Wired Wars: Cable vs. Internet

The cable and Internet industries are built on vastly different business models. Does one have to triumph, one to perish? Or will venture capital reconcile them?

by Steve Harmon [June 7, 1999]

[Steve Harmon is internet.com's Senior Investment Analyst. The following column appeared originally at The Internet Stock Report.]

This is a big enough event that I wanted you to sit down with it Monday morning and consider it carefully; it expands on my analysis from Friday. The future of the Internet may be at stake in a significant way.

Oregon is known for being wet, and the home of Nike and the Trailblazers. Perhaps there's more than irony to the fact that if we put these three ingredients together last Friday it produced a potential watershed moment for the fleet of foot clearing a path to the future.

Specifically an Oregon Federal court ruling that local AT&T/TCI cable lines carrying Internet traffic must be opened up to non-cable companies, a boon to ISPs such as AOL (NYSE:AOL), EarthLink (NASDAQ:ELNK) and MindSpring (NASDAQ:MSPG), all stocks on the up Friday.

Shares of cable Internet stocks fell with @Home (NASDAQ:ATHM) hit the hardest down 10% to $94.50 per share. AT&T (acquiring TCI, a majority owner of @Home) will inevitably fight the ruling in appellate court. AT&T's (NYSE:T) was off 1% on the news.

Mortal blow?
The question many of you have sent me is this: does the ruling hurt @Home? My answer: they can all win. First, with appeals and legal mumbo jumbo there's a long way to go here before the ruling either gets enforced or tossed out.

True to some extent, part of ATHM's (the company and stock) appeal has been the exclusive nature of its agreements signed with the cable companies to provide high-speed cable Internet access via their systems.

I believe the reason AT&T made a bid for TCI was to provide next-generation communications services. And that's the quandary.

If AT&T withdraws its bid for TCI, then a huge potential capital infusion to create high-speed cable Internet networks may get delayed from lack of investors wanting to step up to the plate. A big plate.

I've mentioned before the $36 billion it will take to upgrade the U.S. cable systems for two-way flow. One industry leader told me that $6 billion had been spent so far. Where's the other $30 billion coming from? AT&T certainly has some cash flow.

I believe that the closer the telcos get to providing all sorts of services that the likelier the FCC will step in and rule either that 1) a wire is a wire and just as telephone lines may be leased to others so must cable lines be or 2) the tremendous cost of upgrading a cable system for two-way services should give those paying that cost (the cable companies) the right for exclusive or preferred services on those systems.

Or both. Open the wire and have preferred status for x number of years, or a better rate on network services to pay back capital expenses on network build-out Sell city bonds to upgrade it city by city. There are solutions.

Culture clash
This is what happens when two very different business models collide. Cable has always been about closed programming; Internet, open programming. Cable, pay for everything on the table; Internet, one price all you can eat.

To be fair I don't think AOL nor any ISP has the right to have access to a line for free, nada, nothing. AOL taking its 17 million dial up subscribers and transplanting them on a cable hot coaxial wire at AT&T's expense is not business either. That's charity.

The key issue at the center goes beyond wires and speaks to the nature of Internet capitalism, of the phenomenon of entrepreneurs from across the world being able to leverage a global communications infrastructure, a level playing field of ideas brought to market, a market riding a wire.

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