Why Fighting AT&T in Court Is Bad for the Internet Business

Recent court rulings requiring AT&T and its cable operating subsidiaries to open their networks to ISPs will hamstring development of consumer broadband. The Clinton administration needs to provide policy leadership.

by Jason Chervokas co-Founder and co-Managing Editor of @NY [July 20, 1999]

When a federal court in Portland, OR, ruled last month that AT&T had to make its newly acquired cable television infrastructure available to Internet service providers other than itself, the ruling was hailed by the consumer advocates that helped spur the case in the first place. After all, the court was responding to arguments that suggested that the cable infrastructure for providing broadband data services should be considered a utility like the phone lines and should be open to all service providers. And that kind of thinking—which resulted in the break up of Ma Bell—certainly spurred the kind of competitive marketplace that improved telephony in the US and gave consumers a new range of options.

So a strange band of consumer advocates, small ISPs, and local cable regulators in Oregon applied the same logic to broadband over cable in the AT&T case and hailed the resulting court decision.

But when you take the time to look under the hood of the ruling as it stands—and AT&T is currently appealing—you'll notice that, in fact, the court decision marks the first time since the commercial explosion of the Internet that an American municipality has stepped in to slow the growth of the Net. And you can be sure it won't be the last time. Already cable regulators in one county in Florida have passed a regulation that mirrors the Portland ruling. And more municipal authorities are considering similar measures. If the ruling stands, broadband access to American homes will be set back by a decade and that will be bad for the Internet content business and particularly bad for New York. Here's why.

One-way street. As currently constituted, the coaxial cable network that AT&T has so heavily invested in through the acquisitions of TCI and MediaOne, are not configured to handle the kind of two-way data flow that the Internet affords. In fact AT&T is planning to invest billions of dollars in rebuilding that network. AT&T bought the cable companies for the franchises and consumer relationships they have, not for the backend hardware.

Sure, the telecom giant is convinced it can reap huge profits years down the road by making this enormous investment. But it is a risky gamble pouring billions into an unproven technology to provide services to an unproven market.

If at this early stage of AT&T's broadband network development, local municipalities decide piecemeal that AT&T—and by extension other cable operators—must open networks to competing service providers, the result will be a disincentive to make the needed multi-billion dollar infrastructure investment. Put yourself in AT&T's shoes—if you were told that is was going to cost you $9 billion to create a high value property for you competitors to use against you, would you shell out the dough? No way.

So, if the ruling stands, the pace with which broadband cable-based data services will be deployed in the US will be dramatically slowed. That might be an acceptable byproduct of regulation if AT&T/TCI/MediaOne was an anticompetitive, predatory, monopoly operator in the broadband data services business. But, in fact, that combined company is barely in the broadband business today. Furthermore, there's no assurance that cable is going to be the primary way that American consumers buy broadband services. DSL, which provides high bandwidth services over conventional phone lines, is an absolutely functional solution. Direct satellite networks, as well as cellular and other kinds of wireless networks can achieve the same results. And alternative telcos like Qwest and Winstar, investing in new fiber networks, could also come into play down the road as consumer providers. The Portland court has totally overreached in its response to an imagined future threat in a knee jerk response to the notion that a big corporate entity in inherently anticompetitive.

Why? Blame local bureaucrats. Currently, thousands of local municipalities are in the business of awarding cable television franchises and setting terms of service that franchise winners must meet. There are jobs for commissioners and regulators in towns all over this country and the franchises create plenty of local revenue. These guys need something to do and the FCC—by adopting a laissez-faire attitude to regulating the growth of new-age data service providers—has opened the door to action by thousands of municipal bodies.

That can only spell disaster for the pace of growth of the industry, as companies that want to invest in infrastructure upgrades will suddenly be faced with thousands of different regulators environments in which their businesses operate.

Why does this matter to Silicon Alley? Two reasons: First, New York City is a severely bandwidth challenged town. The telephony infrastructure in many places is old. To continue to foster a high tech Internet culture here we need bandwidth. Not just business bandwidth—which is attainable here for the right price—but consumer bandwidth. New York's history with cable TV is not a pretty one. Huge swaths of the city were without cable service for decades as a result of graft in corrupt city administrations over the years. Although there's no reason to expect corruption to keep high speed bandwidth out of the hands of New Yorkers in the 21st century, there's also no reason to expect that New York with be less of a bureaucratic nightmare than Portland, OR.

Second, media makers and content creators here are still salivating over the potential of a consumer environment where there is high-speed access to millions of American homes. Whether you're creating video and audio for download or just delivering "traditional" Web or e-mail content, the prospect of a near-term future where millions of Americans have the choice to by high-speed, always-on Internet access, in all likelihood means your market opportunity will soon explode.

So what can be done? In many ways the solution is in the hands of the Clinton-Gore administration. A big part of the current problem is that the FCC—perhaps fearing a fight with local regulators— has not been willing to go out on a limb and issue policy directives or provide regulatory guidance on the issue of high bandwidth cable service, adopting inside a "let the market decide" attitude. Unfortunately local regulators haven't adopted the same credo. It's time for some leadership from the top.

—End

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