HomeMy WebLinkAboutAgenda - 06-29-2000-5bORANGE COUNTY
BOARD OF COMMISSIONERS
ACTION AGENDA ITEM ABSTRACT
Meeting Date: June 29, 2000
Action Agenda
Item No. ~~`
.SUBJECT: America Online, Inc., Time Warner Inc., and MediaOne (AT&T) Request to
Transfer Control and Ownership Among and Between the Entities.
DEPARTMENT: County Manager PUBLIC HEARING: (Y/N) No
ATTACHMENT(S): INFORMATION CONTACT:
1) Bob 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) Resolution NO. 00--Draft #2A Durham 688-7331
Mebane 336-227-2031
PURPOSE: 1) To review a report on America Online, Inc., Time Warner Inc., and
MediaOne (AT&T) Request to Transfer Control and Ownership among and Between the
Entities. 2) Adopt a 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 of a proposed AOL
and Time Warner, Inc. merger 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 of a cable television franchise. The
County must approve ar deny the transfer resolution based upon findings of fact.
Bob Sepe, Consultant to Triangle J Council of Governments on cable television regulatory
matters, has reviewed FCC Form394 on behalf of the County and submitted a report with
findings and recommendations. The County Cable TV Citizen Advisory Committee reviewed
the report on April 13, 2000. Since the May 16, 2000 Board of Commissioner Meeting, Dave
Permar has revised the proposed Resolution. Michael Patrick, Chair of the County Cable
Committee will present the report to the Board. Both Bob Sepe and Dave Permar will be in
attendance to respond to 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. The County's approval is subject to acceptance by Time Warner Cable/Advance
New House of the conditions stated in the resolution.
z
~. etion a udits
MEr~o~uM
TO. John Link
Orange County Manager
PO I3ox 8181
Hillsborough, NC 2727H
FRAM: Robelt F. 5epe
Information Service Manager •
8yU,3521
5UBJECT: America Online, inc., Tune Warner Inc., and MediaOne (AT&T) Request to
Transfer Gontral and Ownershi amon and Between the Entities.
Y have reviewed the Company's filing, supporting documents furnished by the company and
conducted fact finding discussions with company represelatatives, ?be informatiop aad the
fin$ncial data provided by the parties submitted as part of the Transfer of Ownership/Control
filings were prepared by the management of Companies involved.
The documents were reviewed to determine whether the company provided sufficient information,
consistent with that prescribed by the Federal Communications Commission. Questions regarding
the transfer were posed to the parties and subsequent fact finding discussions were conducted
regarding the transfer. The documents submitted by the company are believed to be free of
material misstatemerlts and that the accompanying report provides a reasonable basis for my
recommendation. .
The transfer resolution shall be provided T1COG's attorney David Perrnar, under separate cover.
lfyou have not received the resolution, which must be approved by duly 1v~, call 1vlr. Permar at
919856-~9~4d,
xc. Rene Boyene
Dada Pen~tar
Franchise Fc:e U-Tax Audfuin & Cable Television Administration
101 Pocono Lame, Cary, , Norlh Garolii~x 27513-i31G Vaicc # 919.4G7.53~2 Pgx # 919.460.lyR6tt
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SUMMARY
The franchise documents, cable standazds 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-Time Warner.
This transaction raises several important public policy questions, which must be considered. The
issue centers around "Open Access", a form of common carrier status placed on the cable
company's broadband high-speed Internet platform. The arguments suggesting that local
governments condition their approval upon a requirement that AOL-TW offer open access to
unaffiliated Internet service and e-tailers are presented more fully in the report.
Regardless, it is imperative that the franchise authority secure certain assurances from the new
management entity that this hypothecation will not adversely impact current and future
subscribers, rates, the cable distribution system, Time Warner Cable-Advance Newhouse's
(TWEAN) business and customer service policies and practices.
The franchise and FCC-394 documents direct Time Wazner 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.
Although, Time Warner did not submit FCG394 documents to the City regarding the sale of
MediaOne's 2S.S 1 % ownership interest in Time Warner Entertainment, it is both necessary and
prudent for the City to acknowledge that this transaction is taking place.
