Broadband and the Beast.

"Open access" regulations may delay faster Internet connections.

In the last few years AT&T has spent more than $100 billion building a broadband cable network capable of providing high-speed Internet access and local telephone services along with TV programming. Given such a bundle of services and the Internet's stunningly steep adoption curve, AT&T is hoping that consumers will sign up in droves. It figures that by getting out in the field first, it should be able to snag the lion's share of the nation's cable modem users.

The trade publication Cable Datacom News estimates that there are currently about 1.5 million such customers in the U.S. and Canada, a figure it estimates will be 15.9 million by 2003. It's hard to overstate the growing frenzy over broadband, since the technology allows users to access the Internet at speeds unimaginable with even the best 56K modem connection and is seen as crucial to the future of Web-based business.

But even if broadband is the next big thing, it's not clear yet if and when AT&T's bet will pay off in full. The company s Excite@Home service, which offers a cable modem and full Internet access for about $45 a month, has about 600,000 subscribers. But The Wall Street Journal and others have cast a cold eye on AT&T's cable and Internet operations, accusing them of underperforming and blaming them for the telecom giant's recent earnings woes.

If the vagaries of the marketplace aren't enough to deal with, AT&T has also picked up a few hitchhikers on its own information superhighway. Internet service providers (ISPs) such as America Online, Mindspring, and Erols are trying to catch a ride on AT&T's "fat pipe." These ISPs, which present themselves as "open access" advocates, are lobbying the Federal Communications Commission to force AT&T and other cable companies to lease them space on their super fast systems at cut-rate, regulated prices.

Pricing, not access per se, is the critical issue. Currently, most cable-based broadband providers have exclusive contracts with their own ISPs, such as Excite@Home and Time Warner's RoadRunner. When those deals expire--AT&T's runs out in 2002, for example--it's generally accepted that broadband providers will start leasing space at market rates to competing ISPs. The only question is how much it's going to cost.

Abetting the ISPs in the battle for open access are self-styled consumer advocates. The advocates claim that AT&T and other cable companies offering similar services possess an illegal monopoly and should be forced to open their systems to competitors at below-market rates. This is not a stupid argument on its face. After all, the cable companies are themselves creatures of government, built on municipally granted exclusive franchises. But the investment in broadband, like the development of the technology itself, has been market-driven, and any policy that substantially reduces the potential return is likely to slow implementation and stifle innovation. After all, why take the risks if you can't get the rewards?

Most people would agree that the preferred regulatory regime is the one most likely to provide customers with the broadest range of services and options--a criterion that undercuts the open-access position. Nothing, however, is settled, and how this battle plays out over the next few years will have a serious impact on how quickly the average American can expect to get high-speed access to the Internet. It's also an object lesson in how consumer advocates are often a consumer's worst friends.

So far, the open access crowd has found little sympathy in the nation's capital. The FCC has prudently refused to step in and regulate an industry that has barely taken shape. But a series of orchestrated local battles has already yielded some results for AOL and its allies, as they have been able to convince a handful of municipalities to implement a policy that the feds have rejected.

In early June, Portland, Oregon, became the first city to require AT&T to open its cable network to competing ISPs. AT&T promptly filed suit, but the city's decision was upheld by a federal court, and an appeal to the U.S. Court of Appeals for the 9th Circuit is pending. Other localities have ordered AT&T's pipe opened up, including Broward County in Florida, and Cambridge and Weymouth in Massachusetts. St. Louis has taken preliminary steps toward open access. In October, the city of Fairfax, Virginia, required its cable provider, Atlanta-based Cox Communications, to open up its network. Cox has so far threatened to sue the city and to refuse to provide Internet service there. (Additionally, as of press time in mid-November, a group of lawyers in Los Angeles were seeking certification of a federal class-action lawsuit against several cable companies, claiming some 500,000 consumers were being overcharged for or denied broadband access.)

The strategy of fighting local battles in the absence of federal support for open access was the brainchild of George Vradenburg III, AOL's senior vice president for global and strategic policy. A Hollywood lawyer brought in by an AOL desperate to find its home in the broad-band market, Vradenburg is a shrewd tactician and a friend of such Washington notables as David Boies, the lead attorney in the Department of Justice's antitrust case against Microsoft. In November 1998, Vradenburg created the openNet Coalition, a lobbying group made up of ISPs threatened by AT&T's burgeoning high-speed capabilities. Reporting on a meeting put together by Vradenburg at Washington's Willard Hotel, Regardie's Power, a D.C. business magazine, outlined the group's basic strategy: to attack AT&T in the name of consumer choice.

But the open access lobby's initial bid to curry regulatory favor with the FCC failed miserably. Essentially, commissioners didn't buy AOL's claim of being shut out of the broadband market, especially since the world's biggest ISP was simultaneously cutting deals with local phone companies and satellite carriers to provide broadband access via non-cable means. Faced with a Republican Congress not likely to be sympathetic to its cause, AOL instead has taken its case to local city councils--a strategy that has AT&T hopping mad.

"It isn't the role of government to step in and force cable companies to open up their pipes to other ISPs," says Jim McGann of AT&T's government affairs office in Washington, D.C. "We are perfectly willing to sit down with AOL or other ISPs and negotiate access on business terms." That is, of course, after AT&T's exclusive deal with Excite@Home expires. Until then, AT&T's clear message is that it will not be giving anyone access at any price, as per its contract with Excite@Home.

