Senate Energy, Utilities and Communications Committee
Senator Debra Bowen, Chairwoman
 

Informational Hearing:
Competition & Choice in Broadband Access to the Internet

June 22, 1999
2:00 p.m. to 4:00 p.m.
State Capitol, Room 112
 

Introduction

• Senator Debra Bowen, Chairwoman

Overview

• U.S. Internet Council – Bill Meyers, Chairman

Panelists

• Utility Consumer Action Network – Michael Shames, Executive Director
• California Nevada Community Action Association – Marty Omoto, Executive Director
• San Mateo County Telecommunications Authority – Brian Moura, Chairman
• AT&T – Lois Hedg-Peth, President, Pacific Region
• Time Warner – David Auger, Vice President and General Manager, Los Angeles
• @Home – Milo Medin, Chief Technology Officer
• Pacific Bell – Keith Epstein, Vice President and Senior Counsel, Internet
• GTE – Edwin Shimizu, Director, National Regulatory Affairs
• California Internet Service Providers Association – A Representative to be Designated
• America OnLine -- A Representative to be Designated

Senate Energy, Utilities & Communications Committee
Senator Debra Bowen, Chairwoman
 

Informational Hearing:
Competition & Choice in Broadband Access to the Internet

June 22, 1999
2:00 p.m. to 4:00 p.m.
State Capitol - Room 112

Background

For a number of years, the cable television industry has been talking about the notion of a "convergence" of the cable and telephone industries in which each provider would have the technology to be able to offer services previously offered exclusively by the other.

Convergence has gone from the drawing board to the playing field in a number of areas, as cable companies have quickly become viable competitors to telephone companies in offering telecommunications service. The competition has mainly taken place in Orange County, San Diego, and parts of the San Francisco Bay Area, and it’s expected to grow more rapidly should AT&T continue to acquire and upgrade cable television systems across the nation.

Competition from cable in local telecommunications service is particularly significant because it brings a network into a person’s home that’s completely independent of the existing telephone lines. Equally important, it represents a competitive option for residential customers, who have few choices for local telephone service.

A New Market: High Speed Internet Service

Somewhat surprisingly, it’s been the cable companies – not the traditional telephone companies – that have pioneered the new market for high speed Internet access. This service provides users with access to the Internet that’s 100 times faster than conventional Internet access.

Early feedback shows people are willing to pay extra for this high speed service for two basic reasons: First, it's significantly quicker, so users can do more on the Internet, including using video (i.e. a "Star Wars" preview trailer), while spending less time waiting. Second, it’s always "on," (i.e. users don’t have to dial up their Internet service provider (ISP) each time they want to access the Internet) making it much more convenient to use on a spontaneous basis.

The cable industry also brings new skills, perspectives, and customer relationships to the marketing of Internet service, which may increase the number, and broaden the demographics, of Internet users.

The most well-known and successful of these "new" high speed Internet services is @Home, which is partially owned by AT&T. The @Home service comes with two basic elements: First, unlike most ISPs that simply connect users to an existing high speed communications network, @Home owns and operates its own nationwide high speed network. Second, @Home operates a website that gives customers access to the Internet, to @Home content and to e-mail. The @Home service is the exclusive high speed Internet access service and ISP for the cable companies it serves, but @Home users can go anywhere on the web and connect to any ISP. A similar service, known as "Roadrunner," is offered exclusively on other cable companies that provide Internet service through their cable systems.

High speed Internet service isn’t limited to the cable companies – both Pacific Bell and GTE have begun offering their own type of high speed Internet access, known as Digital Subscriber Line (DSL) service. Unlike @Home, the DSL services offered by Pacific Bell and GTE are not bundled with their own ISP service.

This is the significant policy difference between the two services that the Committee may wish to explore. Cable customers who want to buy high speed Internet service are required to pay for the @Home ISP service as part of the high speed Internet access package. Telephone customers who want to buy high speed Internet service are not required to pay for the telephone company's ISP service as part of the high speed Internet access package.

A Regulatory Collision: Open Networks vs. Closed Networks

This difference between the cable model and the telephone model has also led to a collision of the two regulatory structures that govern each model.

Since the breakup of AT&T and the de-regulation of the long distance telephone service market in 1984, public policy makers have adopted the concept of "open access" when it comes to telecommunications services. Under "open access," local phone companies can’t restrict a customer’s right to choose any long distance company they want or the type of telephone equipment they decide to buy – and phone users can call anywhere in the world that a long distance provider will take them and they can dial up any ISP they want, all without the local phone company having any say in the matter.

By contrast, cable television’s roots come from a "closed access" model, where it’s the cable company – not the customer – that controls what the customer can dial up and watch. If a customer wants a channel not offered by the cable operator or the customer doesn’t want some of the channels in a particular package put together by the cable company, the customer is out of luck.

The regulatory collision that’s happening today begs the question of what happens when "open access" telecommunications services are offered over cable company’s "closed access" network. At the risk of oversimplifying the issue, the bottom line question is, "Which set of rules should apply?"

