Washington -- Steve Case and Gerald Levin stormed Capitol
Hill last week to participate in hearings about the pending merger between their two
companies, armed with a memorandum of understanding to silence critics who said their
union will hamper open access to broadband Internet services.
Just hours before America Online Inc. chairman Case and
Time Warner Inc. chairman and CEO Levin were to go before the Senate Judiciary Committee
Feb. 29, they released an 11-point MOU that mapped out AOL Time Warner Inc.'s
open-access Internet strategy.
And although the MOU goes further than an earlier agreement
between AT&T Corp. and MindSpring Enterprises Inc. (now EarthLink Network Inc.), there
are some questions about whether AOL will be able to deliver on its promises.
One cable source said it was highly unlikely that AOL Time
Warner could live up to its access commitments. "There are practical limits on what
they can accommodate. There are capacity limits that they are going to face," the
The first day of hearings was devoted primarily to the MOU.
On the second day -- March 2 -- before the Senate Commerce Committee, lawmakers grilled
Case and Levin on privacy and competitive issues. Several consumer groups also voiced
concerns about the merger's impact on competition and choice for consumers.
But at the top of everyone's mind on both days of
hearings was the MOU and how it could transform the landscape of broadband communications
over cable plant.
While both the AOL Time Warner and AT&T-MindSpring
agreements pledged to provide consumers with their choice of Internet-service providers
without any buy-through requirements, the AOL Time Warner deal has two major differences.
"It's a quantum leap from AT&T-MindSpring. It
allows video streaming without limitation. It allows competing ISPs to control the
customer relationship for billing and collection and the first screen," said Scott
Cleland, managing director of Legg Mason Wood Walker Inc.'s Precursor Group.
What's more, Cleland said, the AOL Time Warner
agreement might give AOL a critical first-mover advantage because it technically could
take effect in a few months. AT&T has said it won't consider adding unaffiliated
ISPs until July 2002, when its exclusivity agreements with Excite@Home Corp. expire.
"That's a big difference," he added.
AT&T spokesman Jim McGann said AT&T will stick to
its plan. "We've made it very clear that we have a valid contract that
we're going to honor," he said. "Other parties and other companies are
going to have to do what they think is best for them."
But lawmakers seemed disappointed that the agreement lacked
the bite they had hoped for.
Senate Judiciary Committee chairman Orrin Hatch (R-Utah)
said his initial reaction to the AOL Time Warner open-access agreement was positive,
although he still had concerns that the sheer size of the merger would overwhelm consumer
"Some of what I have heard sounds good. But I have to
believe a degree of healthy skepticism is in order given what is at stake here,"
Hatch said. "A cynic could question whether, not unlike vaporware, the promises
presented in this document will ever materialize in the marketplace."
Hatch said he would be more comfortable if the agreement
were more specific and if AOL Time Warner agreed to make compliance with it a
Sen. Herb Kohl (D-Wis.) urged Case to sell AOL's stake
in DirecTV Inc. if AOL completes its plan to acquire Time Warner.
"In my opinion, you will have to sell DirecTV -- a
cable company shouldn't have a stake in a direct competitor," Kohl said at the
top of the Judiciary Committee hearing.
Last June, AOL invested $1.5 billion in DirecTV parent
Hughes Electronics Corp. for less than a 5 percent stake. With its purchase of Time
Warner, AOL would become the second-largest cable operator, with about 12 million cable
DirecTV spokesman Bob Marsocci declined to comment on
Kohl's suggestion. He said the AOL-Time Warner deal has not affected the key business
arrangement between AOL and DirecTV.
"We are moving forward with the launch of 'AOL
TV' this year," Marsocci added.
Much of the hearing centered on the AOL Time Warner cable
Internet-access agreement, with both Case and Levin vowing to give customers choice and to
allow a wide variety of content on their network.
"This is a good thing. It coincides with good public
policy," Levin said, adding that he was committed to open access even if the AOL
Case said his commitment to open access was total. "I
think we made tremendous strides here," he said. "It's not about talk --
it's about action."
Support for the AOL Time Warner agreement came even from
some frequent cable critics.
"We are pleased to see it," said Gene Kimmelman,
Washington office co-director for the Consumers Union. "But there is ambiguity in it
that needs to be cleared up."
Kimmelman said federal regulators should make the agreement
a binding condition of merger approval, or the Federal Communications Commission should
impose it on the companies via rulemaking.
AOL and Time Warner officials stressed that they reached
out to other cable companies to explain their agreement, which they hope operators will
bless as an open-access standard.
"We indicated to them what we announced today and
asked them to take a look at it. Beyond that, I am not going to comment," said George
Vradenburg III, AOL's senior vice president for global and strategic policy.
Cable-industry sources said the AOL-Time Warner deal
"turns the heat up a little bit" on Cox Communications Inc., Comcast Corp.,
Cablevision Systems Corp. and Charter Communications Inc. to join the open-access crusade.
Comcast executive vice president and treasurer John Alchin
said the deal does not force his hand, and it should have a positive effect on other
"It offers one approach to a managed commercial
strategy, as opposed to one mandated or regulated by the government," Alchin said.
"From that standpoint, we're pleased to see it evolve along those lines."
Comcast -- which, along with Cox, Cablevision and AT&T
is a partner in Excite@Home -- won't have to worry about open access until 2002, when
the exclusivity agreements expire. To that extent, Alchin said, most cable operators are
in no hurry to come up with their own formally written plans for open access.
Cablevision officials declined comment. Cox and Charter
officials could not be reached for comment.