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April 20, 1999
CAMBRIDGE, MASS.—An executive vice president of AT&T was seated by the man who’s been pursuing him with a vengeance through policy-makers’ corridors for months: the chief executive officer of a major Internet Service Provider called MindSpring. At the other end of the table was the representative of yet another contender in the ruthless war for broadband Internet: a senior vice president of Bell Atlantic. But mercifully, a legal advisor of the Federal Communications Commission took his apportioned place as a buffer between them.
Some 50 of us came that day to learn from these panelists the plans of the information revolution’s master builders. Where would the companies in charge of Internet access sink their investment? Which facilities would they yield to competitors, and which would they hang onto with the tenacity of a barracuda? Where had the rolling tides of regulation washed them up, and how would they drag themselves once again into the tumult?
The precocious law students at the Harvard Journal of Law and Technology are to be thanked for bringing together these public faces of the major players on the Internet: an incumbent local telephone company (Bell Atlantic), a long-distance company (AT&T) that has just jumped into the cable TV market with its purchase of TCI, an Internet service provider (MindSpring), and the referee (FCC) that tries to keep them all on the up and up while changing the rules of the game as it goes along.
The April 17 symposium, called “Changing Times, Changing Technology,” gave us not only an update on the results of the Telecommunications Act of 1996, but fascinating insights into the world views of corporations and regulators alike. They’re fighting on many fronts:
The Bells are trying to get into the Internet market, notably by offering fast Internet service over a technology called ADSL. Many ISPs charge the Bells with squeezing out competitors.
Some ISPs, led by MindSpring and America Online, accuse AT&T of a similar squeeze, because it plans to offer Internet service over the lines it just acquired with the TCI cable company.
The Bells want to enter the long-distance market (including data and Internet service) but Congress requires them to show proof first that their local markets are open to competition, and the FCC so far has denied their requests to offer long-distance.
The Bells have challenged several aspects of current pricing. They have tried to get Internet Service Providers to pay access charges (a change that would probably force per-minute charges for Internet users) and are refusing outright to honor “reciprocal compensation” agreements that would make them pay for traffic to competing telephone companies.
The FCC, in trying to implement clauses of the Telecom Act requiring the Bells to provide facilities to competitors, laid out a slew of rules for pricing and for which components to offer. But the Bells and some states held up the rules for a long time in litigation, which has only recently been resolved largely in favor of the FCC.
Let’s see what the panelists think of all these things. The following summaries use the panelists’ exact words as much as possible, although sometimes I have found it necessary to condense and strip out details.
The panorama as seen by Edward Young, Senior Vice President of Bell Atlantic:
The incumbents like us are the only information pipe many homes have in rural areas. We’ve had to offer them phones through universal service. It’s not economically viable for anyone to offer broadband, but if we’re to do it you need to give us an alternative stream of revenue—that is, let us enter the long-distance market.
The urban myth of Bell telephone companies as fat, dumb, and happy monopolists raking in the profits is belied by the Telecom Act, which forces us (in Section 251) to open our local markets.
My job is to get rid of regulation that gets in the way of pursuing Bell Atlantic’s business. Our competitors (cable companies, non-incumbent local phone companies) aren’t fettered by regulations requiring them to open their facilities to other companies. Throw the yoke off of me!
We have no interest in dominating Internet service. We found that it’s not as easy as we thought to offer it. Our bellatlantic.net service has only about 100,000 customers. Even if it becomes more successful, our strategy will still be to open our network to competing ISPs, because we think we’ll get more traffic and more revenue that way.
The Internet is growing at a phenomenal rate, but how do you support development of the infrastructure? No one wants to tax the Internet. The answer has to come from Congress.
We need the freedom to choose partners and offer special deals. MindSpring likes the “customer” status it has with us according to FCC rules. It doesn’t have to pay access charges. But ultimately that regulation hurts the ISPs as well as us. We can’t offer MindSpring a special deal on, say, a million lines, because we’ll have to offer the same low rate to any of their competitors.
Somewhat like those species where the parents eat the children, we’d like to turn around and eat up our parent, AT&T.
As seen by Charles Brewer, Chief Executive Officer of MindSpring:
American homes have only two wires today that can be used for broadband—and many have only one: the cable TV line. I can rent or buy a wire from Bell Atlantic and offer fast Internet service over ADSL, but I need to get the same access to the cable modem. None of the alternative ways into the home—satellite, wireless, high-speed lines like T1—meet our requirements: they’re not broadband, or they’re not really 2-way, or they’re priced too high for a residential user. We’re stuck with cable or DSL over a telephone line.
