January 12, 2000 - THE IMPACT
A Rush to Provide High-Speed Internet Access
By SETH SCHIESEL of the NY Times
For most Americans, linking to cyberspace from home is akin to trying to eat a vat of thick, rich soup with a straw. With their $165 billion merger deal, America Online and Time Warner intend to start handing out ladles.
The agreement between America Online, the No. 1 Internet provider, and Time Warner, the media and cable television titan, is reverberating throughout the communications and media industries. But the most important impact for consumers may be how the deal advances the deployment of high-speed Internet access.
America Online is hoping to use Time Warner's extensive cable television systems to deliver torrents of digital data. Time Warner's systems reach only about a fifth of the nation's homes -- roughly 21 million households -- but Monday's deal may well set off a chain reaction among local phone companies, long-distance giants, other cable providers and wireless carriers to step up their high-speed Internet strategies.
That scramble will include companies ranging from AT&T to Bell Atlantic, though all of them face serious technical, financial and regulatory challenges before they can make high-speed, or broadband, access as pervasive as the telephone.
Still, even as the America Online-Time Warner deal reshapes the competitive landscape within the communications business, many analysts believe that consumers stand to benefit.
"The race to provide broadband access will only accelerate from here," said Daniel P. Reingold, chief telecommunications analyst for Credit Suisse First Boston, the investment bank. "It's always been in AOL's interest to have multiple suppliers of high-speed access, and that interest dovetails with the consumers' interest."
Time Warner's cable systems cross the nation, but New York City appears set to become a prime battleground. Time Warner provides cable television service in parts of Brooklyn and Queens and is the dominant cable provider in Staten Island and Manhattan.
Even before its deal with America Online, Time Warner was planning to offer high-speed Internet service throughout Manhattan by this fall. But Time Warner's linking with America Online, may prompt Bell Atlantic and other, smaller companies to accelerate their own high-speed Internet agendas.
"This deal creates new energy about access to the Internet, and if you peel back the onion a little bit it's really about high-speed access to the Internet," said David Gallemore, executive vice president for strategic planning and marketing for SBC Communications Inc., the Bell local phone giant that does business as Ameritech, Pacific Bell, Southern New England Telecommunications and Southwestern Bell.
America Online's interests appeared to reflect Time Warner's. The owner of high-profile media products ranging from People magazine to the Cable News Network, Time Warner wants to extend the reach of those brands into the Internet.
Coupled with expanded availability of lightning-quick data connections, the migration of Time Warner's media properties into cyberspace could help remake the Internet over the next few years from a largely static environment of pictures and text to a dynamic arena of television-quality video and CD-quality sound.
But in forging a merger with Time Warner, the No. 2 cable provider, America Online's interests did not necessarily dovetail with those of the other communications behemoths jockeying to lead the digital revolution. How these other companies cope with the new giant in their midst will have important implications for how, when and from whom consumers are finally able to buy a ticket to the digital future.
The most intriguing questions, and the murkiest answers, are about AT&T.
Since C. Michael Armstrong took over as AT&T's chairman in 1997, the company has agreed to spend more than $100 billion to acquire the cable giants Tele-Communications Inc. and Mediaone Group Inc.
With those deals, AT&T, already the biggest phone company, has become the biggest cable television provider in the nation. But AT&T wants to use the systems it has acquired to deliver far more than television. It also wants to offer local telephone service and high-speed Internet links using the same systems.
Publicly, AT&T and America Online have been at odds over the last year over whether AT&T should have to open its cable systems to allow other Internet companies, like America Online, easy access to AT&T's cable subscribers. Late last year, AT&T tried to forestall any potential new regulation by announcing a set of principles for open access supported by Mindspring, the big independent Internet service provider.
Privately, however, AT&T has been working hard, at least since last summer, to cut a side deal with America Online, according to executives close to the talks. Such a deal would help AT&T drive penetration of its high-speed Internet service by marketing it to America Online's 20 million customers.
Now that America Online is set to control millions of cable lines of its own, AT&T may find its bargaining position weakened, some analysts said yesterday. If AT&T fails to make a deal with America Online, it could become more difficult for AT&T to sign up millions of customers for its cable modem service.
Ultimately, however, AT&T, Time Warner and America Online appear to have a common interest. Because most cable systems are local monopolies, AT&T's cable operation does not compete directly against Time Warner's. And despite the size of the deal, merging with Time Warner still will get America Online direct cable access to only about 20 percent of the nation's homes.
So in the end, many analysts expect the three companies to form at least a loose alliance, especially since AT&T can help a combined AOL Time Warner deliver telephone service over its cable lines.
Such an alliance, however, could further strain America Online's relationship with the Bell local telephone giants.
Even as cable television companies across the nation are upgrading their systems to deliver advanced Internet services, local phone companies are racing to beat them to the punch using D.S.L., a technology that transmits huge volumes of digital data over standard phone lines.
Last year, America Online announced agreements with the two biggest local phone carriers, Bell Atlantic and SBC Communications Inc., to market the Bells' D.S.L. Internet service to America Online's customers.
But now, America Online is set to own cable systems in New York City, in the heart of Bell Atlantic's territory, and in Houston, in the heart of SBC's. Not surprisingly, executives close to Bell Atlantic and SBC said yesterday that they were somewhat disappointed in the Time Warner deal because it could impede their plans to deliver high-speed Internet service over phone lines.
"This probably pushes AOL closer to AT&T and other cable operators and away from the Bell operating companies in terms of broadband distribution," said Eric Strumingher, a communications analyst for Paine Webber. "I think AOL's vision is to have the type of customer experience that is going to require massive amounts of broadband capacity, and the cable industry is well ahead of where the Bells are in terms of delivering this."
The fact that the merger was seen as a general vote of confidence in high-speed Internet service over cable buoyed the stocks of many cable companies Monday. But even that could not help Excite@Home, the cable modem venture, yesterday as many communications analysts and executives said the venture, which has tried to compete against America Online, appeared to have been outmaneuvered. Excite@Home's shares fell $2.875, to $37.25, in Nasdaq trading.
Excite@Home has exclusive deals to offer Internet services over the lines of a roster of cable companies, but many of those deals run out in two years. Excite@Home has signed up about a million customers, but now America Online has waded into the cable business with its 20 million users and a great chance to take Excite@Home's cable partners when the arrangements expire.
George Bell, Excite@Home's president, said yesterday that the America Online-Time Warner deal underscored the importance in the communications industry of broadband and of owning popular media brands.
"This places broadband at the center of how these content forms are delivered," Mr. Bell said. "The broadband platform becomes very much a centerpiece for any company that wants to be a leader in any sort of media in the future."
But to many analysts, what the deal truly underscores is the value of customers. America Online has them, and as communications carriers of every description vie to offer high-speed Internet service, they are all waiting to see just how the company chooses to throw its customers' weight around.
Competition is good so they say. Noticing the wireless internet companies are quiet lately. Maybe if this gets Ameritech and GTE to get off their lazy butt and get cable broadband out here in Northern IL faster, then the AOL-TWX deal will have done some good. Much to think about tonight. Good night.
Jack |