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;
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Cazolina 27S 13-5316 Voice # 919.467.5392 Fax # 919.460.6868
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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
5. Any recommendations by staff.
The Cable Act of 1992, Section 617(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 fmancial, legal and management
implications, of the 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 representatives to discuss issues associated with the
transfer. Also, they spoke with attorneys from Time Warner's home office who has the
responsibility to shepherd the merger. The AOL-Time Warner one hundred twenty-(120) day
review period commenced on Mazch 9, 2000.
Franchise Fee U-Tax Auditing & Cable Television Administration
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REPORT
AOL - TWI - AT&T
TRANSFER OF OWNERSHIP &CONTROL
III. BACKGRQUND:
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
responsibilities ofoperating acable-telecommunication system.
The FCC-394 form must be completed by the operator and provided to the franchise
authority to disclose the business matters associated with the transfer. It requires the
cable operator to: 1) furnish a copy of the document providing for 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 partnership with 9.7 million subscribers that also include the Warner
Brothers Studio and the Home Box Office premium cable channel, is 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 42% of the homes served by
cable television As a result, the federal government (FCC) has ordered AT&T to
divest itself of cable systems or partial stakes in other operators or programming
interests, such as Liberty Media Group to comply with the federal ownership
limitsr. Without divestitures, the merged AT&T-MediaOne would serve 34.4
1FCC Document CC92-12, June 5, 2000.
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million subscribers or 41.8% of Multichannel Video Programming Distributor
(MVPD) subscribers, which represents 51.32% of nationwide cable subscribers.
On June 5, 2000, the FCC has granted conditioned approval of the
AT&T-MediaOne Merger. As anon-severable condition to granting the
application, the FCC requires the applicants to complete one of the following
options to reduce its attributable ownership interests to 30% of MVPD subscribers
nationwide: 1) divest their interests in Time Warner Entertainment; 2) insulate
their interests in Time Warner Entertainment (TWE) by ending involvement in
TWE's video programming activities, which entails selling AT&T's programming
interests, including Liberty Media Crroup; or 3) divest their interests in other cable
systems, which involves divesting cable systems serving approximately 11.8% of
subscribers nationwide (i.e., more than 9.7 million subscribers or more than half
of AT&T's current subscribers)
If AT&T chooses to sell its TWE interest (option #1), it is likely that the City will
have to review and approve that transaction as well. The new owner could be
another cable company, a telephone company, another Internet service provider or
some other company seeking to position itself the new e-commerce economy.
A. AUL-TWI Merger
AOL is acquiring Time Warner. To effect the merger, the companies propose to
eliminate their existing stock and issuing shares in a new company, AOL-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 in traditional media with the world's largest Internet company. The
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.
Time 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 year 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
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homes, making AOL the lazgest provider of information distributed via a wired
broadband platform. It offers AOL's 13 million customers, many of which are
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, Time 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 are expected to exceed $30 billion.
Under the deal, Time Warner shareholders will receive 1.5 shares of AOL-Time
Warner for each share of Time Warner stock. AOL stockholders 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 $164 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.
III. 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. Both company
provided and public documents pertaining to the AOL arid AT&T transactions were read
carefully. Information furnished by the transferee was evaluated against similar
information known by the consultant as well as information gathered over time by the
consultant from trade journals and electronic information sources about the transferee's
character, legal, technical, financial-business practices.
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 regarding the proposed transactions 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.
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A thorough review of print and electronic media trade journals was performed to become
better acquainted with the various aspects of the transaction.
III. FINDINGS:
A. Time Warner -America Online
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 WARNER's broadband pipe to grow its content
businesses. The merger represents the best of bath 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
farce 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 gaups 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 accessz" platform.
The US Congress and local governments brought sufficient pressure to beaz upon
the parties whereby on February 29th, AOL and Time Warner issued a MOU or
Memorandum of Understanding (Exhibit A) committing their cable network to an
open access standazd to offer consumers a choice between unaffiliated Internet
Service providers.
ZThe ability of consumers to choose between and among multiple Internet Service Providers on a
high-speed cable (television) telecommunication broadband platform.
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The MOU offers that AOL-TW 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-Time Warner customers. This commitment is
non-binding, nor does it suggest unaffiliated providers will be able to gain access
to the broadband platform on terms that are equivalent to those offered affiliated
companies. 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, lots of content, and
unrneasurable values like the synergy produced by cross-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.
