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HomeMy WebLinkAboutAgenda - 05-16-2000-9dORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: May 16, 2000 Action Agenda Item No. - ~',~ SUBJECT: Resolution Transferring Control of a Cable Television Franchise from Time Warner Inc. to America Online DEPARTMENT: County Manager PUBLIC HEARING: (Y/N} No ATTACHMENTS}: INFORMATION CONTACT: 1) Bab Sepe Report Albert Kittrell ,ext. 2300 (American Online, Inc., Time Warner Corintha Barber, ext. 2300 Inc., and MediaOne (AT&T) Request TELEPHONE NUMBERS: to Transfer Control and Ownership Hillsborough 732-8181 among and Between the Entities.) Chapel Hill 968-4501 2) Attorney David H. Permar Letter 5/8/00 Durham 688-7331 3) Resolution NO. 00- Mebane 336-227-2031 PURPOSE: 1) To review a report on the transfer of ownership and control of Time Warner to America Online (AOL). 2) Adopt resolution transferring ownership and control of Time Warner to AOL and MediaOne to AT&T. BACKGROUND: On February 8, 2000 Time Warner notified the County that AOL and Time Warner, Inc. would merge and submitted a completed FCC Form 394. The Federal Communications Commission allows the franchise authority (Orange County) to review the legal, technical and financial qualifications of the new owner. The County must approve or deny the transfer resolution based upon findings of fact. Bob Sepe, Consultant with Triangle J Council of Governments has reviewed FCC Form 394 on behalf of the County and submitted a report with findings and recommendations. The County Cable TV Citizen Advisory Committee reviewed the report with Bab Sepe on April 13, 2000. Michael Patrick, Chair of the County Cable Committee will present the report to the Board and Bob Sepe and Dave Permar will be in attendance to answer questions. FINANCIAL IMPACT: N/A RECOMMENDATION(S): The Manager recommends that the Board adopt a resolution consenting to the transfer of control of a cable television franchise from Time Warner, Inc. to AOL Time Warner, Inc. and a transfer of control from Media One Group, Inc. to AT&T Corporation. This would be subject to acceptance by AOL Time Warner, Inc. and AT&T of certain conditions on the approval as noted in the report. 2 April 7, 20b0 MEMORANDUM ....`'.. . _... ...~:.,.___ _..... ~ sit`; . Ill i . ; ~ ~`IFi ~~ 1 rr.;~ :: T0: Jahn Link Orange County Manager PO Box 8181 • 11 ~ i ~ II • ~ Hillsborough, NC 27278 I _ .,,,,,,.., I FROM: ~ Robert F. Sepe ', - - Information Service Manager 890.3521 . SUBJECT:' .America Online, Inc.,'Time'V~'arner Inc., and MediaOne (AT&T) Request to Transfer Control and Ownership among and Between the Entities. I have reviewed the Company's filing, supporting documents furnished by the company and conducted act finding discussions with company representatives. The information and the financial to provided by the parties submitted as part of the Transfer ofOwnership/Control filings wer prepared by the management of Companies involved. The doc ents were reviewed to determine whether the company provided sufficient informatia ,consistent with that prescribed by the Federal Communications Commission. Questions egarding the transfer were posed to the parties and subsequent fact finding di5cussia were conducted regarding the transfer.. The documents submitted by the company aze believe to be free of material misstatements and that the accompanying report provides a reasonable basis for my recommendation. The transfer resolution shall be provided TJCOG's attorney David Permar, under separate cover. If you have not received the resolution, which must be approved by June 8~', call Mr. Permar at 919-856-3940. xc: ' Rene Boyette David Pexxna= 3 SUMMARY The franchise documents, cable standards ordinance and franchise agreement, prohibit the transfer of either control or assets, however accomplished, without the prior consent of the franchise authority. The proposed transaction will not result in the assignment of the franchise to anew entity., The transfer will alter the ownership (stock) and control (management) of Time Warner Inc.(Time Warner). The new company will be AOL-Tune Warner. ' This transaction raises several important public policy questions which must be considered. These issues center around Open Access, a form of common carrier status placed on the cable company's broadband high-speed Internet platform. The arguments aze presented more fully in the report. Regardless, it is imperative that the franchise authority secure certain assurances from the new entity that this hypothecation will not adversely impact current and future subscribers, the cable distribution system, Time Warner Cable-Advance Newhouse's (TWEAK) business and customer service policies and practices. The franchise and FCC-394 documents direct Time Warner to furnish the franchise authority a full set of descriptive identifying particulars about the proposed transaction. Also, by supplying copies of all documents pertaining to the transfer, the Company has complied with the transfer of ownership provisions of the current Franchise Agreement. The material change in the ownership and management structures of Time Warner require the franchise authority to review, weigh and approve the transfer of ownership and control among and between the entities. To evaluate the proposed sale of MediaOne to AT&T and the merger of AOL and Time Warner Inc., the following issues, concerns and documents were cazefully