Opponents Gang Up On AOL, Time Warner

SAN FRANCISCO (07/31/2000) - The Federal Communications Commission held an unusual public hearing Thursday to consider the proposed merger of America Online Inc. (AOL) and Time Warner Inc. (TWX) , giving opponents of the deal a chance to make their case in public while executives of the two companies played defense.

Almost nothing new was said at the half-day proceeding attended by all five of the agency's commissioners, who eventually must decide whether to approve the merger outright, approve it with conditions or block the transaction. The Federal Trade Commission is also reviewing the deal.

But as Yale professor Barry Nalebuff noted during the hearing, simply airing the complaints and generating media coverage pressures the companies to address many of the issues without the need for government intervention.

"Getting issues out in the open will solve the concerns raised," the games-theory expert said. "The process of getting people to talk about their plans in the future helps."

By the end of the day, most of the commissioners had given little indication of how they were leaning. Republican Harold Furchgott-Roth, who generally opposes the FCC's merger reviews, appeared annoyed by the proceedings and ready to approve the deal immediately, while Democrat Gloria Tristani expressed the strongest doubts.

FCC staffers said that despite the many concerns raised, the agency remained on track to complete its review of the mega-deal by October.

"Our time frame right now is October to complete this," Deborah Lathen, head of the FCC's cable bureau, said after the hearing.

Most of the complaints from participants and questions from FCC commissioners focused on a few areas.

The most frequently expressed concern was that the combined companies would discriminate against competitors trying to reach consumers over the merger partners' cable platform, whether it is ordinary cable-television programming, interactive TV services or broadband Internet content.

Purveyors of "bottleneck" complaints included Walt Disney Company (DIS) , BellSouth (BLS) , Internet service provider RMI.NET (RMII) and the Consumer Federation of America. They urged the FCC either to require strict limits to prevent any discrimination or to block the transaction altogether.

"We are here to warn against a world in which consumer choice is limited and skewed by conflicted business interests of the company that operates both the pipeline to the home and a closed and proprietary-marketing environment," warned Disney's top lobbyist Preston Padden.

AOL and Time Warner officials cited their previous commitment to allow unaffiliated ISPs onto their broadband platform, although without setting a specific date for doing so, and disavowed any plans to favor their own content or discriminate against unaffiliated producers.

"AOL has never done anything like that and we never would," said AOL Chairman Steve Case.

Time Warner President Richard Parsons observed that Disney went public with its complaints after a dispute between the two companies led Time Warner to drop Disney-owned TV stations from cable systems in several major markets for two days in May.

During negotiations over allowing Time Warner to carry the ABC network TV stations on its cable systems, Disney asked for a series of "parity" guarantees regarding interactive and broadband services. Time Warner refused the guarantees, which would have required Time Warner to make available features or services used for its own content to all Disney offerings, as well.

Both sides agreed at Thursday's hearing that Disney had threatened to go to the FCC if its demands were not met - a threat it subsequently carried out.

"It's money. That's all it is," Parsons said.

The argument appeared to appeal to FCC Chairman William Kennard, who pointedly questioned Disney's Padden about the company's motives.

"We don't like to have our processes here used as leverage in a business dispute," Kennard said.

The FCC also heard from instant-messaging service providers angry that AOL, by far the market leader, has refused to allow communications between users of their software and AOL's 130 million IM users.

AOL offered its standard line, warning that allowing straightforward interoperability could allow spamming and hacking to flourish over instant messaging. Instead, the company favors an elaborate server-to-server based system that would take some time to create.

The FCC has tried to avoid dealing with nonmerger issues in its reviews, and AOL's instant-messaging competitors face an uphill battle in making the case that adding Time Warner would have any influence on the IM market.

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