On Apri125th, Consumer groups3 demanded a major restructuring of the proposed
Time Warner - AOL merger because it would create dominate the Internet market
and consumers would have fewer choices for Internet services and content. The
fear is that the combined companies would offer only AOL's service on Time
Warner's broadband cable modem platform; thus, blocking rival Internet service
providers nondiscriminatory access to its customers via the cable system.
Although the companies entered into a Memorandum of Understanding, see
Exhibit I, pledging to open up their cable TV lines to other Internet service
providers, consumer groups want "hard" assurances that any unaffiliated ISP
would have access to the high-speed cable modem platform at "reasonable terms
and conditions." This concept is known as "open access," and it has been the
source of significant public policy debate across the country.
With regard to the Open Access issue, a new United States District Court decision
(MediaOne Group, Inc. et al v. County of Henrico, Virginia) was issued May 10,
2000. The Court ruled that a local government's authority on the Open Access
issue is preempted by the Federal Cable Act. Last year, another United States
District Court in Oregon held that a local government's authority on Open Access
is not preempted by the Federal Cable Act, AT&T. Corp., et al v. City of Portland,
aConsumer Federation of America, Consumers Union, etc.
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USDC, Oregon CV-99-65-PA. Neither decision is controlling in North Carolina.
The Oregon decision is on appeal and the Virginia decision is likely to be
appealed.
No doubt, there will be some resolution of this matter at the federal level.
Considering North Cazolina's strong local government law relating to the
regulation of cable operators as "public enterprises," it would be appropriate for a
local government to include an "Open Access" provision as a condition for
granting approving the AOL-TWC merger.
Absent any requirement by local governments to obligate AOL-TW to adhere to
the terms of the MOU, the parties (AOL, Time Warner and AT&T) can exercise
their discretionary ability to restrict or even cut off customers from content and
products offered by unaffiliated Internet based competitors.
A. MediaOne - AT&T
USWest, a former 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 own 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.
AT&T's acquisition of MediaOne's 25.51 % shaze of Time Warner Entertainment
Advance Newhouse will give it a 32% interest in Time Warner's high speed
Internet service, Road Runner. When this interest is combined with AT&T's 58%
stake in Excite home, MediaOne's high-speed Internet service, places AT&T
squarely is in the position of dominating the two prominent broadband-cable
modem services.
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The federal ownership statutes limit any one cable operator to no more than 30%
of the marketplace. AT&T's purchase of MediaOne boosted its national market
share to 39%. Although, MediaOne surrendered its management rights to Tirne
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 FCC 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 come 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 their
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
investmerit's current value approaches $15 billiona. Because of RR's exceptional
appreciated value; a buyout of AT&T's interest by the new entity, AOL -Time
Warner, is extremely unlikely because it is cost prohibitive and assets would be
better spent to upgrade existing networks and enhance services.
The Open Access Alliance of the Say (San Francisco) Area conducted a study5
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 care business. This means that
the intellectual property and technology issues related to Open Access have
become firmly established6.
4Talking Up the Deal, Multichannel News, January 24, 2000.
SThe Business journal of San Jose, March 13, 2000.
6Broadband in the Public Interest, February 10, 2000 -Volume I, No. 7
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Closed Access, the absence of Open Access, constitutes a power vested in cable -
telecornmunication 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 not 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 marketplace evolves, the
government should implement minimalist measures to 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.
On April 25th, consumer groups voiced their concern regarding the acquisition of
Media4ne's 2S.S 1 % interest in Time Warner Cable by AT&T. This business deal
would establish AT&T as the largest and most dominant cable television
company in the United States. The acquisition locks the number 1 and 2 largest
cable operator's together in a gigantic conglomerate with significant market
power and vast telecommunication resources.
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
$75 per share, Time Warner was at $64 per share: AOL is paying a bit above $110 a
share, a $45 premium over the pre-deal price of Time Warner. The merger represents a
good deal far Time Warner stock shareholders and Gerald Levin. The $110 price
increases the value of Levin's unvested options by $125 million and the value of his
vested options by $240 million; total gain is $365 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 billion.
Cable Carried Incentive for AOL Merger, Allan Sloan, Newsweek.
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D. Public Policy Questions to Consider
The questions for local government officials to weigh fallow.
Without Open Access AOL-TW Internet service subscribers maybe directed first
to Company or affiliated content providers and would have to perform intense
searches to find similar content and e-commerce retail outlets offered by
independent providers.
