous control of 
cable distribution systems in the Time Warner ``family'' and its vast 
stockpile of popular television, Internet and other content services, 
it is obvious that the AOL-Time Warner merger could substantially harm 
consumer choice and drive up prices for a broad variety of cable-based 
services. Everyone in the television programming and broadband Internet 
service markets will need to reach enough ``eyeballs'' to obtain the 
financing and advertiser support necessary to make their services 
financially viable. This will require carriage on Time Warner's and 
AT&T's cable systems. If AOLTV takes off, the need for open access to 
cable lines for traditional online services may be dwarfed by a new 
combined service where the AOL brand is the only Internet gateway that 
provides TV viewers immediate access by remote control.
    Unfortunately, the FCC has failed to require nondiscriminatory open 
access to cable systems or effectively limit horizontal ownership of 
cable systems, and the Clinton Administration has taken a hands-off 
approach to media and communications mergers. This leaves consumers at 
risk of losing the market's potential to expand competition to cable TV 
monopolies and to preserve Internet competition using new broadband 
technologies. AOL's and Time Warner's recently announced ``memorandum 
of understanding'' does not alleviate this concern. While we commend 
the companies for taking a first step to outline the elements that open 
access would entail, their agreement is meaningless unless disputes 
about its terms are subject to public oversight and independent third-
party enforcement.
    As the quotes from AOL in Attachment B indicate, it was not long 
ago that AOL believed that regulation was necessary to make an open 
access policy work. Given that the elements of open access described in 
the memorandum only make sense if AOL's and AT&T's description of 
cable's monopoly power in Attachment B is accurate, it is difficult to 
understand why these companies should be trusted to enforce a policy 
against their cable monopolies' financial self interest.
    Therefore, Consumers Union will ask the FTC and FCC to reject the 
AOL-Time Warner deal unless it is significantly restructured. To 
prevent horizontal concentration in the cable and broadband markets, 
all ownership links and preferential arrangements between Time Warner 
and AT&T must be severed. In addition AOL should be required to divest 
its holdings in Time Warner's satellite competitor, DIRECTV. Finally, a 
nondiscriminatory open access policy with public accountability should 
be implemented before this merger is cleared. Such a policy must 
include consideration of new services that combine traditional 
television with new interactive broadband Internet services, to ensure 
that nondiscrimination principles govern an evolving marketplace.

WHO DO YOU TRUST?
AOL AND AT&T . . . WHEN THEY CHALLENGE THE CABLE MONOPOLY
OR
AOL AND AT&T . . . WHEN THEY BECOME THE CABLE MONOPOLY?
February 2000
          i. commercial interests and public policy flip-flops
A. Changing Policy Positions
    Before they purchased cable TV companies, both AT&T and AOL were 
vigorous and prominent advocates for the proposition that governments 
need to adopt a public policy to ensure fair competition and open 
access to the broadband Internet. Promptly upon the acquisition of 
cable wires--the very bottleneck facilities about which they had 
complained so loudly--they reversed their policies and ceased 
supporting a public obligation to provide open access to cable 
facilities. Yet, they continue to demand that open access requirements 
be imposed on other types of facilities that they do not own.
    While this is certainly not the first policy flip-flop driven by 
merger and acquisition, it is unique given what AOL and AT&T are 
seeking from policymakers: a trust-me, hands-off approach to open 
access. They have made their honesty an issue by claiming that they can 
be trusted to do what they previously claimed could only be 
accomplished through public policy action. Therefore, we believe it is 
appropriate to scrutinize whether these companies can be simply trusted 
to open their cable networks to nondiscriminatory, open access for 
nonaffiliated internet service providers (ISPs).
    If AOL and AT&T were just expressing a self-interested, but 
inaccurate, description of cable's monopoly power before they purchased 
cable properties, then how can they be ``trusted'' to do anything other 
than follow their current self-interest in exercising control over 
access to their cable systems? On the other hand, if their previous 
policy positions reflected an accurate description of the market 
structure and critical steps needed to ensure open access--as we 
believe they did--then how is it possible for the ``market,'' as they 
described it, to open itself up? This paper offers a detailed 
description of the market structure and elements of open access as 
presented to the public by AOL and AT&T before they sought to become 
cable companies through merger.
    Based on AOL and AT&T's past assessment of the market, which we 
believe is accurate and coincides with our own past research,\1\ how 
can the public trust them to do anything other than exercise the market 
power that they claimed cable companies possess? Why should 
policymakers entrust open access rules to a cable market dominated by 
AOL and AT&T, when those companies provided policymakers with market 
analysis demonstrating that openness can only be achieved through 
regulatory mandate?
---------------------------------------------------------------------------
    \1\ Consumer Federation of America, Consumers Union, and Media 
Access Project, Breaking the Rules: AT&T's Attempt to Buy a National 
Monopoly in Cable TV and Broadband Internet Service, August 17, 1999; 
Consumer Federation of America, Transforming the Information Super 
Highway into a Private Tool Road: The Case Against Closed Access 
Broadband Internet Systems, September 20, 1999.
---------------------------------------------------------------------------
B. Increasing Urgency for Public Policy to Require Open Access
    The AOL flip-flop resulting from its acquisition of Time Warner, 
coming on the heels of the AT&T merger with MediaOne, is a special 
source of concern. These transactions push the ongoing trend of 
concentration and consolidation in the cable TV and broadband and 
Internet industries to alarming new levels. To trust them to 
voluntarily refuse to exercise monopoly power that they previously 
sought government control over is like relying on a dictator to act 
benevolently. Their economic interests will inevitably drive them to 
abuse their market power.
    We now face the prospect of having two huge, interconnected 
companies--AT&T and AOL--completely dominating the broadband landscape. 
First, they would own over half of all cable wires in the nation and 
half of the most popular cable TV programming. They would have over 
half of the narrowband Internet subscribers and at least three-quarters 
of all residential broadband Internet subscribers.
    Second, the cable industry has never behaved in a competitive 
manner and this merger makes competition even less likely.\2\ Major 
cable companies never overbuild one-another's facilities. They never 
compete head-to-head in the wires business and they are joint ventured 
up to their eyeballs in programming.\3\ The AOL-Time Warner merger 
creates one, interconnected set of owners of broadband service 
providers since AT&T owns more than 10 percent of AOL-Time Warner 
through MediaOne's substantial ownership of Time Warner Entertainment. 
Indeed, AOL-Time Warner executives trumpeted the fact that the first 
call they made after announcing the merger was to AT&T CEO Michael 
Armstrong to offer to work together.
---------------------------------------------------------------------------
    \2\ Breaking the Rules.
    \3\ Breaking the Rules.
---------------------------------------------------------------------------
    Third, AOL was being counted on by some to use its strong position 
in the narrowband Internet market to propel the telephone industry's 
high-speed technology (Digital Subscriber Line or DSL) forward as a 
competitor to cable. DSL is behind cable in roll out and subscribers 
and has significant technological disadvantages compared to cable, 
including geographic coverage and bandwidth. It was hoped that AOL's 
marketing and money would make this less attractive alternative a 
future competitor for cable, particularly in the residential sector, 
where DSL's limitations are greatest. There could be no clearer vote of 
no confidence in DSL than AOL's acquisition of Time Warner.
    In order to allay fears about the remarkable concentration that is 
taking place in the industry, these companies have offered a series of 
explanations and claims that actual and potential competition will 
alleviate or prevent market power problems. When these arguments fail 
to quiet critics and the companies are pressed to provide better 
assurances, the companies insist that they can be counted on to 
voluntarily negotiate fair arrangements for access to their newly 
acquired facilities. These promises stand in sharp contrast to the 
statements they made before they secured a favored place on the 
information superhighway by purchasing exclusive rights to its most 
attractive high-speed lanes.
    This paper demonstrates that their statement about open access 
before they obtained this advantage should carry special weight in 
informing policy makers about the demands that should be placed on them 
as facilities owners. The paper relies on official statements made to 
governmental entities by these corporations. They loudly demanded a 
public policy that imposes open access obligations on broadband 
facility owners before their commercial interests in the issue changed. 
The purpose of this paper is not to chastise the companies for changing 
positions, although it does point out the many ways in which what they 
now say contradicts what they said so recently. Rather, the purpose of 
the paper is to understand why they were so adamant to secure open 
access to cable facilities. There are still thousands of Internet 
service providers out there who have not been able to purchase their 
own wires, and never will be. They still need the protections that 
these two huge corporations demanded.
    AT&T made a lengthy filing before the Canadian Radio-Television and 
Telecommunications Commission from the perspective of an unaffiliated 
content provider owning no wires in Canada.\4\ It argued strongly that 
an open access requirement is necessary to promote competition and 
ensure that unaffiliated content providers would not be discriminated 
against by the owners of broadband access facilities. In the process, 
it provided a detailed and point-by-point refutation of every one of 
the arguments that AT&T, as a dominant cable operator in the United 
States, has made against open access.
---------------------------------------------------------------------------
    \4\ AT&T Canada Long Distance Services, ``Comments of AT&T Canada 
Long Distance Services Company,'' before the Canadian Radio-television 
and Telecommunications Commission, Telecom Public Notice CRTC 96-36: 
Regulation of Certain Telecommunications Service Offered by Broadcast 
Carriers, February 4, 1997.
---------------------------------------------------------------------------
    AOL's advocacy of a public policy requiring open access is well 
known and its overnight reversal of position has attracted a great deal 
of attention. It argued vigorously for open access at the federal 
level.\5\ What is less well known is the detailed description of open 
access that AOL offered a couple of months before it acquired Time 
Warner.\6\ The City of San Francisco witnessed one of the most 
prolonged fights over open access, supporting the concept but requiring 
technical, legal and economic analysis to flesh it out before it 
imposed a requirement. AOL, which had fought bitterly for open access 
in the City, answered the challenge by outlining not only the 
justification for open access, but a road map to the light handed 
requirements that would keep the broadband Internet open.
---------------------------------------------------------------------------
    \5\ At the federal level, AOL's most explicit analysis of the need 
for open access can be found in ``Comments of America Online, Inc.,'' 
In the Matter of Transfer of Control of FCC Licenses of MediaOne Group, 
Inc. to AT&T Corporation, Federal Communications Commission, CS Docket 
No. 99-251, August 23, 1999 (hereafter, AOL, FCC).
    \6\ America Online Inc., ``Open Access Comments of America Online, 
Inc.,'' before the Department of Telecommunications and Information 
Services, San Francisco, October 27, 1999.
---------------------------------------------------------------------------
    Contrast that position to AOL's current stance. When AOL chairman 
Steve Case announced the merger with Time Warner, he said, ``We always 
hoped [open access] would come through the marketplace, rather than 
having to get government involved.'' Time Warner chief executive Gerald 
Levin said that the two companies were ``going to take the open access 
issue out of Washington, out of city hall, to the marketplace.'' \7\
---------------------------------------------------------------------------
    \7\ Press Conference, January 10, 2000.
---------------------------------------------------------------------------
    Although the advocacy of AT&T and AOL for open access for cable 
modems for broadband Internet service are the central concern in this 
paper, it is important to note that these two corporations have also 
advocated open access for other technologies. AT&T argues for open 
access to telephone networks for advanced services. Its most recent 
statements, filed in the U.S. in late-January 2000, make especially 
interesting reading in light of the vigorous fight AT&T has put up 
against open access requirements for its cable systems.\8\
---------------------------------------------------------------------------
    \8\ ``Comments of AT&T Corp. in Opposition to Southwestern Bell 
Telephone Company's Section 271 Application for Texas,'' In the Matter 
of Application of SBC Communications Inc., Southwestern Bell Telephone 
Company, and Southwestern Bell Communications Services, Inc. d/b/a 
Southwestern Bell Long Distance for Provision of In-Region InterLATA 
Services in Texas, Federal Communications Commission, CC Docket No. 00-
4, January 31, 2000 (hereafter, AT&T SBC Comments).
---------------------------------------------------------------------------
    The sharp reversal of position underscores the need for binding 
public policy, rather than vague private sector promises, to protect 
and promote competition in the next generation of Internet development. 
To put the matter bluntly, it is patently obvious that important public 
policies which will determine the free flow of commerce and information 
in the ``Internet Century'' cannot be left to the whims of the 
commercial interests of large corporations that change their views with 
every merger or acquisition.
C. The Government Role in Ensuring Open Access
    Did these companies really advocate a role for government policy to 
ensure open access? There is no doubt about it.
1. AOL
    While AOL always intended for private parties to implement open 
access by negotiating the necessary details to implement an obligation 
created by government action, it simply cannot hide from the critical 
role it felt government had to play. AOL urged governments to make an 
unequivocal commitment to a comprehensive and meaningful policy of open 
access that clearly signaled that closed access is not acceptable. It 
urged San Francisco to back up that commitment by providing a private 
right of action and a threat of government enforcement. AOL stated:

        The City's critical and appropriate role is to establish and 
        firmly embrace a meaningful open access policy, not to manage 
        the marketplace. We believe that once such a policy is fully in 
        place, the industry players will negotiate the details to 
        fairly implement open access. The City thus should not have to 
        play an active role in enforcing nondiscriminatory pricing or 
        resolving pricing disputes. Rather, the City should simply 
        adopt and rely on a rule that a broadband provider must offer 
        high speed Internet transport services to unaffiliated ISPs on 
        the same rates as it offers them to itself or its affiliated 
        ISP(s). The City's unequivocal commitment to this policy and 
        the resulting public spotlight should offer enforcement enough, 
        and indeed we expect that cable operators will adjust their 
        ways readily once they understand that a closed model for 
        broadband Internet access will not stand. When necessary, the 
        opportunity to seek injunction or bring a private cause of 
        action would offer a fallback method of obtaining redress . . .

