June 9, 1998

IN A TELCO WORLD, WILL INTERNET COMPETITION THRIVE OR DIVE?

by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—Telephone companies are following the lead of aerospace firms, banks, hospitals, and other industries to merge and form corporations of a size approaching the national monopolies of old. How will telco mergers affect your access to personal contacts, information, entertainment, and markets? Regulators have the tough job of making the predictions.

Predictions were rife last week, as well as accusations, in the hotly contested merger of WorldCom and MCI, two major long distance phone companies with large Internet subsidiaries. Critics claim that these companies are determined to build up enough power over the Internet backbone—the routers and cables that carry traffic to and from smaller Internet Service Providers—to force the market into doing their bidding.

In response, MCI sold its backbone routers to the international firm Cable and Wireless on May 28, throwing in its service to ISPs for good measure. This left only its service to end-users in its portfolio. (There are two sides to Internet access: attaching users to an ISP and attaching ISPs to the backbone systems. The backbone systems communicate among themselves in complicated peering arrangements we’ll look at in a moment.)

Thus, states MCI spokesperson Jim Monroe, the company addressed the central concern of the critics and ridded itself of its backbone. The percentage of the Internet backbone owned by a combined MCI/WorldCom will now be no larger than the WorldCom portion by itself, so there can be no more opposition to a merger. He also points out that customers have not filed complaints against the merger.

Not so, answered GTE, Sprint, and the Communications Workers of American union last week. Their objections were matched by Karel Van Miert, a commissioner of the European Union which must review the merger.

First of all, the merger concentrates a huge number of customers in both long-distance telephony and Internet service. These tend to be large business customers too. If two customers connected to MCI/WorldCom can use advanced services that cannot be achieved by two separate ISPs, the concentration of customers on MCI/WorldCom will gradually grow. On the other hand, these services are not yet available, and other ISPs will be able to play the same game.

While most predictions are speculative, a few moves in the new telecom game hint at the conclusion. In the case of WorldCom, the early move is a new fee imposed by its huge UUNET subsidiary on smaller ISPs. Until recently, UUNET exchanged traffic freely with all other ISPs (the “peering” mentioned earlier). Now it offers free peering only to the handful of ISPs who can offer an equal amount of bandwidth.

Peering, which makes it possible for one Internet user to reach any other user anywhere in the world, is fundamental to the Internet’s existence, but has never been tied down in economic or regulatory rules. And there is no technical way to do so. If you choose to read my article on my Web page, does it benefit you or me? Whose ISP should pay for the privilege?

There may have been economic reasons to start charging for peering, but UUNET got its way essentially because it dominated central routers used by a huge amount of North American traffic. That’s the kind of power that the critics of MCI/WorldCom are afraid of. They insist that the merger can go through only if WorldCom sells UUNET—essentially turning itself into a long-distance phone company with an add-on ISP service like the others.

These critics point out that MCI did not divest itself of the fiber used to carry Internet traffic. That’s because it’s the same fiber used to carry voice traffic, a physical proof of the modern convergence of telephone and computer traffic.

So the critics are worried that MCI/WorldCom can move their customers back quickly to a MCI/WorldCom backbone. Still, many other companies are competing for these customers, busily building new capacity and reaching out to grab someone.

There are certainly aspects of the MCI/WorldCom that bear scrutiny. The CWA is worried about a loss of jobs, several thousand having already been shed by MCI before the merger has even gone through. The CWA comment before the FCC says, “The merged entity’s planned reduction in network investment and sales and marketing expenses translates into a loss of 75,000 telecommunications jobs by the year 2002.” CWA Spokesperson Deborah Goldman warns that customers will rue the changes as well, either because quality of customer service goes down or because pricing changes will put phone and data service beyond the means of the average residential user. These arguments do not bear on an anti-trust action, however.

We must not assume that a defeat for WorldCom and MCI will leave us with an open and low-cost Internet. Many economic storm clouds are gathering, and the lightning bolts have come on fast over the past few months, less from WorldCom and MCI than from other telephone companies.

From the break-up of AT&T in 1984 to the passage of the Telecom Act of 1996, the United States had seven baby Bells. The mergers facilitated by the Telecom Act have now reduced those to five, and SBC now wants to merge with Ameritech to bring the number to four.

No one has stood in the way of these mergers (although the FCC may balk at SBC/Ameritech) because they simply combined companies in different geographic areas offering the same services. But what if the combined resources of the mega-Bells allow them to drive competitors out of new markets?

That is what bothers independent ISPs when the Bells offer high-speed data services (Digital Subscriber Line). In most states where it is offered (notably excepting California) the Bell has also offered an Internet service along with it. In myriad small ways, as I have shown in another article, a Bell can use its control over DSL to squeeze out competitors—and in fact, public regulators in some states are holding back DSL or imposing strict conditions on the Bell to prevent anti-competitive action.

Petitions before the FCC by Bell Atlantic and Ameritech to offer data transmissions over new long-distance networks suggest to many observers that phone companies are trying to leverage their near-monopoly on local service to dominate future data services, where most people expect to see the biggest growth—and also the key to the information economy and public discourse of the future.

Meanwhile, U.S. West is offering a joint service with Qwest, a long-distance provider, provoking a lawsuit by other long-distance providers. AT&T has bought Teleport, a company offering local service. All these mergers and agreements pose the question: will any one group of companies grow large enough to lock up information services?

We are talking here of a true battle over access, unlike the Microsoft anti-trust action. You’ve heard that the Department of Justice is afraid Microsoft could dominate the Internet. And indeed, there are legitimate concerns over control over Web browsers and (through icons on the Windows 98 desktop) over the channels people will use to reach commercial sites.

But while worth examining, the Microsoft skirmishes affect just the presentation of information. Internet access itself is a battle being fought by telcos on the ground, or underneath it where the fiber lies.

Dan Schiller, communications professor at the University of California at San Diego, sees in all these developments the end of the promise of universal access as he states in a paper about MCI and WorldCom. Universal access is universally lauded as a social goal, but it seems like the opportunities for self-expression and learning offered by the Internet will never reach the penetration that telephone service has.

Both Schiller and Goldman find the current industry contenders doing their best to cherry-pick the large companies and high-volume professional users. A two-tier society for information and other advanced services would become the norm.

An alternative, cheerier viewpoint is that technology always leads to more competition. Even should a phone company tie up the wires, competitors will sneak in through cable TV, satellites, or wireless radios. This was the premise behind the 1996 Telecom Act—which made mergers easier, but also encouraged companies to enter each other’s turf—and we are beginning to see evidence that it could work. However, prices right now are on their way up rather than down.

Whether a swarm of smaller competitive firms can do better is still unknown. But lower prices depend on ever-improving technology, and that usually arises only where the current players are always looking over their shoulders.


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