Today, it's AT&T versus AOL; tommorrow, it's anyone's guess
Last June, a federal judge in Portland, Oregon ruled that AT&T had to open its cable modem lines to competing Internet service providers. The decision meant that the people in the Portland area could select the ISP of their choice rather than being forced to use the ISP designated by AT&T-Excite@Home, of which AT&T owns 58 percent. There's just one little catch. Broadband cable isn't actually available in Portland, at least not yet. But such is the incendiary nature of the issue, which pits cable companies like AT&T against ISPs like America Online, that the debate has gotten to court faster than broadband service has gotten to customers.
While the "open access" debate might at first seem like a local skirmish, it stands as an early test of the economic model for home-based broadband services both here in the U.
AT&T's loss in Portland is just one lost battle in a much bigger war. While the ruling by judge Owen Panner of the U.
But in San Francisco, the Board of Supervisors voted 8 to 3 against an open access initiative. The supervisors may have been responding to AT&T's lobbying effort as well as an implied threat that open access would delay the service. Indeed, that may be the cable industry's trump card. In congested core cities like San Francisco, New York, and Tokyo, creating cable for broadband involves an arcane, tangled cable plant. While the cable industry is not telling cities that it wants to keep the ISP market for itself, it can clearly pick and choose where to offer its services first. One supervisor told a reporter that while her constituents did support open access, "we also want to insure that we get an upgraded system."
Ironically, the relationship between the cable companies who transport data and the ISPs who deliver the service is not well understood, neither by customers nor the politicians making the decisions on their constituents behalf. "The only thing the cable company does is the last mile," says Milo Medin, senior vice president of engineering and chief technology officer for the @Home Network. When a cable modem customer makes a request, the packet is sent across the cable plant via a fast Ethernet line to the ISP's switch. The ISP handles the request from there. "The cable companies take care of the frequencies, like what channels the transmitters work on, while we take care of the data. And when there's a problem with the cable modem at your house, we're the ones who take care of that too. This is part of the public naivete. Everybody assumes that our relationship with the cable operator is same as an ISP's relationship with the phone company, and it's not."
High investment versus consumer choice
The high-level arguments from each side of the debate are fairly clear. Internet service providers say that the consumers will get a better deal from a competitive market in which they are free to choose the ISP of their choice. And in the U.
The cable companies counter that providing broadband over cable is not cheap. They say they've invested $10 billion already with $20 billion to go in order to bring broadband service to the entire country. With that kind of expenditure, they say, it's only fair that they retain a monopoly on the ISP provider in order to make money on their investment. They argue that the cable industry was banking on this advantage when it upgraded the system. In the U.
Public opinion among those following the issue leans toward the ISPs. American consumers, like their Japanese counterparts, consider competition and freedom of choice a birthright. After all, U.
ISPs have been savvy in leveraging these anti-cable, pro-competition sentiments. Last February, some 170 ISPs formed the openNet Coalition. Founding members include America Online, US WEST, MCI World Com, Cable & Wireless USA, and many lesser known organizations. The group's stated goal is to "insure that the Internet's hallmarks of competition and consumer choice are maintained as new broadband Internet access options are developed." It argues that competition will "lower prices, spur innovation, and advance the social and economic benefits of the Internet." OpenNet argues that "just as cable operators use their control over the cable facility to gain control over programming and video content, they are now attempting to use control of broadband access lines to dominate Internet content. For consumers, the threat in this model is that the broadband network will be a closed, proprietary network, and will differ dramatically from the open, non-discriminatory access they enjoy today."
So far, no counter-coalition of cable companies has emerged with the same focused voice. That may be because AT&T, through its acquisition of TCI and other cable companies, has become such a dominant player that it is synonymous with the cable industry. But the cable industry does have its supporters. Audrie Krause, a consumer advocate, has written that ISP providers like GTE and SBC Communications (which owns Pacific Bell, California's telephone company) are taking a hypocritical stance. She says that these are the "very same companies that have maintained monopoly control of local phone service by using every regulatory and legal trick in the book to avoid opening their own networks to competitors-as they were mandated to do three years ago when Congress enacted the Telecommunications Act of 1996."
Larry Pryor, a professor of Journalism at USC's Annenberg School for Communication, wrote that cable's poor historic performance is no predictor of the future. "When it comes to growth of the Internet, the past is irrelevant, and the future is all but inscrutable. This is a poor set of circumstances for trying to set long-lasting regulatory policy."
