Senate Testimony

February 29, 2000: 8:09 p.m. ET

Time Warner's Gerald Levin

GERALD LEVIN, CHAIRMAN & CEO, TIME WARNER: Thank you, Chairman Hatch and Senator Leahy and members of the committee. I, too, am grateful for this opportunity to speak to you about the planned merger of Time Warner and AOL. And obviously, both of us will be happy to answer your questions.
    I know our merger announcement came as a surprise to many. And the truth is, for such a large transaction, it was worked out in a remarkably short period of time. Even more remarkable, while I'm sure such challenges don't exist here in Washington, we avoided any leaks.
    (LAUGHTER)
    And from my perspective, the AOL-Time Warner merger was not a bolt from the blue, but actually the fulfillment of almost three decades spent in the media business. Because I began my career with the quixotic hope, or so it seemed at the time, of using cable television to overthrow the stranglehold the broadcast triopoly had on television. When you have mavericks like Ted Turner, as well as myself, we believe that the real power of television would only be unleashed when it became a medium, driven by consumer choice, with programming alternatives that went far beyond what simply three advertising supported networks could deliver. And the success of that once radical notion, I think is reflected in today's premiere pay television networks, like Home Box Office, and the lineup of services that we have on our cable systems of hugely popular networks, such as CNN, Disney - I'll repeat that -Disney -
    (LAUGHTER)
    Discovery, ESPN, Nickelodeon, CNBC. Obviously, the list is very long. And although we would never claim that this early experience with cable gave us a clairvoyant glimpse of the Internet, it was, in fact, profoundly formative for us, because we were left with a conviction that we barely touched potential of technology to empower viewers to become their own programmers with no limits, no limits on their options.
    Possessed, as I was, of this belief, I committed my company in 1994 to the deployment of the world's first fully interactive digital network in our Orlando, Florida cable system. Short term, that full-service network, which of necessity was a closed system that needed to be invented from scratch, did not lead to any instant rollout of interactive television. But long-term, the risks that we took resulted in our engineers creating a breakthrough architecture that melded fiber-optic trunk lines with a coaxial connection to subscriber homes to offer a switched broadband avenue for interactivity.
    And so in 1995, Time Warner made a $5 billion commitment to rebuild its systems with broadband architecture. A commitment which now stands at more than $6 billion, and we entered into a social contract, a social compact with the Federal Communications Commission. In fact, by faith at that time in cable's pivotal part in the future of digital interactivity was so strong, that at a time when re-regulation put cable out of favor with investors, we undertook major acquisitions to expand our cable footprint.
    And at the very moment, we are opening the way for broadband delivery, the first great wave of a truly network society arrived in the form of the Internet. And today, we're all awash in that wave, or better yet, surfing it; and the sea change has been so sweeping and so profound, that it's hard to believe that the word "Internet" itself didn't enter Webster's until 1997.
    The growth of the Internet over so short a time reflects the sheer velocity of what's taking place. In 1995, there were 19 million Internet users. Five years later, there are over 200 million, and that number will cross one billion by mid-decade, led by AOL's easy-to-use consumer-friendly service, a constantly increasing number of people are making e-mail, instant messaging and e-commerce an integral part of how they live, how they work and how they communicate. It would be hard for me to exaggerate the implications of the Internet revolution because for the first time in our human history, we have at our disposal a universal limitless connection that no government, no corporation or centralized agency can control. Because every user has the ability to publish and to offer something new. In fact, every Web site contains the possibility of meeting consumer needs in more attractive, efficient ways so that the noise that you're currently hearing across the economic landscape is that of time-honored, in some cases, centuries-old business hierarchies as they crash to the ground. Because the first lesson of the Internet has already been written.
    If you think you can do business in the realm of digital inter-activity, the way you've always done business, you need to think again, because thinking again is precisely what Time Warner has been doing for the last five years, as we refocused on achieving a company-wide digital transformation.