analyzed and considered: 1. Information gathered during telephone conversations with the parties' representatives and responses to questions about the deal'; 2. Assurances from the parties that they agree to be bound by the terms and conditions in the franchise agreement; 3. The completed FCC-394 Applications For Franchise Authority Consent To Assignment or Transfer of Control of Cable Television Franchise; 4. Any outstanding issues the franchise authority may seek to resolve as a condition of the transfer; and 1Q & A's are attached as Exhibit I -i- 4 5. Any recommendations by staff. The Cable Act of 1992, Section 6i7(e), stipulates that the transfer request must be "accompanied by such information as is required in accordance with Commission regulations and by the franchise authority." It also provides a one hundred-twenty (120) day review period to allow the franchise authority to examine the various aspects, such as the financial, legal and, management implications, ofthe proposed transaction. ~ The 120 day period commences from the date the cable operator submits the transfer request to the franchise authority along with the information required by the franchise agreement. The consultants spoke with Time Warner irepresentatives to discuss issues associated with the transfer. Also, they spoke with attorneys from Time Warner's horrie office who have the responsibility to shepherd the merger, The AOL-Time Warner one hundred twenty (120) day review period commenced on February 10, 2000 while the MediaQne-AT&T one hundred twenty (120) day review period commenced on February 10, 2000. -71- 5 REPORT AOL - TWI - AT&T TRANSFER OF OWNERSHIP &CONTROL III. BACKGROUND: Commensurate with the Cable Act of 1992, the Federal Communications Commission promulgated a transfer of ownership procedure to allow franchise authorities to review the legal, technical and financial qualifications of the new owner/transferee; and determine whether or not the transferee is qualified to assume the duties and responsibiliries of operating acable-telecommunication system. The FCG-39~ form must be completed by the operator and provided to the franchise authority to disclose the business matters associated with the transfer. Zt requires the cable operator to: 1) furnish a copy of the document providing fox the transfer of control from TWI to AOL 2) transfer of ownership from MediaOne to AT&T; 2) address whether the transferees are legally qualified to transact business in North Carolina; 3) address the character qualifications of the transferees; 4) discuss the transferee's financial qualifications; and 5) present evidence that the transferee is technically qualified to operate the cable system. A. AT&T - MediaOne Acquisition AT&T's acquisition of MediaOne's 25% stake in Time Warner Entertainment, a limited partpership with 9.7 million subscribers that also include the Warner Brothers Studio and tfie Home Box Office premium cable channel, may be barred under Federal cable-ownership limits. These limits prohibit any cable operator from serving more than 30 % of cable television customers. AT&T's acquisition of MediaOne would boost AT&T's market share to 39% of the homes served by cable television As a~result, the federal government (FCC) could force AT&T to sell cable systems or partial stakes in other operators or programming interests, such as Liberty Media Crroup to comply with the federal ownership limits. B. AOL-TWI Merger AOI, is acquiring Time Warner. To effect the merger, the companies propose to eliminate their existing stock and issuing shares in a new company, AUE-Time Warner, This is the largest corporate merger in the history of the USA, Time Warner, the world's largest media and entertainment company, will be acquired in a stock swap by America Online for about $168 billion. The merger unites the biggest name i:n traditional media with, the world's largest Internet company. The -I- 6 merger will transform the Internet from a communication medium, originally coveted by academic and scientific professionals, to a highly evolved ubiquitous media entertainment and communication economic engine. Tirne Warner was created in 1990 merger of Warner Communications and Time, Inc. while AOL was founded in 1985. AOL has four times the net profit of Time Warner. For the fiscal yeaz ending June 30"', 1999, AOL earned $762 million,on $4.8 billion in sales against TWI's $26.8 billion gross revenues. While AOL has become a cable and telecommunication company, the merger completes the transformation of Time Warner's cable systems into comprehensive digital networks, The merger grants AOL access to Time Warner's 20 million homes, making AOL the largest provider of information distributed via a wired broadband platform, It offers AOL's 13 million customers, many of which aze Time Warner cable subscribers, direct high speed access to AOL's content engines via the cable modem platform. Likewise, Time Warner cable subscribers will have access to the same platform and content database delivery engines. Soon, Tirne Warner's vast intellectual property libraries, as well as AOL's, will be delivered at light speed via fiber optic cable and cable modems upon the click of a mouse and fora "small fee" to the public. The combined revenues of the media giant is expected to exceed $30 billion. Under the deal, Time Warner shareholders will receive 1.5 shares of AOL-Time Warner for each shaze of Time