        As stated above, the City's role is to establish a 
        comprehensive open access policy with an effective enforcement 
        mechanism. Network management issues are best left to the 
        industry players, and the City need not play a hands-on role in 
        this area. The companies involved are in the best position to 
        work out specific implementation issues. This is not to say, 
        however, that a reluctant provider would not have the ability 
        to interfere with the successful implementation of an open 
        access regime. Accordingly, through its enforcement policy if 
        necessary, the City should ensure that the necessary degree of 
        cooperation is achieved. (AOL, pp. 4-5).

    AOL did not have to defend the need for open access in its comments 
to San Francisco, since the proceeding was to implement open access 
requirements. It did, however, pat the city on the back for endorsing 
open access. As AOL put it

        AOL applauds the City for taking this critical step in the 
        implementation of the Board of Supervisors' open access 
        resolution, which wisely supports consumers' freedom to choose 
        their Internet service provider and to access any content they 
        desire--unimpeded by the cable operator. (AOL, p. 1).

    AOL also offered its arguments for open access in the FCC's 
proceeding overseeing the AT&T/MediaOne merger.

        What this merger does offer, however, is the means for a newly 
        ``RBOC-icized'' cable industry reinforced by interlocking 
        ownership relationships to (1) prevent Internet-based challenge 
        to cable's core video offerings; (2) leverage its control over 
        essential video facilities into broadband Internet access 
        services; (3) extends it control over cable Internet access 
        services into broadband cable Internet content; (4) seek to 
        establish itself as the ``electronic national gateway'' for the 
        full and growing range of cable communications services.

        To avoid such detrimental results for consumers, the Commission 
        can act to ensure that broadband develops into a communications 
        path that is as accessible and diverse as narrowband. Just as 
        the Commission has often acted to maintain the openness of 
        other late-mile infrastructure, here too it should adopt open 
        cable Internet access as a competitive safeguard--a check 
        against cable's extension of market power over facilities that 
        were first secured through government protection and now, in 
        their broadband from, are being leveraged into cable Internet 
        markets. Affording high-speed Internet subscribers with an 
        effective means to obtain the full range of data, voice and 
        video services available in the marketplace, regardless of the 
        transmission facility used, is a sound and vital policy--both 
        because of the immediate benefit for consumers and because of 
        its longer-range spur to broadband investment and deployment. 
        Here, the Commission need do no more than establish an 
        obligation on the merged entity to provide non-affiliated ISPs 
        connectivity to the cable platform on rates, terms and 
        conditions equal to those accorded to affiliated service 
        providers. (AOL, FCC, 
        p. 4).
2. AT&T
    AT&T's policy recommendations in Canada were oriented toward a 
federal agency. It argued that federal regulatory authorities should 
not forbear regulation, which is exactly the opposite of what it now 
argues in the U.S.

        AT&T Canada LDS submits that the application of the 
        Commission's forbearance test to the two separate markets for 
        broadband access and information services supports a finding 
        that there is insufficient competition in the market for 
        broadband access services and the market for information 
        services to warrant forbearance at this time from the 
        regulation of services when they are provided by broadcast 
        carriers. As noted above, these carriers have the ability to 
        exercise market power by controlling access to bottleneck 
        facilities required by other service providers. It would 
        appear, therefore, that if these services were deregulated at 
        this time, it would likely impair the development of 
        competition in this market as well as in upstream markets for 
        which such services are essential inputs. (AT&T, p. 15).

    AT&T argued that vertically integrated cable and telephone facility 
owners possess market power and have to be prevented from engaging in 
anticompetitive practices. These are the very same arguments AOL made 
in the U.S. over two years later.

        The dominant and vertically integrated position of cable 
        broadcast carriers requires a number of safeguards to protect 
        against anticompetitive behavior. These carriers have 
        considerable advantages in the market, particularly with 
        respect to their ability to make use of their underlying 
        network facilities for the delivery of new services. To grant 
        these carriers unconditional forbearance would provide them 
        with the opportunity to leverage their existing networks to the 
        detriment of other potential service providers. In particular, 
        unconditional forbearance of the broadband access services 
        provided by cable broadcast carriers would create both the 
        incentive and opportunity for these carriers to lessen 
        competition and choice in the provision of broadband service 
        that could be made available to the end customer. Safeguards 
        such as rate regulation for broadband access services will be 
        necessary to prevent instances of below cost and/or excessive 
        pricing, at least in the near-term.

        Telephone companies also have sources of market power that 
        warrant maintaining safeguards against anticompetitive 
        behavior. For example, telephone companies are still 
        overwhelmingly dominant in the local telephony market, and 
        until this dominance is diminished, it would not be appropriate 
        to forebear unconditionally from rate regulation of broadband 
        access services (AT&T, p. 15).

        In the opinion of AT&T Canada LDS, both the cable companies and 
        the telephone companies have the incentive and opportunity to 
        engage in these types of anticompetitive activities as a result 
        of their vertically integrated structures. For example, cable 
        companies, as the dominant provider of broadband distribution 
        services, would be in a position to engage in above cost 
        pricing in uncontested markets, unless effective constraints 
        are put in place. On the other hand, the telephone company will 
        likely be the new entrant in broadband access services in most 
        areas, and therefore expected to price at or below the level of 
        cable companies. While this provides some assurances that 
        telephone companies are unlikely to engage in excessive 
        pricing, it does not address the incentive and opportunity to 
        price below cost. Accordingly, floor-pricing tests would be 
        appropriate for services of both cable and telephone companies. 
        (AT&T, pp. 16-17)

    Furthermore, in the case of both cable and telephone broadcast 
carriers, safeguards would also need to be established to prevent other 
forms of discriminatory behavior and to ensure that broadband access 
services are unbundled. (AT&T, 
p. 17).
  ii. the need for open access policy: analysis of supply and demand 
                                factors
    The recommendation that government requirements for open access are 
necessary to promote and protect competition rests on extensive 
analysis of market structure. A comprehensive case was laid out by AT&T 
in Canada and AOL in the U.S, which rejected each of the major 
arguments against open access. AT&T/AOL cited at least five fundamental 
supply-side characteristics that support the recommendation for open 
access and three demand-side characteristics.
A. Supply-Side
1. Vertical Integration
    AT&T drove a very hard bargain when it came to the question of 
regulation of access to broadband facilities. It viewed one fundamental 
problem as leveraging market power from the core business of vertically 
integrated facilities owners who have a dominant position in an 
adjacent market. Thus, it advocated regulation of access not only 
because there was a lack of competition in the new market (broadband 
access), but also because there was a lack of competition in the core 
markets that the facilities owner dominates (cable TV service for cable 
operators and local exchange service for telephone companies).

        In terms of the appropriate period in which to apply the 
        safeguards, AT&T Canada LDS is of the view that safeguards 
        against anticompetitive behavior would need to be maintained 
        for cable companies until competition in the provision of 
        broadband access services has been established in a substantial 
        portion of the market . . .

        In the case of cable companies, there would need to be evidence 
        that vigorous and effective competition had evolved in a 
        substantial portion of the market for broadband access services 
        and in their core businesses (i.e., the distribution of 
        broadcast programming services). Moreover, in order to protect 
        against abuse of any residual market power, safeguards should 
        be in place, including the implementation of an effective price 
        mechanism for basic and extended basic cable services in order 
        to prevent instances of cross-subsidization, and provision of 
        nondiscriminatory and unbundled access to the broadband service 
        of cable broadcast carriers. (AT&T, pp. 17 . . . 18)

        Similar considerations apply to the case of telephone companies 
        with respect to local telephone services. Until vigorous 
        competition in local telephone markets exists, some safeguards 
        . . . will be needed. (AT&T 17).

    AOL described the threat of vertically integrated cable companies 
in the U.S. in precisely these terms.

        At every link in the broadband distribution chain for video/
        voice/data services, AT&T would possess the ability and the 
        incentive to limit consumer choice. Whether through its 
        exclusive control of the EPG or browser that serve as 
        consumers' interface; its integration of favored Microsoft 
        operating systems in set-top boxes; its control of the cable 
        broadband pipe itself; its exclusive dealing with its own 
        proprietary cable ISPs; or the required use of its ``backbone'' 
        long distance facilities; AT&T could block or choke off 
        consumers' ability to choose among the access, Internet 
        services, and integrated services of their choice. Eliminating 
        customer choice will diminish innovation, increase prices, and 
        chill consumer demand, thereby slowing the roll-out of 
        integrated service. (AOL, FCC, p. 11)
2. Paucity of Alternative Facilities
    AT&T maintained that the presence of a number of vertically 
integrated facilities owners does not solve the fundamental problem 
that nonintegrated content providers will inevitably be at a severe 
disadvantage. Since non-integrated content providers will always 
outnumber integrated providers, competition can be undermined by 
vertical integration. In order to avoid this outcome, even multiple 
facilities owners must be required to provide nondiscriminatory access.

        Furthermore, as noted above, every carrier that provides local 
        access services will control bottleneck access to its end 
        customer. This means that any connecting carriers, such as 
        IXCs, have no alternatives available to obtain access to the 
        end customers or the access provider, other than persuade their 
        customers to switch to another access provider or to become 
        vertically integrated themselves. In AT&T Canada LDS' view, 
        neither of these alternatives is practical. Because there are 
        and will be many more providers of content in the broadband 
        market than there are providers of carriage, there always will 
        be more service providers than access providers in the market. 
        Indeed, even if all of the access providers in the market 
        integrated themselves vertically with as many service providers 
        as practically feasible, there would still be a number of 
        service providers remaining which will require access to the 
        underlying broadband facilities of broadcast carriers. (AT&T, 
        p. 12).

    AOL also argues that the presence of alternative facilities does 
not eliminate the need for open access.

        Moreover, an open access requirement would provide choice and 
        competition of another kind as well. It would allow ISPs to 
        choose between the first-mile facilities of telephone and cable 
        operators based on their relative price, performance, and 
        features. This would spur the loop-to-loop, facilities-based 
        competition contemplated by the Telecommunications Act of 1996, 
        thereby offering consumers more widespread availability of 
        Internet access; increasing affordability due to downward 
        pressures on prices; and a menu of service options varying in 
        price, speed, reliability, content and customer service. (AOL, 
        FCC, p. 14)

    Another indication of the fact that the availability of alternative 
facilities does not eliminate the need for open access policy can be 
found in AOL's conclusion that the policy should apply to both business 
and residential customers. In San Francisco, the city asked whether the 
policy of open access ``should apply only to residential services?'' 
The business sector has experienced a great deal more competition for 
telephone service and broadband services. DSL, which was originally 
intended by telephone companies as a business service, is much better 
suited to this market segment and market analysis indicates that cable 
and telephone companies are dividing this market more evenly. If ever 
there was a segment in which the presence of two facilities competing 
might alleviate the need for open access requirement, the business 
segment is it. AOL rejected the idea.

        Defining ``consumers'' to include only residential customers, 
        however, would unduly limit the fulfillment of these goals. 
        There is no indication that the Board intended to exclude 
        business customers from the benefits flowing from competition 
        and choice . . . The City should thus ensure nondiscriminatory 
        open access to broadband Internet access for residential and 
        business services alike. (AOL, pp. 1-2).
3. Essential Access Functions
    AT&T also made a much more profound argument about the nature of 
the integration of facilities and programming. AT&T defined access to 
the customer as an essential input to the delivery of information 
services for both cable and telephone facilities.

