SpongeBrain:WSJ: AOL,cable,AT&T."While this thread sleeps, AOL hard at work",
TA
(note: "Some observers believe that AOL, in particular, is using regulatory pressure to help it cut a deal with AT&T.")
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Outcome of Battle in Oregon
Stands to Shape E-Commerce
By BRYAN GRULEY
Staff Reporter of THE WALL STREET JOURNAL Jan,15,'99
PORTLAND, Ore. -- Is it time to regulate a powerful and lucrative new gateway to the Internet? Eight citizens of this city and its environs have volunteered the nation's first answer: A reluctant yes.
Their decision matters because the world is witnessing the birth of an industry -- with the Internet as its vehicle -- that is motivating regular people to spend huge sums of money by clicking a computer mouse. Like the auto and steel industries of the early 20th century, online commerce is changing the way the economy works.
While the shift has been driven chiefly by the high-tech industry, regulators in cities, states and Washington, D.C., will play a big role in deciding whether it is fueled by competition, dominated by monopolists, or hamstrung with regulation. Policy makers are writing, or choosing not to write, rules that will determine who gets access to the pipelines that connect people to the Internet, and who fills those pipes with the stuff people want to watch, listen to, play with and buy.
Arguments for Access
Indeed, those are the issues already confronting regulators in AT&T Corp.'s proposed $40.9 billion acquisition of cable giant Tele-Communications Inc. Consumer groups, Internet-service providers, or ISPs, and at least one Baby Bell telephone company want the Federal Communications Commission and municipal cable regulators to require AT&T to make TCI's cable network -- reaching about one-third of the nation's homes -- available to any and all rivals who want to funnel Internet services through that network.
The reason: AT&T plans to spend billions of dollars to make TCI's network capable of delivering Internet service as much as 100 times speedier than what most consumers now see. This "broadband" technology provides, via cable modem, a fatter pipe through which AT&T can simultaneously supply video images, phone calls and Web pages that pop up as quickly as television channels. AT&T plans to offer this service exclusively through TCI's affiliate, AtHome.
But here's the rub. Consumers who covet AtHome's high-speed service but want to use, in addition, America Online Inc. or another ISP can do so only if they first agree to pay $40 a month or so for AtHome. That, contend AOL and others demanding direct access to the broadband network, would give AT&T too much control over the future of this industry.
Quite the contrary, argues AT&T. The Basking Ridge, N.J., company says it is offering what Congress wanted when it deregulated telecommunications three years ago -- direct competition to the Baby Bells, which have a lock on local phone service. Even if it was technologically practical -- AT&T says it isn't -- AT&T doesn't think it should have to open its network to rivals that aren't taking the risk of buying and upgrading it. Such a burden would discourage other companies from investing in broadband technology too, the company argues.
'The Larger Competition'
"Is it more important to give people the flexibility to define 'access' the way they want, or is it more important to get competition for the Baby Bells?" posits Neil Goldschmidt, the former Portland mayor, Oregon governor and U.S. transportation secretary who has lobbied on AT&T's behalf. "I think there's a huge good in getting the larger competition."
While the cable pipe offers a handsome platform, it isn't the be-all, end-all of broadband. U S West and other Baby Bells are rolling out their own speedy Internet services, and wireless and satellite technologies show promise. Also, companies that snipe at each other over policy might turn around and become business partners tomorrow. Some observers believe that AOL, in particular, is using regulatory pressure to help it cut a deal with AT&T.
In Portland, the Mount Hood Cable Regulatory Commission, an eight-member panel of unpaid appointees, recommended last month that AT&T be required to offer "nondiscriminatory access" to its cable platform. Elected city and Multnomah County officials adopted the rule -- the first of its kind -- as a condition of approving the transfer of TCI's cable licenses to AT&T. "We think this is a monopoly issue, we think this is a competitive issue, we think this is a compelling public-policy issue," says Sue Diciple, a Portland business consultant and Mount Hood commissioner.
