RAY SUAREZ: AOL Time Warner executives celebrated their mega media merger today to the sound of the New York Stock Exchange opening bell. They got the green light from the Federal Communications Commission last night to combine the nation's largest Internet service provider with its second largest cable company, and immediately changed the sign outside the headquarters in New York. Chairman Steve Case offered his plans on ABC's "Good Morning America" today.
STEVE CASE: Now the real opportunity is to bring these worlds that have been kind of separate-- the personal computer, technology, Internet industry over on that side, and the media, entertainment, and communications industry over on that side-- and bring these together in a very integrated way to create kinds of services that otherwise wouldn't have been possible.
RAY SUAREZ: The deal's approval comes a year and a day after it was originally announced. Gerald Levin of Time, who is now the CEO of the merged entity, says the companies used the year well.
GERALD LEVIN: We've actually had a year of integration of organization, and now we're going to hit the ground running.
WILLIAM KENNARD: I am very pleased that this transaction is now complete.
RAY SUAREZ: Approval by the FCC came after consideration of consumer groups' objections, and a prior agreement had been forged at the Federal Trade Commission. Chairman William Kennard today said the FCC had also approved the historic merger with conditions. AOL-Time Warner is required to allow Internet service providers to control the first screen their customers see when they log on, to enable customers using the AOL instant messaging service to communicate and share video or music with customers using rival services, to allow companies using Time Warner high-speed cable access lines to directly bill their customers. The AOL-Time Warner executives promised to run the business not just in the shareholder interest, but in the public interest.
RAY SUAREZ: Evaluating the AOL-Time Warner merger was the last item on Chairman Kennard's to-do list. He announced today that he is resigning from the FCC, effective next Friday. He joins us now for a Newsmaker interview. William Kennard, welcome.
WILLIAM KENNARD: My pleasure.
RAY SUAREZ: In your announcement you green lighted the deal, you said "I took a hard, careful look at this merger to make sure this marriage would benefit consumers." How does a merger of two industry giants like this benefit consumers?
WILLIAM KENNARD: Their burden was to come to the FCC and demonstrate that this merger would serve the public interest. We took a hard look at it and we determined that it could only serve the public if it would not jeopardize what we cherish about the Internet, which is being an open, robust place where competitors can come and offer their services to consumers. So we imposed some very important conditions on our approval to make sure that consumers are protected.
RAY SUAREZ: Well, give us some examples of what the two companies had to do in order to pass muster, not only with your commission but with the Federal Trade Commission?
WILLIAM KENNARD: It essentially came down to two areas. We have to make sure that a very exciting service that is being offered in the Internet today, instant messaging, continues to develop in a competitive environment. So we made sure that AOL is able to interoperate or required to interoperate with its competitors. The other area is broadband cable. You know, so many Americans today have awakened to the power of the Internet in their lives and they want it to move faster. And our challenge was to make sure that as people start using broadband over cable, that they can access the services that they want, so that if you're an AOL Time Warner subscriber but you want to use an ISP that competes with them like Earthlink or Juno or Microsoft, that you'll be able to access that competitor. It is all about competitive choice for consumers.
RAY SUAREZ: Now, it is interesting that so much of the deliberations in this final period focused on instant messaging. I'm sure many AOL subscribers have gotten a little note from a friend, two lines in the left hand corner of their screen when they're logged on, and it's hard to imagine the largest merger in American history hinging on that…with the little tinkly bell that you hear when the message comes up.
WILLIAM KENNARD: Right. Sometimes it is an annoyance, actually. But instant messaging is very significant because what is happening is people are creating communities online, and instant messaging is the key to this. So if you're an AOL subscriber, you have a community of people that you can communicate with, and that little pop-up box tells you when your friends are online. The problem today is that competing services can't interoperate. It's as though you had a telephone network and in order to communicate with all your friends using different telephone companies, you had to buy two or three or four phones. That's not good for consumers. And so what we've required is that as AOL puts its assets together with Time Warner, that they have to interoperate so that competition can flourish in this particular area.
RAY SUAREZ: So under the terms of the deal, if you're logged in with a different Internet service provider, you would be able to use instant messaging to talk to people who are logged on another network.
WILLIAM KENNARD: Exactly. If your community of users is AOL and that's who you subscribe to but you have friends on Yahoo, you want to be able to communicate with them without having to subscribe to Yahoo in addition to AOL. That's what this is all about, giving consumers the ability to seamlessly communicate with one another using instant messaging on different competitive services.