        AT&T Canada LDS is of the view that broadband access services 
        are a bottleneck service. These facilities are a necessary 
        input required by information service providers seeking to 
        deliver their services to their end-user customers. In fact, 
        many of these access facilities share the same bottleneck 
        characteristics as those exhibited by narrowband access 
        facilities, such as those which are used in the provision of 
        local and long distance telephone services. (AT&T, p. 10)

    Because of the essential nature of access, AT&T attacked the claim 
made by cable companies that their lack of market share indicates that 
they lack market power. AT&T argued that small market share does not 
preclude the existence of market power because of the essential 
function of the access input to the production of service.

        By contrast, the telephone companies have just begun to 
        establish a presence in the broadband access market and it will 
        likely take a number of years before they have extensive 
        networks in place. This lack of significant market share, 
        however, is overshadowed by their monopoly position in the 
        provision of local telephone services.

        In any event, even if it could be argued that the telephone 
        companies are not dominant in the market for broadband access 
        services because they only occupy a small share of the market, 
        there are a number of compelling reasons to suggest that 
        measures of market share are not overly helpful when assessing 
        the dominance of telecommunications carriers in the access 
        market . . .

        Where the market under consideration involves the provision of 
        telecommunications access service (such as the market for 
        broadband access services), it is more important to examine the 
        supply conditions in the relevant market than the demand 
        conditions which characterize that particular market. This is 
        because telecommunications access service represents an 
        essential input to the production process of other service 
        providers. Therefore, even if the service provider only 
        occupies a very small market share of the overall market for 
        broadband access services, it is dominant in the provision of 
        its access services because alternate providers must rely on 
        that access provider in order to deliver their own services to 
        the end-user subscriber. (AT&T, pp. 8, 9).

        AOL also identifies the critical importance of access.

        The key, after all, is the ability to use ``first mile'' 
        pipeline control to deny consumers direct access to, and thus a 
        real choice among, the content and services offered by 
        independent providers. Open access would provide a targeted and 
        narrow fix to this problem. AT&T simply would not be allowed to 
        control consumer's ability to choose service providers other 
        than those AT&T itself has chosen for them. This would create 
        an environment where independent, competitive service providers 
        will have access to the broadband ``first mile'' controlled by 
        AT&T--the pipe into consumers' homes--in order to provide a 
        full, expanding range of voice, video, and data services 
        requested by consumers. The ability to stifle Internet-based 
        video competition and to restrict access to providers of 
        broadband content, commerce and other new applications thus 
        would be directly diminished. (AOL, FCC, p. 13)

    AT&T explicitly rejects the claim that nondominant firms in the 
access market should be excused from open access regulation.

        AT&T Canada LDS does not consider it appropriate to relieve the 
        telephone companies of the obligation . . . on the grounds that 
        they are not dominant in the provision of broadband services. 
        These obligations are not dependent on whether the provider is 
        dominant. Rather they are necessary in order to prevent the 
        abuse of market power that can be exercised over bottleneck 
        functions of the broadband access service. It should be noted 
        that . . . Stentor [a trade association of local telephone 
        companies in Canada] was of the view that new entrants in the 
        local telephony market should be subject to regulation and 
        imputation test requirements because of their control over 
        local bottleneck facilities. Based on this logic, the telephone 
        companies, even as new entrants in the broadband access market, 
        should be subject to similar regulatory and imputation test 
        requirements. (AT&T, p. 24, emphasis added)
4. New Markets Need Open Access
    As indicated in the above quotes, AT&T argued for open access at an 
early stage of development of broadband in Canada. Thus, AT&T's 
argument responds directly to the claim that the market is too new to 
require an open access obligation. AT&T argued that the requirement is 
necessary to ensure that the market develops in a competitive direction 
from its early stages in Canada.
    AOL argued exactly the same thing in the U.S., when the market was 
still new, but much more highly developed. It argued that requiring 
open access early in the process of market development would establish 
a much stronger structure for a proconsumer, procompetitive market. 
Early intervention prevents the architecture of the market from 
blocking openness and avoids the difficult task of having to rebuild 
the market on an open bases later.

        The Commission should proceed while the architecture for cable 
        broadband is still under construction. To wait any longer would 
        allow the fundamentally anti-consumer approach of the cable 
        industry to take root in the Internet and spread its closed 
        broadband facility model nationwide. Must consumers await an 
        ``MFJ for the 21st Century?''

        Obliging AT&T to afford unaffiliated ISPs access on 
        nondiscriminatory terms and conditions--so that they, in turn, 
        may offer consumers a choice in broadband Internet Access--
        would be a narrow, easy to administer, and effective remedy. It 
        would safeguard, rather than regulate, the Internet and the new 
        communications marketplace. The openness it would afford is 
        critical to a world in which--as boundaries are erased between 
        communications services and applications--we ensure that 
        consumers likewise are truly afforded choice without 
        boundaries. (AOL, FCC, p. 18)
5. Open Access Speeds Deployment
    There is a final supply-side argument that these companies have 
made that is critically important to the ongoing debate, which involves 
the impact of open access requirement on the deployment of facilities. 
AOL argues that open access conditions would do little to slow, and 
might actually speed, the development and deployment of broadband 
facilities, while they ensure a vigorously competitive content market.

        Open access will not unduly increase cable operator's financial 
        risk. A nondiscriminatory transport fee set by the cable 
        operator would allow AT&T to recover full transport costs plus 
        profit from each and every interconnecting provider. And AT&T's 
        affiliated ISP would still be free to compete--based on cost 
        and quality--with other ISPs. As Forrester Research observed, 
        ``[c]able companies can make money as providers of high-speed 
        access for other ISPs. Instead of gnashing their teeth, large 
        cable operators should make their networks the best transport 
        alternative for providers of all types of telecommunications 
        services.'' According to AT&T itself, ``the only way to make 
        money in networks is to have the highest degree of 
        utilization.'' Open access would allow AT&T to do just that, 
        fostering a wholesale broadband transport business that would 
        increase use of the cable operator's platform, fuel innovation, 
        and attract additional investment. (AOL, pp. 6-7)
B. Demand-Side Fundamentals
    AT&T offered a series of observations about the nature of the 
demand side of the broadband market that reinforces the conclusion that 
an open access requirement is necessary.
1. Narrowband Does Not Compete With Broadband
    The most fundamental observation on the demand side offered by AT&T 
is the fact that narrowband services are not a substitute for broadband 
services.

        AT&T Canada LDS notes that narrowband access facilities are not 
        an adequate service substitute for broadband access facilities. 
        The low bandwidth associated with these facilities can 
        substantially degrade the quality of service that is provided 
        to the end customer to the point where transmission reception 
        of services is no longer possible. (AT&T, p. 12).

    AT&T and the cable industry say exactly the opposite in the U.S. 
This is a critical point in the antitrust analysis of the AT&T-MediaOne 
merger. If the narrowband market is a separate market from broadband, 
as AT&T so clearly argued in Canada, then the concentration of 
broadband services that AT&T proposes to accomplish through merger in 
the U.S. appears to violate the antitrust laws.
    Not only did AT&T reject the notion that competition for narrowband 
Internet service is sufficient to discipline the behavior of vertically 
integrated broadband Internet companies, it expressed the concern that 
leveraging facilities in the broadband market might damage competition 
in the whole content market.

        As noted above, even though the market for Internet access 
        service generally demonstrates a high degree of competition 
        (with the exception of co-axial cable Internet access 
        services), the potential exists for providers who also control 
        the underlying access to undermine the continuation of such 
        competition. Accordingly, AT&T Canada LDS submits that 
        safeguards against anti-competitive behavior should be applied 
        to the provision of information service by those broadcast or 
        telecommunications carriers who own and operate broadband 
        access networks. (AT&T, p. 17).

    AOL raised a parallel concern. It argues that the leverage from 
integration could undermine the prospects for increased competition in 
the traditional cable industry.

        We submit that, to answer this question, the Commission should 
        examine certain critical ``mega-effects'' of the proposed AT&T/
        MediaOne combination. First, the FCC should consider how this 
        merger's video and Internet access components together would 
        service to keep consumers from obtaining access to Internet-
        delivered video-programming--and thereby shield cable from 
        competition in the video market. (AOL, FCC, p. 8)
2. Switching Costs
    AT&T also made an argument in Canada on the demand-side that 
undercuts its claims in the U.S. that the current advantage of cable 
over DSL should not be a source of concern. AT&T argued that the 
presence of switching costs can impede the ability of consumers to 
change technologies, thereby impeding competition.

        [T]he cost of switching suppliers is another important factor 
        which is used to assess demand conditions in the relevant 
        market. In the case of the broadband access market, the cost of 
        switching suppliers could be significant, particularly if there 
        is a need to adopt different technical interfaces or to 
        purchase new equipment for the home or office. Given the fact 
        that many of the technologies involved in the provision of 
        broadband access services are still in the early stages of 
        development, it is unlikely that we will see customer switching 
        seamlessly from one service provider to another in the near-
        term. (AT&T p. 12)

        The equipment (modems) and other front-end costs are still 
        substantial and unique to each technology. There is very little 
        competition between cable companies (i.e. overbuilding). Thus, 
        switching costs remain a substantial barrier to competition.
3. Bundling
    A third demand-side problem identified by AT&T in Canada is the 
leverage that vertically integrated firms possessing market power in an 
adjacent market can bring to bear on a new market. By packaging 
together broadband services, particularly those over which integrated 
firms exercise market power, non-integrated competitors can be placed 
at an unfair advantage.

        [T]his dominance in the broadband access market provides cable 
        broadcast carriers with considerable market power in the 
        delivery of traditional broadcasting services. This dominant 
        position in the core market for BDU (cable TV programming] 
        services can, in turn, be used by the cable companies to 
        leverage their position in the delivery of non-programming 
        services, the vast majority of which will be carried over by 
        their cable network facilities.

        As broadcasting and telecommunications technologies converge, 
        subscribers will seek to simplify their access arrangements by 
        obtaining all of their information, entertainment and 
        telecommunications services over a single broadband access 
        facility. This, in turn, will make it more difficult for 
        service providers to use alternate access technologies as a 
        means of delivering service to their customers. (AT&T, pp. 8-
        9).

    Bundling remains one of the focal points of antitrust and 
competitive concern in the U.S. AOL raised the bundling issue in its 
comments at the FCC as well.

        Second, the agency should reflect upon how this merger would 
        enable cable to use RBOC-like structure to limit consumer 
        access to the increasingly integrated video/voice/data 
        communications services offered over the broadband pipe 
        controlled by cable. And finally, the agency should recognize 
        how these two ``mega-effects'' of the merger together reinforce 
        cable's ability to deny consumers the right to choose: (a) 
        between a competitive video-enhanced Internet service rather 
        than a traditional cable service; (b) among competing cable 
        Internet services; and (c) among competing ``bundles'' of 
        video/data/voice services that contain multichannel video. 
        (AOL, FCC, p. 8)
C. Understanding the Present and Looking to the Future: Open Access 
        Remains Necessary
    While AT&T might argue that conditions have changed since it so 
vigorously supported open access in 1997, and therefore it should not 
be held to those comments, AOL can make no such claim. In fact, AT&T's 
analysis of the broadband market is still applicable.
    First, many of the arguments it made are unaffected by changes in 
the industry. There are fundamental characteristics of the 
communications and broadband industry identified by AT&T/AOL that do 
not change which require open access to facilities. These are enduring 
characteristics of the market--paucity of facilities compared to 
content providers, access as an essential input, separate narrowband 
and broadband markets, switching costs, bundling--that establish the 
need for a public obligation to provide open access.
    Second, AT&T's view of the likely development of alternative 
technologies expressed in Canada is similar to the view that many take 
today. The two wireline technologies that are up and running, although 
not fully deployed, are dominant. Cable is ahead of DSL. Wireless is 
farther out in the future.

        [I]t would appear that there is only a limited number of 
        broadcast carriers that are capable of offering broadband 
        access services. Indeed, only the cable and telephone companies 
        appear to be positioning themselves as hybrid broadcast/
        telecommunications carriers at the present time. While this is 
        not to say that other service providers such as MMDS and LMCS 
        carriers do not have plans to launch hybrid services of their 
        own, neither of these service providers currently offer both 
        broadcasting and telecommunications services on a facilities 
        basis over their networks.

        In the opinion of AT&T Canada LDS, the supply conditions in 
        broadband access markets are extremely limited. There are 
        significant barriers to entry in these markets including 
        lengthy construction periods, high investment requirements and 
        sunk costs, extensive licensing approval requirements 
        (including the requirements to obtain municipal rights of way) 
        . . . Under these circumstances, the ability for new entrants 
        or existing facilities-based service providers to respond to 
        nontransitory price increases would be significantly limited, 
        not to mention severely protracted. (AT&T, pp. 7, 12).

