Portland's Populist Foray
Come back to Haunt
Consumers
By Jim Seymour
Special to TheStreet.com
6/6/99 2:25 PM ET
Minor cases in distant jurisdictions often ripple through our
legal system in ways different than, and with far more impact
than, the proceedings might indicate.
Late Friday, U.S. District Court Judge Owen Panner ruled in
Portland, Ore., that AT&T (T:NYSE), which I am long, had
no right to restrict access by local Internet service providers,
or ISPs, to the wiring grid of cable-TV provider TCI, acquired
earlier this year by Big T.
In buying TCI, AT&T also in effect bought the company's
franchise agreements with thousands of local government
entities across the country, each of which then had to
approve the transfer of franchise rights from TCI to A&T. This
looked easy enough: It was a classic political rubber-stamp
operation, the sort handled thousands of times a week in
city council chambers and county supervisors' meetings.
But AT&T hadn't counted on the politics of Portland, one of
the country's most desirable areas to live, but also an area
with deep populist streaks in its political consciousness.
Asked to approve the transfer, both the Portland City Council
and the Multnomah County Commissioners Court heard the
arguments. Then, responding to loud complaints by local
ISPs and consumer groups, they voted in December to
refuse approval of the franchise transfers ... unless AT&T
promised that other ISPs would have access to the
AT&T-TCI cable-modem system.
AT&T, which sees @Home (ATHM:Nasdaq) (of which it now
controls a nice chunk) as its horse in the ISP business,
logically refused.
A bizarre legal battle ensued -- including, among other
oddments, the curious fact that neither TCI nor AT&T ever
offered, or announced plans to offer, cable-modem service in
Portland.
Judge Panner's decision Friday hardly ends the matter -- we
can expect an appeal very shortly -- but it does seriously
muddy the waters at this enormously important moment in
the development of the telecom infrastructure that will serve
us in the new century.
Put simply, if AT&T -- or any other cable-access provider --
is forced to treat its system as a de facto public utility,
providing "carriage" to its competitors, those owners of fast
cable-access systems are going to be a lot less willing to
invest the billions of dollars need to update and build out our
national telecom infrastructure to accommodate our needs
for higher-speed connections.
Their share prices will undoubtedly suffer too, of course.
Beyond that, the fast cable-access services, such as ATHM
and Time-Warner's (TWX:NYSE) RoadRunner, which
today look like such bright stars to investors, will be far less
valuable, reduced to also-rans, competing on a lowest-price
basis, in an era of all-comers' access to those cable
systems.
If you haven't been following the Portland case, but all this
sounds familiar, it's exactly the same argument being put
forward in Washington these days by America Online
(AOL:NYSE). AOL's lawyers have been complaining to the
Federal Communications Commission, asking for a ruling
requiring AT&T and other fast-access system owners to
open their systems to AOL. After all, AOL argues, these
have become nothing more than common carriers, though
the wires in question are cable wires, not telephone wires.
AOL says it should be able to offer its customers access
over those lines, just as it offers access over customers'
existing phone lines -- just as telephone customers can
choose which long-distance carrier to access over their
telephone lines.
Judge Panner's decision will inevitably put pressure on many
other local governing bodies around the country to play the
populist card. It also puts indirect but powerful pressure on
the FCC to bring the open-access question to the front
burner.
It's easy to understand the plight and the feelings of ISPs,
from the few remaining mom-and-pop shops to national
giants like AOL, in this. They're scared to death that the
appeal of fast connections via cable modems will cause us
to drop them and move to the @Home or RoadRunner
services being offered by the cable giants. Local ISPs, as
much as they brag about their service and variety of
offerings, in fact have a pretty terrible record of satisfying
their customers, who generally are at least as ready to jump
to a new provider as these ISPs fear.
And while many local and regional ISPs have built up sizable
Web-hosting businesses -- in part because of their
long-standing fear of the coming of the fast-access providers,
though also largely because they were going after the
bigger-ticket business market, rather than the mass
consumer market, with its razor-thin margins -- most still
rely on that high-volume market of $20-a-month consumer
accounts for the bulk of their cash flow.
But declaring the cable systems of America common
carriers would be a disaster for our national telecom policy,
for the companies building these systems ... and for those
unhappy consumers looking for something better. The debt
and equity markets are not going to be willing to finance the
huge remaining investments needed to make fast access
available everywhere unless they see commensurate returns
flowing to the AT&Ts of the business from that capital
investment.
Friday's ruling seems like one of those cases that, like so
many populist efforts to manage the market, at first appears
likely to greatly benefit consumers but in the end will
severely penalize them. What about those local ISPs? In a
dynamic market system, companies, and classes of
companies, come and go. Yes, that sounds Darwinian ... but
capitalism is Darwinian.
Local and regional ISPs that have run their businesses well,
provided good service and fair prices, and have positioned
themselves well for the future by emphasizing business
customers, will do fine. For the others -- unless as a matter
of national policy we're willing to protect the economically
inefficient and the quality-of-service-challenged -- we need to
let consumers speak with their dollars.
No one's taking away the consumer's right to stay with
dial-up or ISDN connections to their current local ISPs -- nor
to jump to the fast-access ADSL offerings from their phone
companies, which can be expected to exploit this
controversy to the hilt. It's also worth noting that anyone who
wants fast cable-modem access to AOL can easily convert
their $22-a-month, dial-up account to a $7-a-month "content
only" account and then dial in over @Home, RoadRunner or
any other fast cable system.
Investors who've made big bets on companies moving
aggressively into the fast-access market -- on every side --
should follow closely developments in the Oregon and
Washington cases, including the ripple effects rolling out
from these jousts.
We're a long way from final decisions, but with Judge
Panner's decision, the battle has truly been joined.
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