BUSINESSWEEK ONLINE : JULY 31, 2000 ISSUE
LEGAL AFFAIRS

Whose Net Is It, Anyway?
Web access is becoming a dicey issue for industry and regulators

About 100 years ago, the imaginative robber baron Jay Gould had a bright idea. He organized a handful of train companies in St. Louis, and together they gained control of the two railway bridges into town. This coalition then proceeded to squeeze huge fees out of every rival that wanted to use the bridges--until the Supreme Court put an end to the lucrative game in a famous 1912 case, U.S. vs. Terminal Railroad Assn. Deeming the bridges to be essential facilities for the local train industry, the high court forced Gould & Co. to open them up on an equal basis to everybody.

This distant Industrial Age precedent may not seem to have much to do with today's digital economy. But it's becoming more relevant every day. Across the high-tech landscape, companies increasingly are gaining control over critical pieces of the U.S. information infrastructure. Like Gould's Terminal Railroad Assn., in a sense, these companies are becoming the sole owners of some of the key bridges on the Info Highway. Microsoft Corp. (MSFT) owns the Windows operating system--the brains inside of 90% of U.S. personal computers. AT&T (T) controls some of the underground cables that promise to offer consumers high-speed Net access. America Online Inc. (AOL) dominates the world of instant messaging, a popular new service allowing people to send one another e-mails at once.

In each of these cases, rivals and consumer groups have complained that the monopolists take unfair advantage of their power--or at least are in a position to do so (table). And regulators have been re-reading cases like Terminal Railroad and asking a fundamental question: How much responsibility does a monopolist have to share its private property with rivals? Or, to put it another way, when should the government force a key technological ''bridge'' to be open?

While the debate is only beginning, regulators are already taking steps to protect the principle of openness in a digital economy. As part of his package of interim remedies in the Microsoft case, U.S. District Judge Thomas Penfield Jackson plans to force the company to share proprietary information about the source code in Windows with rivals. In May, a French court ruled that it was illegal for France Telecom to make wireless Internet customers to go to its own Web site. Instead, they had to be offered a choice of wireless portals. And the Federal Communications Commission plans to study whether cable companies such as AT&T should be forced to open their wires to competing Internet service providers.

TRADE-OFF. The tech industry has an enormous stake in the outcome of the global openness debate. Collectively, cable companies such as AT&T, wireless service providers such as Vodafone AirTouch, and business-to-business market makers such as General Motors are spending billions of dollars to build, buy, and upgrade new communications and commerce networks. The rich valuations that investors initially granted some of these companies were predicated on the notion that they would be able to harvest fields of gold by controlling these networks. But now some analysts think AT&T, for example, may have overestimated its ability to control its recently acquired cable companies. ''They thought they could operate a closed system and that they wouldn't have to share any of the profits,'' says Scott C. Cleland, telecommunications analyst at Precursor Group. ''And that was a flawed assumption.''

Philosophically, the debate over openness juxtaposes two conflicting principles: respecting private property and preserving the ability to compete. On the one hand, says Federal Trade Commission Chairman Robert Pitofsky, trustbusters don't want to sit idly by and watch companies transform the Net into a series of monopolies. On the other, they don't want to discourage companies from investing in the Net by demanding that they will have to share the fruits of their labors. ''That's the trade-off,'' says Pitofsky. ''It's essential that we get it right.''

Trustbusters are facing this dilemma more frequently because many information industries seem to have a natural tendency toward monopoly. In large part, that's due to the ''network effect.'' The more people use a particular digital product or service--say, Microsoft's operating system or AOL's instant messaging--the more attractive it is compared with rivals', and the more new consumers will adopt it. Over time, this phenomenon leads to winner-take-all markets.

That worries openness advocates. At bottom, they believe in the simple principle that information should be able to travel freely from one end of the global communications network to the other. If, say, AT&T makes it harder for a customer to access rival Web sites, that raises serious concerns about free expression. ''It is basically the First Amendment idea--that you and I should be able to speak without having somebody interposing in between,'' says Charles Nesson, director of Harvard's Berkman Center for Internet & Society.

Another justification for openness, say advocates, is that it encourages innovation. When a company controls a key piece of the infrastructure, it can cripple rivals that try to attack its monopoly. Indeed, Microsoft was able to wage a successful predatory campaign against Netscape Communications Corp. to protect its Windows monopoly. By mandating openness in some markets, it may be possible to prevent monopolies from abusing their power, says Lawrence Lessig, author of Code and other Laws of Cyberspace. ''If innovators realize that the network will not be used strategically against them--that is, that the network will remain neutral--then there's reason to develop radical new applications,'' says Lessig.

