T&T Must Allow Rivals on Cable System, Judge Rules (Update5) (Adds background and details.)
Portland, Oregon, June 4 (Bloomberg) -- AT&T Corp., the second-largest U.S. cable-TV operator,
must allow competitors such as America Online Inc. to use its cable-TV networks in Portland and
Multnomah County, Oregon, a federal judge ruled, sending shares of Internet service providers
higher.
Earlier this year, Portland-area officials approved the transfer of Tele-Communications Inc.'s cable-TV
franchise to AT&T on the condition that TCI's cable system be opened for use by outside Internet
companies. TCI, which AT&T bought for $59.4 billion in March, and AT&T sued to overturn that
condition. ''The open-access provision is within constitutional power of the city and county. It furthers
the substantial interest in preserving competition,'' U.S. District Judge Owen Panner wrote in his
opinion. If Panner's ruling stands, it may set a precedent that could make it easier for municipalities to
require AT&T to open up its broadband cable domain to rivals nationwide.
AT&T Vice President Mark Rosenblum called the ruling ''inexplicable'' and said the court went
beyond its jurisdiction. AT&T will appeal the ruling, although Rosenblum declined to say when the
appeal will be filed. AT&T held a conference call with analysts, and said it expects the ruling will be
overturned.
Shares of America Online surged 12 1/4 to 118. MindSpring Enterprises Inc., which provides Internet
services, rose 14 to 79 5/16. AT&T fell 7/8 to 53 3/8.
Will Ruling Stand?
Several analysts said they believe the ruling will be overturned. Kim Wallace, chief political strategist
at Lehman Brothers Inc., said the Federal Communications Commission could join AT&T's appeal.
The FCC, which is charged with enforcing the 1996 Telecommunications Act, didn't place similar
open-access conditions on the 1999 acquisition of TCI by AT&T. ''It's highly unlikely that a
lower-level court judge has the same level of knowledge and expertise about the 1996 Telecom Act''
as the FCC, Supreme Court and appeals courts do, he said. ''The FCC didn't condition the AT&T-TCI
(union) for two reasons: It will promote local phone competition, and the FCC didn't want to stifle
investment in new technologies.''
AT&T's competitors -- including No. 1 online service AOL and other Internet service providers -- want
open access, which would allow them to transmit their information offerings over AT&T's cable
networks for a fee. Excite At Home, which offers high-speed Internet access through cable-TV lines
and is majority-owned by AT&T, might be forced to allow rivals on its network.
Shares of Excite At Home, formed by the merger of Web-based online directory Excite Inc. with
high-speed ISP At Home last week, fell 10 percent, or 10 3/4 to 94 1/2, in trading of 11.4 million,
three times its three-month daily average. ''It's clearly unfavorable if you're AT&T. There's no way to
think this is good news for At Home,'' said John Corcoran, an analyst at Stephens Inc., who rates At
Home a ''buy.''
Bundled Services
If AOL obtained open access, it could bundle its online service on the cable companies' network with
the AOL brand, presenting a seamless Internet access and online service under the AOL name.
Consumers would never know that AOL rented cable-TV lines from AT&T or other cable operators.
Excite At Home, which has exclusive agreements with cable operators Tele-Communications,
Comcast Corp., Cox Communications Inc. and others, already offers its own online service with its
high-speed Internet access through cable-TV lines. It wants consumers to pay a premium for AOL's
online service, which consumers would receive in addition to Excite At Home's service. ''It's clearly
the first substantive chink in the armor of the cable case,'' said William Blair analyst Abhishek Gami,
who rates America Online a long-term ''buy.''
So far, America Online, MindSpring and other Internet services have joined telephone companies to
offer fast service over phone lines, called DSL. Currently, subscribers to cable- Internet providers
have to pay AOL separately for its content and services.
Internet Via Cable
Some analysts expect Internet-cable service to prove more popular with consumers. Cable-based
Internet providers are projected to have 13.6 million subscribers in 2002, up from 700,000 last year,
according to Forrester Research, a Cambridge, Massachusetts-based market research company.
Fast online connections over phone lines will be just a fraction of that, increasing to 2.2 million
subscribers in 2002 from less than 200,000 last year.
High-speed connections using both cable and phone lines will account for 26 percent of the market
in 2002 from 2 percent in 1998, Forrester said.
The judgment raises the uncertainty level for AT&T, said Robert Wilkes, an analyst at Brown Brothers
Harriman. ''It also raises investor anxiety that AT&T might have to open up their network to
competitors'' nationwide, he said.
Wilkes said the ruling is one step in the legal process. ''If I were an AT&T investor, I wouldn't be
unduly concerned at this point,'' he said.
A spokesman for the FCC declined to comment because regulators didn't have time to review the
decision late today.
Consumer Groups
Consumer advocates cheered the ruling. ''This should encourage cities to demand open access for
the citizens,'' said Gene Kimmelman, co-director of the Washington office of Consumers Union. ''It
demonstrates that there's a strong legal basis that even the smallest of cities can take on the new
giant in cable TV, AT&T.''
AT&T's reaction to the ruling is ironic, said Jeffrey Kagan, an independent telecommunications
analyst based in Atlanta. ''They've been clamoring for open access to the (regional Bells') networks
for years,'' he said. ''Now that competitors want to use their new networks, they complain.''
AT&T said the ruling won't affect it's current cable-TV operations in Portland. The ruling only applies
for high-speed Internet access services, which AT&T doesn't currently offer in that area. Rosenblum
declined to say when AT&T would offer those services.
NYSE/AMEX delayed 20 min. NASDAQ delayed 15 min.
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