    Third, even where there have been positive developments in the 
industry to expand alternatives, it is not clear that such changes have 
been or will soon be of sufficient magnitude to change the basic 
conclusion of AT&T's analysis. Many analysts reach the same conclusion 
today about the U.S. that AT&T reached three years ago about the 
Canadian market. The changeable characteristics of the market that 
might lessen, but not negate, the need for open access, have simply not 
moved far enough to create a basis to contradict AT&T's conclusion that 
open access is necessary. Ironically, AT&T told Canadian regulators not 
to speculate about the development of technologies. They were told to 
deal with the facts on the ground, not what might happen in the future.

        As noted above and in some of the preceding sections, the 
        market for broadband access services is subject to rapid 
        innovation and technological change. Indeed, the recent 
        advances in wireless broadband delivery systems suggests that 
        the possibility exists, at least in the long term, for a 
        breakthrough in technology which could have a significant 
        impact on the supply conditions affecting broadband access 
        services. However, since the happening of these events is 
        difficult to anticipate and the resulting impact on the market 
        essentially unpredictable, it is appropriate to design policies 
        and approaches to regulation which address the current market 
        conditions and a need to supply safeguards in those instances 
        where market power is present. (AT&T p. 15).

    Any claim that the market situation has changed so much that open 
access is no longer necessary is totally undermined by AT&T's continued 
insistence in the U.S. that telephone companies be required to make 
their advanced services networks available to competitors on an open 
access basis. AT&T continues to make exactly the same arguments about 
the telephone companies in the U.S. in 2000 that they made about the 
telephone companies in Canada in 1997.
    In opposing the entry of SBC into long distance in Texas, AT&T 
complains about bottleneck facilities, vertical integration, bundling 
of services. As a result, it demands nondiscriminatory access. It has 
simply stopped making the arguments that apply with equal force to 
cable companies. Needless to say, AT&T refuses to accept the same 
public policy obligation to provide open access to the approximately 2 
million cable homes that its cable wires pass in Texas.

        Today, SWBT is exploiting its control over essential xDSL-
        related inputs, not only to prevent advanced services 
        competition from AT&T and others, but also to perpetuate its 
        virtual monopoly over the market for local voice services . . .

        SWBT has not, in fact, complied with its statutory duties to 
        provide nondiscriminatory access to xDSL-capable loops (47 
        U.S.C. s. 271(c)(2)(B)(ii)&(iv)) and the operational support 
        systems and processes that are needed to enable Texas consumers 
        to benefit from a competitive market for xDSL services (47 U.S. 
        (c)(2)(B)(ii)) . . .

        SWBT must also have policies, procedures, and practices in 
        place that enable AT&T (by itself, or through partners) to 
        provide consumers with the full range of services they desire, 
        including advanced data services. Otherwise they will not be 
        able to purchase some services--and will therefore, be less 
        inclined to obtain any services--from AT&T. Thus, SWBT's 
        inability (or unwillingness) to support AT&T's and other new 
        entrants' xDSL needs not only impairs competition for advanced 
        services but also jeopardizes competition for voice services as 
        well.

        As both the Commission and Congress have recognized, high-speed 
        data offerings constitute a crucial element of the market for 
        telecommunications services, and, because of their importance, 
        the manner in which they are deployed will also affect the 
        markets for traditional telecommunications. Many providers have 
        recognized the growing consumer interest in obtaining 
        ``bundles'' of services from a single provider. Certainly SBC, 
        with its $6 billion commitment to ``Project Pronto'' has done 
        so. AT&T is prepared to compete, on the merits, to offer ``one-
        stop shopping'' solutions. Competition, however, cannot survive 
        if only a single carrier is capable of providing consumers with 
        a full package of local, long distance, and xDSL services. 
        (AT&T SBC Comments, pp. 9. . . 10. . . 11. . . 12)

    Now that AT&T has bought a stake in the majority of cable wires in 
the country, it excludes cable programming and cable-based broadband 
Internet from the mix of services that must be included in the bundle. 
It is willing to compete on the ``merits to offer one-stop shopping'' 
by demanding open access to other people's wires, but it will not allow 
the same terms and conditions for others to compete over its wires.
    AOL, however, did not hesitate to point out the powerful 
anticompetitive effect that integrating video services in the 
communications bundle could have. The video component of the bundle is 
certainly one of the most important of the components.

        The second ``mega-effect'' of this proposed merger is of even 
        broader potential consequence. With this merger, AT&T would 
        take an enormous next step toward its ability to deny consumers 
        a choice among competing providers of integrated voice/video/
        data offerings--a communications marketplace that integrates, 
        and transcends, an array of communications services and markets 
        previously viewed as distinct. (AOL, FCC, pp. 9-10).
D. Conclusion
    The concept of essential functions in network industries that 
provide market power over end user customers even where several access 
providers are available is extremely important. These are the new choke 
points in the Internet economy. Because of switching costs, convergence 
of access, and bundling of products, this is a fundamental observation 
about the nature of these industries. These demand side structural 
problems interact with the observation that facilities providers will 
always be far fewer in number than content providers with the 
inevitable result that absent an open access obligation many content 
providers will be at a severe disadvantage.
    AT&T-AOL were fundamentally correct in concluding that even without 
vertical integration and dominance, access is an essential function 
that presents a significant problem for public policymakers who are 
concerned about preserving the remarkably dynamic innovation and 
competition of today's Internet. In the information economy where the 
smooth flow of information is so critical, these choke points may call 
for even greater commitment to ensure open access than has historically 
been the case, because their importance imbues them with even greater 
potential for the abuse of market power.

        Where a broadband access provider is neither vertically-
        integrated nor dominant with respect to telecommunications or 
        broadcasting service, but is offering broadband access services 
        then the requirement for third party access tariff, CEI and 
        other non price safeguards should apply. (AT&T, p. 29)

    It was quite clear in the formulation of these two ``unaffiliated'' 
companies that broadband access services should be available on 
nondiscriminatory terms, even where there is an absence of vertical 
integration and dominance. Through this analysis, they arrived at an 
entirely reasonable public policy formulation that is consistent with 
our view that communications and transportation networks have always 
been and should always be subject to a requirement to be open because 
of the critical role they play.
                    iii. implementing public policy
A. Overview of Approaches and Goals
    AOL's proposed rule for San Francisco typifies its approach to 
light handed open access requirements in which the local franchising 
authority creates the obligation and then allows private parties to 
work out the details with city enforcement as a backstop.

        Section 1: Non-discrimination requirements: Franchisee shall 
        immediately, with respect to this franchise, provide any 
        requesting Internet Service Provider access to its broadband 
        Internet transport services (unbundled from the provision of 
        content) on rates, terms and conditions that are at least as 
        favorable as those on which it provides such access to itself, 
        to its affiliates, or to any other person. Such access shall be 
        provided at any point where the Franchisee offers access to its 
        affiliate. Franchisee shall not restrict the content of 
        information that a consumer may receive over the Internet . . .

        Section 2: Private Right of Action: Any Internet Service 
        Provider who has been denied access to a Franchisee's Broadband 
        Internet Access Transport Services in violation of this 
        Ordinance has a private cause of action to enforce its rights 
        to such access.

        Section 3: Enforcement Rights of City and County: In addition 
        to any other penalties, remedies or other enforcement measures 
        provided by Ordinances or state or federal laws, the City and 
        County may bring suit to enforce the requirements of this 
        Ordinance and to seek all appropriate relief including, without 
        limitation, injunctive relief. (AOL, pp. 2-3.)

          AOL made essentially the same recommendation to the FCC.

        The essence of an open access policy is thus competition, not 
        regulation. Open access would create a competitive check on 
        conduct--a far more preferable option than a behavioral check 
        requiring constant step-by-step scrutiny of a cable operator's 
        dealing with every provider of content or new applications to 
        make sure that the company's conduct doesn't skew its network 
        in favor of affiliated service providers.

        This approach does not require imposition of legacy common 
        carrier regulation. The model for such early, targeted 
        safeguarding is drawn directly from the existing cable 
        regulatory framework, but its policy foundation cuts across all 
        FCC regulation. Any cable television system operator that 
        provides any Internet service provider access to its broadband 
        cable facilities would have to provide a requesting ISP 
        comparable access to its facilities on rates, terms, and 
        conditions equal to those under which it provides access to its 
        affiliate or to any other person. (AOL, FCC, p. 14).

    Commenting before a federal body with much broader regulatory 
powers, AT&T proposed a much more vigorous regime of regulation.

        Given the incentives and opportunities available to broadcast 
        carriers to abuse their market power and control over 
        bottleneck facilities, AT&T Canada LDS has recommended the 
        adoption of a number of safeguards in order to prevent 
        instances of anti-competitive behavior . . .

          1) implementation of a cost-based price floor to protect 
        against below cost pricing of broadband access services;
          2) implementation of a cost-based price ceiling with a 
        limited mark-up to prevent excessive pricing of access services 
        in uncontested markets;
          3) implementation of a third party access tariff, allowing 
        for nondiscriminatory and unbundled access to broadband 
        bottleneck facilities, as well as comparably efficient 
        interconnection and associated non-price safeguards;
          4) implementation of price caps, accounting separations and 
        other safeguards against anti-competitive cross-subsidization; 
        and
          5) imputation of appropriate third party access tariffs to 
        value added information services providers by broadcast 
        carriers. (AT&T, p. iii)

    It is interesting to note that the provisions of the 
Telecommunications Act of 1996 to which AT&T points when it demands 
open access to xDSL in the U.S. are almost identical to the provisions 
that AOL proposed in the San Francisco proceeding. This makes it quite 
clear what entities that do not own essential access wires need to 
enter markets.

        s. 271 (c)(B) COMPETITIVE CHECKLIST--Access or interconnection 
        provided or generally offered by a Bell operating company to 
        other telecommunications carriers meets the requirements of 
        this subparagraph if such access and interconnection includes 
        each of the following:

        (ii) Nondiscriminatory access to network elements in accordance 
        with the requirements of sections 251 (c)(3) and 252 (d)(2) . . 
        .

        (iv) Local loop transmission from the central office to the 
        customer's premises, unbundled from switching or other 
        services.

        s. 251 (c)(3) UNBUNDLED ACCESS--the duty to provide, to any 
        requesting telecommunications carrier for the provision of a 
        telecommunications service, nondiscriminatory access to network 
        elements on an unbundled basis at any technically feasible 
        point on rates, terms, and conditions that are just, reasonable 
        and nondiscriminatory in accordance with the terms and 
        conditions of the agreement and the requirements of this 
        section and section 252. An incumbent local exchange carrier 
        shall provide such unbundled network elements in a manner that 
        allows requesting carriers to combine such elements in order to 
        provide such telecommunications service. (Telecommunications 
        Act of 1996)

    It is also interesting to note that AT&T embeds the obligation to 
provide nondiscriminatory access and unbundling into the permanent 
conditions in the industry structure. That is, it recommends the 
relaxation of detailed regulation only after vigorous competition 
develops in both the access market and the adjacent core markets where 
facilities owners have market power. However, even after this 
deregulation, AT&T recommends the continuance of ``safeguards to ensure 
that broadband access services continue to remain available from the 
telephone [and] cable companies on a nondiscriminatory and unbundled 
basis.'' (AT&T, p. iii)

        While AT&T Canada LDS considers that forbearance from the 
        regulation of broadcast carrier access and value-added 
        information services is not warranted at this stage in the 
        development of the broadband market, conditional forbearance 
        may be warranted when certain barriers to entry are removed in 
        the cable distribution and local telephony markets. With 
        respect to the broadband services provided by telecom broadcast 
        carriers, the following safeguards should be treated as 
        preconditions to any relaxation of the rules applicable to 
        these carriers:

          1) local competition issues are resolved and the terms and 
        conditions for local entry have been successfully implemented 
        such that practical alternatives to the supply of local 
        services exist in the local market;
          2) the broadband tracking requirements established in 
        Decision 95-21 have been implemented and reports from the 
        telephone companies satisfy the Commission that treatment of 
        broadband investment and expenses are appropriate;
          3) price cap regulation has been implemented in such a manner 
        as to preclude telephone companies from recouping broadband 
        investment costs from utility services: and
          4) the establishment of safeguards to ensure that broadband 
        access services continue to remain available from the telephone 
        companies on a nondiscriminatory and unbundled basis.