PROFIT MOTIVES. But opponents argue that government-imposed openness could do just the opposite--stifle innovation and dampen investment. Cable and phone companies are spending huge sums upgrading their networks because they believe there is a profit to be made. Investment will dry up if companies figure there is nothing to be gained by it, argues James W. Cicconi, executive vice-president for law and government affairs at AT&T. ''The pioneer company goes out and takes all the risks. It raises the capital and builds the network. And now another company says: 'Thank you very much, we'll take over now and ride that system for free,''' says Cicconi.

Another criticism of openness is that it can require excessive regulation. Consider the issue of AT&T's underground cables. If the government forces the company to share its lines with competing Internet service providers, then it may have to get into the complex business of deciding how much AT&T should charge them. ''It's important that we not back into a situation where we end up with a much greater level of government intervention in matters of pricing,'' says J. Gregory Sidak, fellow at the American Enterprise Institute.

Clearly, the debate over openness is still raging. But that's not stopping consumers and business rivals from trying to force dominant companies to share their private property. As a result, regulators are increasingly going to be dealing with this issue, whoever wins the White House in the fall. Here's where key industries are headed:

-- Cable: For the moment, the forces of openness appear to be winning in this arena--largely because the many cable companies have privately agreed to go along with their wishes. AT&T has pledged to let the former Mindspring Enterprises, now part of Internet service provider EarthLink (ELNK), hook up to its cable network. Similarly, AOL and Time Warner (TWX) have said they expect to enter into open-access agreements with other ISPs after their merger closes.

But not everyone is convinced that voluntary self-regulation is a long-term answer. There are still plenty of games cable operators could play to favor their own business partners. Time Warner, for example, might make it faster and easier for sports fans to get content from its CNN/Sports Illustrated site than from a Disney-owned ESPN (DIS) site. If this type of thing happens, regulators might be tempted to step in. ''We need to distinguish between the people saying they're going to be open and people who are open,'' says Greg Simon, co-director of the openNet coalition.

-- Wireless: The next big fight could well break out in the world of wireless. So far, the issue has not been big in Washington. But in Europe, where wireless services are widespread, there have already been two skirmishes. On June 21, Britain's BT CellNet Ltd. bowed to pressure to allow its wireless customers to choose rival Internet portals as the home page on their cell phones rather than its own default home page. In May, France Telecom was forced to take similar action. ''It's valuable real estate for the carriers, and they're going to have a hard time letting it go,'' says IDC wireless analyst Callie Nelson.

These issues, say experts, are bound to flare up in the U.S. Sprint PCS, the most aggressive U.S. wireless service provider, currently offers no way for customers to reprogram their cell phones to select home pages. Instead, it offers a menu of preassembled content from 30 providers. Those slots are occupied by high-profile companies such as AOL and Bloomberg, which pay Sprint (FON) placement fees running into the tens of millions of dollars. To visit a Web site that isn't a preferred content provider, users must click on to a second screen and press a ''go to'' icon, bringing up another screen for entering a Web address. Hardly the easiest process.

By yearend, the company will offer an option that lets consumers configure their own home page. ''We're very open to being open,'' says Sprint PCS Senior Vice-President Keith Paglusch. Maybe so, but if consumers start to complain that wireless systems are too closed, regulators might come off the sidelines.

-- Net backbone: It wasn't widely noticed at the time, but openness was a big reason for the Justice Dept. challenge in June to the WorldCom-Sprint merger. Together, they would have controlled 53% of the Internet backbone. That made trustbusters fear that the new company would have the power to discriminate against rival networks and force Net service providers to come knocking on WorldCom's (WCOM) door. ''The real threat,'' says Joel I. Klein, assistant Attorney General for antitrust, ''is that they could privatize a portion of the Internet.'' Trustbusters are continuing to watch this area closely.

-- B2B and B2C exchanges: Since the beginning of the year, dozens of industries ranging from aerospace to health care have announced joint-venture Web sites to buy or sell goods and services online. These sites greatly increase efficiency but could potentially stifle competition. Some Justice investigators are concerned, for example, that a ticket-vending site to be run by five major airlines could limit information from rival carriers. Alternatively, it could get exclusive fare information from the five and then refuse to share it with online rivals such as Travelocity.com.

How far are trustbusters willing to push the openness issue? So far, they're giving away few clues. Klein has been loath to lay down hard rules for when the government should mandate open access, since Internet monopolies have varying degrees of power. ''They can be an impenetrable barrier, or they can simply create a hurdle,'' says Klein. ''One needs to look at the specifics.''

Those words may offer some comfort to the many companies facing demands to open up their private property. But make no mistake: Trustbusters are more aggressive about the issue of openness than they have been in years. If things keep up this way, more and more corporate chieftains could find themselves reading the old story of Jay Gould and the Terminal Railroad Assn.

By Dan Carney in Washington and Mike France and Spencer E. Ante in New York, with bureau reports

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