The Internet, atwo-way communication pathway, came of age over the common
carrier telephone system. Recently, it made a transition to the cable television
broadband platform. If local government concludes the Internet must be an "open
medium," and that it is a significant public interest issue, then it must act to
preserve the Internet's common carrier heritage. Absent any requirement by
government to obligate AOL-TW to the terms of the MOU, AOL-Time Warner
has the power to limit their customers from web content offered by unaffiliated
Internet service providers.
2. 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 9th Circuit Court of
Appeals, is a legitimate public policy question. As Portland learned, doing so
may result in substantial legal defense expenditures. Henrico County, Virginia is
now traveling the same path.
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 guazd against possible
uncertainties, it is recommended that the Franchise Authority:
Consent to the transfer with conditions; and
2. Certify that the current .franchise is in full force and effect; and
3. Direct AOL-Time Warner to be bound by the Cable Television Franchise Ordinance and
perform all duties and obligations of the grantee thereunder; and
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4. Carry over any transgressions or issues to the new entity; and
5. Prohibit any revaluation of intangible and tangible assets by the new entity to become the
basis for future rate increases whereby advising AOL-Time Warner that the franchise authority
intends to 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 rates; and
6. The City's approval is rescinded if TWEAN does not accept the terms of the transfer
resolution within 30 days or challenges any provision of the transfer in court; and
7. Direct TWEAN to reimburse the City for any direct and indirect expenses associated with
the transfer review process; and
8. ,Direct AOL-Time Warner 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
whereby granting unaffiliated Internet Service Providers (ISPs) use of the broadband cable
modem platform on terms and conditions identical to those ISPs, e-commerce and e-tailers
afEliated with America Online-Time Warner.
PROCEEDING
The franchise authority must approve or deny a transfer resolution, based upon Ends 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 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 af:
a. a public meeting where the counciUcommission/board grants interested parties an
opportunityto 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. It is customary to call for a public comment in these matters; the
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comment period may be publicized by issuing a press release to the print and electronic 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.
Exhibit I
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
similarly to provide consumers with a choice of broadband ISP offerings.
3. AOL Tirne 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.
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.440.6868
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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 ISPs,
consistent with providing a quality consumer experience and any technological
limitations in providing multiple 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
Warner. T.n 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 ISPs 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 dime Warner will offer ISPs 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 order 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 Jnternet 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 direct relationship with the consumer. Accordingly, both the
cable operator and the ISP will be allowed to market and sell broadband service directly
to customers. When AOL Tune Warner's cable systems sell broadband Internet service to
a customer, they will be entirely responsible for 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.
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27S 13-5316 Voice # 919.467.5392 Fax # 919.460.6868
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10. This MOU represents an initial step by Time Warner and AOL to articulate the terms,
conditions and pazameters under which a combined AOL Time Warner will offer
consumers access to multiple ISPs on its broadband cable systems. It is the intention of
the parties to continue to refine those particulazs in a manner that is responsive to, and
consistent with, the desire of 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 (d/b/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 obligations aze due that would permit the full implementation of the
commitments described herein as quickly as possible.
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.686$
1$
Exhibit II
REQU]REMENTS OF FCC'S CONDITIONED APPROVAL
OF THE AT&T-MEDIA,ONE MERGER
• As anon-severable condition to granting the application, the FCC requires the applicants
to complete one of the following options to reduce its attributable ownership interests to
30% of Multichannel Video Programming Distributor (MVPD) subscribers nationwide:
o divest their interests in Time Warner Entertainment;
o insulate their interests in Time Warner Entertainment (TWE) by ending
involvement in TWE's video programming activities, which entails selling
AT&T's programming interests, including Liberty Media Group; or
o -divest their .interests in other cable systems, which involves divesting cable
systems serving approximately 11.$% of MVPD subscriber's nationwide (i.e.,
more than 9.7 million subscribers or more than half of AT&T's current
subscribers).
• The merged firm must file with the~Cable Services Bureau, within six months from the
closing of the merger, a written document specifying which of the foregoing three
compliance options it has elected to pursue.
• The merged firm must complete the elected compliance option by May 19, 2001.
• If the merged firm has not completed the elected compliance option by the May 19, 2001
deadline, then it will be required to place into an irrevocable trust for the purpose of sale
'the assets that it must divest to satisfy the 30% limit.