    I've spoken of what that transformation did for our cable customers: providing broadband capacity for high-speed delivery of the Internet, but that was a part of a far larger effort, impelled by the nature of our content businesses which are operations intimately involved with artistic and intellectual expression in every form, we were pioneers in adapting our flow of creating offerings to this environment, because people throughout Time Warner understood the irrevocable impact of what was occurring. They embraced the almost inconceivably broad canvas the Internet provides for expanding the reach of their minds and imaginations.
    The challenge for Time Warner was never facing up to the historic significance of digital inter-activity. We jumped that hurdle while other media companies are still debating if there was a race. The challenge was time. The global economy, in general, and the global media industry in particular, are on fast-forward. They have entered a new context, and that is: Internet time.
    Beginning last September in Paris, Steve Case and I had the opportunity to work together as co-chairs of the global business dialogue on in e-commerce to help set internationally self-regulatory standards for Internet traffic.
    The next month, at the Fortune Magazine Forum in Shanghai, we continued our conversation about the relentless unfolding of the digital future. These locales couldn't help but underline the unique leadership that America enjoys in deploying and using the Internet, and the fierce competitive determination of entrepreneurs across the globe who are trying to catch and surpass us.
    Steve and I understood that those who wished to stay ahead in the instant evolution of this medium did not have the luxury of waiting on events. We saw that the company of the future, a company with the creative infrastructure to provide a constant stream of quality content, plus a genetic appreciation of how to form Web communities, and how to serve them easily and conveniently: such a company had not yet come into existence.
    The solution to that puzzle became obvious to both of us. By putting together AOL and Time Warner, we could create the first enterprise, not only fully prepared to compete on the Internet, and really a prototype for this 21st century, but a company that could be a decisive spur to bringing consumers everywhere, the speed and immediacy of broadband across all delivery platforms, wired or wireless; thus, unlocking the fullest possibilities of inter-activity.
    For my part, while the economic rationale for this merger was compelling, it was not sufficient. Before I could take the step of joining America Online in a merger of equals, I had to satisfy myself about three basic premises.
    First, at the very core, the very heart of Time Warner, the cornerstone of our global reputation and the enduring basis of the bond of trust that we've created with audiences in every part of the world, is commitment to journalistic independence, journalistic integrity. Ten years ago in a landmark decision that allowed the Time Warner merger to go forward, Chancellor William Allen of Delaware's chancellery court, spoke of our journalistic culture as truly unique, and deserving of protection and preservation.
    The addition of CNN in 1996 made that culture even richer and more far reaching. I want to assure you that I have always regarded the defense of that heritage as utterly central to my responsibilities as CEO, and in light of the continuing expansion of news and information outlets, many of which we carry in our cable systems, I've had a heightened awareness of Time's and CNN's role in upholding the standard for reliable, unbiased journalism.
    Steve Case has been equally clear about his unwavering commitment to journalistic independence, and I have to say that his unprompted offer to have me serve as the CEO of AOL-Time Warner was a further reaffirmation of that belief.
    Second, as a prime mover in the design and development and deployment of broadband networks, Time Warner assumed the financial risk, huge though it was of that investment, in the face of strong competition from DSL, DBS and other broadband providers. In building that capacity, we recognize not just the possibility of consumers having choice among ISPs, but in fact, the desirability. This we learned clearly and historically with HBO because the provision of choice is, in fact, a boon to the dynamic growth of cable subscriptions and a prod to the creation of new and better programming.
    AOL and Time Warner now have a shared commitment to provide consumers with multiple ISPs in a genuinely competitive broadband marketplace. I'd like it elaborate on that commitment because you have before you our announcement of a memorandum of understanding between Time Warner and AOL regarding our commitment to open-access business practices. As you can see from a review of this detailed understanding, we are serious about setting out the framework that will lead to true ISP choice for Time Warner cable subscribers.
    We'll obviously answer your questions, but I just want to outline the key elements of our plan.
    First, delivering consumer choice. AOL-Time Warner is committed to offer consumers a choice among multiple ISPs. Consumers will not be required to purchase service from an ISP that is affiliated with AOL-Time Warner, in order to enjoy broadband Internet service, over AOL-Time Warner cable systems.
