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They should have seen it coming. With Time Warner chairman Gerald Levin in tow, America Online chairman Steve Case trooped to Capitol Hill again last week to tout the benefit of their companies’ planned union before a panel of anxious lawmakers. And again the two executives were peppered with questions about whether a united AOL Time Warner would shut out competing Internet service providers, interactive TV purveyors and instant-messaging services from their cable and Internet infrastructure. In the nearly 10 months since the acquisition was announced, the questions from Congress and regulators at the Federal Trade Commission and Federal Communications Commission have only grown in volume and intensity, egged on by competitors like AT&T, Disney and Microsoft — all of which are lobbying hard for regulators to force open the merging companies’ networks. But Case and Levin are still offering the same bland promises. Just trust us, they say; discrimination isn’t in our business plan. That message was a better sell before Time Warner, in the midst of a contract dispute with Disney, pulled ABC television from its system for two days in May, affecting millions of customers. The hardball move backfired, seemingly justifying concerns raised by competitors. Late last week, European regulators appeared to be on the verge of clearing the acquisition with few conditions; in Washington, meanwhile, mandatory conditions appear all but certain. Unless the companies agree at the very least to let other ISPs onto their high-speed cable broadband system, FTC staff have determined that the agency should go to court to block the merger. Conditions to create a level playing field for interactive television are also under consideration. Case and Levin have already promised as much. But regulators are seeking a legally binding agreement spelling out precise terms and conditions for shared access. Such a consent decree would weaken AOL and Time Warner’s bargaining leverage when striking deals with individual ISPs or television channel producers. And a decree on AOL Time Warner spells trouble for the rest of the cable industry. For three years, cable operators have been fighting government regulation of their broadband pipes. After persuading Congress and the FCC to stand aside, cable operators have finally come up against a powerful bureaucrat they can’t sway: FTC Chairman Robert Pitofsky. The turning point in the battle for Pitofsky’s support may have been April, when consumer advocates brought in then-Harvard law professor Lawrence Lessig to explain the danger posed to the Internet by the closed cable broadband model. Without the openness of the Internet’s current design, Lessig warned, cable operators could slow access to content from unaffiliated Web sites or limit the reach of e-commerce sites that didn’t give them a cut of sales. Pitofksy “totally got it,” says one person who attended. The FTC’s subsequent investigation of AOL’s and Time Warner’s business plans did nothing to reassure the chairman. Once the FTC imposes access requirements on AOL and Time Warner, with cable wires passing about one in five U.S. households, rules for the rest of the industry become a much more likely outcome. As of late last week, the companies were still in close talks with the FTC, and the agency’s lead attorney, Richard Parker, had not made a final recommendation to the five voting members of the agency. “It’s testosterone alley over there,” says a person close to the agency’s review. All sides say a compromise is most likely. Even if the staff were to recommend blocking the deal, the companies would likely offer greater concessions to gain a reprieve (which is exactly what happened in 1996 when Time Warner acquired Turner Broadcasting). Apart from Time Warner, the only other major cable operator opening up to other ISPs is AT&T. Under pressure from the FCC during the review of its Media One merger, AT&T signed an agreement in principle to allow MindSpring (now owned by Earthlink) onto its broadband system. The nation’s largest cable operator is also planning to conduct a trial of shared access in Boulder, Colo., starting in November. As for the rest of the industry, most seem to accept that they’ll eventually share access — though they have done nothing to begin sorting out the technical and business complexities involved. Asked at last week’s hearing about getting AOL onto cable systems beyond Time Warner, Case said talks had produced nothing solid and some companies were waiting to see how the merger-approval process played out. The post-merger battle for access will largely unfold at the FCC. The agency has repeatedly declined to force open the cable broadband platform, most recently when it approved AT&T’s acquisition of Media One in June. But a series of contradictory court decisions has forced the FCC to revisit the issue. The biggest push came from a June 22 9th U.S. Circuit Court of Appeals ruling that cable broadband service should be classified as a form of telecommunications service — just as high-speed Internet service over telephone lines is — and is therefore subject to FCC telecom rules. That would prohibit cable operators from excluding other ISPs, but the court also noted that the FCC could choose to refrain from applying typical telecom rules to the incipient cable broadband market. After a summer of wrangling with the issues at the FCC, the agency last week issued a call for comments. Once the agency receives feedback from affected parties and the public, it could formulate new rules. The entire process could take from nine months to a year or more. The lengthy time frame infuriates ISPs and consumer groups that favor regulatory action, but they hope conditions on AOL Time Warner will help accelerate the issue. And this time around, the cable industry won’t present a unified face. AOL and Time Warner have signaled that if they are forced to agree to legally binding conditions for their merger, they are likely to press for a set of nationwide rules applying to all cable companies. Proponents of regulation think the FTC’s agreement with AOL and Time Warner will clear away many of the arguments used by cable companies to oppose new rules across town at the FCC. “If it is required of AOL Time Warner, it will make it easier for the FCC to issue comprehensive rules requiring this of the industry,” says Dave Baker, VP of public policy at Earthlink. “It might even create a de facto legal standard.” The cable industry could also be hurt by another petition submitted to the FCC that also arose out of the 9th Circuit’s decision. Last week, the United States Telecom Association, a trade group representing the Baby Bells, asked the FCC to include cable operators’ revenues from broadband in the pool of money tapped to support subsidized phone service for rural and low-income customers. The $4 billion universal service system is backed by a small fee on all telecommunications service revenues, which currently includes local and long-distance phone service as well as wireless and paging. Because the appeals court ruled that cable broadband was a form of telecommunications service, the association argued that it should be assessed universal service fees. If the FCC agrees, the cable industry would have to fork over a few percent of broadband revenues a year for the subsidies. The petition is likely to get wrapped into the FCC’s larger inquiry on broadband. But it’s another sign that cable’s unregulated Internet days may be slipping away.
CHART: Who’s Playing Nice? A look at cable companies’ policies on sharing access to broadband systems.
Related Articles from The Industry Standard: Time Warner, AOL Holdings Chart Lost Lessons at Time Warner Copyright � 2000 The Industry Standard

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