AT&T has rejected the condition, contending that local regulators have no legal authority to impose it. The company this week told local officials that it would file a lawsuit in federal court to have the provision declared illegal. Meantime, Portland risks missing out on high-speed Internet service, says James Cicconi, AT&T's general counsel. "Consumers wind up losing," he says.
The Justice Department has already approved the merger, and the FCC isn't expected to impose an access condition on the deal itself. But the agency may consider separately whether all cable networks offering high-speed Internet service should be opened to rivals. That could take a year or more.
Portland as Trailblazer
City regulators don't think they can afford to wait. In Los Angeles, Denver, Seattle, San Francisco and other cities, officials who oversee TCI's cable franchises are considering access rules. While AT&T has obtained approvals from more than 700 of the 1,000 communities that must approve the merger, the company is concerned enough that its top lawyer, Mr. Cicconi, has taken to visiting with city officials. But some cities are pressing on, following the trail blazed by Portland.
On Sept. 2 last year, three months after AT&T announced its plan to acquire TCI, the companies filed a routine application to transfer TCI cable franchises in Portland and Multnomah County to AT&T. The petition went to the Mount Hood Cable Regulatory Commission.
The commission's namesake is a mountain that lies east of Portland and is often shrouded in the low gray-and-blue sky of winter. The panel makes recommendations on cable regulation to elected city and county officials, who usually follow the advice when making decisions. The commissioners toil over tedious matters of franchise compliance for no pay and in virtual anonymity. Their last controversy involved an obscenity-law proponent who wanted to broadcast a public-access program called "Orgy TV." (He didn't get on.)
"We do this for the love of our city," says commissioner Ruth Miles, who co-manages an office building and runs her own graphic-arts business. "It's not something you talk about at a cocktail party."
The AT&T-TCI deal thrust the two women and six men into the middle of a fierce debate between AT&T and an unlikely coalition of opponents: the local Baby Bell, U S West Inc.; and a group of mostly small local ISPs, which themselves have been quietly abetted by AOL, the nation's largest such provider.
Ironic Alignments
U S West lent a touch of irony. The Denver-based Bell had just finished battling the local ISPs over a similar issue before Oregon phone regulators. The company had resisted opening its phone lines to rivals who wanted to use them to supply enhanced Internet service. After U S West lost that fight, it aligned with the ISPs and AOL to demand that AT&T's cable network be opened.
They found a sympathetic ear in David Olson, the Mount Hood panel's paid staff director and, according to his e-mail address, "cableczar." Amid the clutter of paperwork and Diet Coke cans in his downtown office, Mr. Olson, 46 years old, has won a national reputation as an aggressive regulator.
He had his own Internet epiphany three years ago, when his father contracted lymphoma. Mr. Olson jumped on his PC and in minutes was downloading the latest research papers and clinical trials on cancer, which he packed off to his dad. "I said to myself, 'This is unbelievable,'" he recalls. He has used the AtHome product, and says it's "terrific."
He says he had thought about opening up cable networks before AT&T agreed to buy TCI, but the deal crystallized his thinking. With a gigantic phone company planning to bundle voice, video and data services, he felt it was crucial that its precious pipeline be opened to others, with fair reimbursement to AT&T.
When U S West and AT&T "are going to dominate the two wires that go into everybody's home, from pauper to king, they need to have that wire be available to serve other interests but their own," he says. "That's been the core of telecommunications policy for years."
Across the country, AOL was making the same argument to Washington regulators. Eventually Mr. Olson was speaking with Steven Teplitz, a Washington lobbyist for AOL. Mr. Teplitz also made contact with Richard Horswell, the 27-year-old head of a Portland ISP and president of a trade group representing 40 Oregon ISPs.
Forming a United Front
Mr. Horswell says his group had been aware of the issue, but his discussions with Mr. Teplitz "really helped focus our strategy." AOL hired a local lobbyist to work for the group and had its lawyers prepare a supporting brief. AOL and the ISPs also talked with U S West "to get our ducks in a row," Mr. Horswell says. "When it comes down to an issue as big as this, you can't afford not to work together."