Warner stock. AOL stock holders will receive one share of AOL-Time Warner stock for each share of America Online stock. The market value of Time Warner is estimated to approach $97 billion and AOL is currently valued at $1x54 billion: . AOL offers services in 15 countries and 7 languages: Time Warner, via CNN serves 1 billion households world wide; it has 2.2 million CompuServe customers ' and 120 million magazine readers: N. METHODOLOGY: '~ Time Warner's submission to the Franchise Authority was evaluated to determine whether the operator provided information about the transferee consistent with the, procedures prescribed by the Federal Communications Commission. Documents provided by Time Warner about AOL and AT&T were read carefully. Information famished by the transferees was evaluated against similar information lmown by the consultant: information which had been gathered over time by the consultant from trade journals and electronic information sources about the transferees' character, legal,, technical, financial-business practices. -2- 7 On occasion, discussions with Time Warner representatives were conducted to clarify issues and concerns related to the transactions. In addition to the franchise authority, the Federal Trade Commission conducts its own independent review of the transfer/merger. FTC attorneys have the ultimate responsibility to assess the impact of the merger upon the national competitive telecommunication environment. Both transactions, MediaOne to AT&T and the AOL-TWI merger must be approved by the FTC. Any decision by the franchise authority regazding the proposed merger and sale may be rendered moot, should the FTC rule that one or both transfers are not in the public's best interest and issue an order to disapprove either transaction. A thorough review of print and electronic media trade journals was performed to become better acquainted with the various aspects of the transaction. V. FINDINGS: A. Time Warner -America Qnline The merger is not about cable television per se, but about Time Warner's CEO, Gerry Levin, merging Time Warner's exceptionally branded content with the geometrically expanding Internet world of America Online driven by its CEO Stephen Case. Time Warner needs AOL's experience moving content over the Internet and AOL need's TIME WA.RNER's broadband pipe to grow its content businesses. The merger represents the best of both possible worlds for entrepreneurial businesses. The merger is a vertical integration of the businesses involved and it postures the new entity AOL-Time Warner as a dominant global force in the media entertainment business. Historically, vertical integration results in preferential treatment by the common ownership entities to the exclusion of other competing businesses. Continued vertical integration of content, intellectual property owners, and conduit, Internet-telecommunication, providers may severely disadvantage unaffiliated businesses and result in predatory service rates: . The preeminent concern relates to Open Access. Consumer groups feaz that cable operators, such as Time Warner and AT&T, offering high-speed cable modem Internet access could control access to the Internet and imperil the low cost ubiquitous nature of the Internet. Significant reputable consumer and industry groups, such as the Consumer's Federation of America, the Center for Media Federation in America and the OpenNet Coalition, raised the flag on this issue to demand an "open access2" platform. zThe ability of consumers to choose between and among multiple Internet Service Providers on a high- speed cable (television) telecommunication broadband platform. -3- 8 The US Congress and local governments brought sufficient pressure to bear upon the parties whereby on February 29~', AOL and Tune Warner issued a MOU or Memorandum ofUnderstanding (Exhibit A) committing their cable network to an open access standard to offer consumers a choice between unaffiliated Internet Service providers. The MOU will allow independent ISPs to sell Internet portal and content services directly AOL-Time Warner customers thereby establishing a direct link between the ISP and the customer. Road Runner (RR) will be among the ISP choices available to AOL-Tune Warner customers. Absent the MOU, the merger could have enhanced the parties (AOL, Time Warner and AT&T) ability to restrict or even cut off customers from gaining access to Internet based competition. Because the MOU was "freely" offered by the parties, the Federal Government has withdrawn Open Access as a condition of merger approval. The new company will have lots of cash, lots of customers, Tats of content, and unmeasurable values like the synergy produced by crass-marketing web sites to television to magazines. Management has been slow to announce operating plans. Since the merger announcement, AOL has dropped about a third of its value, but it will continue to attract new investors. Once the merger has been completed, AOL-Time Warner will find itself well-positioned with cash flow that will grow faster than a traditional cable or Internet company. B. MediaOne - AT&T ,, USWest, a farmer Regional Be11 Telephone Company (RBOC), made a corporate decision in the 1990s to enter the cable television business. They purchased the assets of multiple system providers (MSOs), such as Colony Cable as well as a 25% interest in Time Warner Entertainment. USWest named its cable division