More Consumer Choice, or a Lethal Combo?

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The Federal Communications Commission, on a charmless block between a Bureau of Engraving annex and the drearier Potomac waterfront, isn't usually a happening place.

But this week, its doors were flanked by the ultimate Washington status symbol: white television vans with 50-foot microwave towers and satellite dishes. You can hire limos, tuxes and toadies, but those white vans materialize only for the truly famous, like Elian Gonzalez, or the notorious, like Monica Lewinsky.

Starting before 8 a.m., packs of lobbyists and lawyers queued on the sidewalk, desperate to snag seats when the auditorium doors opened at noon. Reporters were admitted by reservation only. And kibitzers in distant cities tuned in via the FCC's webcast.

The cause of all this frenzy? The long-awaited FCC hearing on the Time Warner-America Online merger. The hearing pitted Time Warner CEO Gerald Levin, AOL chairman Steve Case and their top aides against an array of consumer advocates and competitors. (TIME.com, of course, is owned by Time Warner.)

Fireworks were mostly absent, but the most combative moment came when Disney/ABC vice president Preston Padden pronounced the merger "a deadly combination for consumer choice."

"This is a spillover of business disputes dressed up to look like public policy," scoffed Richard D. Parsons of Time Warner, referring to a nasty contractual dispute between Time Warner Cable and ABC last May. "It's money. That's all it is."

The FCC, backed by a key court ruling, claims broad authority to regulate as telecommunications the provision of Internet services over cable. Technically, the agency is considering applications by Time Warner and AOL to transfer about 200 licenses, held mostly by Time Warner cable subsidiaries, to the new media giant, AOL Time Warner. It can effectively undermine the merger if it denies licenses crucial to the Levin-Case plan to use existing cable operations as "pipes" to sell high-speed Internet and interactive television service. (Concerns as to whether the merger creates an antitrust problem are the purview of the Justice Department and the Federal Trade Commission, not the FCC.)

That's why Levin says the most important thing about the hearing was that it gave him and his colleagues a chance to listen to the commissioners. Case left immediately after he testified, delegating rebuttals to AOL Interactive president Barry Schuler, but Levin stayed in the audience till the bitter end, staring intently at the commissioners as if trying to read their faces. Levin insists he heard nothing that gave him pause, but the session wasn't exactly warm and fuzzy, either.

Commissioner Gloria Tristani said the merger "raises the specter of barriers to the free flow in the marketplace of ideas that has been the essence of our democracy. If the shelves in the marketplace of ideas are stocked by too few hands, a kind of digital imperialism may replace a well-informed citizenry." Tristani suggested that AOL might be required to divest or share with rivals its hugely popular Instant Messaging software, which now commands 90 percent of the market.

"If the extent to which instant messaging has penetrated the online world is as great as the record indicates," she said, "can America afford to leave its ownership in the hands of a single entity whose fiduciary obligation is to its shareholders and not to the public?" AOL has balked at making its IM "interoperable" with competitive systems. Instead, AOL has distributed its own software free. "I actually think our company has been a model for how to take a technology and open it up," Case said. But critics such as Ross Bagully, chairman of rival IM service Tribal Voices, says AOL's refusal to work for interoperability forces people who want to send messages to their friends to download and sign onto AOL.

The key factor in the FCC's deliberations is "open access." The commissioners want to make sure AOL Time Warner will not deny rival Internet service providers access to AOL Time Warner-owned cable platforms.

"I believe that the promise of the Internet is in its remarkable openness," Kennard said. "Everyone here agrees that the broadband platform should be open. It's mainly a question of how we get there."

"We are serious about our commitment to open access because we know it is good for our business and good for consumers," Case said.

"Expanding consumer choice is part of who we are," Levin said. "It's as basic to our corporate DNA as the editorial independence and integrity of Henry Luce's Time Inc. and Ted Turner's CNN. Since Home Box Office's debut over a quarter of a century ago, Time Warner has been a leader in overthrowing the paradigm that limited the public's programming choices to those selected by a triopoly of broadcast networks." He added that Time Warner is now trying out a multiple-ISP service in its Columbus, Ohio, system.

But Kennard warned, "We've heard a lot of good intentions and seen some non-binding industry agreements, we've seen some technical trials, but it's my belief, until we see an open access platform... there will continue to be a lot of skepticism, and for good reason."

Republican commissioner Michael Powell, Colin Powell's son and a former Justice Department antitrust prosecutor, scolded: "I look at the heavy-handed tactics of some of your local [cable] operators and your promise to work for open instant-messaging access, and I don't see a good track record."

On the other hand, Powell worried aloud that there was little justification in interfering with the deal. "Regulatory intervention can raise costs, distort market development, impede the flow of capital and be a nightmare to manage and enforce. Particularly when dealing with vibrant markets in their infancy, we should be very reluctant to accept the propriety of a regulatory solution, even where the possibility of an acute problem exists," he said.

The commission has three options: approve the license transfers, deny them outright or approve them with conditions. The smart money is on the third option. FCC watchers believe Kennard and his allies will insist the corporations agree in writing to achieve complete instant messaging interoperability and to give competing ISP companies unfettered access to AOL Time Warner regional cable platforms.

There's no formal deadline, but one source says the staff has been told to wind up its work by August, meaning the full commission could make a decision by late September or early October.

(The FCC's web page on the merger can be found at http://www.fcc.gov/csb/ button2.html. Statements from the hearing are at http://www.fcc.gov/csb/aoltw/ 07-27-00_enbanc/agenda.html)