Case, Levin Make No-Conditions Pitch

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Washington-Leaders of America Online Inc. and Time Warner Inc. appeared on Capitol Hill last week and left no doubt that they want to wrap up their merger quickly, with no U.S. government strings attached.

Time after time, AOL chairman CEO Steve Case and his Time Warner counterpart, Gerald Levin, said key merger conditions that have appeared in various news outlets should not be adopted as replacements for market-based solutions.

"That's certainly our opinion, because we said right from the outset there are no overlapping businesses between the two companies," Levin said.

Added Case: "There aren't the same kind of classical antitrust issues [as] when you look at Exxon-Mobil, Sprint-WorldCom or most of the mergers out there."

Case and Levin, the only witnesses to testify before the House Telecommunications Subcommittee, declined to be specific about their problems with merger reviews by the Federal Trade Commission and the Federal Communications Commission, apparently fearing that any negative comments would result in regulatory reprisal.

"We don't believe any conditions are necessary or appropriate. At the same time, we don't have any desire to be getting into sort of a tiff with the United States government," Case said.

According to published reports, the FTC wants to block the deal unless AOL and Time Warner agree to provide unaffiliated Internet-service providers with access to Time Warner Cable systems.

The FCC is reportedly having the same thoughts about access, and may also demand that AOL ensure its customers can receive instant messages from users of the online provider's messaging competitors.

In Europe, AOL and Time Warner last week apparently reached a deal with the European Commission that would allow the AOL-Time Warner merger to go through-provided Time Warner abandons its joint venture with United Kingdom music publisher EMI Group PLC or sells off one of EMI's biggest labels, Virgin Records.

Time Warner spokesman Scott Miller declined to comment on the EMI deal, but on the merger with AOL, he said: "Our discussions with the (EC) are proceeding well and are nearing the end. We are confident that they will conclude successfully."

Last week's House hearing was ostensibly about interactive television. But the presence of Case and Levin made it plain that issues broadly related to the $123 billion merger between the world's leading Internet-access provider and the U.S.'s No. 2 MSO were the real topic.

Case and Levin held their fire about the FTC and FCC merger reviews. But subcommittee chairman Rep. Billy Tauzin (R-La.) said he was troubled to read the agencies were conducting their reviews in a process closed to the public and weighing conditions that would restrict AOL-Time Warner but none of its peers or competitors.

"I think it's awful that part of this process is being conducted behind closed doors," said Tauzin. "I think the process stinks. We ought to change the law so they stop working that way."

Case and Levin faced repeated questioning on three issues: instant messaging, open Internet access and interactive television.

AOL is by far the dominant provider of instant messaging, which allows for real-time chats over the Internet. An exploding technology through which users send 1 billion messages a day, instant messaging is expected to incorporate voice and video and to gain wide use in the home and office.

But AOL has refused to link up with competitors, claiming it needs to protect its customers from computer viruses, invasions of privacy and junk messages from porn sites that could reach children.

AOL has been accused of being intransigent in order to build an insurmountable lead in the market. But Case restated AOL's promise to work with competitors and standards organizations to establish interoperability by the middle of next year.

Case refused to commit to a deadline that would put the matter to rest. "I think it's hard to set a hard deadline because it requires collaboration with lots of different companies and a standards process," he said.

Ross Bagully, senior vice president of CMGI, owner of instant-messaging rival Tribal Voice, told reporters after the hearing that AOL's position on the technology was designed to hobble competitors.

Levin took the lead on open access, saying that AOL-Time Warner had committed to providing nondiscriminatory access to ISP competitors, citing Time Warner Cable's multiple ISP trial in Columbus, Ohio, and an access deal with Juno Online Services Inc.

"If I can demonstrate that multiple ISPs is a sound business practice, then it will proliferate in the cable industry," Levin said.

David Baker, vice president of law and public policy for EarthLink Inc., an AOL competitor with about 4.5 million subscribers, reportedly said last week that AOL and Time Warner were not living up to their February memorandum of understanding that contained a commitment to open access.

Though not responding directly to Baker, Case said some ISPs wouldn't sign access deals now because they felt they might get a better deal from AOL-Time Warner after the merger closed.

"Some ISPs, including major ISPs, have explicitly told me they are not going to enter into an agreement, even though we have offered open access, until the merger is approved because they don't want to help the merger get approved and may get better terms if they wait," Case said.

As currently configured, AOL TV is a dial-up service that connects to TV sets via a set-top box. The Walt Disney Co., for one, has said AOL-Time Warner would use AOL TV to feature its own services and programming, while placing competitors' content in harder-to-reach locations.

Although AOL is new to the TV business, Case said he is pushing his company in that direction because consumers clearly want their TVs to perform to some degree like their computers when connected to the Internet.

But interactive TV, he said, is an experiment, with consumer acceptance by no means assured.

"I think together we can make the promise of interactive TV a reality, but it's still in the starting gates," Case said. "The reality is, it's still a concept."

In a sign that some in Congress are objecting to FTC and FCC merger conditions, House Commerce Committee chairman Rep. Thomas Bliley (R-Va.) wrote to FCC chairman William Kennard Sept. 26, asking for an FCC staff document that reportedly calls for imposing open-access conditions on AOL-Time Warner. He gave the agency 48 hours to comply.

In the letter, Bliley said he was troubled that the FCC was considering an open-access condition, claiming such a move might exceed the agency's jurisdiction and run afoul of the First Amendment.

Bliley said he was further puzzled because Kennard had said repeatedly that the market should settle the access debate. To the extent the FCC is considering access policies, Bliley said, it should do so in a rulemaking, and not via merger conditions.

FCC staff did not meet Bliley's deadline, but instead sought a meeting with his staff to discuss release of the merger document.

"We have agreed to meet with them," a Bliley spokesman said.

In a separate letter to FTC chairman Robert Pitofsky, Bliley said he had read press accounts stating that the commission was planning to block the AOL-TW merger unless the companies agreed to open-access policies.

Bliley warned the FTC that such a move would establish "a de facto national policy without the benefit of the necessary input from the [FCC] and other affected stakeholders."

He asked the FTC to produce all records regarding the analysis of open-access policies in connection with the merger by Oct. 6.

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