Open Access: What's at stake?
As AT&T lobbies hard to keep its cable systems closed, some say it must upgrade its systems or choke on the debt that paid for them.
By Randy Barrett, Karen J. Bannan, and Louis Trager, Inter@ctive Week
August 2, 1999 5:44 AM PT
The pitched battle over open access continues to rage. Last week, legions of lawyers, lobbyists and publicists made declarations, filed lawsuits, threw slant bombs and deftly twisted arms to gain the upper hand for their respective sides.
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The dispute is simple: Internet service providers (ISPs) want to provide their customers with high-speed service through the nation's cable system. The nation's cable companies - most notably AT&T (NSYE:T) - have their own Internet agenda and don't want to let them in.
What's less clear are the stakes involved. AT&T has made a $120 billion bet that it can retain exclusive control of its recently acquired cable franchises. Access providers continue to expend resources to force open the networks to a customer base they may not be able to reach any other way.
And the Federal Communications Commission (FCC) is betting its "no regulation" policy will deliver broadband competition over time.
The economics
The fight is centered at the local level, as public utility commissions consider granting AT&T cable license transfers in connection with its recent purchase of Tele-Communications Inc.
Portland, Ore., and Broward County, Fla., have voted to deny the transfers until AT&T guarantees it will make its local cable plant open to competing ISPs.
Last week, San Francisco approved the licenses but said it would revisit the open access issue at a later date. About 600 more municipalities have yet to weigh in on TCI's proposed merger with MediaOne Group.
AT&T, which will soon have control of about 60 percent of the cable market, warns local governments and other regulators that mandatory access would undermine its financial incentive for undertaking the expensive cable network upgrades required to support high-speed data access and cable-telephone service.
"Changing the rules of the game puts a shotgun slug through two inches of Excel spreadsheets that these guys used to generate their rate-of-return calculations," said Milo Medin, who founded @Home and is now chief technology officer at Excite@Home (Nasdaq:ATHM), a cable modem service affiliated with AT&T and other big cable companies. "They are based on the premise that they [AT&T] control the price on access."
Open access supporters, however, contend AT&T is bluffing and has no choice but to upgrade all its systems. It's paying big bucks for TCI and MediaOne and needs to squeeze every dime out of every service it can, as soon as possible, to recoup the premium prices it paid.
AT&T admits it didn't barge into cable because it couldn't resist the video business. Rather, the carrier saw no alternative in its make-or-break struggle to enter the local market, so it can avoid enormous connection fees to the Bells on long-distance calls and offer consumers full packages of wireline and other telecommunications services.
There's more. Excite@Home and Road Runner, the leading companies offering high-speed access, are controlled by cable companies. As these affiliated service providers grow, the cable operators benefit not only from splitting the revenue from subscribers they sign up, but also from growth in the value of their stake in the service providers. If independent ISPs got access to the cable network, the operators would not have that extra benefit of dealing with an affiliate.
The AT&T revenue directly at stake in the access wars doesn't look huge. The company projects $1.9 billion in residential data revenue in 2004. AT&T takes about a two-thirds cut in its Excite@Home deal, and analysts have said the carrier could expect to get at least as much from independent service providers.
But to justify its huge cable gamble and forge ahead competitively, AT&T is counting on cable telephony and Internet services together to provide fully 12 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) by 2004. That's almost as big a contribution as the company expects from wireless or video, and considerably more than from consumer long-distance.
To get there, AT&T is racing to have a bare majority of the TCI and MediaOne networks upgraded to two-way capability by year's end and 90 percent before 2001. The carrier plans to spend $2 billion on plant upgrades in 2000 alone.
The steep prices AT&T put up for TCI and MediaOne assume that 22 percent of its cable homes passed subscribe to high-speed Internet by 2004, up from 8 percent from 2000; and that 30 percent sign up for cable-telephony, up from 13 percent next year.
AT&T has threatened to withhold Excite@Home service in Portland until local regulators give up on their open access demands. But a widespread embargo to other recalcitrant cities is doubtful, according to Scott Cleland, an analyst at Legg Mason Precursor Group.
"AT&T is holding its breath and saying it's going to keep holding its breath until open access goes away," Cleland said. "We all know it's going to have to take a breath and upgrade. AT&T can't put every city at the back of the line. At some point, it can't afford to carry the debt it assumed when it bought TCI."
Portland, which imposed the first access requirement and won a federal court victory, isn't that hard to snub. It's part of AT&T/TCI/MediaOne's seventh biggest market cluster, with about 600,000 subscribers. Miami, where the access battle rages, is a little bigger, with about 610,000 subscribers; and San Francisco - where AT&T won its franchise transfer, although the city promises to revisit access later - has more than 1.5 million customers.
Access supporters, including America Online (NYSE:AOL) Chief Executive Steve Case and MindSpring Enterprises (Nasdaq:MSPG) CEO Charles Brewer, say cable companies are being shortsighted: Independent ISPs could help grow the cable modem pie, they argue, and the cable operators would come out ahead even if they had to share some slices.
"I think they're going to re-examine the model in 2002 [when current exclusive cable modem deals expire], if not before then," AOL Senior Vice President George Vradenburg said.
The business issues go much deeper, analysts said. AT&T and cable companies don't just fear for their high-speed Internet positions. They also are defending against new competition that online providers could offer against their base services, in the form of Internet telephony and Net-based video-on-demand. Internet telephony "is a huge consideration, and that is what AT&T probably is most worried about," said Michael Harris, president of Kinetic Strategies, a broadband research and analysis group.
See also: ZDNN's Internet section
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