RAY SUAREZ: Now, for its part, AOL has downplayed this a little. Chairman Steve Case said this is a feature, not a product. And he has questioned whether it is as critical as your commissioners seem to think. What's the future? When your commissioners look down the road at instant messaging, what were they thinking about that made it so critical to their deliberations?
WILLIAM KENNARD: Well, the importance of instant messaging is that it creates an online community. AOL is clearly the dominant provider of Internet access. It has 26 million subscribers. The next larger competitor, Earthlink, only has 4.6 million subscribers. So AOL is becoming the place to be in the Internet space. We don't want to create a situation where one company becomes so dominant that no other competitors have a chance. You know, it's not unlike what happened over 100 years ago at the beginning of the last century when we had a company, AT&T, that became very dominant in the telephone marketplace, and by refusing to interconnect with its competitors, AOL effectively had a monopoly. ....
RAY SUAREZ: AT&T.
WILLIAM KENNARD: AT&T - I'm sorry --- effectively had a monopoly. We don't want to create that situation. We've worked too hard to create competition in this space. So we are ensuring that consumers will be able to have a competitive environment for instant messaging.
RAY SUAREZ: Are you really creating competition, though, when the largest Internet service provider, which is looking forward to the future of streaming video and broadband, real-time communications, hooks up with the second largest cable company in the country, allowing them access to those fat wires rather than the skinny they're using to enter homes now?
WILLIAM KENNARD: Well, remember, it's a careful balance here. There are some pro-competitive aspects of this merger as well; for example, putting these two companies together hopefully will spur the deployment of lots of new products and services to consumers. When you can marry a company like Time Warner that has lots of content and libraries with a company like AOL, we don't want to deprive consumers of these new products but nor do we want to allow one company to become too dominant. So what we've done is impose some very narrowly tailored conditions to make sure that these companies can come together, pool their resources and innovate without becoming the 800-pound gorilla that could unfortunately squelch competition by other competitors.
RAY SUAREZ: As part of the terms of the deal, will successor FCC's after you leave, be revisiting the company to make sure it's complying with the terms of the agreement?
WILLIAM KENNARD: Yes, under the terms of our order that we just released, AOL will have to periodically report to the FCC on its progress in meeting our standards for interoperability. And so there will be some ongoing oversight and vigilance here.
RAY SUAREZ: Let's talk about your time at the FCC. It has been a wild time to be commissioner, having to implement the 1996 Telecommunications Act. When you look back, what are the highlights of your time in the job?
WILLIAM KENNARD: Well, I feel very privileged. It's been a very important time to have this job because communications is becoming so important to all Americans and people all around the world. When I look back at my three-year tenure, I'm most proud of the work that we did to promote competition in these markets, to reduce telephone rates for consumers. We've seen an explosion of technology in the wireless area and broadband, and the FCC had a lot do with that. I also feel very proud that in doing so, we didn't forget about those people who are most in danger of being left behind. You know, whenever you have new technologies and new products, there is always a danger that people on the wrong side of the digital divide will not get access. And we focused a lot of attention, listened to people in the inner cities and on Indian reservations and the disability community to make sure that they are getting access to this technology just like everyone else.
RAY SUAREZ: So if you are in a poor neighborhood, if you are in a poor county, are you more likely to be able to log on somewhere than you were four years ago?
WILLIAM KENNARD: Absolutely. For example, when the Clinton-Gore administration came into office in 1992, and 1993, very few of our schools and libraries had access to the Internet. Today, 95 percent of our schools have access to the Internet. By the end of this year, we will have wired a million classrooms to the Internet. That's because of investments that we made in government to make sure that all of our children get access to technology. We have created lots of policies to ensure that people with disabilities have access to technology. And it's very, very important that government continue to play a role in making sure that as we move into this digital age, we all move together as a country, because increasingly technology is defining everyone's potential how we learn, how we communicate, how we do business. And we can't afford to have a country where some people have access and some people don't.
RAY SUAREZ: Do you feel reassured as you prepare to leave the job that the Telecommunications Act is keeping the promises it made during the debate over its passage?
WILLIAM KENNARD: I do. I do believe that this act is working; that we have implemented it in an aggressively pro-competitive way. But there will - it requires ongoing oversight. You know, I sometimes get worried when I hear people talk about being, you know, business friendly. Business friendly means competition, it means holding a check on consolidation and making sure that this explosion and new entrepreneurial companies continues to flourish. And that will require that government continue to play a role in this area.
RAY SUAREZ: Chairman Kennard, thanks for joining us.
WILLIAM KENNARD: Thank you.