September 29, 2000 Ms. Deborah Lathen Chief, Cable Services Bureau Federal Communications Commission 445 Twelfth Street, S.W. Washington, D.C. 20554 Re: In the Matter of Applications of America Online, Inc. and Time Warner Inc. for Transfers of Control (CS Docket No. 00-30) Written Ex Parte Presentation Dear Ms. Lathen: This letter summarizes and elaborates upon the information submitted by America Online, Inc. ("AOL") and Time Warner Inc. ("Time Warner" and, together with AOL, the "Applicants") concerning the merged company's plans for offering interactive television ("ITV") services. The high degree of interest in the promise of ITV has been reflected, to some degree, by comments submitted in this merger proceeding. Certainly AOL and Time Warner hope and expect that our merger will help drive consumer awareness and adoption of interactive television offerings. However, a number of concerns raised in this proceeding regarding AOL's current ITV offering, AOLTV, are factually incorrect and/or irrelevant. A handful of competitors-most conspicuously The Walt Disney Company-have argued that AOL Time Warner will harm competition by discriminating against non-affiliated program providers or unaffiliated ITV providers in the provision of video and interactive services. As discussed below, these contentions lack a grounding in fact and the related requests for Commission action lack any basis in law. Several of the expressed concerns relate to services that do not, in fact, exist. Furthermore, none of these contentions is specific to the AOL/Time Warner merger; rather, any issues relevant to the provision of interactive TV services are industry-wide in character and not appropriate for merger-specific regulation. In order to help clarify these issues, the information set forth below provides a brief overview of the current state of evolution in ITV services, a detailed description of how AOLTV operates, and a showing that any fears about "downstream" or "upstream" provision of video or interactive content are unfounded. Furthermore, the discussion below points out that recent Commission precedent-particularly the AT&T/MediaOne Order-makes clear that these claims warrant no FCC action. Broader policy issues that may remain unsettled, such as the extent of cable operators' obligations to carry broadcasters' digital signals, should be (and are being) resolved in rulemaking proceedings of general applicability. I. Interactive Television is a still-nascent service with a range of entrants whose offerings incorporate a variety of different functions. Although the concept of interactive television has been around for more than two decades, ITV services have only recently become available to consumers. Given that ITV is still a nascent business, it is not surprising that even the term "interactive television" has meant different things to different people. Even now, as a new generation of ITV services are emerging, the term encompasses a diverse set of potential "enhancements" to the television viewing experience, including Internet-on-the-TV-set, various hybrids of traditional TV and Internet features on the TV, video-on-demand services, interactive program guides and consumer electronic devices that permit viewers to interact with their television sets. What remains to be seen is whether any particular enhancements or combination of these potential ITV features will succeed in the marketplace. To date, many attempts at ITV have failed, either because of lack of consumer interest or limits of the technology. Nevertheless, an industry-wide interest in offering interactive TV is at an all time high now, thanks largely to technical advancements and a perception that consumers now have a greater understanding of- and interest in-interactive services generally. Many companies, both well known and new start-ups, have endorsed this perception by entering the ITV marketplace with services in some form. The largest ITV company, Microsoft, has attracted approximately one million subscribers in its four years of offering its WebTV interactive service. WebTV provides consumers with an interactive electronic program guide, interactive content, Internet access, e-mail, chat, and Microsoft's own instant messaging system-and Microsoft is embedding its Microsoft TV software into its next-generation Windows operating system. A brief review of some of the interactive television services now available suggests the varying forms of offerings that fall under the ITV label: ? Microsoft is using a dial-up telephone link to provide, as noted above, TV screen access to the World Wide Web; ? TiVo and consumer electronic companies are creating interactive Digital Video Recorders; ? Companies like Wink and RespondTV, are exploring "e-commerce"-or, as some are beginning to call it, "t-commerce"-opportunities over the television; ? GemStar is creating interactive electronic program guides and services; ? Along with efforts by cable operators to offer video-on-demand and other innovative services, WorldGate Communications, Inc., ICTV, Inc., MoreCom, Inc., Diva