        With respect to the broadband services provided by cable 
        broadcast carriers, the following safeguards should be treated 
        as pre-conditions to any relaxation of the rules applicable to 
        these carriers:

          1) a demonstration that vigorous and effective competition 
        has evolved in a substantial portion of the market for 
        broadband access services and in the market for BDU services:
          2) the implementation of an effective price cap mechanism for 
        basic and extended basic services in order to prevent instances 
        of cross-subsidization; and
          3) the establishment of safeguards to ensure that broadband 
        access services continue to remain available from the cable 
        companies on a nondiscriminatory and unbundled basis. (AT&T, p. 
        ii, emphasis added)

    AT&T's regulatory proposal goes far beyond anything being 
considered for cable operators in the U.S., although wireline telephone 
companies are subject to exactly this type of regulation in their high 
speed services. Indeed, as noted, AT&T continues to push for regulation 
of telephone companies, including their advanced DSL services. In fact, 
one of the more important implications of the AT&T analysis in Canada 
is that the cable and telephone industries should be subject to similar 
obligations. In the U.S. it vigorously defends asymmetric regulation, 
with its property being unregulated.
    Whether through AOL's private negotiations backed up by a public 
obligation or AT&T's direct regulation, the objectives of both 
companies were generally the same. The standards by which we should 
measure the quality of open access are the conditions that AOL and AT&T 
stipulated that facilities owners should grant to non-affiliated ISPs 
when they were non-affiliated ISPs themselves.
B. Specification of Nondiscriminatory Access Conditions
    In order to analyze the complex issue of nondiscriminatory access 
to the broadband facilities, CFA has adopted the analytic approach 
presented in Table 1.\9\ It identifies three broad areas of concern and 
about two dozen specific practices. AT&T and AOL provided extensive 
concrete discussions of these potential problems.
---------------------------------------------------------------------------
    \9\ The framework for analysis is based on the paradigm presented 
by Larry Lessig, Code and Other Laws of Cyberspace (New York, Basic 
Books, 1999) as described in Mark Cooper, ``Creating Open Access to the 
Broadband Internet,'' Briefing: Can We Preserve the Internet as We Know 
It? Challenges to Online Access, Innovation, Freedom and Diversity in 
the Broadband Era (Dec. 20, 1999) and ``Open Access to the Broadband 
Internet: Overcoming Technological and Economic Discrimination in 
Proprietary Networks,'' University of Colorado Law Review, forthcoming.
---------------------------------------------------------------------------
    In addition to pricing safeguards, AT&T advocated a number of non-
price safeguards to accomplish three general goals of open access.

        Such safeguards are necessary to ensure that competing service 
        providers:

        (1) are able to gain comparable access to network bottlenecks; 
        (2) are protected against abuse of confidential information 
        which is provided to the bottleneck access provider; and (3) 
        are not otherwise disadvantaged in the market by the bottleneck 
        access provider through, for example, the negotiation of 
        exclusive or preferential agreements with other service 
        providers. (AT&T, p. 22)
C. Architecture: Technology Bias
    The first source of potential discrimination lies in the 
architecture of the network. It involves the technical capabilities of 
the network that could disadvantage independent ISPs in the activities 
that they are allowed to conduct. The architecture of the network, 
controlled by the proprietor, can be configured and operated to 
restrict the ability of the independent ISP, while it does not restrict 
the ability of an affiliated ISP. Technology bias can take several 
forms, including interconnection, structure, and flow control. We have 
already noted that AOL urged the FCC to act early in the development of 
the industry to prevent it from embedding anti-consumer characteristics 
into its architecture.

           Table 1. Technical and Economic Sources of Discrimination in Proprietary Broadband Networks
Architecture: Technology Bias                                        The Market: Business Leverage
----------------------------------------------------------------------------------------------------------------
INTERCONNECTION
Physical connection
Compatibility
 
FILTERING
Committed Access Rate
Preferential Queuing
                                                                     INFORMATION GATHERING
STRUCTURE                                                            PRICING
Restricted backbone choice                                           Price Squeeze
Precedence                                                           Cross-subsidy
Collocation                                                          Pricing Options
Replication
 
 
 
Norms: Service Restrictions
----------------------------------------------------------------------------------------------------------------
PROVIDERS
Speed of service
Time of downstream video
 
CONSUMERS
Limits on upstream traffic
Prohibitions on server set-up
Prohibitions on local area networking
----------------------------------------------------------------------------------------------------------------


1. Interconnection
    Interconnection involves allowing ISPs to establish a connection 
between networks. These connections must be compatible if they are to 
be meaningful. The cable industry's existing exclusive contracts do not 
allow independent ISPs to connect directly to the consumer. AT&T Canada 
was very concerned about exclusive and preferential deals.

        A prohibition on preferred agency or exclusive arrangements 
        between vertically-integrated broadband access providers and 
        integrated or affiliated information service providers which 
        contain discriminatory access provision, either in terms of 
        price or quality of access. (AT&T, p. 23)

    It is important to recognize that mere physical interconnection and 
protocol support are only very minimum conditions that must be met to 
ensure access to customers. They are necessary, but not sufficient, 
conditions. AOL described interconnection in some detail.

        Access: The term ``access'' means the ability to make a 
        physical connection to cable company facilities, at any place 
        where a cable company exchanges consumer data with any Internet 
        service provider, or at any other technically feasible point 
        selected by the requesting Internet service provider, so as to 
        enable consumers to exchange data over such facilities with 
        their chosen Internet service provider. (AOL, p. 2)

        There are at least three possible network designs that allow 
        for open access. These include:

         policy-based routing, which routes packets to the 
        appropriate ISP using the source IP address as the unique 
        identifier;
         virtual private networks (VPNs) and IP tunnels, which 
        create virtual dedicated connections over the HFC network 
        between the customer and the ISP (a solution appropriate to 
        routed (layer 3); and
         Point-to-Point Protocol over Ethernet (PPPoE) 
        encapsulation, which is a protocol analogous to commonly 
        employed designs for dial-up (a solution appropriate to bridged 
        (layer 2) access networks).

        Each of these options has its own unique set of advantages and 
        disadvantages. The appropriateness of each option varies 
        depending on the type of cable system (i.e. large or small, 
        multiple nodes vs. single node) and the networking architecture 
        being addressed. (AOL, p. 7-8)

    AT&T uses the term Comparably Efficient Interconnection (CEI) to 
describe interconnection in the broadband market.

        More specifically, in order to effectively compete with 
        broadcast carriers in the provision of non-programming 
        services, competitors must be able to provide end users with 
        equivalent services at equal or lower prices. Therefore, in 
        providing nondiscriminatory access to their broadband networks, 
        broadcast carriers must allow competitors to access their 
        broadband distribution network in the most efficient manner 
        possible. For example, competitors must have the option to 
        specify the point of interconnection as either the headend, the 
        drop, inside wire, or any combination thereof. This concept is 
        known as Comparably Efficient Interconnection (CEI) and refers 
        to the principle of providing competitors with access to the 
        broadband network on terms that are technically and 
        economically equivalent to those provided by the broadcast 
        carrier to itself. Under CEI, the interconnection provided must 
        be equivalent in terms of scope, quality and price but may vary 
        by type of competitive entity. (AT&T, pp. 25-26)

    AT&T also expressed a concern about standards and their management.

        To the extent that standards are developed for interfacing with 
        broadband access services, the carriers who provide these 
        services should not be permitted to implement any non-standard, 
        proprietary interfaces, as this would be contrary to the 
        development of an open network of networks. In addition, any 
        new network or operational interface that is implemented by a 
        broadband access provider should be made available on a 
        nondiscriminatory basis. (AT&T, p. 23)
2. Structure
    Structure involves the deployment of physical facilities in the 
network. The proprietary network owner can seriously impair the ability 
of independent ISPs to deliver service by restricting their ability to 
deploy and utilize key technologies that dictate the quality of 
service. Structure determines how facilities are deployed and the 
effect that deployment has on the quality of service. Substantial 
discrimination can result from forcing independent ISPs to connect to 
the proprietary network in inefficient or ineffective ways or giving 
affiliated ISPs preferential location and interconnection. The quality 
of service of independent ISPs can be degraded.
    The ability to deploy facilities to ensure and enhance the quality 
of service will be particularly important in the third generation of 
Internet service development. The multimedia, interactive applications 
that will distinguish the next phase of the Internet are particularly 
sensitive to these aspects of quality, much more so than previous 
applications.

        Of course, allowing a single entity to abuse its control over 
        the development of technical solutions--particularly when it 
        may have interests inconsistent with the successful 
        implementation of open access--could indeed undermine the 
        City's policy. It is therefore vital to ensure that 
        unaffiliated ISPs can gain access comparable to that which the 
        cable operators choose to afford to its cable-affiliated ISP. 
        (AOL, p. 8)
3. Flow
    Flow control involves the filtering of the flow of information. 
Even though networks are interconnected, there is still the possibility 
of discriminating against some of the data that flows through the 
Internet. Simply put, the technology allows pervasive discrimination 
against external, unaffiliated service providers.

        Of course, it is implicit in the open access resolution that 
        nondiscriminatory access for multiple ISPs extends to all 
        relevant aspects of the technical and operational 
        infrastructure, so that all business system interfaces will be 
        open to all ISPs and performance levels will not favor the 
        affiliated ISP. (AOL, p. 7)

        It is important to confirm that the cable operator must provide 
        equal treatment for local content serving (caching or 
        replication) that the affiliated and nonaffiliated ISPs can 
        provide, specifically, no firewalls, protocol masking, extra 
        routing delays or bandwidth restrictions may be imposed in a 
        discriminatory manner. (AOL, p. 9)
D. Norms: Service Restrictions
    The second source of potential discrimination involves behavioral 
norms. The network owner can place restrictions on how nonaffiliated 
service providers can use the network. As long as the network owner is 
also a direct competitor of the independent ISP, concerns about 
restriction being imposed to gain competitive advantage will persist. 
Restrictions that are explained as necessary for network management may 
be viewed as driven by business motives, rather than technical 
considerations, by independent ISPs. These limitations can be applied 
to either service providers or consumers.

        In a last mile shared environment, proper network and bandwidth 
        management might possibly require certain limitations on data 
        transmission. However, content- or service-specific 
        restrictions can be both over- and under-inclusive--and most of 
        all, anticonsumer. Limitations on video streaming, for example, 
        protect cable's traditional video programming distribution 
        business. TCI admitted early on, its 10-minute cap is a 
        ``restriction which we imposed on @Home so that we were the 
        determiner of how stream video works in our world . . . [and] 
        so that [we] determined [our] future in the area of streaming 
        video. Any legitimate network management policies must be free 
        of such anticompetitive intent and effect. (AOL, p. 10)
E. Business Leverage
    Open access cannot ignore business reality. If the network owner 
inserts himself in the relationship between the customer and the 
independent ISP in such a way as to ensure that its affiliated ISP has 
a price, product or customer care advantage, then competition between 
ISPs will be undermined. This gives rise to the third category of 
discrimination issues, which involves the market. The potential 
anticompetitive problem is the abuse of business leverage.
1. Information
    In order to manage the network and effectuate the service 
prohibitions discussed above, the network owner must engage in 
intensive monitoring of individual activity and gathering of 
information. The proprietary network owner must identify flows of data. 
Needless to say, this raises business and competitive concerns. The 
gathering of all that information places the network owner in a 
powerful position vis-a-vis competitors and consumers. The detailed 
control of the network confers an immense information advantage on the 
system operator. Because of the conflict of interest created by the 
vertical integration of facilities and content, the potential for 
competitive abuse of information is substantial. It is an advantage 
that is evident to those in the industry

        Confidential treatment of information provided by service 
        providers to broadband access carriers that are vertically-
        integrated . . . Broadband access providers that are affiliated 
        with or have joint marketing arrangements with broadband 
        service providers should also be required to enter into non-
        disclosure agreements affording these latter parties the same 
        level of confidential treatment . . . (AT&T, p. 23)
2. Pricing
    The most critical business issue is a potential price squeeze that 
can be placed on independent programmers and service providers by the 
closed business model. By controlling a bottleneck, network owners can 
place price conditions on independent content providers that undermine 
their ability to compete. Both AOL and AT&T appear to want a separate, 
wholesale transport service to be made available.

        Broadband Internet Transport Services--The term ``broadband 
        Internet access transport services'' means broadband 
        transmission of data between a user and his Internet service 
        provider's point of interconnection with the broadband Internet 
        access transport provider's facilities. (AOL, p. 3)

    In Canada, AT&T insisted that tariffs be set subject to clear 
conditions and filed. The central goal was to avoid the problem of 
cross-subsidy.

        Accordingly, the cable companies and telephone companies should 
        be required to file tariffs for approval of their broadband 
        access services and to include in such applications evidence 
        that the rate is compensatory.

