FCC Takes a Hard Look at AOL-Time Warner

It’s no surprise that the Federal Communications Commission (FCC) is interested in open access and instant messaging issues in its consideration of the merger of America Online Inc. and Time Warner Inc.. But less public attention has been paid to AOL’s interests in interactive television and both companies’ ties with AT&T Corp. But at the urging of non-profit groups petitioning the merger, FCC reviewers are taking a harder look at those areas.

Earlier this week, AOL and Time Warner filed a set of answers to questions posed by the FCC in an Aug. 14 letter to the two companies. The Aug. 14 letter was the fourth request for additional information made by the FCC. The FCC’s questions delved into AOL’s and Time Warner’s stance on interactive TV, AOL’s DSL agreements, and both companies’ agreements and shared interests with AT&T.

In the area of interactive TV (ITV), the commission was especially interested in how AOL deals with unaffiliated programming services as opposed to its ITV partners.

AOL responded, “The ultimate success of AOLTV will depend in large part upon the availability of interactive content. Accordingly, AOL built AOLTV around open standards in order to ensure compatibility with the broadest possible range of content. Thus, while AOL is actively pursuing interactive content agreements with video programmers, the open nature of AOLTV guarantees that any video programmer — regardless of whether it is an “ITV partner” or, indeed, has any agreement or relationship with AOL — can reach AOLTV subscribers with its interactive content.”

The company added that AOLTV incorporates Liberate Technologies‘ open platform and supports the Advanced Television Enhancement Forum (ATVEF) Enhanced Content Specification. This allows non-ITV partners to deliver content to AOLTV by incorporating ATVEF “triggers” into video signals.

The FCC also questioned AOL’s and Time Warner’s relationships with Replay TV Inc. Last year, Time Warner made a $10 million investment in Replay Networks Inc. (later renamed Replay TV Inc.), giving the company a 3.3 percent stake in Replay’s fully diluted equity and voting rights for that 3.3 percent. Time Warner does not have the right to appoint any Replay directors but does have observer rights at board meetings and holds three seats on Replay Advisory Council.

“The only current agreement between Replay and any Time Warner affiliate is a Network Service Agreement between Replay and Turner Broadcasting System Inc. that sets forth certain mutual rights and obligations with respect to the non-exclusive license for distribution of Turner Network programming and content through the Replay TV Platform and the Replay Network Service,” Time Warner answered. Further, the company said, the agreement does not provide for exclusivity to any Time Warner video programming or content. AOL said it has no relationship with any personal video recorder (PVR) company other than TiVo Inc., a relationship covered in previous filings.

In the area of DSL, the FCC asked if a DSL customer can get AOL ISP service via DSL if AOL has no contractual arrangements with the DSL provider.

AOL responded, “Under AOL’s Bring Your Own Access (or BYOA) offering, any consumer with a DSL connection may become an AOL BYOA subscriber even if AOL itself has no contractual arrangement with the DSL provider. BYOA offers consumers who already have an Internet connection the ability to access all of the content of the AOL flagship service at a reduced subscription rate.”

On April 26th, a group of non-profit organizations and consumer advocacy groups — including Consumers Union, the Consumer Federation of America, Media Access Project and the Center for Media Educat

ion — petitioned the FCC to deny AOL’s and Time Warner’s request for transfers of control. Part of the group’s argument was that the merger of AOL and Time Warner would strangle the growth of DSL.

“By focusing the attention of the largest narrowband ISP on cable modem service as the delivery medium for the broadband Internet, it dramatically reduces the chance that telephone based DSL service will become a significant competitor for high-speed Internet service in the residential sector,” the group said in it’s petition.

As for AT&T, the group of non-profits argued that the merger of AOL and Timer Warner would allow for the creation of a powerful duopoly — AT&T and AOL Time Warner — sharing control of several markets, including cable programming, ISPs and cable broadband connections. The group said the problem is exacerbated by the fact that AT&T has a stake in AOL and, through its merger with MediaOne, also has a stake in Road Runner.

In light of this, the commission asked the companies to disclose any existing joint ventures or contracts either of them have with AT&T. AOL said it has a Mobile Channel Agreement with AT&T Wireless Services which provides for the distribution of AOL Mobile Channel via the AT&T Digital PocketNet Service. It has also entered into an Internet peering agreement with AT&T under which the two will exchange traffic bound for one another’s IP networks.