MediaOne. Recently, USWest decided to concentrate on its core business, telephone service and decided to divest itself of its cable television assets.. Simultaneously, AT&.T, a long distance telephone company, received authority from the federal government to provide local telephone service. AT&T reasoned that they could either lease `Bell' lines or deploy their awn network. AT&T decided to pursue the third alternative, to purchase cable systems and use those wires to provide local and long distance telephone service to its customers and compete against the Bell telephone companies and GTE. -4- 9 AT&T's acquisition of MediaOne's 25.51% shaze of Time Warner Entertainment Advance Newhouse will give it a 32% interest in Tirne Worrier's high speed Internet service, Road Runner. When this interest is combined with AT&T's 58% stake in Excite@hame, MediaOne's high-speed Internet service, places AT&T squazely is in the position of dominating the two prominent broadband-cable modem services. The federal ownership statutes limit any one cable operator to no more than 30% of the mazketplace. AT&T's purchase of MediaOne boosted its national market share to 39%. Although, MediaOn-e surrendered its management rights to Time Warner, this did not deter the FCC from ruling that the transaction exceeded the federal limits. The FCC is not enforcing the rule because a federal district court judge in 1993 ruled that the statute authorizing the 30% cap was unconstitutional because it violated the First Amendment. The matter was appealed to the US Court of Appeals in December 1999 and a decision is expected later this year. The FGC believes that the lower court's ruling will be reversed and the 30% statute cap will be upheld. Consequently, the FCC has advised AT&T that they would have 180 days from the date of decision to came into compliance. Compliance could mean that i) AT&T could exchange its Time Warner stake for a sweet heart contract with AOL-Time Warner to provide phone service over theix cable systems or ii) AT&T could divest itself of its Rainbow Media Holdings, Inc., and Liberty Cable properties to comply with the 30% cap rule. MediaOne initially invested $1.5 billion in Road Runner's start-up. This investment's current value approaches $15 billion3. Because of RR's exceptional appreciated value, a buyout ofAT&T's interest by the new entity, AOL -Time Warner, is extremely unlikely because it is cost prohibitive and assets would be better spent tv upgrade existing networks and enhance services. The Open Access Alliance of the Bay (San Francisco) Area conducted a study4 and.subsequently reported that a cable broadband monopoly would result in higher Internet access prices, $5 to $15 monthly, absent competition. The merger validates Open Access as a solid business model for delivery of Internet and telephony via cable. With AT&T as a major player, there can be no doubt that Open Access is compatible with their core business. This means that the intellectual property and technology issues related to Open Access have ~'I'alking Up the Deal, Multichannel News, January Z4, 2000. `~TThe Business journal of $an Jose, March 13, 2000. -5- I.o become fu~rnly establisheds. Closed Access, the absence of Open Access, constitutes a power vested in cable - telecommunication companies. This power, if not mitigated by government, can result in a regime that determines how broadband gateway telecommunications should develop. Closed Access grants the cable-telecommunication companies, like AOL-Time Warner, a monopoly on the high-speed broadband platform. As such, they have the ability to protect ,themselves from competitors by nat allowing unaffiliated ISPs access to the broadband platform or by restricting or limiting Internet traffic to unaffiliated competitive ISPs. Common wisdom offers that the competitive marketplace, but not government regulation, is the best means to assure widespread availability ofhigh-speed Internet service. To make certain that a competitive mazketplace evolves, the government should implement minimalist measures tv assure Open Access to the broadband platform so that consumers can benefit from i) choice between content providers, ii) lower prices and iii) improved service. C. Financial .Aspects of the Deal for the CEOs The deal creates several sets of multimillionaires and places Gerald Levin and Steve Case squarely in the super wealth class. Recall that AOL is swapping 1.5 of its shares for each Time Warner share. The day before the deal was announced, AOL stock was trading at $7S per share, Time Warner was at $b4 per share. AOL is paying a bit above $ 110 a share, a $4S premium over the pre-deal price of Time Warner. The merger represents a good deal for Time Warner stock shareholders and Gerald Levin. The $110 price increases the value of Levin's, unvested options by $12S million and the value of his vested options by $240 million, total gain is $3S5 million. Steve Case is the clear winner. The value of his unvested options exceeds $600 million, which he could not otherwise sell unless AOL was traded to a new company. Mr. Case's vested options are valued at near $775 million; his new found wealth approaches $1.375 billion6. D. Public Poliey Questions to Consider The questions for local government officials to weigh follow. 