• . Sixty days before the compliance deadline, May 19, 2001, the merged firm must file with
the Cable Services Bureau a written document that either (a) states that it will be in
compliance by the deadline, or (b) states that it will not be in compliance and describes
the irrevocable trust arrangement that it will complete by the May 19, 2001 deadline.
• During the period prior to compliance with the foregoing conditions, the merged firm
must comply with interim conditions (originally proposed by the applicants) that are
designed to mitigate the potential harm to the diversity of programming and competition
during the compliance period.
• Appendix B of the FCC's Memorandum Opinion and Order lists the interim conditions
and related enforcement mechanisms, which include safeguazds to limit the merged firm's
involvement in the video programming activities of Time Warner Entertainment and the
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.6$6$
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programming networks in which the merged entity has attributable ownership interests
(including Liberty Media Group and Rainbow among others.)
• Appendix B also outlines strict enforcement mechanisms to ensure compliance with the
foregoing non-severable conditions. Failure to comply with these conditions and
safeguards during the transition period can result in a forfeiture of up to $100,000 for the
first failure and up to $250,000 for additional failures. Continuing failure by AT&T to
comply with these interim conditions can result in additional penalties of up to $10,000
per day, and up to $100,000 per day after 5 days of not resolving the continuing failure.
FACT SHEET:
FCC's Conditioned Approval of AT&T-MediaOne Merger
FCC's Cable Horizontal Ownership Rules
The 1992 Cable Act required the Commission to establish rules and regulations limiting the
number of cable subscribers a company is authorized to reach through its own cable systems or
those in which it has an attributable ownership interest. Tn 1992, the FCC adopted cable
horizontal ownership rules that limited the reach of one entity to 30 percent of cable subscribers
nationwide.
On October 8, 1999, the FCC adopted new cable horizontal ownership rules that maintained a 30
percent limit, but calculated total horizontal ownership by counting nationwide subscribers of
cable, direct broadcast satellite (DBS) and other multichannel video. programming distributors
(MVPD), not just cable homes passed. At the time the rules were revised, a 30% limit on
MVPDs subscribers was effectively equal to 36.7% of cable subscribers nationwide.
FCC's Cable Ownership Attribution Rules
The FCC's cable ownership attribution rules determine whether the size or type of an entity's
ownership interest in a cable system is such that it confers on the entity the ability to influence or
control the operations of the cable system or creates economic incentives to take actions that
concern the FCC. Thus,.the cable ownership attribution rules identify ownership interests that
raise issues of concern to the FCC.
Multichannel Video Pro rammin Distributor PD Subscribershi
• Nationwide MVPD subscribers: 82.36 million
• Nationwide cable subscribers: 67.1 million
• Thirty percent of nationwide MVPD subscribers permits an operator to serve 24.7 million
subscribers
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.6868
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• AT&T serves 18.96 million subscribers, or 23 percent of MVPD subscribers nationwide
• Excluding its attributable ownership interest in Time Warner Entertainment (TWE),
MediaOne serves 5 million subscribers, or 6 percent of MVPD subscribers nationwide
• TWE serves 12.6 million subscribers, or 15.3 percent of MVPD subscribers nationwide
Without divestitures, the merged AT&T MediaOne would serve 34.4 million subscribers or
41.8% of MVPD subscribers, which represents 51.3290 of nationwide cable subscribers.
Enforcement of the Cable Horizontal Ownership Rules
On May 19, 2000, the U.S. Circuit Court for the District of Columbia upheld the constitutionality
of the statute underlying the FCC's rules on cable horizontal ownership. That court decision
automatically lifted the FCC's voluntary stay and the agency immediately began enforcing its
30% horizontal ownership.limit.
Section 613 and the FCC's Cable Horizontal Ownership Rules
1. 1992 Cable Act required the FCC to set a horizontal ownership limit for cable.
2. Daniels Cablevision challenged the constitutionality ofthe statute in District Court.
3. September 1993 -District Court agreed that the statute was unconstitutional.
4. FCC appealed to the U.S. Court of Appeals far District of Columbia Circuit.
5. FCC adopted 30% as the ownership limit, but voluntarily stayed enforcement of the rule
because of the District Court's ruling.
6. Tirne Warner challenged the 30% rule as unconstitutional in the U.S. Court of Appeals for the
District of Columbia Circuit.
7. D.C. Circuit Court consolidated the challenge to the statute (Daniels) and the challenge to the
rules (Time Warner).