In a Sept. 30 letter to AT&T, Mr. Olson asked if the company planned to offer ISPs access to the high-speed service "on nondiscriminatory terms and conditions."
AT&T responded in subsequent letters that At Home is a cable service and thus isn't bound by rules that require telephone companies to make their lines available to ISPs at a fair price. Nor did AT&T think the city had authority to impose such requirements; in AT&T's view, that more properly falls to the FCC (although AT&T doesn't think the FCC legally can require it to open its cable network either).
Cable laws include a number of requirements for third-party access to a network, but none cite Internet service. "It clearly is a gray area," Mr. Olson says. But "I come from an environment that says, unless the federal [law] says you can't do something, you can."
A Mind of Its Own
Oregon has long had an independent streak. The state has led the nation in confronting such touchy issues as assisted suicide and marijuana for medicinal use. Its autonomy showed again at the Mount Hood panel's Nov. 16 meeting, in a crowded conference room at a local community college.
Mr. Horswell, whose Europa Communications posts ads in the restrooms of some of Portland's many pubs, pleaded the ISPs' case. The commissioners found it compelling, in part because some of the small ISPs had been diligent about getting service to rural areas where bigger providers wouldn't want to bother. It was important that they not be crushed by AT&T, Ms. Diciple, the commissioner, says.
AT&T thought these small ISPs were mistaken. Many probably wouldn't be able to use the AtHome architecture, the company says, and even if they could, the network couldn't handle many ISPs without risking a slowdown. But George Vradenburg, AOL's senior vice president for global and strategic policy, says the ISPs might be able to show the cable people a few things about expanding capacity. "I have enormous optimism in engineers," Mr. Vradenburg says.
The panel voted 5-2, with one member absent, to recommend imposing the access condition. Even those favoring the condition were torn, though. As a vice president at hard-driving Nike Inc. in nearby Beaverton, Commissioner Robert Kreinberg says he could sympathize with AT&T. "I'm not a big regulatory fan," he says. "But I think there are some issues where regulation is needed to maintain a sense of competition and fair play. It's like if I owned all the airports in the world and I owned an airline and said only my airline could land there."
Yet it's clear that the Mount Hood panel didn't address some questions that easily could arise if their rule sticks. For example, how would regulators ensure that AT&T doesn't favor certain ISPs over others? And what if the network really can't handle a limitless number of ISPs?
"We all agree this is a debate that would have been better to have at the FCC," Ms. Miles says. "But in the vacuum of leadership from the federal level, we have made this decision hoping they'll take notice."
Nor did AT&T address those broader issues at the November meeting, preferring to focus on the legal aspects. After the vote, AT&T lawyer Richard Thayer told Mr. Olson, "I hope you have a big budget." He wasn't smiling, Mr. Olson says. A spokeswoman for AT&T says Mr. Thayer was referring to potential legal costs for his company as well and didn't mean to sound aggressive.
Unanimous Backing
Efforts to reach a compromise failed, and on Dec. 14, the Mount Hood panel decided to reaffirm its earlier vote, and this time, they unanimously supported the access condition. Three days later, Portland city and Multnomah County commissioners adopted the recommendation with only one dissenting vote.
AT&T has since refused to sign off on the city and county license transfers because they contain the access condition. That, in effect, means the company's petition for the license transfers is denied. No immediate change in cable-TV service is expected because AT&T and TCI aren't expected to close their deal for several weeks, at least.
Earlier this week, AT&T and TCI officials paid courtesy calls on city and county officials to warn them that a lawsuit could be imminent. But AT&T held its legal fire while Oregon Sen. Ron Wyden, a Democrat, intervened in the hopes of brokering a compromise, sources close to the matter said.
Mr. Olson, the Mount Hood staffer, is scheduled to fly to Los Angeles today to brief cable officials there about the commission's actions. The Californians are paying his airfare.
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