1. Without Open Access AOL-TW Internet service subscribers maybe directed first to Company or affiliated content providers and would have to perform intense gBroadband in the Public Interest, February 10, 2000 -Volume I, No. 7 6Cable Carried Incentive for AOL Merger, Allan Sloaq Newsweek. -6- 11 searches to find similar content and e-commerce retail outlets offered by independent providers, The Internet, a two way communication pathway, came of age over the common carrier telephone system. Recently, it has made the transition to the cable television broadband platform. To grow it must retained its common carrier heritage, hence Open Access is a necessary component and this aspect of the medium should be safeguazded by local government. 2. Should Open Access be extended to the cable program environment? If not, then cable television subscribers may never see programs provided by unaffiliated companies, such as Fox News Network, a cable television program service that competes against Company owned Cable News Network or Disney on the Basic Service Tier which competes with Company owned Cartoon Network. In the past, the US Supreme Court has ruled that the cable company is a First Amendment speaker and as such it can make content related decisions. Whether cable systems have matured to achieved common carrier status can only be addressed by the US Congress. Transforming cable companies to common carriers is complicated by the fact that the US Supreme Court ruled in FCC v. Midwest Communications, 1979 that cable operators are not subject to common carrier rules. Expansion of the Open Access argument to include unafbliated program providers, independent content producers, becomes moot in communities served by multiple cable television franchisees who compete head-to-head for customers by offering content and program services at prices people are willing to pay. One or the other company~will be motivated to offer vast arrays afprogram services to retain customers. 3. Whether local government should take up the gauntlet and become involved in over azching anti-competitive monopolistic concerns, such as the City of Portland's stance on Open Access, currently before the 9~' Circuit Court of Appeals, is a legitirrtate public policy question. As Portland learned, doing sa may result in prolonged and substantial legal defense expenditures. The U.S. Constitution's First and Fifth Amendments may become the focal point ofa Constitutional argument regarding Open Access as applied to cable pro~~g• Although Disney/ABC is not demanding free access to the cable platform, Disney seeks nondiscriminatory access, a position on the cable system platform and receiving the same program fees as Time Warner pays its affiliated program providers. On the other hand, Time Warner is a First Amendment speaker; as such -ry_ 12 it is entitled to receive compensation (Fifth Amendment) for the use of its cable system. TW perceives Disney/ABC's action as constituting a taking of private property without just and just compensation . RECOMMENDATIONS Although the acquisition of Time Warner by America Online and MediaOne by AT&T is not without some regulatory and anti competitive uncertainty, the long term potential economic and technological benefits a vertically integrated company with a unique sets of expertise, is both a positive and negative aspect of the transfers..Accordingly, to guard against possible uncertainties, it is recommended that the Franchise Authority: I. Direct AOL-Time Warner a) to be bound by the Cable Television Franchise Ordinance and perform all duties and-obligations ofthe grantee thereunder, b) represent and warrant that they are able to provide, and shall agree to provide subscribers all services required under said franchise subject to changes or modifications as permitted under the franchise and applicable law; c) aclrnowledge and agree that they were, and shall be subject to the local regulatory authority as set Earth by the FCC; and d) cooperate fully with the franchise authority and to obtain from any governmental agency all licenses, permits and other approvals necessary for lawful operation and maintenance of the cable television system. II. Require AOL-Time Warner and AT&T to affirm that as the new owners and management entity, shall be bound by the terms and conditions in the present franchise agreement and the transfer resolution. Il'I. Advise AOL-Time Warner that the franchise authority shall exercise its rate regulatory prerogatives pursuant to the Cable Act of 1992 to ensure that the current value placed upon the intangible assets of TWEAN shall not increase as a result of the transfer and adversely impact subscriber,r~.tes. 1V. Require AOL-Time Wamer.to implement Open Access to protect the public interest and ensure continued competition among and between Internet Service Providers (ISPs) and equal access to the cable modem broadband platform by customers served by unaffiliated ISPs. V. Respect Time Warner Cable's First Amendment right with respect to program selection and side step Open Access issues pertaining non discrirtunatory mandatary dial position on the cable system platform and program fees payment to unaffiliated program providers. This issue is best addressed by the federal government; action by the US Congress or the federal court system may be necessary to satisfactorily resolve this public policy debate. -g_ 13 PROCEEDING The franchise authority must approve or deny a transfer resolution, based upon finds of fact, regarding the approval or denial of the cable operator's FCC-394 