AOL Prepares for a Grilling on Capitol Hill

After spending Tuesday trying to put out one merger-related fire, America Online ( AOL) has to hope another one doesn't flare up Wednesday morning on Capitol Hill.

AOL, which is in the midst of gathering regulatory approvals for its planned acquisition of Time Warner ( TWX), was on the defensive Tuesday after The Wall Street Journal suggested that AOL was trying to create a worldwide instant messaging system by linking its AOL Instant Messenger and ICQ services.

That has raised the ire of AOL competitors like Yahoo! ( YHOO) and CMGI ( CMGI) subsidiary Tribal Voice, which say that AOL, as a condition of the Time Warner deal, should be pushed into making its systems for sending short text messages compatible with those of its rivals.

AOL, which operates AIM and ICQ as separate services and doesn't enable users of one to send instant messages to the other, is estimated to command at least 90% of the worldwide usage of instant messaging -- a technology that hasn't generated much revenue for anyone yet, but which some boosters say could be as important a medium as the World Wide Web and email are today.

The Journal article, the accuracy of which AOL disputes, comes one day before AOL Chairman Steve Case and Time Warner Chairman Gerald Levin are slated to testify on the future of interactive television at a hearing by the House Telecommunications Subcommittee. As is the case with instant messaging, interactive TV is a minuscule moneymaker now, but has vast commercial possibilities -- and could be unfairly dominated by a merged AOL Time Warner, say other companies.

Fair Play

The Wednesday morning hearing itself is the subject of a congressional dispute, because Case and Levin, much to the disappointment of Democratic members of the telecom subcommittee, are in fact the only witnesses scheduled for the hearing -- unlike, say, a Federal Communications Commission hearing on the AOL Time Warner merger in July, at which several critics of the merger testified.

In a letter to the Republican subcommittee chairman Rep. Billy Tauzin (R., La.) Tuesday, Democrats John Dingell (D., Mich.) and Ed Markey (D., Mass.) wrote, "Both AOL and Time Warner have gone to great lengths in various proceedings to convince policymakers and the public that their proposed merger is no threat to competition, consumers, innovation or diversity. It is more than a little ironic, therefore, that the AOL-Time Warner perspective will be the only one permitted at a hearing on the future of interactive TV."

The short witness list for the hearing hasn't deterred AOL's critics. Ross Bagully, senior VP at CMGI, says he spent Tuesday with other opponents of AOL on the instant messaging issue, telling their side of the story to Congress members. Bagully says he met personally with subcommittee Vice Chairman Michael Oxley (R., Ohio) and Barbara Cubin (R., Wyo.), another member of the House Telecommunications Subcommittee.

AOL shares fell 19 cents Tuesday to close at $56.25; Time Warner rose 38 cents to $80.50.

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