S. On October 8, 1999, the FCC revised its 30% ownership limit to account for all multichannel
video program distributor (MVPD) subscribers, not just cable homes passed.
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.6868
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9. The D.C. Circuit Court decided to consider sepazately the challenge to the statute and the
challenge to the FCC rules.
l0.On May 19, 2000, the D.C. Circuit Court upheld the constitutionality ofthe statute requiring
ownership limits. The FCC's voluntary stay on enforcing its rules was automatically lifted.
11. D.C. Circuit Court will hear oral arguments on the FCC rules on October 17, 2000.
Local Phone Competition
• Local competitors added 65 percent of new business lines in the third quarter of 1999.
• In 1996, competitors to the incumbent phone companies had one percent of the local
market.
- In the second quarter of 1999, competitors reached siac percent of the mazket.
• AT&T provides residential local telephone service to SS5,000 customers nationwide.
- MediaOne provides residential local telephone service to 100,000 customers
nationwide.
Public interest Benefits from the AT&T-MediaOne Mer er
In analyzing the potential public interest benefits from the merger, the FCC found that
consumers are likely to benefit from increased local telephone competition. The FCC determined
that the combination of AT&T's brand name, expertise and telephony assets with MediaOne's
expertise in providing cable telephony, and the economies of scale offered by the merger, is
likely to increase these companies' ability to compete successfully against the incumbent LECs.
AT&T's success in providing cable telephony over the merged firm's systems also is likely to
facilitate its efforts to provide local telephony over other cable operators' networks through
contractual arrangements. The FCC concluded that the merger will enable AT&T and MediaOne
to provide local telephony competition more effectively than either company could
independently or through joint ventures.
Broadband
In its analysis, the FCC also considered the impact the merged firm will have on broadband
services, but declined to impose conditions in this regazd. The FCC discussed the merged entity's
ability to provide high-speed Internet access over a vast cable infrastructure. The merged firm
also would have major ownership interests in the nation's two largest cable broadband Internet
services providers (ISPs), Excite@Home and Road Runner. Excite@Home and Road Runner are
the exclusive ISPs serving broadband subscribers over the cable systems of AT&T, MediaOne,
TWE, Cox Corporation and Comcast Corporation, among others. The FCC analyzed the merger
as modified by the U.S. Department of Justice's proposed consent decree with the applicants,
which requires them to divest their interests in Road Runner no later than December 31, 2001,
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.6868
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and to obtain the Justice Department's approval prior, to entering certain types of arrangements
with America Online and Time Warner that involve broadband services. Given the nascency of
broadband Internet services, the FCC concluded that growing competition from alternative
broadband access providers, the applicants' commitment to give unaffiliated ISPs direct access to
their cable systems, and the terms of the Justice Department consent decree make it unlikely that
the merged firm will be able to dominate and threaten the openness and diversity of the Internet.
Timeline of AT&T-MediaOne Mer er
July 23,1999: FCC issues Public Notice regarding AT&T Corp. and MediaOne Group, Inc
merger application. Merger review begins.
October 26,1999: FCC requests documentation from AT&T demonstrating how the company
will fit under the revised horizontal ownership and ownership attribution rules.
December 21,1999: AT&T requests 18-month waiver to come into compliance with FCC's
ownership rules. Waiver request requires FCC to collect fiuther public comments.
February 4, 2000: The Cable Services Bureau convenes a Public Forum on the proposed
AT&T-MediaOne merger.
March 24, 2000: FCC receives complete information from AT&T regarding waiver request and
subscriber certifications.
June 5, 2000:FCC grants conditioned approval of AT&T-MediaOne merger. AT&T is required
to elect one of three divestiture options within six months after closing the merger.
March 19, 2001: AT&T is required to report to the FCC that it will meet the May 19, 2001
divestiture deadline, or to describe the irrevocable trust arrangements far sale of the assets that it
must divest to complete the compliance option it has elected to reduce its attributable ownership
interests to 30% of MVPD subscribers.
May 19, 2001: Divestiture deadline. If AT&T has not completed the elected compliance option,
the designated assets will be put into an irrevocable trust by this date for sale.