ISPs can distinguish themselves in three ways. There’s an easy-to-use interface (where America Online excels, for instance). There are special services over the wide-area network (like secure connections to the office over a virtual private network, or Internet telephony). And most important for MindSpring, there’s customer service. Customer service is where traditional cable companies are weak—and as more advanced services like video become available, integrating them will be a difficult job making good customer service increasingly important.
What AT&T is offering me is a chance to show a Web page, handle email, and do other high-level things for the customer over that AT&T network. That’s not acceptable; it doesn’t allow me to offer the advanced services that make my ISP attractive.
We’re convinced that AT&T can afford to give us access to their network. Investment will still take place.
The FCC has done well by insulating ISPs from regulation. We’d like to see our protected status extend to broadband.
As seen by John Petrillo, Executive Vice President of AT&T:
The FCC has a difficult job to do, and they’ve been doing it well.
Don’t make us open our cable network to competing ISPs. We’ll just stop offering our data service instead, because we can’t justify the billions of dollars it would require to upgrade the cable network if we had to share it with others. After we’ve built the infrastructure and we’re up and running, society can decide whether it would be best to open our network to others—but not now.
We hold out more hope than Charles does for a multiplicity of ways into the home. ISPs like MindSpring aren’t limited to using our network. First, the low-bandwidth, dial-up market will be strong for years—Steve Case of America Online said so himself. Second, let MindSpring buy up or partner with competitors like the phone companies are doing, and build their own backbone. In a few years there could be half a dozen wires to the home.
The cable companies of this country need 35 billion dollars to integrate in data services. If we regulate cable service, the taxpayers will end up paying instead of investors.
As seen by James Casserly, Senior Legal Advisor at the Federal Communications Commission:
We’re not picking winners and losers; we’re opening the doors to lots of folks.
Competition will not bring an end to regulation. Look at slamming (where a user is switched to another phone company without his consent). That didn’t happen in the days when there was only one phone company; now we need regulation to deal with it.
We tried to determine what the Bells would have to unbundle and offer to competitors, but we were partly overturned by the courts. The Bells beat us on that. But we’ve recently issued some rulings that will help competition locate their equipment in Bell facilities.
The Telecom Act didn’t anticipate the current situation. Although Congress considered adding rules on new, integrated “multimedia,” they ended up with a traditional breakdown of rules for telephone, cable, broadcast media, etc.
The FCC is struggling (repeated several times).
Feints, thrusts, and parries:
Brewer conspicuously failed to mention the wrangles that other ISPs are having with Bell companies. He has apparently decided to pick his fight, and that fight is now with AT&T and the cable companies.
Young, however, could not resist briefly reviving an old grudge that Bells have had against ISPs for years: the claim that customers stay online too long with their ISPs and therefore throw off the cost estimates that keep Bells profitable.
Brewer, in praising the Bells’ cooperation, got drawn into a discussion of when it might be economically worthwhile for him to invest in equipment. Petrillo seized on this as proof that it was feasible for ISPs to build their own network to the home (even though that would be a much more enormous job).
Young, in turn, wryly interpreted Petrillo’s optimism as an admission that there are alternative ways to get local access besides buying or renting from the incumbent Bells.
The afternoon session dragged somewhat, not because the panelists were any less knowledgeable or forthcoming, but because they clustered at one end of the political spectrum. Each speaker proved to be more conservative than the previous one. While their first-hand knowledge was impressive, most of the unpredictable statements came from the first speaker, Larry Pressler, who as Senator introduced and brought to fruition the Telecom Act of 1996.
There were moments of tremendous insight, as when former FCC commissioner Glen Robinson pointed out that competition has historically led to more regulation, not less. The reasons are that new entrants want a particularly type of deregulation that favors them, while incumbents always feel threatened by new technologies and claim that regulation is needed for a “level playing field.”
On the key issues of the day, the panel showed moderate views. They agreed that the Bells should be let into long-distance, but didn’t flog the FCC about delays as some members of Congress recently have. They understood that the FCC needed to use long-distance as a carrot to encourage Bells to move toward opening their local markets, and that some Congressmen were playing politics by focusing on the Bells’ entry into long-distance.
They were also surprisingly sympathetic to the desire of ISPs like MindSpring to get access to the cable modem. Pressler repeatedly stressed that there should be a “creative” way to get Bells and cable companies to share their facilities—he even invoked the possibility of using some universal service measure to do it!
But those speculations were scant relief from the philosophical lockstep march of the afternoon panel: that the Telecom Act should have removed even more barriers from business, that deregulation is the key to prosperity, and that the FCC should not be reviewing mergers on public interest grounds. While I admired the panelists’ expertise, I could have heard similar points by tuning into late-night AM talk radio—with or without FCC controls.
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