        Cross-subsidization is an issue for vertically integrated 
        carriers particularly where the broadband service (including 
        access) is not provided on an arm's length basis. The 
        Commission has required telephone companies to maintain an 
        accounting separation for their broadband activities and to 
        provide adequate tracking reports. (AT&T, pp. 19, 22)

    In the U.S., AT&T has now offered to make transport services 
available at a price that is, presumably, less than it charges its 
customers for transport and content. That price remains to be 
negotiated, however, and the principles for arriving at a reasonable 
price are not stated. The potential for cross-subsidy and 
discrimination is shifted, not eliminated, by this concession. In the 
context of the more regulatory model advocated by AT&T in Canada, it 
was able to specify what would constitute reasonable rates.

          1) cost-based rates to prevent vertically-integrated access 
        providers from engaging in predatory pricing;
          2) limits on the level of mark-up over cost with respect to 
        cable companies' broadband access services;
          3) unbundling and nondiscriminatory access in the price of 
        information services of all broadcast carriers.
          4) imputation of the tariffed rates for broadband access in 
        the price of information services provided by vertically-
        integrated broadcast carriers;
          5) price caps in core markets where vertically-integrated 
        carriers are dominant; and
          6) investment and expense tracking as a further check against 
        cross-subsidization. (AT&T, p. 21)

        In the case of cable companies, the implementation of an 
        appropriately designed price cap regime could provide some 
        protection against cross-subsidization . . . Furthermore, if in 
        addition to price caps, the Commission considers it necessary 
        to insulate basic cable subscribers from cross-subsidizing 
        cable companies' other broadband activities as common carriers, 
        it could implement accounting separation and tracking 
        requirements for cable companies. (AT&T, p. 22)

    AOL worries about AT&T in the U.S. offering ``one click access'' to 
the Internet without a price difference. This forces independent 
service providers to subsidize the content of the affiliated ISP.

        Provided that the City establishes the right policy--allowing 
        the consumer to choose any ISP they want without being required 
        to pay for or go through the cable-affiliated ISP--then there 
        are many technical solutions available to broadband providers 
        and no need for the City to mandate any particular approach. 
        (AOL, p. 7)

    Beyond the cross-subsidy question, in the U.S. the whole idea of a 
wholesale transport tariff remains up in the air. AT&T has steadfastly 
resisted the basic idea of entering into commercial relationships with 
ISPs and allowing the ISP to have the only relationship to the 
customer.
    However, the pricing standards to which AT&T points in its efforts 
to obtain nondiscriminatory access to xDSL technology from local 
telephone companies in the U.S. embody these fundamental principles of 
cost-based, nondiscriminatory prices for unbundled services.
        s. 252 (d) Pricing Standards.--

          (1) INTERCONNECTION AND NETWORK ELEMENT CHARGES.--
        Determinations by a State commission of the just and reasonable 
        rate for the interconnection of facilities and equipment for 
        purposes of subsection (c)(2) of section 251 and the just and 
        reasonable rate for network elements for purposes of subsection 
        (c)(3) of such section--

            (A) shall be--

          (i) based on the cost (determine without reference to a rate 
        of return or other rate-based proceeding) of providing the 
        interconnection or network elements (whichever is applicable), 
        and

          (ii) nondiscriminatory, and

            (B) many include a reasonable profit.

          (2) [A] State commission shall not consider the terms and 
        conditions for reciprocal compensation to be just and 
        reasonable unless--

          (i) such terms and conditions for the mutual and reciprocal 
        recovery by each carrier of costs associated with the transport 
        and termination on each carriers network facilities of calls 
        that originate on the network facilities of another carrier; 
        and

          (ii) such terms and conditions determine such costs on the 
        basis of a reasonable approximation of the additional costs of 
        terminating such calls. (Telecommunications Act of 1996)
3. Bundling
    As noted above, in Canada AT&T expressed concerns about an 
incumbent monopolist selling video ``broadcast'' services or local 
telephone services and planning to sell bundles of ``broadband 
services.'' In this regard a fundamental issue arises over what 
independent ISPs will be allowed to sell and how consumers will be 
allowed to buy services. Cable TV's bundling of programming has long 
been a source of concern. If cable owners leverage bundles with 
Internet and cable service, independent ISPs will be at a severe 
disadvantage.
    AT&T proposed principles to govern bundling raise concerns in two 
regards. On the one hand, it recommended unbundling of service 
elements. On the other hand, it recommended that the unaffiliated 
content provider be allowed to resell (and therefore bundle) the cable 
programming--i.e., to create a complete bundle.

        Because broadcast carriers exercise control over bottleneck 
        facilities, they have both the incentive and the opportunity to 
        bundle these facilities with their other services and offer the 
        entire package to their customers for a single price . . . 
        [T]he Commission concluded that the bundling of monopoly 
        service elements with competitive service elements is generally 
        appropriate subject to three conditions:

          1) the bundled service must cover its cost, where the cost 
        for the bundled service includes:
            a) the bottleneck component(s) ``costed'' at the tariffed 
        rate(s) (including, as applicable, start-up cost recovery and 
        contribution charges); and
            b) the Phase II causal costs for components not cover in a) 
        above;

          2) competitors are able to offer their own bundled service 
        through the use of stand-alone tariffed bottleneck components 
        in combination with their own competitive elements;

          3) resale of the bundled service permitted . . .

        In the absence of such a requirement, broadcast carriers will 
        be able to engage in strategic and anti-competitive pricing 
        behavior arising directly out of their dominant position in the 
        access market. (AT&T, pp. 27-28)

    What AT&T had identified as a powerful lever in the marketplace, 
control over the core product, it sought to neutralize by requiring 
unbundling and resale.

        AT&T Canada LDS submits that broadcast carriers should not be 
        permitted to bundle their broadcast and telecommunications 
        service until the Commission has established rules which permit 
        the unbundling and resale of BDU services. Furthermore, to the 
        extent that the unbundling and resale of BDU services is tied 
        to entry of the telephone companies into the BDU market, no 
        telephone company should be permitted to bundle BDU service 
        with its local telephone service until all of the issues 
        relating to unbundling and resale of these service have been 
        resolved by the Commission. (AT&T, p. 28)

    The question of how and what independent ISPs will be able to 
market to customers remains a bone of contention between AT&T in the 
U.S. and the unaffiliated ISPs.
                             iv. conclusion
    The ``unaffiliated'' AT&T/AOL indictment of a vertically 
integrated, highly concentrated market clearly applies to the current 
situation in the U.S. and will likely continue to for the foreseeable 
future. The discussion of demand-side problems points to issues that 
are long term in nature. The insightful discussion of network access as 
an essential function for communications technologies establishes the 
need for open access on an enduring footing. The recommendation by AT&T 
that the federal governments in Canada not forbear from regulation was 
correct in 1997, as it was in 1999, when AOL made a similar 
recommendation in the U.S. That conclusion applies to the U.S. today as 
a matter of public policy.
    What AT&T and AOL said as ``unaffiliated'' companies has even 
greater importance for other ``unaffiliated entities.'' Even as non-
facilities owners, AT&T and AOL were still very large and powerful 
corporations. Their analysis makes a strong case that the problems 
facing unaffiliated ISPs are large and real. Their frank discussion of 
the potential problems and the specificity with which they offered 
solutions should be a wake up call to policy makers. All but the most 
powerful ISP are likely to fare very badly in a commercial setting 
where discriminatory access is not firmly rejected.
    It is obvious, however, that in the terms of the U.S. debate over 
open access, the remedies that AT&T proposed in Canada are well beyond 
what is being considered in the U.S. for cable TV. Telephone companies 
in the U.S. are under legal obligations that match the array of 
regulations AT&T advocated for cable TV and telephone companies in 
Canada. No one in the U.S. is advocating or contemplating such a heavy-
handed regulatory approach for cable. AOL's light-handed approach, with 
government triggering private negotiations and backstopping the 
process, has received considerable attention. It has been adopted in a 
number of communities.
    Combining the defense of open access with AOL's description of the 
necessary policy elements to ensure nondiscrimination through light-
handed regulation presents a complete and compelling package. Public 
policy makers can readily adopt AOL's recommendations of a few months 
ago to ensure that unaffiliated ISPs, who are unable to buy broadband 
wires, will have a reasonable chance of competing in the broadband 
marketplace that AOL believes will be the dominant form of 
communication in the century ahead.
    AT&T's much more detailed road map to nondiscriminatory access 
could be useful, however, in providing guidelines and benchmarks as 
private negotiators and the courts develop a means to understand the 
issues they need to be on the lookout for as negotiations proceed. The 
long debate over open access has produced some key barometers of open 
access.

          1) Comparably efficient interconnection, with the 
        identification of several options for physical and virtual 
        interconnection, a list that can hopefully be expanded.
          2) Open standards with change management.
          3) ISP neutral network management.
          4) Minimum content and service restriction, consistent with 
        neutral network management.
          5) Performance parameters, including a list of services to be 
        made available and practices to be avoided.
          6) Confidentiality of competitively sensitive information and 
        protection against abuse of such information by vertically 
        integrated broadband service providers.
          7) A wholesale relationship between unaffiliated ISPs and 
        vertically integrated service providers from whom the 
        independents wish to purchase facilities.
          8) Rates for transport service that are subsidy free and not 
        anticompetitive.
          9) Bundling and marketing provisions that prevent the abuse 
        of leverage over monopoly services.

    At the same time, AOL's desire to make open access as efficient as 
possible by using a public obligation to trigger private negotiations 
over the details of open access is a valid process. Ironically, the 
Telecommunications Act of 1996, to which AT&T points in its demand for 
open access to telephone company xDSL services, had a negotiation and 
arbitration procedure in place to attempt to have private parties 
implement. AT&T's complaints about the Baby Bells reluctance to open 
their markets only makes it clear that obstinate corporations can make 
the process difficult, but that does not obviate the need for the 
process. The obligation to negotiate and recourse to legal authority 
for redress drives the process forward. Without the public obligation, 
there is little chance that open access will be provided for those who 
need it most, the smaller niche players and innovative start ups, who 
have defined the special nature of the Internet.
    Early in the twentieth century, as the telephone was just starting 
its evolution to the dominant means for people and businesses to 
communicate at a distance, AT&T first articulated the concept of 
universal service.\10\ While the motivation for and impact of that 
commitment have been hotly debated, there is no doubt that it deeply 
affected the development of public policy throughout the entire 
century.
---------------------------------------------------------------------------
    \10\ Consumer Federation of America, A Historical Perspective and 
Policies for the Twenty-First Century (Washington, D.C., 1997).
---------------------------------------------------------------------------
    As we begin the ``Internet Century,'' there is clearly a need for a 
new balance between the public and private roles in the network of 
networks that is the Internet. It is unfortunate that as the remarkable 
potential of a broadband Internet began to emerge, the dominant 
technology appears to be one that had excused from an open access 
obligation by Congress for its core service. It would have been 
encouraging if, in the initial commercial convergence of the Internet 
and the cable TV industry, the open values of the Internet had proven 
dominant.\11\ Unfortunately, it appears that the two new giants of the 
broadband industry have yet to overcome the closed business model and 
antigovernment rhetoric of ``one of America's most enduring 
monopolies.'' \12\ What they said before they bought their own wires 
should carry special weight with policy makers who are concerned about 
keeping the Internet open.
---------------------------------------------------------------------------
    \11\ Lessig's argument in Code raises a broader set of concerns 
about the threats to the openness of the Internet and clearly believes 
a new balance must be struck to preserve that openness.
    \12\ Press Statement, U.S. Department of Justice, Primestar Merger.

    Senator Burns. Thank you, Mr. Kimmelman.
    Now we have Robert Lande, who is Senior Research Scholar, 
American Antitrust Institute. Thank you for coming.

