Former FCC Officials Oppose AOL TW Petition

Two former Federal Communications Commission (FCC) officials have blasted AOL Time Warner’s request to offer instant messaging-based services such as the IM videoconferencing like those available through rivals Microsoft and Yahoo! .

As part of the FCC’s 2001 merger conditions, AOL TW agreed to hold off high-speed IM services until its IM service was interoperable with rival systems, or until AOL TW no longer dominated the IM market.

While AOL TW’s IM system is still not interoperable with rivals, in April the company formally petitioned the FCC for relief from the high-speed IM proscription, claiming it no longer dominates the IM industry.

At the time of the merger, the company controlled almost 100 percent of the market, but since then, according to Media Metrix, its share has fallen to approximately 59 percent. Microsoft now claims 22 percent of the market while Yahoo! claims 19 percent.

Nevertheless, University of Pennsylvania professors Gerald R. Faulhaber and David J. Farber, in comments opposing the AOL TW relief petition, say the numbers do not present a “compelling” case for AOL TW. Faulhaber was the chief economist and Farber the chief technologist at the FCC at the time of the historic merger.

“Clearly the most immediate impact of adopting interoperability is to make your customers better off,” Faulhaber and Farber say in their petition to the FCC. “By denying its customers interoperability, AOL Time Warner is denying them access to more than 40 percent of the IM market. The only reason it might want to deny these benefits to its users is if by doing so it denied even greater benefits to the customers of it competitors, which is exactly what market tipping is all about.”

The two also claim, “AOL Time Warner has a very easy way to demonstrate that it is no longer dominant in IM: offer to interoperate with their competitors. If they are truly not dominant, then this is their best strategy. But if they are dominant (as they claim they are not), then they would refuse to interoperate (which is what they are actually doing).”

In its petition, AOL Time Warner argues not only that the market share numbers should allow it to enter the high-speed IM market but also cites the zero cost of IM as another example of a competitive marketplace.

“On the face of it, this cannot be evidence that the market is competitive,” Faulhaber and Farber argue. “There are two possible reasons for a zero price: the firm is attempting to build market share quickly in order to obtain proprietary network effects and tip the market in its favor; or the firm offers the service as a feature of a broader service (such as AOL ISP service) without charge. Either one may be perfectly valid, but it is disingenuous to claim that a zero price ‘proves’ the market is competitive.”

Monday was the deadline for filing comments on the AOL TW relief request. The company now has until May 20 to respond. Following AOL TW’s reponse, the FCC has until July 18 to rule on the relief response.