|BUSINESSWEEK ONLINE : JULY 5, 1999 ISSUE|
|NEWS: ANALYSIS & COMMENTARY
Whose Cables Are They?
Court rulings on Internet access have set off a storm of debate
It's hard to imagine that a public policy debate over the highly technical question of Internet access over cable could generate so much political mudslinging. In Los Angeles, three out of five commissioners on a city advisory group have resigned since the beginning of June, in protest over Mayor Richard J. Riordan's refusal to force the cable companies to allow Internet service providers to use their networks. One commissioner, Robert Duggan, accused the mayor of selling out consumers in favor of the cable industry. And State Senator Richard Alarcon, the California Senate Majority Whip, is expected to introduce legislation to open cable wires to Internet companies statewide.
What's all the fuss about? From Los Angeles to Ft. Lauderdale, local officials are beginning a hot debate on something called ''open access.'' At issue is whether AT&T (T) and other cable companies that are upgrading their systems to provide high-speed Internet access are obliged to open their networks to competitors such as America Online Inc (AOL). Although there are alternatives--beefed-up phone lines and satellites--cable is quickly shaping up as the most popular way to deliver zippy Net connections to U.S. households. That means whoever gets to sell cable Internet service will benefit--as the market for Net access swells to a projected $35 billion by 2002, up from $14 billion today, and as electronic commerce booms. ''No one can match the cable industry for speed and ease of use,'' says Spencer Grimes, cable analyst at Salomon Smith Barney (C).
For a while, it looked as if AT&T and other cable players wouldn't have to share. Since the long-distance giant cut deals to acquire Tele-Communications Inc. (T) and MediaOne Group (UMG) for a combined $116 billion, most cities have transferred the cable licenses to AT&T without conditions. The Federal Communications Commission, eager for consumers to get local phone competition and high-speed net access, also gave its blessing. Then came Portland, Ore. Earlier this year, its city and county officials decided to force AT&T to open up the TCI cable network it was buying to any other Internet player that wanted the use of the pipes. AT&T challenged the dictate but lost a federal court decision on June 4. AT&T is appealing that ruling.
''PRAIRIE FIRES.'' Portland was just the first of a growing firestorm. In Florida, Miami-Dade County and Broward County, which includes Ft. Lauderdale, are debating the open-access issue and are expected to vote on it in July. Seattle, San Francisco, and Oakland, Calif., are also weighing the issue. All told, as many as 200 municipalities could consider the open-access question in the next year. There seem to be ''prairie fires across the country,'' says George Vradenburg III, senior vice-president at AOL.
The result is a massive lobbying battle. In the high-profile Los Angeles conflict, C. Michael Armstrong, AT&T's chairman and CEO, visited Riordan to press his case against open access. The company is hiring lobbyists in nearly every region where the issue is hot. Among the lobbying outfits on board in L.A. is one headed by former Democratic strategist and John F. Kennedy staffer Joseph R. Cerrell.
On the other side, AOL has hired the high-powered law firm of Latham & Watkins and GTE is using former Democratic National Committee Chairman Charles Mannatt's law firm, Mannatt, Phelps & Phillips. AOL wants to be able to buy capacity on AT&T's cable pipes at wholesale prices and then resell it to consumers, bundled with AOL's content, at a higher price. ''It's very important that consumers have choices and competition be allowed to flourish,'' says AOL CEO Steve M. Case.
AT&T executives seethe at such comments. The company points out that it spent more than $100 billion to buy cable networks across the country, and it must invest billions more to enable the cable systems to handle services like Net access and telephone calls. The company says it shouldn't have to share its hard-won network with other companies. ''People can go to any Web site they want,'' says AT&T General Counsel James W. Cicconi. ''What AOL really wants is the ability to control the customer. They want to maintain their dominance.''
MOMENTUM. Cable players also downplay the idea that they have any monopoly control over Net access. Only about 800,000 people tap the Net over cable modems, or less than 1% of total Net users. Although that number will grow, the number of alternatives are increasing daily, cable companies argue. Indeed, AOL has already struck deals with Bell Atlantic Corp. (BEL) and SBC Communications (SBC) to sell its Net service over high-speed phone lines. And on June 21, AOL announced that it would invest $1.5 billion in Hughes Electronics Corp. (GM) so AOL customers could reach the Net from high-speed satellite connections. ''I think AOL's investment undercuts the notion that there won't be true competition for broadband Internet access and undercuts the need for government involvement,'' says Brian L. Roberts, president of Comcast Corp. (CMCSA), the country's third-largest cable company.
For now, though, AOL and other open-access advocates appear to be gaining momentum. Several municipalities are following Portland's lead. Miami-Dade and Broward Counties seem to be leaning toward opening up the cable plant. And the Los Angeles city council, which early on voiced support for open access, will now probably oppose Riordan's stance against open access, sources say. Spokane (Wash.) is headed for a fight on the issues as well. ''I'm looking to take a more critical and aggressive stance on these issues,'' says Jay Cousins, who sits on the Spokane board advising the city and county on cable regulation. ''The city, when it comes to any company like TCI, is about as obsequious as it gets.''
In the long term, however, AT&T and other players are hoping to turn the tide. The long-distance giant expects to win its appeal of the Portland court case. If that happens, it's likely to set a strong precedent that AT&T has no legal obligation to share its cable network and can do so at commercial rates it negotiates with AOL and others.
AT&T also has a safety net. Although AT&T is fighting open access in each municipality now, the FCC has made it clear that it thinks there needs to be a consistent national policy on the issue. And FCC Commissioner William E. Kennard has said that he is opposed to regulating open access because he wants AT&T and other cable players to have every incentive to upgrade their networks. ''My No. 1 concern, numero uno, is we've got to get Americans faster Internet access in their homes,'' he says. With friends like Kennard, AT&T can afford a few enemies in Los Angeles and Portland.
By Peter Elstrom in New York, Ronald Grover in Los Angeles, and Catherine Yang in Washington
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