transfer request. The franchise authority should adopt the staff report as its own and grant the an opportunity to comment on the matter; it is suggested that the public comment period coincide with a regular public meeting. A transfer resolution; conveying approval is attached. To be valid, the Resolution must be executed following the conclusion of: a. a public meeting where the counciUcommissiox~lboard grants interested parties an opportunity to comment; and b. adoption by the Franchise Authority of this report as its own (required by FCC rules). It is appropriate for public comment to be heard, related to the transfer of ownership. A statutory public hearing is not required. Tt is customary to call for a public comment in these matters; the comment period may be publicized by issuing a press release to the print and electxoxaic media, and otherwise announce the "call for public comment" in other ways. The cable company must be notified of the public meeting and advised to have a representative present to comment, rebut and/or respond to questions posed by elected officials. _g_ 14 Exhibit I Reply Comments to Questions Posed to Time Warner, Inc. 15 Exhibit II MEMORANDUM OF UNDERSTANDING Between Time Warner Inc. And America Online, Inc. REGARDING OPEN ACCESS BUSINESS PRACTICES February 29, 2000 1. This Memorandum of Understanding ("MOU") sets out the commitments that AOL Time Warner will make to provide open access (i.e., to make a~ choice of multiple Internet Service Providers ("ISPs") available to consumers) on its broadband cable systems. It is the intention of the parties to enter into as quickly as possible a binding definitive agreement to provide broadband AOL service on Time Warner's cable systems, which will be used as a model for the .commercial agreements that will be available to other ISPs. 2. 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. AOL Time Warner intends to encourage actively other cable operators sirnilarly to provide consumers with a choice of broadband ISP offerings. 3. AOL Time Warner will effectuate such choice for consumers by negotiating arm's-length commercial agreements with~both affiliated (such as AOL) and unaffiliated ISPs that wish to offer service on the AOL Time Warner broadband cable systems. Pursuant to such commercial agreements; AOL Time Warner will partner with ISPs to offer consumers a choice of competing broadband Internet service offerings, 4. AOL Time Warner will not place any fixed limit on the number of ISPs with which it will enter into commercial arrangements to provide broadband service to consumers. AOL Time Warner will provide its consumers with a broad choice among ISFs, consistent with providing a quality consumer experience and any technological limitations in providing mulriple ISPs on its broadband cable systems. 5. The terms of the commercial agreements between AOL Time Warner and ISPs wishing to provide broadband service will not discriminate on the basis of whether the ISP is affiliated with AOL Time Warner. Thus, while the economic arrangements reached by AOL Time Warner and ISPs wishing to provide broadband service will vary depending on a number of factors (such as the speed, marketing commitments, and nature and tier of the service desired to be offered), AOL Time Warner will not discriminate in those economic arrangements based upon whether or not the ISP is affiliated with AOL Time 16 Warner. In addition, AOL Time Warner will operate its broadband cable systems in a manner that does not discriminate among ISP traffic based on affiliation with AOL Time Warner. . 6. AOL Time Warner will allow ISFs to provide video streaming. AOL Time Warner recognizes that some consumers desire video streaming, and AOL Time Warner will not block or limit it. '7. AOL Time Warner will allow ISPs to connect to its broadband cable systems without purchasing broadband backbone transport from AOL Time Warner. 8. Consistent with technological capability, AOL Time Warner will offer ISFs the choice to partner with it to offer broadband. Internet service on a national (on all AOL Time Warner cable systems), regional or local basis, in ozder to facilitate the ability of consumers to choose among ISPs of different size and scope. AOL Time Warner is committed to bring the benefits of the Internet to all Americans, and will not allow ISPs to offer "redlined" service to only a portion of an AOL Time Warner cable system that is fully enabled to provide broadband service. 9. AOL Time Warner is also committed to allow both the cable operator and the ISP to have the opportunity to have a dixect relationship with the consurner. Accordingly, both the cable operator anal the ISP will be allowed to market and sell broadband service directly to customers. When AOL Time Warner's cable systems sell broadband .Internet service to a customer, they will be entirely responsible far billing and collection. When an ISP sells broadband Internet service directly to a customer, it may, if it so chooses, bill and collect from the customer directly. ,. 10. This MOU represents an initial step by Time Warner and AOL to articulate the terms, conditions and parameters under which a combined AOL Time Warner will offer consumers access to multiple ~SPS on its broadband cable systems. It is the intention of the parties to continue to refizie those particulars in a manner that is responsive to, and consistent with, the desire df consumers to have a choice among multiple ISPs offering broadband service and the still-evolving nature of the cable infrastructure. 