STATEMENT OF ROBERT H. LANDE, SENIOR RESEARCH SCHOLAR, AMERICAN 
                      ANTITRUST INSTITUTE

    Mr. Lande. Thank you very much.
    If this merger goes through, we can expect to see a lot 
more major media mergers. There is even the possibility of the 
scenario that Senator Gorton referred to earlier, that our 
country could be left with only a handful of major media 
companies, and then a fringe of much, much smaller players.
    I ask the Committee, is this the situation that we would 
like the country to be in a decade from now? And if not, can 
the antitrust laws do anything about it?
    Well, I submit the answer to the first question is no. And 
as to whether the antitrust laws can do anything about it, the 
answer is unclear.
    Why should we fear being left with only a handful of major 
media conglomerates? Frankly, it would represent too much 
control in the hands of too few people. They would not 
necessarily have to exercise this control in the form of higher 
prices for newspapers. They might exercise their control in 
terms of a lack of editorial diversity, a lack of a decision as 
to which news stories are noteworthy and which are not, the 
biasing of certain links to certain Web sites.
    Now can the antitrust laws prevent this kind of a problem? 
The problem is that mostly the antitrust laws are concerned 
with price. And normally, if you have about half a dozen 
companies, you are going to get price competition. But, Mr. 
Chairman, would you feel comfortable if there were only half a 
dozen major media companies left in this country?
    Let me go further. What if those half a dozen companies had 
the political philosophy the exact opposite of yours? Would you 
be reassured if they said we will price our Internet access and 
our newspapers at the competitive level? Would that be your 
only concern?
    Well, antitrust is about a lot more than price, 
fortunately. It is about consumer choice, about maximizing 
consumer choice. Usually price competition and choice 
competition go hand in hand. Not necessarily. Not in an area 
like the communications media. Because communications firms 
compete in part by offering a different gatekeeper function, 
different editorial functions.
    And one media conglomerate cannot effectively meet consumer 
demand for a different variety of viewpoints by extending its 
product line. Because those new products will inevitably bear 
to some degree the stamp of their corporate owner. In other 
words, you need a lot more diversity, you need a lot more 
players in the media business than you do in a business where 
the only thing that counts is price.
    And these issues are especially complicated by the web of 
interrelationships that Mr. Kimmelman was talking about. These 
are not free, independent companies making these decisions. And 
we have to bear that in mind.
    I am not at all sure, to be frank, that the antitrust laws 
could prevent what I call the nightmare scenario. That is, our 
country is left with only a handful of major media companies 
and a fringe of smaller players. So what should we do?
    Well, I urge this Committee and this Congress to establish 
a temporary committee to study media mergers and media 
convergence. This independent organization could try and find 
out what might happen if there is this tidal wave of media 
mergers that so many people are expecting to happen in light of 
the AOL-Time Warner merger. Which of the possibilities that I 
have outlined could come to pass? And can the antitrust laws do 
anything about them?
    If the answer is no, then this Committee might wish to 
recommend to your Committee additional legislation to stop this 
potential nightmare scenario.
    Thank you very much.
    [The prepared statement of Mr. Lande follows:]

    Prepared Statement of Robert H. Lande, Senior Research Scholar, 
                      American Antitrust Institute
    I am Robert H. Lande, the Venable Professor of Law at the 
University of Baltimore School of Law, currently on leave as the Senior 
Research Scholar at the American Antitrust Institute.\1\ Thank you very 
much for allowing me to present the views of the American Antitrust 
Institute on the America Online (AOL)/Time Warner merger.
---------------------------------------------------------------------------
    \1\ The American Antitrust Institute is an independent educational, 
research and advocacy organization. See www.antitrustinstitute.org.
---------------------------------------------------------------------------
    Media mergers have long been front-page news, particularly since 
AOL and Time Warner announced their intention to combine. Even more 
significant, however, has been the speculation that this merger has 
caused: if the AOL-Time Warner, and now the Time Warner/EMI, 
transactions are consummated, similar media mergers can be expected. 
There is even a possibility that this merger will cause a wave of media 
mergers so large that, within a decade, most of our information may be 
supplied by perhaps six of these huge media conglomerates and a fringe 
of smaller firms.
    Today, before this has come to pass, is the time to pause and ask 
two critical questions. Is this kind of media oligopoly the place where 
we, as a society, want to end up? And if not, can the antitrust laws 
effectively prevent the threatened wave of mergers? The answers to the 
first question is clear. We do not want to permit mergers until there 
is only a handful of large media firms left. The answer to the second 
question, however, is far less certain. But I optimistically believe 
that the antitrust laws, if they are enforced vigorously and 
interpreted properly, can prevent this from happening.
    We should distrust a media oligopoly because it is an undue 
concentration of control in the hands of a few individuals. It should 
be stressed that this control need not manifest itself as a price rise 
for the daily newspaper or in AOL's monthly fee. Rather, it could 
consist of a change in editorial viewpoints, a shift in the relative 
prominence of links to certain websites, a bias against certain forms 
of entertainment, or a decision not to cover certain topics because 
they are not ``newsworthy.'' In each of these ways mergers could 
significantly undermine diversity of offerings and, ultimately, 
consumer choice.\2\
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    \2\ The kinds of bias that could arise in this area could be 
especially troublesome because consumers might never know that the 
biasing has occurred. When a reader or viewer never learns about news 
events or particular editorial perspectives, he or she might not look 
to other sources for them. The readers or viewers often would have no 
reason to suspect that they have been deprived of a diversity of 
choices.
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    All of these problems can exist without any improper intent on the 
part of the media barons. Even if they try to be fair and objective 
they will necessarily bring their own worldview to the job. And in time 
some of these media conglomerates surely will come into the hands of 
people who are not interested in being fair or objective.
    Which brings us to the antitrust laws.
    At first it might appear that the antitrust laws can be of little 
help in grappling with the issues presented by AOL-Time Warner/EMI. The 
antimerger laws are today commonly understood as protecting price 
competition, and a relatively small number of firms--to greatly 
oversimplify, let's say at most half a dozen--are normally thought to 
be enough to keep a market price-competitive.\3\ Six firms (or even 
four) may be sufficient to make and sell pig iron or aspirin 
competitively because these products are relatively homogeneous and 
much of what we care about is related to product price.
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    \3\ In industry after industry firms merge until there is only a 
handful left, the antitrust authorities often are unable to do anything 
about it. In these industries the merging parties usually assert that 
the government is unable to demonstrate that there will be any likely 
price effects from the merger at issue. On this basis the merger often 
is permitted. In former years mergers were governed by an 
``incipiency'' standard, where mergers were prevented well before they 
would lead to the point where anticompetitive problems were likely. 
This concept, however, has faded in recent years.
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    But a handful of media firms would not be sufficient for the 
diversity of viewpoints in a democracy. Would any Member of this 
Committee feel comfortable if there were only six media viewpoints left 
in this nation? Would you be reassured if I guaranteed you that these 
remaining media conglomerates would sell their newspapers and Internet 
advertisements at competitive price levels? Of course not.
    But the key question is: are these considerations too nuanced for 
antitrust to consider? Would this be a wrong without a remedy? The 
answer to this question is unclear. I believe, however, that the 
antitrust laws, if correctly and vigorously interpreted, should be 
adaptable enough to meet this challenge.
    Antitrust is not exclusively about price. It is essentially about 
choice--about giving consumers a competitive range of options in the 
marketplace so consumers can make their own, effective selection from 
the market's offerings.\4\ A number of Supreme Court decisions have 
made it clear that under the antitrust laws consumer welfare consists 
of much more than low prices.\5\ The purpose of the antitrust laws is 
to give consumers the ability to choose freely from among the options 
that the free market would provide to them.\6\ Consumers should be able 
to make their choices along any dimension that is important to them--
including price, quality, and editorial viewpoint.
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    \4\ See, e.g., FTC v. Indiana Fed'n. of Dentists, 476 U.S. 447, 459 
(1986) (``an agreement limiting consumer choice . . . cannot be 
sustained . . .''); Allied Tube & Conduit Corp. v. Indian Head, Inc., 
486 U.S. 492, 499 n.5 (1988) (observing that the challenged activity 
``might deprive some consumers of a desired product . . .''); Bates v. 
State Bar of Arizona, 433 U.S. 370 n.20 (1977) (``The public is 
entitled to know the . . . useful information that will enable people 
to make a more informed choice. . . .''); United States v. Continental 
Can Co., 379 U.S. 441, 455 (1964) (``price is only one factor in a 
user's choice. . . .''). Many lower courts also make this point. See, 
e.g., United States v. Brown Univ., 5 F.3d 658, 676 (3rd Cir. 1993) 
(characterizing the crucial issue as whether the challenged practice 
``actually enhances consumer choice.''; Berkey Photo v. Eastman Kodak, 
603 F.2d 263 (2nd Cir. 1979) (crucial issue is whether ``the free 
choice of consumers is preserved. . . .''); Butler Aviation Co. v. 
Civil Aeronautics Board, 389 F.2d 517, 520 (2nd Cir. 1968) (analyzing 
effect of corporate acquisition on consumer choice).
    \5\ See supra note 4.
    \6\ Id. For a more thorough discussion see Neil W. Averitt and 
Robert H. Lande, ``Consumer Choice: The Practical Reason For Both 
Antitrust and Consumer Protection Law,'' 10 Loyola Consumer L. Rev. 44 
(1998); Neil W. Averitt and Robert H. Lande, ``Consumer Sovereignty: A 
Unified Theory of Antitrust And Consumer Protection Law,'' 65 Antitrust 
L.J. 713 (1997).
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    In most cases price competition is a reasonable surrogate for 
effective consumer choice and diversity. If a market is price-
competitive but consumers want a wider range of models or options, the 
competing manufacturers normally will extend their product lines. Soft 
drink consumers who want orange soda will get it, and it does not 
matter whether the orange soda is made by a firm that also makes colas, 
or even by an orange juice or beer company. No harm, no foul. A series 
of mergers that would leave only a handful of significant beverage 
manufacturers might well not offend the antitrust laws.\7\
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    \7\ This is, of course, a greatly oversimplified analysis. The 
anti-merger statute is worded in terms of preventing mergers the effect 
of which ``may be substantially to lessen competition, or to tend to 
create a monopoly.'' 15 U.S.C. Sec. 18 (1999). To perform the analysis 
correctly many factors would have to be examined, including the 
relevant market shares, industry concentration trends, and the 
innovative potential of the remaining firms.
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    But some types of consumer choice and some types of nonprice 
competition cannot be satisfied this way. Communications media compete 
in part by offering independent editorial viewpoints and an independent 
gatekeeper function. Six media firms cannot effectively respond to a 
demand for choice or diversity competition by extending their product 
lines because the new media products will inevitably bear, to some 
degree, the perspective of their common corporate parent.\8\ For these 
reasons competition in terms of editorial viewpoint or gatekeeping can 
be guaranteed only by ensuring that a media market contains a larger 
number of firms than may be required in other, more conventional 
markets. The number of media firms necessary to ensure effective 
variety, diversity or choice competition is significantly larger than 
that required to preserve price competition.\9\
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    \8\ An important but subsidiary question is, ``who is the real or 
effective gatekeeper'' concerning particular issues? Even an 
independently owned newspaper has several potential gatekeepers or 
viewpoint promulgators--its writers, editors, and publisher. A large 
conglomerate like AOL-Time Warner would have its CEO as its ultimate 
gatekeeper. Nevertheless, on particular issues different people within 
the organization would, as a practical matter, have gatekeeping or 
viewpoint functions. Despite this possibility of decentralized 
decisionmaking, however, for merger evaluation purposes there should be 
a presumption that a media firm's CEO is the gatekeeper for every part 
of that firm.
    \9\ This interpretation of the antitrust laws is, moreover, 
consistent with fundamental First Amendment principles.
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    Of course, how this general principle affects the legality of any 
specific transaction depends upon the facts of the case. The AOL-Time 
Warner merger is the first major merger between the ``old'' and ``new'' 
media genres. Before this merger the ``new'' media--of which AOL is 
probably the premier example--had started to provide more and more 
competition for the ``old'' media as people increasingly obtain their 
news and editorial viewpoints over the Internet. In many respects this 
is a merger of converging types of media since AOL is in the Internet 
access business and Time Warner owns cable systems, and cable 
increasingly is being used for Internet access.
    This merger raises antitrust issues that I lack the factual basis 
to answer at this time. For example, does AOL compete in a relevant 
market that can best be defined as ``access to the Internet''? Or 
should its market be defined more narrowly, as a market consisting of 
access to the Internet and also the network of chat rooms and other 
proprietary content that AOL provides? Should ``high speed access to 
the Internet'' be considered a separate relevant market?
    If the relevant market for merger purposes is ``all forms of access 
to the Internet,'' then AOL's market share is not unduly large (a 
reported 25%) and entry is relatively easy. Even if the postmerger AOL-
Time Warner firm would attempt to steer AOL users towards Time Warner 
publications, in light of AOL's non-dominant market share and easy 
entry it is unlikely that this would detrimentally affect consumers. If 
the market consisting of chat rooms, etc. is the more meaningful one, 
however, then the possibility of anticompetitive effects from this 
merger increases because AOL might well have significant power within 
this market. AOL might be able to use its market power to distort 
consumer choice in a manner that favors Time Warner publications 
anticompetitively.\10\ Other antitrust issues could arise in a relevant 
market consisting of ``high speed access to the Internet.'' If, in a 
few years, Time Warner will have a very large share of this market in 
certain areas of the country through its cable systems, and if AOL is 
regarded as one of the most likely potential entrants into this market, 
then the AOL-Time Warner merger could serve to forestall this entry.
---------------------------------------------------------------------------
    \10\ AOL could bias its links or screens analogous to the manner in 
which the some airline reservations systems allegedly were biased 
during the 1980s.
---------------------------------------------------------------------------
    The FTC is currently collecting the information that will enable it 
to make these crucial determinations. Nevertheless, there are some 
things that are already clear. An antitrust analysis of the AOL-Time 
Warner merger must stress two issues in addition to the crucial choice 
and diversity issues discussed above: the possibility that this merger 
will spark a trend to similar mergers, and the effects of the web of 
interrelationships that already exist in this industry.
    The January 24, 2000 issue of Business Week has a insightful 
article titled ``So Who's Next: They're all looking at each 
other.''\11\ This piece provides an overview of how, due largely to the 
AOL-Time Warner merger, a virtual tidal wave of mergers between ``old'' 
and ``new'' media could occur. Among the firms rumored to be interested 
in large mergers (although not necessarily with each other) are AT&T, 
Yahoo, Microsoft, Disney, Viacom, News Corp. (owner of Fox)--in fact, 
just about every media conglomerate is wondering whether they are going 
to be left behind by the AOL-Time Warner merger.\12\ Look at the 
January 11, 2000 Wall Street Journal--or, it seems, almost any other 
day's edition--for other rumors or possibilities.
---------------------------------------------------------------------------
    \11\ See Steve Hamm and Steve Rosenbush, ``So Who's Next? They're 
All Looking at Each Other.'' Business Week, Jan. 24, 2000 at 46.
    \12\ Id.
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    If AOL-Time Warner goes through, copycat media mergers are 
certainly likely. A traditional concern of merger enforcement is 
whether the merger being evaluated is likely to spark a trend to 
concentration in the affected industry.\13\ This concern should be 
taken very seriously by the FTC and the courts when they evaluate the 
legality of the AOL-Time Warner merger.\14\
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    \13\ See Robert Pitofsky, Chairman, Federal Trade Commission, ``The 
Nature and Limits of Restructuring in Merger Review,'' Cutting Edge 
Antitrust Conference, Law Seminars International, Feb. 17, 2000, Empire 
Hotel, New York, N.Y., at 6-7 (discussing how the possibility that a 
merger will causing a merger wave can effect the analysis of that 
merger).
    \14\ How many mergers constitute a merger wave? There is no magic 
answer to this question, or to the question of when the enforcers and 
the courts should block a merger because it is likely to be 
anticompetitive. The enforcers and the reviewing courts will have to 
analyze the facts of each merger carefully and at some point they may 
decide that a particular merger is likely to be harmful.
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    Moreover, the only way to accurately assess the effects of this 
merger on the firms' independent editorial and gatekeeper functions is 
to evaluate the AOL-Time Warner merger in light of the large number of 
important media joint ventures that already exist.\15\ Firms often 
behave differently towards firms with whom they have important joint 
ventures. Their incentives to engage in hard competition with these 
firms can diminish. A complex merger like AOL-Time Warner cannot be 
properly evaluated unless this preexisting web of interrelationships 
throughout the industry is taken into account.
---------------------------------------------------------------------------
    \15\ For example, AOL has major ongoing projects with Nokia, 
Hoover, DME Interactive, Onvia.com, Sprint PCS, Motorola, BellSouth, 
Kinko's and MarketWatch.com.
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    Am I convinced that the interpretation of the antitrust laws 
described above is the one that will be applied by the enforcement 
agencies and the courts, and that it will prevent all the important 
problems that could arise from media mergers? Frankly, I am not 
entirely optimistic. What is needed at this point is a much more 
thorough look at the challenges that will be raised by future media 
mergers. This is particularly true for mergers like AOL-Time Warner 
which involve different types of media that are in the process of 
converging.\16\
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    \16\ Many different types of media are in the process of 
converging. For example, Internet access (one of AOL's market) and 
Cable T.V. (part of Time Warner's domain) are likely to converge soon.
---------------------------------------------------------------------------
    I therefore urge Congress to create a Temporary Committee to Study 
Media Mergers and Media Convergence. This Committee could include 
Members of the Senate and the House who have relevant expertise, the 
heads of the FTC, FCC, and DOJ Antitrust Division, heads of companies 
engaged in the affected sectors, and representatives of consumer groups 
and other public interests most affected by media mergers. The 
Committee's purpose should be to identify problems that may be caused 
by large media mergers and by media convergence, and to propose 
appropriate remedies. If the Committee concludes that the existing laws 
cannot prevent the problems that plausibly could arise, then it should 
recommend to the Congress that new legislation should be enacted.\17\
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    \17\ The Committee should be directed to complete its work within a 
short period--a year or two--to ensure that possible problems could be 
prevented.
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    In conclusion, I would like to reiterate the concern that the AOL-
Time Warner mergers could lead to a wave of media mergers that could 
cause an unhealthy level of concentration in this crucial industry. It 
is uncertain, however, whether the antitrust laws could be used to stop 
this trend before it becomes anticompetitive. I have outlined the ways 
in which the antitrust laws could be enforced and interpreted so they 
are likely to stop some or many of the most dangerous large media 
mergers. I am not suggesting that under today's antitrust laws there is 
or should be a higher bar or a special rule for media mergers. I am 
only suggesting the careful yet aggressive application, to special 
circumstances, of the single universal rule of antitrust. And that rule 
is to preserve for consumers a truly competitive range of choices in 
the marketplace.
    However, it is far from certain whether the courts would interpret 
these laws in the vigorous manner I have described. For this reason 
Congress should establish a temporary Commission to study the potential 
problems that could arise from media mergers.
    I greatly appreciate the Committee's invitation to present these 
views here today.

