AT&T TCI AtHome; WSJ Article
June 4, 1999
Tech Center
Judge Rules AT&T Can't Exclude
Internet Providers From Network
By MARK WIGFIELD
Dow Jones Newswires
WASHINGTON -- AT&T Corp. has no right to exclude competing Internet-service providers from its cable systems, a federal judge in Oregon ruled Friday in a case that could help shape the rules for competition in the lucrative market for high-speed Internet service.
In a blow to the telecommunications giant, U.S. District Judge Owen Panner upheld the right of cable regulators in Portland and the surrounding Multnomah County to condition their approval of AT&T's $55 billion purchase of cable-TV giant Tele-Communications Inc. on opening up access to its lines.
"The mandatory-access condition does not substantially impair the plaintiff's contractual rights under the franchise agreements," the judge said. AT&T fought off efforts to impose such conditions on a national level during a review by the Federal Communications Commission.
"This probably signals a turning of the tide in this debate," said Legg Mason Precursor Group analyst Scott Cleland. "It's a very significant legal decision. Now, the FCC has to decide if it wants to have open access imposed city by city, set national rules, or rescue AT&T from the cities."
Mr. Cleland said federal pre-emption, however, would be unlikely. A number of other cities also want open cable access, including Seattle, Los Angeles, San Francisco, Oakland, Washington, D.C. and Miami.
However, the judge's decision is certain to be appealed.
Companies itching for open access include America Online Inc. and other Internet service providers.
Through its acquisition of TCI, AT&T owns a 26% stake in the recently formed Excite At Home Corp., which sells high-speed access to the Internet via devices called cable modems. Other cable providers have stakes in Excite At Home as well, created by the merger of portal site Excite with Internet provider At Home. (Shares of Excite At Home dropped $10.75, or 10%, to close at $94.50 on Friday in the wake of the decision.)
AOL has criticized At Home and the cable-TV companies for denying it access to their high-speed networks. Almost all of AOL's 18 million customers now reach the online service, and through it the Internet, using relatively slow dial-up phone modems.
The cable-franchise transfer between AT&T and TCI in Portland, and in many other cities around the country, is necessary in order for the two companies to offer cable-modem service in those cities. Being able to offer cable, voice, data, video and Internet service through a high-speed modem was the essential reason for AT&T's acquisition of TCI.
Wait for the Appeal
Scott Broyles, a spokesman for the National Cable Television Association, cautioned against reading too much into the decision.
"If you'll recall, it wasn't too long ago that a federal district judge in Texas ruled that the Telecommunications Act of 1996 was unconstitutional," said Mr. Broyles, citing a decision that was then overturned by the Supreme Court. "That's why we have the appellate courts, and we would expect AT&T to appeal."
Following the merger, AT&T planned to upgrade the TCI cable so it could provide high-speed Internet service over At Home. But in its investigation of the merger, the Mt. Hood Regulatory Commission, which advises the Portland-Multnomah County area, determined that other Internet-service providers wouldn't be able to compete with At Home's speed, and would likely be driven out of business.
Consumers wanting to use their current Internet-service provider at the higher speeds available over cable lines would have to subscribe to At Home as well -- something few consumers would do, the commission said. The commission recommended that AT&T's cable-modem platform be open to competitors so subscribers of unaffiliated Internet-service providers wouldn't have to pay twice to use the TCI cable to deliver high-speed Internet access.
The city and county adopted the mandatory-access provision, which AT&T immediately challenged in court. AT&T said the requirement was pre-empted by federal cable statutes, was a violation of the First Amendment's protection of free speech, and a violation of interstate commerce. Judge Panner disagreed on all counts.
Mark Rosenblum, AT&T's vice president for law, called the Portland District Court's decision on cable access "is inexplicable."
The actions of Portland and Multnomah County "are beyond the legal authority municipalities have to review cable-franchise transfers," he said. "Clearly we will continue to pursue our legal case."
Mr. Rosenblum said cable laws don't give municipalities the authority to decide how broadband services should be rolled out. And while municipalities can consider competition issues when reviewing a transfer of control, the AT&T-TCI merger itself had no impact on local competition for Internet services.
"Whether or not that system was owned by AT&T or TCI, the situation is the same," he said. In other words, TCI could have decided to provide high-speed Internet service through At Home even without the merger, with the same effect on competitors.
Mr. Rosenblum downplayed the decision as one affecting only two franchises out of hundreds nationwide that reviewed the merger. And in the Portland area, it will only affect rollout of cable-Internet service, not the combination of AT&T and TCI in general.
An FCC spokesman said agency attorneys were still reviewing the decision and had no comment.
AOL Wants In
AOL fears that AT&T's new strategy could succeed and leave AT&T with control of the nation's cable pipelines. Indeed, Mr. Rosenblum said AOL and U S West Inc. both lobbied Oregon authorities for the open-access provision.
AT&T warned regulators eager to encourage the rollout of technologies offering high-speed Internet access that imposing a national open-access condition on the TCI merger would be a deal-breaker. Such a condition, the company said, would have limited company's potential to recoup its investment in upgrading cable systems to provide high-speed Internet service.
But Friday's decision is just another example of how courts and regulators are groping for answers about how to exercise their powers with respect to the Internet, particularly broadband services, said Paul Glenchur, telecommunications analyst with the Schwab Washington Research Group. Statutes governing cable and telephone service "are not equipped to deal with this," he said.
"Do you use cable regulation to protect competition in the Internet market?" he asked. "It's what happens when technology runs way ahead of the law."
Gene Kimmelman of the Consumer Federation of America said the decision, if upheld, will benefit consumers and commerce. Moreover, it's likely to catch Congress' attention.
"It will stimulate debate on what is a fair standard for entry to the Internet," he said.
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