Systems and Peach Networks, Ltd., are using the television to provide video-on-demand and other interactive services such as e-mail, instant messaging, and on-screen shopping; and ? Liberate Technologies and other software and hardware companies are creating middleware packages to enable the display of interactive television content. All of these interactive services, separately and in combination, are or soon will be available over a variety of transmission mediums, including satellite, cable, DSL, and narrowband connections. In short, the ITV marketplace is a nascent and fluid one: the number of entrants is high, consumer demand is uncertain, innovation is ongoing, and no one party can claim to know what the marketplace will determine to be a successful interactive TV offering. II. AOL's entry in the newly emerging ITV marketplace-AOLTV-is built upon open standards and platform independence. It is into this emerging arena that AOL recently announced the launch of its interactive television service-AOLTV. Designed to enhance the consumer television experience by offering some of the convenience and empowerment found today only on the computer, AOLTV comprises a broad array of interactive features. These include: ? Improved channel navigation-AOLTV provides state-of-the-art interactive navigation features designed to help viewers more quickly and easily select their favorite channel or TV program, including the ability to "bookmark" their own favorites. ? Interactive communication features-AOLTV offers popular Internet features designed for enabling users to read and send e-mail, exchange instant messages, and chat online. ? Internet access-AOLTV provides open Internet access to all content available on the World Wide Web. ? Enhanced interactive content -AOLTV enables users to interact with any programming in which the programmer chooses to put interactive content. Consumers can receive the benefits of AOLTV by acquiring a set-top box from a retailer and subscribing to the AOLTV service for a monthly fee. One of AOL's fundamental business premises is that consumers will be attracted in large numbers to this new product only if AOL can persuade a wide variety of video programmers- broadcasters and cable programmers alike-to build new, innovative interactive components into their television programming. There is no question that easier-to-use navigation, interactive communications, and Internet access on the television set will appeal to those that have built interactivity into their lives . . . but only when the television experience is dramatically transformed through the power and convenience of interactivity will this new form of interactive experience take off. We do not know how, when or even if that will happen. And it will happen only if a large number of the most popular television networks and programs experiment with new interactive elements. AOL-joined together with the skills, resources and creativity of Time Warner brands- can begin to address this "chicken-and-egg" problem, but that alone will certainly not be enough to create compelling interactive TV product. AOLTV's success depends on working with others in the industry to create additional interactive content. Quite contrary to the suggestion of our competitors, we believe strongly that there is no advantage in denying consumers access to a full array of content sources. Indeed, AOL and Time Warner's surest route to failure in interactive television would be to restrict or degrade consumers' access to a true diversity of interactive content and service offerings. With these fundamental principles in mind, the AOLTV service has been designed to be accessible by all potential providers of video programming, including any enhanced programming that the provider might wish to supply. This understanding, in turn, has driven the "openness" of AOLTV's technical design, described in more detail below. As a threshold matter, the AOLTV service simply passes through to subscribers the video signal just as that signal is provided by their existing video programming source. AOLTV's interactive functionality accompanies that video programming without altering the video signal itself. That interactive data stream requires two-way connectivity to the Internet. The current AOLTV set-top box relies upon a built-in dial-up modem to connect to the Internet. Likewise, AOL's planned second-generation set-top box, which will work in conjunction with DBS operator DirecTV's MVPD service, also will utilize a narrowband Internet connection. AOLTV uses software developed by Liberate Technologies. This software enables AOLTV's interactivity by incorporating the open ITV standards established by the Advanced Television Enhancement Forum ("ATVEF"). In order to make available the widest possible variety of ITV content and thereby drive consumer demand for this new service, AOL enables any video programmer (working with the ATVEF standard) to provide interactive content to AOLTV subscribers-regardless of whether that video programmer has any agreement or relationship