Time Warner’s relationship with AT&T is far more extensive:

  • AT&T holds an equity interest in Time Warner Inc. amounting to about 9 percent of the company’s total equity but which represents less than one percent of the voting power
  • Through the merger with MediaOne, AT&T acquired the approximately 25 percent limited partnership interest that MediaOne held in Time Warner Entertainment Company L.P.
  • AT&T acquired MediaOne’s 31.4 percent interest in Road Runner; Time Warner holds about 40 percent indirect ownership interest in Road Runner. (The Department of Justice ordered AT&T to divest its interest in Road Runner by Dec. 31, 2001 as part of the approval conditions for its merger with MediaOne.)
  • AT&T owns, through its merger, 6.28 million shares of Time Warner Telecom Inc. Class B stock, less than six percent of total outstanding shares and less than 10 percent voting interest; Time Warner holds 47.05 percent of the equity and has 66.68 percent of the voting power
  • Time Warner Cable and AT&T subsidiaries share a general partnership in Kansas City Cable Partners, which owns and operates cable television systems in Missouri and Kansas
  • A Time Warner subsidiary and an AT&T subsidiary share a limited partnership in Texas Cable Partners L.P., which owns and operates cable television systems in Texas
  • Comcast, Time Warner Entertainment and AT&T own the CAT Partnership, which owns the cable television systems serving Watertown, NY and Hattiesburg, MS
  • Comcast, Time Warner Entertainment, Cox Communications Holdings Inc., MediaOne of Delaware Inc. and TCI Communications Inc. (an AT&T subsidiary) hold stakes in iNDEMAND (formerly Viewer’s Choice), which provides pay-per-view movies and events to multichannel video programming distributors
  • Time Warner and Liberty Media Group (AT&T wholly owns Liberty Media Group) each indirectly own 50 percent of Courtroom Television Network LLC
  • Time Warner Entertainment Company L.P., Time Warner Entertainment-Advance/Newhouse Partnership and TCI Cable Management Corp., along with several other companies, all hold stakes in National Cable Communications LLC, which sells and distributes national advertising on cable programming networks
  • Time Warner Entertainment, TCI Cablevision of Ohio Inc. and TCI/TKR Limited Partnership are partners in Cincinnati Cable Advertising Interconnect L.P., which sells and distributes local advertising on va

    rious cable television systems in the greater Cincinnati area

  • Time Warner subsidiary KBL Ventures Inc and MediaOne (now AT&T) subsidiaries Cable TV North Central, Continental Cablevision of St. Paul Inc. and King Videocable Co. each have a 25 percent stake in Interconnect of the Twin Cities, an entity that sells and distributes local advertising on cable systems in and around Minneapolis, MN
  • Time Warner Entertainment-Advance/Newhouse Partnership, Comcast, Continental and TCI hold stakes in The Detroit Cable Interconnect L.P., which sells and distributes advertising on cable television systems in and around Detroit, MI
  • Time Warner Entertainment-Advance/Newhouse Partnership, Marcus and TCI share ownership in Greater Birmingham Interconnect, which sells and distributes local advertising on cable systems in and around Birmingham, AL.
  • Five Time Warner subsidiaries and four AT&T subsidiaries, along with several other companies, share ownership in Adlink Cable Advertising, which sells and distributes local advertising on cable television systems in California
  • Time Warner Telecom, AT&T Communications of California Inc., and TCI Telephony Services of California Inc., along with a number of other companies, hold stakes in West Coast Portability Services LLC, a telephone number portability company
  • Time Warner indirectly owns 37.25 percent of Time Warner Entertainment Japan Inc., while AT&T holds 12.75 percent.

The FCC is still digesting the filing and has not yet determined if additional information will be necessary.

The FCC is shooting for an October decision in the authorization review of a transfer of licenses and permits from Time Warner Inc. and America Online Inc. to the combined AOL Time Warner entity. The transfer of licenses and authorizations is a necessary part of the AOL Time Warner merger. Even with FCC approval however, the companies will still have to jump through Federal Trade Commission (FTC) and Department of Justice hoops before the merger can be completed.

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