The cable companies' best ally is the Federal Communications Commission, which governs everything from telecommunications to televisions broadcasts in the United States. Its chairman, William E. Kennard, told the National Cable Television Association that while the broadband market is fertile ground for growth, it is still an undeveloped business that should be offered protections in its formative years. "Some people talk about broadband as though it is a mature industry but, the fact is that we don't have a duopoly in broadband. We don't even have a monopoly in broadband. We have a No-opoly because in fact most Americans don't even have broadband. We have to get these pipes built." Indeed, only some 800,000 U.
But Kennard also warned his audience that the FCC would be watching to make sure that broadband access would be as open as phone-based access. The FCC is also concerned that the Internet not just go faster, but further, reaching both urban and rural areas, inner cities as well as suburbs.
Cable industry supporters will also tell you that AOL, their chief critic, is hardly the most constant proponent of open access. The company has taken a seemingly contradictory stance in the area of messaging software. AOL has built part of its business on enabling two or more users to contact each other in real-time if they are online. Microsoft challenged this exclusive arrangement with its MSN Messenger Service, which enables its users to detect when AOL's 25 million subscribers are online and exchange messages. The two companies have engaged in a technology arms buildup, with AOL blocking Microsoft, and Microsoft upgrading its Messenger Service to get around the blocks.
In terms of the greater good of the Internet community, it is hard to see AOL's overall point. If open access is good, it should be good in all arenas. "AOL is absolutely right on the cable open-access matter, and absolutely hypocritical when it keeps its instant-messaging customers walled off from the rest of the Internet," wrote San Jose Mercury columnist Dan Gillmor. "The need for standards in the instant-messaging arena could not be more obvious. Making it happen involves solving some technical problems as well as political ones, but so far AOL has shown no interest beyond vague statements that it would like to be more open. Let's hope AOL changes its tune-and practices-soon." (Gillmor also noted that Microsoft itself was taking a hypocritical stance in demanding that AOL open its messaging system to competition, given its own proprietary dominance in operating systems.)
Meanwhile, AOL is not just waiting for AT&T to open the door. It's cut a separate deal with Hughes Electronics DirecTV to offer broadband AOL services to that company's seven million customers, investing $1.
An AOL-AT&T Alliance?
At this writing, some rumors have it that the major players in the dispute may come to an agreement. News reports say that AT&T and America Online may strike a deal that gives AOL some kind of preferential access. It's unclear what that would mean, given that Excite@Home has an exclusivity agreement for handling data across AT&T's cable. But any sort of a leg up for AOL is bad news for smaller ISVs, including Excite@Home itself. Indeed, the New York Times has reported that AT&T's chairman, C. Michael Armstrong, thinks the merger of @home-the country's first broadband cable service-with the Excite portal, is not in AT&T's best interest because the telecommunications giant does not want to be in the business of providing content. Conceivably, AT&T could force @home to sell off Excite and concentrate on the broadband business.
All of this movement reflects the fast-changing nature of this business. Excite@Home wants to go up against AOL with a high-speed service that deliverers compelling content. AT&T meanwhile is worried more about the "Baby Bells," the local telephone companies divested from AT&T as part of a court-mandated backup. The Baby Bells not only want to get into the long-distance business, but provide competing broadband service via DSL. And so for AT&T, AOL-with its 16 million subscribers-may eventually be a better ally than an enemy.
Two facets of a complex issue: Milo Medin of Excite@Home and Greg Simon, co-director of the OpenNet Coalition
Milo Medin, @Home Network's senior vice president of engineering and chief technology officer, sees the ISP/
Milo Medin: @HomeNetwork
- From your perspective, what's this debate about
- It's about who is going to resell service, and who is going to brand it and who is going to control the customer. That's what it all boils down to. Cable operators don't want AOL to be able to resell the cable service because they want to be able to bundle your video and your data to keep you from getting your television feed from satellite. That's the reason they started deploying broadband cable. Initially they didn't even think Internet access was going to be a big market, but they felt the demographics of high speed modem users was very close to the demographic of a satellite TV user. So if they could offer you high speed data for your cable, they reduced the odds of your dumping cable to go with satellite. That's how it all started.
- Is @Home the only ISP involved with broadband cable services?
- There's Roadrunner, which was formed by TimeWarner/
Media One. And some cable operators are doing it themselves. But while a few other players are operating in smaller markets, there's tremendous economies of scale for running data networks. That's why there are all these mergers and acquisitions in telecoms. When you get big enough, you can go off and buy 15,000 route miles of fiber optic cable, even though it costs $100 million to do it. The tiny "Mom and Pop" operations will never be able to afford that.
How is the ISP/
Cable issue playing out in the market?