with AOL. Interactive content is created for the AOLTV service using the HTML open Internet standard (i.e., the language used to design web pages). That interactive content is then transmitted by a video programmer in accordance with ATVEF standards. ATVEF-enabled ITV requires the use of a consumer electronic device-in this case the AOLTV set-top box, but also other consumer electronic devices, such as television sets and third-party set-top boxes-that is capable of receiving and interpreting ATVEF data embedded into a video programmer's signal. In the provision of ITV, ATVEF data performs two functions. First, it lets the AOLTV set-top box know that interactive content is available through what is known as a "trigger." When the device detects a trigger, it displays on the television screen an icon that the user can click on (using, for example, a remote control device or a wireless keyboard) to access interactive content. Second, ATVEF provides for the delivery of the interactive content itself. That delivery can either be accomplished directly, by embedding the actual content into the video signal, or indirectly, by instead embedding a link to a web site from which the content can be retrieved over an Internet connection. Finally, the interactive content is delivered by the user's chosen MVPD and/or via an Internet connection to (again, in this case) the AOLTV set-top box, which synchronizes that content with the video signal and displays it on a TV set. The AOLTV set-top box displays the video programmer's content on the television screen in the way that the video programmer has chosen. As AOL has previously described, this would allow the display of its interactive content as a "wrap-around" contemporaneously with its video programming (via the "picture-in-picture" technique) in the same manner that an AOLTV partner's content is displayed. Indeed, to enable subscribers to enjoy consistent quality and presentation in interactive content regardless of the source, AOLTV freely publishes a style guide to help programmers create and display their interactive content over the service. This style guide allows (but does not require) unaffiliated programmers to format and fashion their interactive content to appear just like that of AOL's interactive content partners. AOL recognizes that one of the main reasons why ITV has yet to fulfill its promise to revolutionize the television-viewing experience is that there has been an insufficient amount of quality interactive material to attract viewers. AOL has taken the steps described above to address that problem-by allowing AOLTV subscribers access to the widest possible range of innovative, dynamic, and entertaining interactive content. III. The "cable return path" model advanced by some does not exist, may not lawfully be mandated, and is not necessary to ensure the viability of competitive interactive TV. As described above, AOLTV enables any video programmer to offer ITV to AOLTV subscribers. Thus, a video programmer (whether working as an AOLTV partner or independently) has the option of (1) taking advantage of the ATVEF-enabled capabilities of the AOLTV service, (2) working with one of the many other ITV providers, or (3) developing its own set-top box and/or interactive service, as Congress and the Commission have made possible for it to do through the equipment compatibility and commercial availability of navigation devices rules. Some, however, have questioned whether a merged AOL Time Warner will be able to preclude the introduction of other interactive TV services because of its ownership of broadband cable infrastructure. As demonstrated by our explanation of how AOLTV and other ITV services operate, the answer is no. Simply put, AOLTV and other ITV services simply are not dependent on cable in order to provide interactive services to consumers who receive their video service from cable (or any other MVPD). In any case, for AOL's interactive service to by truly successful, moreover, it must be available nationwide. To offer a nationwide interactive television service utilizing a cable set-top box that integrates ITV and MVPD service, a national set-top box standard for cable must be developed. Otherwise, an ITV provider would be burdened with the need to develop a service that complied with each MSO's distinct standard. AOL, which would remain an unaffiliated ITV provider as to more than eighty percent of the cable marketplace even after this merger, is thus incented to ensure that its interactive service works nationwide, regardless of the MVPD. (This explains why the first generation AOLTV set-top boxes use a dial-up connection to the Internet and open, ATVEF-compliant standards.) For the same reason, no cable operator or ITV provider will be in a position to preclude the success of other ITV services. Yet some would argue that cable must provide a "return path" to interactive services of all content providers. As ITV services continue to emerge into a viable business, however, there is no need for any such regulatory action in general, much less in