With the FCC solidly on its side, AT&T has little reason to negotiate. At every step so far, the FCC has supported AT&T's entry into the cable and broadband markets, even relaxing federal cable ownership restrictions in October to clear the way for AT&T's acquisition of cable operator MediaOne. FCC Chairman William Kennard has looked favorably on AT&T's expansion, at least in part because of the competition that he sees AT&T as able to bring to the local telephone market. He also does not see the broadband market as in any way monopolized, citing satellite services such as Hughes Network Systems' DirecPC and phone-line-based technologies such as Digital Subscriber Line (DSL), both of which provide competition to cable.

"We don't...have a monopoly in broadband," Kennard told a group of communications lawyers in San Francisco in July. "We have a 'no-opoly.'" Kennard sees it as simply too early to regulate, stressing that "the bottom line is that most Americans don't even have [access to] broadband."

That is expected to change in the near future, of course, which is precisely why there is such a large battle brewing now. By investing so heavily now, AT&T has managed to capture a good portion of early adopters. But whether it will be able to hold on to--much less expand--its customer base remains to be seen.

Steve Cohen, a spokesman for the openNet Coalition, emphatically denies that there's choice available in broadband access, saying, "I think the consumer should have the same freedom of choice and opportunity that they have right now with dial-up" Internet access. While such rhetoric pushes the right consumer buttons, it ignores Kennard's trenchant observation: While most Americans don't have broadband access, there is a growing range of options in the marketplace.

Though open access proponents discount non-cable-based broadband methods, many of these technologies are making significant inroads. DSL--a broadband technology that can run over upgraded traditional copper wires--used to be an expensive alternative but has come down significantly in price. U.S. West, a regional Bell operating in 14 Western states, now offers DSL Internet access for as low as $20 a month. The highest speeds cost more (about $40 a month), but even the slowest DSL is three times faster than a conventional 56K dialup modem. In July, there were about 92,000 DSL subscribers in the U.S. That number is expected to rise dramatically over the next three years. Spurred by the threat of cable modems, all the Baby Bells have announced plans to start selling DSL, and industry analysts predict that there will be roughly 94 million DSL lines available by 2002.

There are also wholly wireless ways to get broadband access. "Terrestrial wireless," similar to cellular phone networks, is an idea that is actively being pursued by companies such as Sprint and Motorola. Sprint has already started offering a terrestrial wireless "Integrated On-Demand Network," which provides voice, broadband Internet, and video. Motorola and Sun Microsystems are teaming up to invest $1 billion in infrastructure for wireless digital networks with similar capabilities. Both of these ventures will at first be aimed at small and medium businesses but are expected to be available to residential customers within five years.

Aside from terrestrial wireless, there is also satellite. Comparable in price to DSL and similar to TV services such as DISH Network and DirecTV, satellite services offer residential consumers who have room for a mini-satellite dish access to the Internet at eight times the speed of a traditional modem. At this point, the dishes cost around $250, though prices are dropping regularly. Monthly service fees start around $20 and increase based on usage.

Not only are these wireless technologies viable, but for rural markets they are often the only choice. Cable tends to have weak or nonexistent market share in rural areas, and even DSL is unavailable to customers more than 18,000 feet away from a telephone company central office. Indeed, wireless technologies are so attractive that AOL has invested heavily in both, making a $1.5 billion deal with satellite provider Hughes Electronics Corp. and entering into partnerships with Bell Atlantic and SBC Communications.

So, contrary to the claims of open access advocates, the broadband market is in fact robust with prices falling and services improving. In fact, about the only thing that could go wrong at this point would be for excessive new regulations to stunt the growth of this promising new sector of the economy.

Lawrence Gasman, president of Communications Industry Researchers, a consulting firm that assesses the commercial impact of new information technologies, sees regulation as a potential disaster that would discourage investment in new and competing technologies. He points out that there are a number of unresolved issues on the technological side. No one, he says, is quite certain if the technology exists to allow more than one ISP to share the same network, and there are large questions regarding network administration. While Gasman stresses that these questions will be answered, he suggests that ham-handed regulations of access and pricing will slow down development of broadband.

"If you tell a cable or a Bell company that on top of all the problems they're having implementing a new system, they're going to have to deal with opening it to anyone else--that might be a real discouragement to creating a network in the first place," says Gasman. "The concern that there won't be enough competition is misplaced. If there's no network, there's no competition.

If the argument sounds far-fetched, it isn't. AT&T has already made it clear that those cities which impose burdensome open access requirements will be the last to see broadband. The company is not simply being vindictive, but recognizing that it will not make as much money in cities where other ISPs have a claim to the networks it is building.

As the FCC has argued in an amicus brief on behalf of AT&T in the case before the 9th Circuit, the most sensible policy in this area is to leave the market to progress on its own. Local control could only wreak havoc on an important framework that is just now developing. Maximum investment in broadband only will come when companies interested in investing in this technology can be assured that they will retain the rights to the networks they are creating.

That's especially true since, at this point, no broadband technology is truly dominant. Cable seems to have the lead for now, but billions of dollars are being poured into competing formats precisely because what will dominate is far from clear. AOL and the other ISPs in the openNet Coalition, then, haven't been shut out of the broadband market. They just dislike how much it's currently costing them to enter it. But in lobbying local governments to grab a share of the broadband pipe rather than getting on with the actual building of it, open access advocates may be slowing down the one thing they profess to care about most.

Ryan H. Sager ([e-mail]) is a junior at George Washington University and a reporter in REASON's Washington office.