Franchise Fee U-Tax Auditing & Cable Television Administration
101 Pocono Lane, Cary, North Cazolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.6868
23
Draft #2A
[WITH OPEN ACCESS PROVISION]
RESOLUTION NO. 00-
A RESOLUTION GRANTING THE CONSENT OF ORANGE COUNTY 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
WHEREAS, Time Warner Entertainment-Advance/Newhouse Partnership
("TWEAN") holds three (3) valid, non-exclusive franchises to operate a cable television
system in Orange County, North Carolina (the "Franchising Authority"); and
WHEREAS, TWEAN 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 TWEAN; and
WHEREAS, awholly-owned subsidiary of AT&T Corporation ("AT&T") is
acquiring all of the shares of Media One pursuant fo an Agreement and Plan of Merger
dated May 6, 1999, ("Transaction No. 1 ") so that following closing of the transaction,
AT&T will control an approximate 17% interest in TWEAN; and
WHEREAS, TWI and America Online, Inc., ("AOL") have entered into an
Agreement and Plan of Merger dated January l0, 2000 ("Transaction No. 2"); and
WHEREAS, the merger agreement will result in a stock to stock merger
("Transaction No. 2") in which TWI and AOL 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
WHEREAS, the franchisee, TWEAN, 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
WHEREAS, on or about February 10, 2000, TWI, as transferor, and AOL-TW,
as transferee, filed an FCC Farm 394 seeking the consent of the Franchising Authority to
Transaction No. 2; and
WHEREAS, on or about February 18, 2000, Media One, transferor, and AT&T;
transferee, filed a Form 394 with the Franchising Authority seeking consent to
Transaction No. 1; and
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WHEREAS, the Franchising Authority has conducted a thorough review of the
legal, technical and financial qualifications of the applicants and the transferees to own
and operate the cable system; and
WHEREAS, the Franchising Autharity 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 largest cable television operators in the
United States and AOL is the largest and most dominant provider of Internet services;
and
WHEREAS, 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. 1 and 2 will have ananti-competitive impact on the provision
of Internet services and cable programming to the public; and
WHEREAS, 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 below;
NOW, THERFORE, BE TT RESOLVED that in consideration of the foregoing
and the promises set forth herein, the 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, 2001.
2. The Franchising Authority confirms that:
(a) the three (3) franchises held by the franchisee are valid and in full
force and effect.
(b) the franchisee will be in material compliance with the franchises
when the other conditions set forth in this Resolution are met.
3. TWEAN:
(a) agrees to be bound by the three (3) franchises and perform all
duties and obligations thereunder;
2~
25
(b) represents and warrants that it is able to provide and agrees to
provide all services required under said franchises;
(c) acknowledges and agrees that TWEAN 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, permits and other authority necessary for lawful operation
and maintenance of the cable system.
4. The past performance of TWEAN under the control of TWI pursuant to
the franchises is not waived by the Franchising Authority consenting to
this transfer and adopting this Resolution. TWEAN (under the control of
its new parent, AOL-TW) agrees to be responsible for and bound by the
breaches and non-performance, if any, of TWEAN (under the control of
TWI) prior to this transfer. The Franchising Authority may, after
consummation of the Transaction Nos. 1 and 2, consider in any ongoing
renewal proceeding, the past performance of TWEAN (under the control
of TWI) to the extent permitted under 47 U.S.C. §546, as if it were the
past performance of TWEAN (under the control of AOL-TW).
5. TWEAN 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, equipment rentals and
installation costs.
6. This Resolution shall become effective on the date of its passage, but shall
be automatically rescinded and the transfer of control denied (1) if not
accepted in writing by TWEAN, within sixty (60) days of passage; or (2)
if any of the conditions of this consent resolution are determined to be
invalid in a final judgment by a court of competent jurisdiction.
7. Within sixty (60) days fallowing 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.
8. TWEAN and AOL-TW shall provide nondiscriminatory access to the
franchisee's cable modem (digital) platform far providers of Internet,
online services, and other video and digital services, whether or not such
providers are affiliated with TWEAN or AOL-TW.
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~~
PASSED, ADOPTED AND APPROVED this the day of June, 2000.
ORANGE COUNTY BOARD OF COMMISSIONERS
By:
Chairman
ATTEST:
seal
By:
County Clerk
WE CONSENT TO AND ACCEPT THE TERMS AND CONDITIONS OF THIS
RESOLUTION.
DATE OF ACCEPTANCE:
TIME WARNER ENTERTAINMENT
ADVANCE NEWHOUSE PARTNERSHIl'
2000 By:
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