FCC Releases Order Permitting AOL Time Warner to Provide Advanced IM Services

August 20, 2003. The Federal Communications Commission (FCC) released a Memorandum Opinion and Order [13 pages in PDF] granting AOL Time Warner's petition to remove the FCC's restriction on its provision of video streaming advanced Instant Messaging based high speed services (AIHS). The FCC had imposed this restriction in its order approving the merger of AOL and Time Warner in early 2001.

The FCC adopted the Memorandum Opinion and Order (MOO) on July 31, 2003, but did not announce, or release, it at that time. This proceeding is Docket No. 00-30.

April 2, 2003 AOL Time Warner submitted a petition [58 pages in PDF] to the FCC requesting relief from the FCC's January 2001 Memorandum Opinion and Order (MOO) approving the merger of AOL and Time Warner. Specifically, AOL Time Warner sought relief from the condition restricting its ability to offer internet users streaming video advanced Instant Messaging based high speed services (AIHS) via AOL Time Warner broadband facilities.

The FCC adopted this MOO on January 11, 2001, and released it at a later date. This MOO is numbered FCC 01-12. The FCC has published the MOO in its electronic comment filing system (ECFS). It is published in six parts as PDF scans. Each part takes an extraordinarily long time to download. See, parts 1, 2, 3, 4, 5, and 6. It is also published at 16 FCC Rcd 6547.

AOL Time Warner argued in its petition that the condition was based upon the assumptions that "AOL was the dominant provider of IM services and, absent interoperability, the ``strong 'network effects'创 associated with IM would cause AOL's unassailable lead in text-based IM to ``swell创 over time", and that "AOL's dominance in the text-based IM would afford the merged company an anti-competitive first-mover advantage in streaming video AIHS, creating barriers to entry and foreclosing competition".

AOL Time Warner further asserted that now, "AOL is not dominant in the provision of IM services today and there is no danger of ``network effects创 causing AOL's share to ``swell创", and that "As Microsoft and Yahoo! have each independently introduced streaming video AIHS, AOL does not have -- and cannot obtain -- a ``first mover创 advantage in this area".

Gerald Faulhaber and David Farber, who worked at the FCC in 2000, submitted a comment [PDF] on April 5, 2003, in which they stated that "We urge the FCC to proceed cautiously. While conditions have evolved since the Merger Order that suggest network effects and tipping are not as urgent today, other evidence suggests that it is perhaps even more urgent. The FCC needs to recall that AOL Time Warner has in its own hands the ability to offer advanced IM-based highspeed services without let or hindrance: it need only interoperate with its competitors, as it promised the world it would do two years ago, to the benefit of all customers."

BellSouth submitted a comment [10 page PDF scan] on May 20, 2003 opposing the removal of the condition. It argued that "circumstances that gave rise to the Condition have not changed substantially enough to warrant modification or removal of the merger Condition."

However, the FCC saw things differently. It wrote in its July 31, 2003 MOO that "Based on information obtained from comScore Media Metrix, a firm that measures Internet and digital media use, AOL抯 market share is shown to have been 100% as recently as June 1999. For the four months prior to the filing of the current petition, Media Metrix reports AOL Time Warner抯 market share as 59.5%, 58.5%, 57.6%, and 58.5% for November 2002, December 2002, January 2003, and February 2003, respectively, a decline for AOL from 75.3% in March 2000 and 61.5% in December 2000, shortly before the Order was released. AOL抯 two major IM competitors, Microsoft and Yahoo!, have averaged 22.2% and 19.3% market shares, respectively, over that same period, an increase from 10.7% and 14% in October 2000." (Footnotes omitted.)

The FCC's MOO states that "the trend in market shares is inconsistent with the market ``tipping创 concerns expressed in the Order. In particular, if a market is subject to tipping and the subsequent dominance of the largest firm, then as the overall market grows, we should see an increase in the largest firm's market share or at least an increase in the largest firm's number of users. In fact, the data show the opposite trend; the smaller firms are consistently growing at the expense of AOL Time Warner as the market grows." (Footnotes omitted.)

The FCC's MOO adds that "We view this development of stable competitors as an indication that the market is maturing and stabilizing." It concluded too that "removal of the IM condition will likely provide public interest benefits. The Commission has continually recognized competition as an important policy objective for communications services, bringing consumer benefits of increased choice, lower prices, improved service, and new product offerings. With the removal of the IM condition, AOL Time Warner will be able to offer new and innovative AIHS services and provide competitive choices to the marketplace at lower prices."  (Footnotes omitted.)

FCC Chairman Michael Powell (at right), who dissented from imposing the condition back in 2001, praised the removal of the condition. He wrote in a statement [3 pages in PDF], "That the Commission strayed out of its core competencies in its analysis of instant messaging should now be clear. As I noted in my statement, the Commission provided no clear market definition, used inconclusive market share data, and relied upon a flawed ``tipping创 analysis with respect to instant messaging. We now have two-and-one-half years of evidence that the market is not tipping."

In contrast, Commissioners Michael Copps and Jonathan Adelstein wrote a joint dissent [PDF]. They argued that "While AOL Time Warner submits evidence that its market share eroded slightly over more than two years while competitors have increased market share, we cannot conclude that AOL Time Warner has made the requisite showing necessary to eliminate this condition nor that relief from the condition is a fair outcome for consumers."

See also, TLJ story titled "AOL Time Warner Petitions FCC for Relief From Instant Messaging Restriction", April 2, 2003, and story titled "FCC Receives Few Comments on AOL Time Warner Petition" in TLJ Daily E-Mail Alert No. 660, May 13, 2003.