the limited context of a merger review proceeding. Indeed, any such requirement would, in effect, be the imposition of what amounts to "Internet must-carry" obligations-i.e., governmentally mandated free Internet access service. If applied in the context of this merger, it would constitute Internet must-carry imposed upon a single cable MSO. There is no basis in fact, policy, or law to support such an expansion of the regulation of cable operators generally, much less one cable operator in particular. First, any argument relating to how the cable operator will provide a "return path" for interactive services is entirely speculative. With respect to Time Warner, for example, Time Warner offers no ITV cable return path today, either to itself or to third parties, and neither the hardware, software, nor business model necessary to provide such a return path exists today. Moreover, as explained above, there are two distinct components to ITV: (1) the video programming component, which involves the one-way, downstream transmission of full-screen, broadcast quality video to the consumer, and (2) the interactive component, which allows the user to interact with web-style content, some of which is embedded in the video programming signal and the rest of which is accessed over a full-fledged, two-way connection to the Internet. The ATVEF standard enables the interactive component in two ways: (1) directly-by embedding that data in the video signal (the ATVEF-B standard); and (2) indirectly-by providing, not the actual interactive content itself, but rather the address (i.e., the universal resource locator, or "URL") of a web site from which the ITV hardware (typically a set-top box) can obtain that content (the ATVEF-A standard). In the first scenario, everything needed for the interactivity is contained within the video signal. In the second scenario, however, there must be available both an upstream path-so that when the user clicks the on-screen trigger containing a URL, that web site request is able to reach its destination-and a downstream path-over which the content located at that web site is transmitted to the user's ITV hardware, which then displays that content on the television screen. Thus, rather than merely a "return path," what is required to fully enable web-based interactive services is a complete Internet connection. There is no basis, however, for the claim that the two distinct components of ITV are now, let alone must be, provided over cable systems. Merely because cable (the MVPD service), and cable modem service (the Internet access service) can both operate over the same HFC facilities does not mean that cable modem service is necessarily a better option for the interactive component of ITV, let alone the only option. There are, in fact, a range of options for both video programming distribution and Internet connectivity which can be offered in virtually any combination as "ITV service." With regard to the provision of the video programming component, there are a number of choices: while cable is obviously a popular MVPD, there is also DBS-an increasingly successful MVPD alternative, and the video programming component for the next generation of both AOLTV and Microsoft's UltimateTV -as well as various other forms of MVPD service and over-the-air broadcast as well. And in terms of the interactive component, any of the alternatives for Internet access- dial-up, DSL, cable modem service, satellite, wireless, etc.-are capable of providing the necessary two-way Internet connectivity. Moreover, because the bandwidth requirements of ITV are not necessarily substantial, there is no requirement that this Internet connection be high- speed; as is the case with AOLTV, a dial-up 56 kbps modem connection will fully suffice. Beyond the fact that there is no practical need for any "return path" requirement to be imposed on cable, there is absolutely no basis for doing so here. The must-carry obligations of cable operators are either, in the analog context, the subject of Commission regulations, or, with respect to digital television, currently the subject of an FCC rulemaking proceeding. In neither instance, however, has Congress or the Commission even considered requiring cable operators to provide broadcasters with a free upstream path, let alone full, two-way Internet access. Time Warner cable systems will pass through any and all video programming-related information that it is required to by the Commission, and is open to commercial negotiations regarding the carriage of additional data outside that scope. IV. In any event, "cable return path" concerns are not caused by or specific to the AOL/Time Warner merger. As several Commissioners reflected in their statements during the July en banc hearing on our proposed merger, it is well-established FCC policy that a merger proceeding is the wrong forum for making broad legal and policy decisions affecting an entire industry. For example, Commissioner Ness stated that: [W]e must ask ourselves whether the potential harms are caused by or exacerbated by the merger