11. All of the foregoing is subject to all pre-existing obligations of Time Warner, including without limitation Time Warner's agreements with Serviceco, LLC (dJb/a Road Runner} and its fiduciary and other obligations to its partners. However, Time Warner will endeavor to reach agreements and accommodations with third parties to which . pre-existing abliga~.ons are due that would permit the full implementation of the commitments described herein as quickly as possible: 17 Iiaruld W. &rxy, 7r. 7. Wiltmr T~ (188Z•19~ William K &ownler w;lliam r. Hatab (1905-1979) Thamae 0. Sinn James G Ltnle (1917.1977) Timis L Frcziar Jotm~ N McCaain, Jc He~aa i4t. oy.~ David H. F~ A Hmlett Wltiea Deroglas Q. Wtcl~am Wgliom D. Yang rV Hitch, Little & B~.nn, r~~.p. AttasrlteyS l~~~R11- 3E7 HGi6awgh 9huee paR Ocoee 8os 527 jtaklplb Naath [k~giriw 17602 919/856331D Fns 919~56..39dD May S, 2000 Mx. Brad Phillips Tirn~ Warner Cable _ 141 Inrwvatian Drive _ Suite 100 Mdmisville, North Carolina 27SG0 Re: TJCOG -Time Warner Cable Negotiations and AOL-Time blamer Transfer of Control Dear Brad X have presented two alternative resolutions to approve the AOL-Tame Warner transfer of control, but recommending alternative No. 2 with mandatory open access and nondiscrimination provisions found in paragraphs 9 and 10 of Draft No. 2 to the local governments participating in the TJCOG Cable Consortium. Ypu have indicated dissatisfaction with bath drafts but have not offered any compelling rationale or justification which would cause me to modify my position. Y halo mentioned on s number of occasions that the issue of zilajor importance to the local governments is the culmination of the franchise renewal process. Discussions ar~d negotiations have been on going for more t~lan three years with little result. Most franchises expired in Tune, 199$, and the local. governments have been losing reverwe as a result of Time yVarne~s intransigence. You have been advised that it u the desire of the local governments to complete the franchise renewal process fairly soon. If this is not possible, they would accept a commitment from Time Warner regarding the favorable disposition of the major franchise renewal issues prior to slaking a final decision on Tht1e Warner's agplication to approve the Aol'.~Time warner merger. Federal law requires action on the transfer of control application within 120 days by the Local Franchising Authority (by June 10, 2000), However, Federal law also provides that the requesting party and the Local Franchising Authority (LFA) can agree to an extension of time. The local governmests are willing to agree to an extension of time on the application of transfer of control to permit Time Warner and the TJCOG Cable Consortium to complete and conclude the franchise renewal process. 18 Jf Time Warm is unwilling to agree to an extension o£ time to substantially complete the franchise renewal process, the LFAs have little option other thaw to adopt Draft No. 2 of the transfer resolution prior to June 10. Yam certain that you will agree that tt is in everyone's irrtecest to resolve these matters and achieve closure as soar as practical; thus allowing everyone to return to their primary responsibilities. Z look forward to hearing from you at your first apportanity. Sincerely yours, HATGI~ & BUNK, 1~. David K Permar bHP/rt ~ -- c: TJCOG Cable Consortium Gary Matz Sob Sepe Renee Bayette [WITH OFEN ACCE55 AND NONDISCRIMINATION PROVISIONS] RESOLUTION NO. 00-- A RE50LUTxON GRANTXNG TSE CONSENT OF TO T#3E TRA'~iSFER OF CONTROL OF A CABLE TELEVISION FRANCHISE FROM TIME WARNER, INC., TO AOL TIME BARKER, ZNC., AND A TRANSFER OF CQNTROL FROG! MEDIA QNE GROUP, INC., TO AT~T CARPORATION WEEREAS, Time Warner Entertainment Advance/Newhouse Partnership ("TWEAK") holds a valid, non-exclusive franchise to operate a cable television system in North Carolina (the "Franchising Authority"); and WHEREAS, TWEAK is a subsidiary of Time Warner, Inc. ("TWI"); and _ WHEREAS, Media One Group, Inc., ("Media One") holds a 25.51$ interest in Time Warner Entertainment Company, L.P., ("TWE") which in turn owns a 66.66 interest in TWEAK; and RHEREAS, a wholly-owned subsidiary of AT&T Corporation ("AT~T") is acquiring all of the shares of Media One pursuant to an Agreement and Plan of Merger dated May 6, X999, ("Transaction No. l") so that following closing of the transaction, AT&T will control an approximate ].7~ interest in TWEAK; and WHEREAS, TWI and America Online, Inc., ("AOL") have entered into an Agreement and Plan of Merger dated January 10, 2000 ("Transaction No. 2"); and Tr?AEREAS, the ~.erger agreement will result in a stock to stock merger ("Y'ransaction No. 2") in which TWx and AAL will merge with subsidiaries of a newly formed holding company; and WHEREAS, as a result of Transaction No. 2, both TWI and AOL will become wholly owned subsidiaries of the new company, AOL-Time Warner, Inc. ("AOL-TW"); and WF~REAS, the franchisee, TWEAK, and TWI, AOL-TW, Media One, and AT&T, have requested the consent of the Franchising Authority, if it determines consent is necessary, to the aforementioned change of control and Transaction Nos. 1 and 2; and x9 zo PASSED, ADOPTED AND APPR~LD this day of r 2000. LOCAL GOVERNMENT Sy• Title' ATTEST: By: Clerk WE CONSENT TO AND ACCEPT THE TERMS AND CONDITxONS