    Second, diversity of ISPs. AOL-Time Warner will not place any fixed limit on the number of ISPs with which it will enter into commercial arrangements. And it will offer ISPs the choice to partner on a national, regional or local basis in order to facilitate the ability of consumers to choose among ISPs of different size and different scope.
    Three, direct relationship with the customer for ISPs. AOL-Time Warner is also committed to allow both the cable operator and the ISP to have the opportunity to have a direct relationship with the consumer. Accordingly both the cable operator and the ISP will be allowed to market and sell broadband service directly it customers. When an ISP sells broadband Internet service directly it such a customer it may if it so chooses bill and collect from the customer directly.
    Four, video streaming. AOL Time Warner will allow ISPs it provide video streaming. We recognize that consumers desire video streaming and AOL-Time Warner will not block or limit it. Now while today's MOU is subject to existing Time Warner obligations such as its contracts with road runner, Time Warner and I am committed to providing a choice of ISPs as quickly as possible and we will work with our partners to try to achieve that goal before current on obligations expire. And I look forward to the rest of the cable industry following this same path of choice and innovation which I believe will drive consumer adoption of cable broadband services. Finally, fundamentally, as to how Time Warner defines itself, I have to refer to our sense of community responsibility. This has been basic to who we are, from the very beginning, and was best summed up in Henry Luce's formulation that we would always operate quote in the public interest as well as the interest of shareholders.
    If you look through the biennial report we issued which details the depth and breadth of our community involvements, you'll see the seriousness and effectiveness with which we continue to live up to Henry Luce's charge. Time to Read for example is the country's largest most successful corporate sponsored literacy program. But we are under no illusions. Like you we recognize the need for a significant increase in corporate involvement focused on helping equip schools with resources they need to prepare students to enter the digital economy. Personally, as someone who has witnessed firsthand the struggle of dedicated teachers to overcome the shameful inequalities embedded in our educational system, I regard this need as a moral obligation and feel it is a personal moral obligation. As the members of this committee have so frequently articulated, if ever there's been a clear and present danger to the future of American society, it's in the digital divide that threatens to aggravate longstanding patterns of discrimination.
    From the inception of my discussions with Steve Case, I've been impressed with the passionate sincerity of his desire to ensure that his company plays an important role in bridging that divide and nothing has been more crucial to the agreement we've reached to merger our companies than our vision of AOL-Time Warner's ability to be a catalyst for a meaningful change in the way our country, indeed our world, offer its children the opportunity for creative expression, intellectual enrichment, and material success. As large as our merger may seem, to pales beside the open ended expanse of broadband media and the wired and wireless access available through PCs, TVs and the burgeoning multiplicity of hand held devices. From the consumers' point of view, the intense competitive struggle to offer everything from telephony to digital downloading of music and entertainment to video on demand embodies the best of all possible worlds -- more choice, better value and lower prices. I am grateful obviously for this chance to express to you my bedrock belief in the positive implications of our merger.
    Although the age we've entered will be brutally unsparing of companies that can't or won't move fast enough, it will also empower individual citizens as never before. If we do it right and I am profoundly optimistic that a clear understanding by both the private and public sectors of what's involved when sure we do, we will add new dimensions to our economy and our democracy. Under you leadership, Chairman Hatch and Senator Leahy, this committee has demonstrated a bipartisan willingness to strengthen copyright protection and insure America's artists are encouraged to keep producing works of international appeal and distinction. I applaud passage of the digital millennium copyright act and I pledge our full cooperation in addressing the vital public interest issues of Internet privacy and the protection of children. I think it's obvious this AOL-Time Warner is probably only the first of many competitive realignments intended to form enterprises with the agility and array of resources to thrive on this new terrain.
    Given the talent and imagination and values that AOL-Time Warner will possess, I am also confident it will be the most socially responsible as well as competitively successful. Along with my colleagues at AOL and Time Warner, I look forward to working with you to make sure that individuals and communities everywhere can use the most powerfully liberating communications tool in human history to amplify and inspire in Jefferson's wonderful phrase, "the pursuit of happiness." Thank you.