of these parties; an issue that does not implicate the fundamental concerns of the Commission, no matter how timely or interesting it might be, or is not merger-specific should not affect our decision whether to grant, condition, or deny the merger application. Commissioner Powell further observed that: It is very difficult to grasp the effect of this combination on consumers in markets that have barely emerged or have yet to be created at all.. It is important to emphasize that many of the interesting challenges, questions and concerns that might arise from this combination are not within the scope of our review, nor are we necessarily empowered to address any and all such questions. While ITV-related concerns raised in this proceeding obviously target Time Warner's cable systems, their premise-the notion of cable as a "bottleneck provider"-would (however misplaced in the ITV context) equally apply or not apply to almost every local cable system in the country. Indeed, the focus of, and basis for, these contentions is really the future of Title VI cable regulation, not this merger. Issues concerning cable's place in the evolving FCC regulatory scheme will affect the entire cable industry, not just AOL Time Warner. Imposition of such "Internet must-carry" obligations would constitute policy determinations of industry-wide significance which are without precedent or enabling legislation. At a minimum, they should be dealt with in proper notice-and-comment rulemaking proceedings, affording all interested parties the opportunity to address the industry-wide implications of any particular proposal. * * * The facts now before the Commission in this proceeding show that the interactive television arena is a young but highly competitive one, with many new entrants offering a wide array of different services under the ITV label. AOL's current ITV offering, AOLTV, is designed to incorporate many attractive components into one service-and, in doing so, to employ open standards that allow unaffiliated program providers to deliver interactive or enhanced content with their traditional video transmissions. This approach reflects our understanding that interactive television will make good on its potential only if it offers viewers the widest possible array of content from the broadest possible number of sources. Video programmers and others surely have much creativity to offer in this interactive TV marketplace of tomorrow. Unfounded invention of "Internet must-carry" obligations for a single cable operator, however, is better suited to stifling-rather than fueling-the promising ITV future. Respectfully submitted, AMERICA ONLINE, INC. TIME WARNER INC. _______________________________ _______________________________ George Vradenburg, III Senior Vice President Global and Strategic Policy America Online, Inc. 1101 Connecticut Avenue, N.W. Suite 400 Washington, D.C. 20036 Timothy Boggs Senior Vice President Global Policy Time Warner Inc. 800 Connecticut Avenue, N.W. Suite 800 Washington, D.C. 20006 cc: William Johnson, Deputy Chief, Policy and Rules Division, Cable Services Bureau Royce Dickens, Deputy Chief, Policy and Rules Division, Cable Services Bureau Darryl Cooper, Cable Services Bureau Nancy Stevenson, Cable Services Bureau Peter Friedman, Cable Services Bureau Linda A. Senecal, Cable Services Bureau Dale Hatfield, Chief, Office of Engineering and Technology David J. Farber, FCC Chief Technologist, Office of Engineering and Technology Robert Pepper, Chief, Office of Plans and Policy Michael Kende, Office of Plans and Policy James Bird, FCC Assistant General Counsel Magalie Roman Salas, Secretary (2 copies) International Transcription Service The Myers Group, LLC and eMarketeer, Inc., Interactive Television Outlook 2000 at 18- 19 (June 2000). (Submitted as attachment to Letter of Lawrence R. Sidman, Counsel to the Walt Disney Company, to Magalie Roman Salas, Secretary, Federal Communications Commision, CS Docket No. 00-30 (September 7, 2000). Id. See Microsoft Press Release, Philips Electronics and WebTV Networks to Deliver New Personal TV Hardware and Services for Customers, January 6, 2000, . See Stephanie Miles, Will Microsoft's Next OS Run Your TV?, September 5, 2000, MoreCom's ITV service, for example, provides Internet access and services to subscribers through two-way modems built directly into digital set-top boxes by equipment manufacturers such as Scientific-Atlanta, Inc. See Fred Dawson, WorldGate, ICTV, Others See ITV Momentum, December 13, 1999, . See AT&T to Test Liberate Middleware, September 25, 2000, . See, e.g., AOL Press Release, America Online Launches AOLTV - The First Interactive Television Service for the Mass Market, June 19, 2000, . AOL announced the launch of the new service on June 19, 2000. AOLTV is currently being test marketed in select cities and will be introduced through a much larger roll-out as the system is refined. 47 U.S.C.  549. 