OF THIS RESOLUTION. DATE OF ACCEPTANCE: TINS WARNER ENTERTAINMENT ADVANCE NEWHOIISE PARTNERSHIP Sy: 5 z1 WHEREAS, on or about February 10, 2000, TW2, as transferor, and AOL-TW, as transferee, filed an FCC Form 394 seeking the consent of the Franchising Authority to Transaction No. 2; and WF~REAS, on or about February 18, 2000, Med~.a one, transferor, and AT&T, transferee, filed a Form 394 with the Franchising Authority seeking consent to Transaction No. 1; and WHEREAS, the Franchising Authority has conducted a thorough review of the legal, technical and financial quallificatians of the appl~.cants and the transferees to own and operate the cable system; and WHEREAS, the Franchising Authority has received and reviewed the report. of its cable television consultant concerning the legal, technical and financial ' qualifications of the transferees and provided an opportunity for public comments; and WHEREAS, AT&T and TWI are .the two ~.argest cable television operators in the United states and AOL is the largest and most dozainant provider of Internet services; and WF~REAS, the Franchising Authority Is concerned that cable television operators through the use of their broadband platforms offer a technically superior method of providing Internet services to customers and therefore, there is a substantial. risk that Transaction Nos. 7. and 2 may have an anti-competitive impact on the provision of Internet services and cable programming to the public; and WF3EREAS, following further review and an investigation, the Franchising Authority has concluded that the transferees have established that they meet the technical., legal and financial criteria to operate the cable system and have satisfied all criteria set forth in and/or under all applicable or required local government and federal documents, laws, rules and regulations, including FCC Form 394 and contingent upon applicants meeting all of the requirements set forth belvW; NOW, THERFORE, BE IT RESOLVED that in consideration of the foregoing and the promises set forth herein, the 22 Franchising Authority and the transferees agree to the following: 1. The Franchising Authority consents to Transaction Nos. 1 and 2, effective immediately upon the closing of the transactions contemplated by the agreements, provided that said closings take place prior to July 1, 2Q01. 2. The Franchising Authority confirms that; (a) the franeh~.se held by the franchisee is valid and ~.n full farce and effect. (b) the franchisee will be i.n material compliance with the franchise if the other conditions set Earth in th~.s Resolution are met. ~ .. 3 . TWEA,N (a} agrees to be bound by the franchise and perfoxm all dut~.es anal obligations thereunder; (b) represents and warrants that it is able to provide, and agrees to provide all services required under said franchise; (c) acknowledges ,and agrees that TWEAK is subject to the regulatory authority of the grantor as provided by state .and federal law; (d) agrees to cooperate fully with the Franchising Authority and to obtain from any governmental agency having jurisdiction, all licenses, perma.ts and other authority necessary for lawful operation .and Yaaintenance of the cable system. 4. The past performance of TwEAN under the control of TWI pursuant to the franchise is not waived by the Franchising Authority consenting to this transfer and adopting this Resolution. TWEAK and its new parent, AOL-TW agree to be responsibly for and bound by the. breaches and non--performance, if any, of TWI and its subsidiaries prior to this transfer. .The Franchising Authority may, after 3 23 consummation of the Transaction Nos. 1 and 2, consider in any ongoing renewal. proceeding, the past performance of TWEAK and TWI to the extent permitted under 47 U.S.C. §546, as if it were the past performance of TWEAK and ACL-TW. 5. TWFAri -and the franchise sha].1 be subject to the Franchising Authority's most recently adapted cable standard ordinance. 6. TWEAK and AOL-TW agrees that the revaluation of the cable system assets, if any, resulting from Transaction Nos. 1 and 2 shall not be the basis for any future rate increases for any regulated cable service, including, but not limited to, basic cable service, equipzaent rentals and installation costs. 7. This Resolution shall become effective on the date of its passage but shall be automatically rescinded if not accepted by TWEAK, within thirty (30) days of passage. 8. Within thirty days following the adoption of this Resolution, franchisee shall pay the sum of $10,000 to the Franchising Authority to reimburse the Franchising Authority for its expenses in connection with this transfer. 9. TWEAK and AoL--TW sha].1 provide nondiscriminatory access to the franchisee's cable modem (digital) platform for providers of Internet, online services, and other video and digital services, whether or not such providers are affiliated with TWEAK or AQL-TW. 10 . TWEAK and ~ AOL-~TW shall make video prograauning on its cable system available to subscribers on reasonable terms and conditions for program providers and without discriminating among program. groviders based upon their affiliation or nonaffiliation with TWEAK or AQL-TW. 4 2~ PASSED, ADOPTED AND RPPR~VED this day of ___^_~ 2000. LOCAL GOVERNMENT By: Tit1e- ATTEST: By: Clerk WE CONSENT TO .AND ACCEPT THE TERMS AND CONDxT70N5 OF THIS RE50LUTxON. DATE OF ACCEPTANCE: TIME WARNER ENTERTAINMENT ADVANCE NEWHOUSE PARTNERSHIP Sy: