America Online has been lobbying for months for laws mandating that cable companies offering broadband service provide “open access” to AOL and other Internet service providers. But last week AOL borrowed one of the late Gilda Radner’s old “Saturday Night Live” punch lines: “Never mind.”
AOL succeeded in persuading local governments from Portland, Ore., to Broward County, Fla., to mandate open access. Its rhetoric and that of its front group, the OpenNet Coaltion, was lofty. But its motives were self-interested. AOL, which owned no cable systems and had no other broadband channels, feared that its lock on the top slot in the Internet service provider market would disappear and it would find itself out of the game in a matter of months if the consumer broadband competition commenced before AOL could field a team.
Today almost 99% of Americans who access the Net from home, including the vast bulk of AOL’s customers, do so through analog telephone lines designed to carry tiny rivulets of voice rather than the Amazonian data flows of the Net. Even with a 56K modem — the fastest available for dialup service — service is dispiritingly slow and discouraging.
Transformed by a device called a cable modem, the coaxial cable that feeds TV programming into most homes today can deliver an Internet connection 10 to 100 times faster than a 56K modem, at a cost of about $40 per month. Users respond with giddy enthusiasm. In less than two years some 1.4 million Americans have signed up for cable Internet access, available to less than 29% of American homes. AT&T’s recent $140 billion cable shopping spree, which made it the largest owner of cable TV franchises in the world, and AOL’s $133 billion grab of Time Warner and its cable empire reflected the power and promise of this technology.
All these billions, however, were only the beginning of the necessary investment. Fiber optics can economically carry the necessary bandwidth for high-speed Net access to within a few miles of your home. But because laying fiber to individual households is still prohibitively expensive in most cases, the most pressing problem in high-speed networking today is how to transform existing to-the-home infrastructure, such as your cable connection or your telephone line, into a “last mile” pathway for broadband.
Because it can handle so much bandwidth, coaxial TV cable has been the leading candidate. But cable TV connections are essentially one-way paths, while the Internet is a two-way medium. Coaxial cable is also subject to electronic interference, which slows down data transmission. Solving these problems to make cable Internet access a reality for most Americans will require billions in additional investment.
Threatening to cut off this infusion of capital — and thus slow the move from dialup to broadband Internet access — has been the AOL lobbying and court campaign. AOL’s decision to abandon the fight for open access will probably slow legislative efforts in that direction. AOL has reportedly let die two open access bills it was pushing in the legislature of its home state, Virginia.
But cable broadband could still face legal suffocation, thanks to federal Judge Owen Panner, who in June upheld the authority of the Portland, Ore., cable regulatory commission to require that AT&T open its privately owned and financed cable lines to competitors, in particular AOL.
Judge Panner’s decision, now under review by the Ninth U.S. Circuit Court of Appeals, completely misconceived both the state of the technology and the shape of the broadband market. The decision would force AT&T and others to open their cables to competing ISPs at prices that would severely undercompensate the cable companies for their investment. Result: a windfall for companies that chose to invest in lawyers and lobbyists rather than broadband infrastructure.
Even assuming prices proved fair, the usual circumstance for imposing such a “common carrier” requirement is the existence of a “natural monopoly” dictating that only one conduit of a kind can realistically be supported to any consumer. Broadband access is not a natural monopoly. “We don’t have a duo-opoly in broadband; we don’t even have a monopoly in broadband; we have a no-opoply,” says William Kennard, chairman of the Federal Communications Commission.
Competing with cable already are digital subscriber lines, which pump through copper telephone wires many times the bandwidth possible just a few years ago. Even mobile wireless will soon be pumping some two megabits per second (more than 35 times as fast as a 56K modem) into mobile phones, Palm Pilots, Rocket Book Readers and other handheld, vest-pocket-nesting, microscreen toting, voice-recognizing Internet appliances.
Judge Panner’s decision threatens to take cable out of the broadband race, making the competition far less urgent. DSL technology languished for years until the local phone companies, who are its biggest sponsors, began to lose dialup customers to cable Internet providers such as @Home. DSL matured into a market-ready product almost overnight, and providers slashed prices by as much as half to compete with cable. But the Portland decision eases that pressure considerably. The share prices of cable modem component manufacturers took a hit, and @Home shares went into a prolonged slide.
Confused perhaps by the presence of established companies like AT&T, Judge Panner seemed to imagine that he was dealing with mature technologies. But broadband is a slender green sprout of a technology, just now finding less than 1% of its eventual market, all too easily trampled under the feet of assorted city elders, congressional beadles and lascivious litigators taking an untimely interest.
True open access — allowing any ISP to send its content over any cable conduit — is desirable. It is also inevitable if market forces are allowed to reign. When bandwidth is constrained — as in broadcast TV — it makes sense for the ogolopolistic owners of the conduits to control the content that flows to the consumer. But when bandwidth is abundant, consumers will overwhelmingly prefer conduits open to everyone’s content.
AOL was fighting this battle because it sensed its own business model was collapsing. A decade ago, before the World Wide Web, AOL customers signed up for content — a private network, including e-mail and instant messaging. But now AOL’s proprietary content is insignificant compared to the bounty of the Web, and its prime appeal is attractively priced, user-friendly Net access. But the AOL network is a clunky dialup system whose excruciatingly slow download times can’t possibly compete with cable. AOL knew it had to invest massively, as AT&T has, in buying and building broadband conduit — and it wanted to slow down AT&T’s progress while it did.
Hog the Ball
So it used city councils, state legislatures and courts, to hog the ball, pass it around and keep competitors, particularly AT&T and Excite@Home, away from the Net. Then last month AOL made the big deal and acquired Time Warner with its vast cable holdings. Last week its general counsel, George Vradenburg III, announced that the company now wants the market to decide which cable systems are open to all ISPs and which ones stay proprietary.
But if the Ninth Circuit upholds Judge Penner’s decision or if a state legislature or Congress doesn’t get the joke and moves to mandate open access, none of us will be laughing. The capital and talent needed to create truly open access will dry up as investments like the one AOL just made become worth a fraction of their potential value. The irony will be that AOL, which thought it could get away with a simple “never mind,” may find itself trying to undo the damage it has done for years to come.