    Senator Burns. Thank you. I am going to ask just a couple 
of questions here and then try to get comments from all three 
of you if I could.
    I think you have already covered the area of your 
assessment of the instant messaging debate. I noticed that 
area. I am concerned about that because of the implications 
coming off of the 1996 Act. Now, nobody else I heard drew a 
parallel like that, but I do not want to get into the same 
situation or create a situation that Congress and the consumer 
is going to have to deal with 10-15 years from now. And, of 
course, the way the technologies are moving, they may have to 
deal with it a lot quicker than we did the old one.
    I want just your take on, in the memorandum of 
understanding, I like that first step. I would agree with you 
there is no enforcement trigger in that area. Maybe we would 
have to take a look at that. But basically, I like to give 
every citizen in this country--businessmen or corporation--the 
benefit of the doubt until they really display to us that they 
are not a very good neighbor with the American way.
    Would you want to comment on that, Mr. Berman?
    Mr. Berman. Thank you, Senator.
    If there was not the MOU and the commitment to openness 
made--and there is no reason that AOL-Time Warner had to make 
that commitment; it is not required by law and there is no 
consensus on the Hill to pass any statute that does that, so 
they are doing something which is contrary to conglomerate 
building because it is opening their network to unaffiliated 
people who can provide similar services to theirs even over 
their network--that has to be taken into account. And I think 
that that is a major step.
    It cannot succeed without other cooperation by other cable 
companies buying into that paradigm. They have not yet. Time 
Warner and AT&T are not the only cable companies. There needs 
to be experimentation. There needs to be fleshing out of this. 
There needs to be an opportunity to see how this is going to 
work over their facilities.
    And that is why I think that the open standards and a race 
to legislation is contrary, even though I share the same 
concerns as the two gentlemen here, and have worked with them, 
that it is not going to work that way, that we have to try 
another way, another paradigm of not trust, but working 
together and trying to spell out the details here, to bring it 
before the Congress, to have forums to document and to build a 
record until the FCC--by the way, which does not want to get 
into this--may be able to act or until Congress has the will.
    That is a long answer, but I think that we are going to 
have to not trust the market, but involve ourselves in the 
market and be part of that market of persuasion.
    Senator Burns. Mr. Kimmelman?
    Mr. Kimmelman. Mr. Chairman, I am not suggesting that we 
need legislation. I just suggest you scrutinize this carefully. 
Because, with all due respect to Mr. Case, he was out around 
the country and here saying that we needed open access rules 
enshrined in public policy before. And now he is in a different 
situation, and I understand that, but Congress must reconcile 
these differences.
    How do we know, if there is a dispute, it will be resolved 
fairly under this voluntary memorandum? Even if you read it in 
the most positive light, the companies are subject to a merger 
review and so they may have some reason to be on good behavior 
before Congress until their merger is approved.
    I think policymakers need to resolve concerns now to make 
sure that we do not have to undo an enormous problem later. Why 
not have this be binding by contract? And why not have these 
terms, with clarification as to what they mean, be subject to 
reciprocity requirements? If anyone who has content and takes 
advantage of this on an AOL-Time Warner system, they have to do 
so on any system they own.
    And you can use market mechanisms, as Mr. Case suggests, to 
make this meaningful and useful in the marketplace. My concern 
is, as I understood him to say, he said, we are presenting 
this, we want to try to do this, we hope everyone else in the 
cable industry will do it--although they have all opposed it 
tooth and nail up to now. And then he said, if that does not 
work we will come back.
    Well, does that mean if it does not work, AOL-Time Warner 
will quit doing it? Because they should not be disadvantaged in 
the marketplace. If he really wants everyone to do it in the 
marketplace, Mr. Case and AOL-Time Warner are better off if 
they are all subject to the same standards--accountability to 
the public for nondiscrimination. It should not be just one 
company. It should be everyone.
    So I am a little suspicious about the vagueness and the 
recalcitrance here on something enforceable.
    Senator Burns. Mr. Lande?
    Mr. Lande. I am afraid if we wait, we will be shutting the 
barn door after the horse has already left.
    Senator Burns. They very seldom ever leave on their own, by 
the way, those horses.
    [Laughter.]
    Mr. Lande. But companies do change their mind on their own. 
And Mr. Levin and Mr. Case are good people, but we do not know 
who their successors are going to be. And what if their 
successors are more like some of the folks at Microsoft, who 
have been known to allegedly discriminate? And we have a case 
that takes years, and that case still is not over.
    I think the best way to do it is to make it binding as part 
of a consent order with the Federal Trade Commission. If they 
agree to that as part of their consent order, then it is 
binding and then we will not have to worry about barn doors 
being opened or closed.
    Senator Burns. Mr. Berman?
    Mr. Berman. One last comment. I am tying it back to the 
privacy debate. It is like the tax moratorium debate. Congress 
is giving the industry a lot of time to try and figure out a 
self-regulatory regime. And they say, the market will solve it.
    Well, the market has not solved it. And Mr. Case I think 
has said that today. But it has given a number of companies a 
chance to try and develop best practices and some technologies 
and things that may improve privacy on the Net, which can now 
be put into regulation. And we maybe have the basis for 
experimentation on how to map privacy onto the Internet.
    I think that the same period of time has to occur in this 
open access so that we know what rules and what contracts to 
make enforceable. Otherwise, I think we slow down technology, 
we push them backward. And instead of moving forward, we may 
end up with a closed open Net before we even know it because 
the Internet is changing so rapidly while we sit here and 
debate these issues.
    Mr. Kimmelman. It seems to me if it is good enough for AOL, 
it ought to be good enough for everybody.
    [Laughter.]
    Senator Burns. I can see right now that as we are going 
into the closing moments of this hearing, and I think there 
will probably be hearings to follow, that this Senator has 
structured this hearing the wrong way. I think we should turn 
around the panels maybe, and we would probably learn a lot 
more. Because I structure my hearings a little bit different.
    I like robust debate at that table rather than this table, 
and we listen. And then we make up our own minds. Some of us 
are incapable of doing that sometimes. Nonetheless, I can see 
we probably made a mistake in structuring it this way, and I 
will be careful of that in the future.
    I want to thank you for coming today and offering your 
testimony. And your full testimony will be made part of the 
record. And we will be visiting with you in the future, I will 
guarantee you. Because your dialog is very, very important to 
this Committee.
    Yes, Jerry?
    Mr. Berman. I have one more comment. AOL and Time Warner 
and AT&T and all of the companies that are involved with this 
together have committed themselves to participating in an open 
forum to discuss the MOU and what it means in an ongoing set of 
forums which the consumer groups have been participating in and 
they are welcome to. And I think that we would like your 
participation and we would like to get the results of that so 
that we can watch this thing develop together.
    Senator Burns. Jerry, I am going to make one other 
suggestion, and I am going to make the suggestion to Mr. 
Kimmelman and Mr. Lande. I am not real sure that this is not a 
project of the Internet Caucus, that we get Room 902 and all 
the principals involved and lay out those arguments and let 
America make up its mind. I think that is true democracy in its 
truest form. And I would not mind pursuing that avenue.
    Thank you very much. This hearing is closed.
    [Whereupon, at 1:10 p.m., the hearing was adjourned.]