Living up to the broadband hype

The antics drew nary a sidelong glance of passers-by in a city with legendary penchant for political expression and random oddity. To communities and states far from Northern California, however, the issue behind this chess-costumed rally--control over the future of Internet access--was anything but folly.

The debate is shaping up to be the Internet's most expansive and expensive political battle yet, a techno-regulatory Waterloo that could determine the course of the new medium and modern communications as a whole. And true to the Internet's individualistic nature, the conflict has taken on a grassroots momentum as communities online and off fight for a say in a matter that literally hits home.

In San Francisco alone, the site of the latest skirmish, more than $1 million is estimated to have been spent lobbying on a single Board of Supervisors vote. The principals on either side of the issue--AT&T and America Online--each accuse the other of using customers as pawns and other pieces of a devious chess match for control of the Internet (hence the protester in a knight's head).

"The industry has failed to live up to people's expectations before," says Kevin Werbach, managing editor of the Release 1.0 technology newsletter and former counsel for new technology at the Federal Communications Commission. "But the stakes are higher now."

Congress, the courts, and local cable commissions are deciding whether Internet service providers like AOL should be allowed to use cable companies' proprietary lines to offer their own high-speed, or broadband, services. These ISPs say AT&T is creating a broadband monopoly by refusing to share access to its cable networks.

AT&T supporters maintain that the company has every right to keep control over its lines after paying close to $120 billion for the privately owned networks. They also contend their strategy holds the only realistic hope of creating genuine competition to the powerful Baby Bells, in both the high-speed Internet and telephone markets.

The attention over what has been coined "open access" has helped move the young high-speed business into the national spotlight, indirectly prodding the development of the Internet and drawing investor attention. But, in some ways, the industry is wilting under the glare.

Unlike most telecom regulatory issues that are settled in Washington, this one is the subject of unparalleled scrutiny at local jurisdictions across the country:

• In Portland, Oregon, local officials told AT&T that it must open its network to outside ISPs as a condition of merging with the local cable company. AT&T sued, but a federal judge supported Portland's position. That legal ruling has set off a flurry of copycat actions among other local governments.

• Officials in Broward County, Florida, voted 4 to 3 to force all local cable companies to open their lines to outside ISPs. Comcast and AT&T subsequently sued.

• San Francisco County supervisors voted Monday to block a proposal that would have opened AT&T's local cable network to outside ISPs. Local officials said they would revisit the issue later.

• In Los Angeles County, several members of a committee charged with reviewing the open-access issue resigned after they said the mayor was pressuring them to support AT&T's position. A detailed staff research report in the end recommended that the county not force access to cable networks.

Despite all of this political maneuvering, barely a million people in the United States connect to the Net on anything faster than a standard dial-up modem. And those who do have access to broadband connections are still waiting for the bugs to be worked out of the various high-speed Internet technologies.

Excite@Home, the most popular high-speed Net service, has come under growing fire from users following service outages in recent weeks, forcing the company to respond with service rebates. But it's not just the cable companies that are suffering. Phone giants like the Baby Bells, which offer digital subscriber line (DSL) services, have also suffered outages and technical problems.

Since broadband has assumed a prominent place on the national agenda, consumers, investors, and policymakers begun to pressure the entire industry to deliver on its high-speed promises.

Local power, future dollars
Broadband players know that they need to stake their high-speed claims soon. At $40 to $50 per subscriber each month, the potential returns are much higher than the usual $20 dial-up access fees--particularly if companies like AT&T can persuade Internet customers to sign up for telephone and other related services.

Beyond subscriber revenues, the companies are eager to tap into e-commerce, which is expected to reach $29 billion by 2002, according to Jupiter Communications. A related study by Zona Research estimated that slow Internet connections now jeopardize up to $4.35 billion a year in online sales.

"Asking about the broadband story is like asking whether immigrants would be able to grow corn in Iowa," says Reed Hundt, the former chairman of the FCC and now a telecommunications venture capitalist. "No one had ever seen soil that deep or that productive. In the same way, no one has ever seen a business opportunity as lucrative as broadband."

Companies across the industry have begun seeding this broadband soil, as investments from AOL, Yahoo, Microsoft, and others have made daily headlines. But AT&T's $120 billion cable TV acquisitions, aimed at offering local phone service and high-speed Internet access, have led the pack.

Accidental catalyst
It was AT&T's move into the marketplace that first gave the open-access drive its momentum. Shortly after Ma Bell agreed to buy Tele-Communications Incorporated, the largest U.S. cable company, a group of telecom rivals led by AOL argued that the merger should be blocked unless AT&T allowed other ISPs to use its cable networks.

For its part, AT&T fought back and said AOL was simply trying to preserve its overwhelming subscriber lead in the Net access business. The company boasts a customer base of more than 17 million--about nine times larger than its nearest competitor's subscriber figures.

"Every time a new company comes in with a new product, the reaction of the entrenched incumbents is to try to get government to try to slow them down," said Blair Levin, the former FCC chief of staff, now serving as a consultant to Excite@Home. "[AOL chief executive] Steve Case wants to get the industry into a regulatory Vietnam here."

Early in the debate, the ISPs captured the linguistic high ground, calling their movement "open access"--a term that mirrored the Internet's populist drives for open technical standards and freely available software code.

But AOL's actual lobbying efforts proved less successful in Washington. Federal regulators quickly approved AT&T's merger without addressing open access concerns. The FCC also issued a report saying that the broadband market was too new to impose network-opening regulations on the cable industry.

Yet the real focus has shifted to action on the local level, much to the chagrin of federal regulators. Last week, FCC chairman William Kennard said he would weigh in on AT&T's side in court to silence the "chaos" of local legislation.

"It is in the national interest that we have a national broadband policy," Kennard said. "The FCC has the authority to set one, and we have. We have taken a deregulatory approach, an approach that will let this nascent industry flourish."

It is this court case that will ultimately determine the short-term future of cable networks. The Ninth U.S. Circuit Court of Appeals in San Francisco has granted a quick hearing on AT&T's appeal, and the company says it is confident it will win--either there or in the Supreme Court if necessary.

But even if the courts do continue to support local decisions, Washington policymakers don't want to let local broadband policy develop much further.

"What I would hope would happen is that broadband access would be agreed to by those controlling it, so others would be allowed in on reasonable terms," said John McCain (R-Arizona), chairman of a Senate committee with jurisdiction over the issue. "But I would like to see this kind of policy adopted by the companies themselves." 

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