47 C.F.R.  76.1200. As Commission analysis demonstrates, compliance with the national cable ownership cap rules, in combination with the growing availability of alternative broadband platforms ensures the competitive functioning of the interactive content and services marketplace. See Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne Group, Inc., Transferor, To AT&T Corp., Transferee, CS Docket No.99-251 (rel. June 6, 2000) at 59, 116 ("AT&T/MediaOne Order"). Specifically, in AT&T/MediaOne, the FCC concluded that compliance with the cable cap restrictions will prevent a vertically integrated cable system/content provider from being able to stifle competition from a broad array of rival "content providers"-a group that the agency defined as including unaffiliated video programmers and "interactive service providers." The Commission found that competition in the national MVPD arena guarantees that rival content providers will be able to reach a sufficient number of consumers to succeed and flourish in the marketplace. "We find that our requirement that AT&T [comply with the cable cap] will circumscribe AT&T's purported ability to harm unaffiliated content providers [defined elsewhere as unaffiliated video programming networks and interactive service providers], unaffiliated EPGs, and other MVPDs.." AT&T/MediaOne Order at 90. In addition, as to set-top box devices used in providing any such service, the Commission ruled that "by requiring MVPDs to grant all equipment manufacturers an opportunity to sell equipment to the MVPDs' subscribers, the navigation devices rules limit MVPDs' ability to exercise market power and dominate the equipment market." Id. at 100. See Press Release, Microsoft, DIRECTV and THOMSON multimedia Join Forces To Make Television More Personal and Interactive, June 12, 2000, . Petition for Special Relief Seeking Commission Order to Discontinue Stripping Information from Broadcast VBI, CSR 5528-Z, DA 00-670 (March 24, 2000). Review of the Commission's Rules and Policies Affecting the Conversion to Digital Television, CS Docket No. 98-120, 2000 FCC Lexis 3468 (June 30, 2000). In any event, the existence of growing competition among rival facilities providers means that "action taken by the merged firm to disfavor unaffiliated broadband content and applications providers is likely to threaten the networks' ability to attract and retain customers." AT&T/MediaOne at 123. The Commission in AT&T/MediaOne thus reached the exact determination that AOL and Time Warner did in deciding to forge the new company: consumers who have grown up with the emerging online medium expect and demand that any Internet- based service provider afford them access to all possible content, regardless of the source. See, e.g., AT&T/MediaOne Order at 143 ("[T]he potential harm alleged by the commenters is not specific to the merger.... [T]he merger is not the cause of this alleged competitive threat, and the merger license transfer proceeding is not the appropriate forum to address this issue."); AT&T/TCI Order at 43 ("[T]his is like other cases where the Commission has declined to consider, in merger proceedings, matters that are the subject of rulemaking proceedings before the Commission because the public interest would be better served by addressing the matter in a broader proceeding of general applicability."). En Banc Hearing on America Online, Inc. and Time Warner Inc. Applications for Transfer of Control, CS Docket No. 00-30, July 27, 2000 ("En Banc Hearing"). Id. Commissioner Furchtgott-Roth also observed that the FCC's "asking whether a particular license transfer would serve the public interest, convenience and necessity entails a significantly more limited focus than contemplating the industry-wide effects of a merger between the transferee and transferor. Our inquiry should be limited to whether the proposed transferee has and will comply with applicable Commission regulations. Our inquiry should not consider, for example, how the combination of the two companies might affect other competitors .." Id. Disney and ABC themselves strenuously advocated precisely this position in their own groundbreaking merger: "Obligations imposed in a piecemeal fashion that result in certain broadcasters (i.e., broadcasters targeted by transfer-of-control petitioners) having to carry programming that other broadcasters are not required to carry would be arbitrary and unfair, putting those broadcasters at a competitive disadvantage." Opposition of the Walt Disney Company to Petition to Deny, File Nos. BTCCT-950823KE-KZ, BTCH-950823LA-LJ, FCC 96- 48, at 26 (filed Oct. 12, 1995). The Commission agreed-thereby adding to its long history of consistent precedent on the point. In re Capital Cities/ABC and the Walt Disney Company Applications for Transfer of Control, 11 FCC Rcd 5841, 5858 (1996). No commenter addressing ITV issues has presented the FCC with any grounds for departing from that precedent here. To the contrary, the Commission already is addressing some of the key issues in administratively appropriate forums: the ongoing digital must-carry rulemaking and the pending GemStar proceeding. (...Continued) (Continued...) 14 Ms. Deborah Lathen September 29, 2000 Page 12