- It depends on the local market. If there is no broadband available in your area, that suits companies like AOL just fine because they know how to win you as a dial-up provider. But if broadband is available, their value proposition isn't as great. When a technology gives one guy an edge, it's harder for marketing to differentiate. And AOL has done a good job differentiating their product by marketing.
- Some believe that AT&T is actually worried more about the local telephone companies than AOL.
- That's right. Companies like GTE, Southwestern Bell, and PacBell don't want AT&T threatening their voice business. Anything they can do to pin AT&T down and hurt their brand makes it harder for them to deploy competing phone service. The irony is that PacBell used to have cable networks. They were building them in San Jose and Orange County [California]. They killed all that because they said cable is a lousy technology and they didn't want any part of it. They sold their cable system to the cable operators. And now they are arguing for choice? Excuse me, is PacBell going to offer data service on top of cable? They have DSL. Why in the world would they do that? So then why are they spending all the money? To hose AT&T. They are trying to prevent AT&T from getting traction in the communications space.
How far ahead is the U.
S. over Japan in broadband cable deployment?
- It depends. In some parts of Japan some cable operators have done aggressive two-way build out. Others have not. So in the areas where they haven't, it will go slower. In the areas where they have, it will probably run at the same speed or faster that we have in the U.
- The cable companies argue that they ought to get a return on the substantial money they've spent upgrading their systems for broadband access. What's wrong with that?
- As a nation we've made decisions in every industry that we don't allow monopolies. Why are the two worst infrastructures in America in the telephone communications arena -- the telephone structure and the cable infrastructure? Why are they so behind the times? Because they've been run by monopolies for years and years. The idea that if you let them have a monopoly on the future that is somehow better for investment just has been disproven over and over and over in the 20th century.
When AT&T builds an underwater cable from the United States to Japan, they have a consortium of over 30 companies. They get all their competitors to drop their cables and join in on one. But when they are on land and they are investing tens of billions of dollars, all of a sudden they say that this is so expensive we have to do it all by ourselves. That is ludicrous.
- The best way to get investment in broadband networks is to open the gate so that other people can join with AT&T and other companies and invest together. The first principle of the new economy is to grow the market before you try to divide up the market. AT&T is following the cable economic model which is to monopolize the market, and not worry about growing it.
- When ISPs want open access, are they also asking for a financial position? Are they willing to invest?
- They are obviously going to have to pay for the access. And, they are asking for the ability to invest in the network along with the network owner. So if AT&T picks two cities to invest in for broadband network Internet access, what about the other cities that want to have that access? They have to wait until AT&T chooses to invest there. Well, there may be other companies that are willing in invest in those other cities with AT&T, so that the future can come to those cities more quickly.
- The concept of one company making all the investment decisions about who gets broadband access is a Stalinesque economic model. It's central planning. It is not the new economy model. That's what is so shocking here. They are trying to substitute the cable economic model of domination and monopolization in place of the Internet model, which is diversity and co-venturing and people competing to build a market where none exists today.
- They also argue that ISPs are pretty much interchangeable, so it doesn't matter to the consumer who they use. Is that valid?
- That's absolutely wrong. Over 5,000 ISPs currently use a twisted copper wire in 5,000 different ways. You can't tell me that companies like Mindspring [an ISP] have not made a difference in how people view Internet service. Their whole success has been based on their ability to offer improved services over the existing Internet companies, whether they are phone companies or whatever. Improved service in terms of customer services, ease of use, quality of the connection, reliability.
- Some San Francisco supervisors seemed concerned about affecting how fast AT&T brings cable modem to the city.
- This goes to the heart of the question. You know you are winning when the other side says that if they lose they'll take their bone and go home. AT&T has quit arguing the merits. Now they are arguing that if you don't let us have a monopoly, we won't let you have the service at all. I think that's obnoxious. That should tell people all they need to know about whether this is about investment or about monopoly.
- Do you think it will continue to be local skirmishes or will it be decided by the FCC or the courts?
- I would hope that we would get to a national policy. But I'm not going to sit around and wait for one when all these cities are heavily engaged in deciding the future of their own cable franchise.
- The FCC chairman has not been sympathetic to your cause.
- True, but the law is the law. If AT&T continues to insist that their Internet service is a cable service, then the localities are the ones who are in charge of the law. If AT&T finally admits that their service is a telecommunications service, then the national government would have to regulate them under the existing law. The existing law says that you have to open your network for resale and interconnection. And the concept that somehow AT&T, of all people, should be the only Internet provider that's not regulated to be open, is ludicrous.
Greg Simon: openNET Coalition