- The Washington Times - Sunday, January 7, 2001

Last month, after almost a year of negotiation, AOL and Time Warner finally escaped the clutches of the

Federal Trade Commission by "voluntarily" agreeing that Time Warner would allow unaffiliated Internet Service Providers "open access" to the capacity on its broadband cable systems.

The venue immediately shifted to the FCC, where the merger applicants are seeking to stave off still more regulatory mandates before they will be allowed to consummate their merger. Ironically, Microsoft, heretofore a proponent of allowing the Internet to develop without government intervention, is now a leader of the last ditch effort at the FCC to introduce new government regulation of online services.

After gaining as much as they could on the FTC's regulatory playing field, AOL's competitors are asking the FCC to mandate a form of open access regime for AOL's instant messaging ("IM") service, one of the Internet's most popular applications. Presently AOL subscribers cannot send or receive instant messages to or from subscribers of the instant messaging systems of AOL's online competitors such as Microsoft, Yahoo and AT&T.; Although AOL claims it is working to resolve certain technical software issues in order to make its IM system compatible with those of its competitors, the competitors say AOL, with the largest number of IM subscribers, is stalling in order to impede the growth of competing systems.

AOL's rivals say that unless the government compels AOL to make its system interoperable, due to the network effects phenomenon attributable to AOL's large subscriber base, AOL will cement its dominant online market position.

In light of the rapid and unforeseeable changes in technology which are driving the Internet revolution, and the size of AOL's competitors such as Microsoft and Yahoo, it seems unlikely AOL will be able to sustain for long whatever dominance it may presently have in the online marketplace, even if it is not required to link its Internet applications such as IM with those of its competitors. Indeed, in defending itself in its antitrust case, Microsoft railed against those who argued it should be required in a dynamic technological environment to make its proprietary operating system interoperate effectively with non-Microsoft Internet applications.

In any event, if the lack of IM interoperability poses any potential risk to consumers by virtue of AOL's alleged dominance, the remedy definitely lies elsewhere than having the FCC fashion a public utility-style interconnection regime for competing online services.

It is important to have in mind the FCC's hook for reviewing the AOL/Time Warner merger at all. The parties hold various types of FCC licenses, almost all of them relating to Time Warner's cable business and none of them having anything to do with the operation of AOL's IM service. Whenever there is a transfer of control of an FCC license, the agency must make a determination that the transfer is in the public interest." The agency is being asked by Microsoft and other AOL competitors to refuse to find the merger is not in the public interest absent imposition of conditions requiring seamless messaging interconnection.

The FCC certainly has a recent history of using its vague public interest authority to impose all sorts of new regulatory conditions, even ones entirely unrelated to concerns arguably raised by the merger. Here, for example, it is difficult to understand how the proposed merger exacerbates whatever concerns independently might exist with AOL's IM system.

Indeed, it is extremely unlikely that the FCC would have initiated a proceeding to develop an industrywide regulation governing the interoperability of Internet services. Because the public interest standard is so indeterminate, however, it provides the agency with tremendous leverage to extract so-called "voluntary" concessions from parties eager to agree to almost anything to get their merger approved.

But if the FCC can't resist using its leverage in this instance, it will be taking a major step down the road toward regulation of the Internet, a road thus far it has wisely refused to travel. Not only wisely as a matter of policy, but as a matter of law as well. When Congress passed the Telecommunications Act of 1996, it declared its intention that the Internet should remain "unfettered by federal or state regulation." AOL's rivals may characterize the regulation they are seeking as a "modest step," but, in fact, they are seeking to import into the online environment an interconnection regime like that which has characterized the public telephone network. Surely Congress did not intend the Communications Act's vague public interest mandate to trump the more specific policy directive that the Internet remain free from regulation.

It is true that the FTC already has taken a not insignificant step down the road to Internet regulation by insisting on an open access mandate for Time Warner's broadband cable platform during its antitrust review of the proposed merger. While the wisdom of the FTC's approach may be questioned, at least it acted in the context of statutes giving it specific authority to assess the impact of merger proposals under competition standards. Notably, the FTC refused entreaties by AOL's rivals to require IM interoperability as part of the AOL/Time Warner settlement agreement. In the unlikely event it turns out that AOL gains and holds an unlawful monopoly position in the online marketplace that threatens consumer welfare, the appropriate remedy is recourse to the antitrust laws.

It would be most unwise, especially at a time when the high-tech sector is experiencing such financial distress, for the FCC to use its public interest authority in a license transfer proceeding to establish a public utility-type regulatory regime for Internet services. It's time for the regulators to recognize that the Internet world bears little resemblance to the days when Ma Bell dominated the communications industry.

Randolph J. May is a senior fellow and director of communications policy studies at the Progress & Freedom Foundation. The views expressed are his own. He writes a monthly column, "Fourth Branch," for Legal Times [p]


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