Unbundling – Theoretical vs. Practical

The debate over unbundling has been fueled in large part by the fear of a cable mega-company that may be (or has been, depending one’s point of view) created by AT&T’s purchase of TCI Cable, its pending purchase of MediaOne, and its partial ownership of a number of other cable companies.

The question of which rules – open access or closed access – should apply depends on which side in the debate you ask. AT&T and the cable companies argue that the closed access rules should apply, since – in the case of @Home – it was built solely with private capital in an unregulated environment. Therefore, they don’t believe that they should be required to unbundle their high speed communications network from their ISP service. They further argue that the cable-provided @Home Internet access is not closed in the traditional sense, because cable customers can access the Internet at "traditional speed" using any ISP in exactly the way they can with telephone companies. Only at high speeds does a cable customer have to use @Home and even then, the customer can use any ISP she chooses and go anywhere she wants without being impaired by @Home.

Not surprisingly, America Online, Pacific Bell and GTE believe the open access rules should apply and that those two services should be unbundled. They argue the rules should apply to the service provided to the customer, not the means by which the customer accesses the service, and since unbundling is mandatory for telephone companies providing high speed Internet access services on copper wires, it should also be mandatory for companies providing the service via cable.

It should be noted that cable companies aren’t the only ones accused of bundling high speed Internet access with ISP service. Pacific Bell, which offers both high speed Internet access and an ISP service, doesn’t require customers to buy them both. However, by pricing it’s ISP service at $10 per month (some would argue by using other revenues to subsidize the cost of providing that service), it undercuts other ISPs by at least 50%, which effectively bundles Pacific Bell’s high speed Internet access and ISP services.

Deciding whether to require high speed Internet access and ISP services to be unbundled raises a number of questions and issues:
 

1. Will unbundling the high speed Internet access from the ISP service lower prices for consumers? Some believe it will, arguing that each component in the bundle should cost less that the entire package. However, @Home contends that unbundling would actually raise the price of the high speed Internet access component because that component is subsidized by the advertising revenues generated by the ISP arm of the operation.
    
2. Does bundling force consumers to "pay twice" for the same or similar services? If cable customers want to have high speed Internet access they must pay for the @Home ISP service even if they want to use a different ISP, such as America Online. Does bundling competitively disadvantage other ISPs and potentially deny them access to a large and lucrative market?
    
3. Will unbundling increase competition among ISPs? Some argue that while bundling creates an incentive for new investment, bundling will eventually eliminate unaffiliated ISPs, which will lead to fewer innovative applications and services in the long run. They argue that many of the real innovations of the Internet, such as the Web browser and web-based retailing, were created because the Internet is a blank canvas that anyone can experiment on.
    
4. Will unbundling the high speed Internet service from the ISP service decrease the incentive to bring high speed Internet services like @Home into the home? AT&T contends that unbundling reduces the cable company's incentive to upgrade their networks to offer high speed Internet services – and that incentive drops even further if unbundling requirements are imposed only by a particular city or state given "better," unrestricted opportunities elsewhere. However, given the popularity and growing demand for high speed Internet service and the competition from the telephone companies, it’s hard for some to imagine that cable companies would choose not to aggressively compete on an unbundled playing field.
    
5. Will bundling these services make it difficult for a customer to get to other parts of the Internet? While this may not be happening today, the drive to squeeze as many dollars out of the web as possible may lead that to change in the future. Certainly there’s a financial incentive to keep the customer's eyes clearly focussed on websites with which the ISP has a business relationship.

The Role of Local Governments

Local governments have the ability to issue franchises to cable television systems that serve their areas and this franchise authority gives them the opportunity to influence whether telecommunications services offered via cable should follow the "closed access" model or the "open access" model.

AT&T’s decision to buy cable operator TCI and, potentially, MediaOne, will effectively force dozens of cable franchise agreements to be transferred, which gives the local governments required to approve the transfer the leverage to impose conditions upon it. In Oregon, the City of Portland and Multnomah County conditioned the transfer of the TCI franchise to AT&T on a requirement that AT&T allow ISPs not affiliated with AT&T to connect their equipment directly to AT&T’s high speed Internet access service (thus allowing them to bypass AT&T’s @Home ISP service).

TCI and AT&T took the city and county to court over the proposed conditions. Earlier this month, federal district court judge Owen Panner granted the City of Portland and Multnomah County’s motion for summary judgment in the case, writing that AT&T and TCI "have no contractual right under the franchise agreements to exclude competitors from the cable modem platform."

While that ruling is being appealed, Portland’s success has buoyed the hopes of California cities, such as Los Angeles and San Francisco, which are considering imposing similar conditions on prospective cable franchise transfer agreements.

The Internet

Ultimately, any decisions affecting the availability of the Internet have to be made with both today’s and tomorrow’s Internet users in mind. Californians share a goal of a vibrant, widely accessible and useful Internet, but how we achieve that will be the subject of plenty of debate. The issues of unbundling and "open access" vs. "closed access" are but two in a series of issues that will impact the development and deployment of the Internet within the state.