March 11, 2002 1:40 PM PST

Broadband battle stalling, switching tack

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January 15, 2002
One of the most costly skirmishes in recent congressional history is being fought over Internet surfers like Bob Greene.

Greene, a retired Intel employee, lives in remote Sebago, Maine. A town of 1,500 people, Sebago nevertheless has about a dozen subscribers to what Greene describes as spotty high-speed DSL (digital subscriber line) Internet service. He's heard some of the big communications companies' see sidebar: Behind today's fight rhetoric about bringing the broadband revolution to rural areas, and he's not convinced.

The phone company's "attitude is that back in the woods, we're lucky if we get e-mail," Greene said. "That's probably the attitude of most of their customer base too. This is the reality of rural life."

Millions of dollars have been spent by telephone companies in the past two years in a bitter legislative battle ostensibly over bringing high-speed Internet access to rural areas like Sebago. Big local phone companies, or "Baby Bells," have been pushing hard to lift rules they say prevent them from reaching rural areas with high-speed Net services.

Opponents, including long-distance companies, ISPs and consumer groups, warn that the Bells' actions would reinstate much of the monopoly power that helped slow the giants' move to broadband services before 1996.

The fight has reached a fever pitch, with the House of Representatives recently passing a controversial bill that would lift many of the restrictions on the local phone companies. It's now moved to the Senate, a much more hostile political landscape with several powerful figures opposed to the bill. Senate Commerce Committee Chairman Fritz Hollings, D-N.C., the most outspoken opponent of the legislation, plans to hold a hearing March 20 to look in part at these broadband issues.

Now Washington, D.C., is in a morning-after phase, trying to figure out where the millions of lobbying and advertising dollars went, and whether the money will actually have any direct impact on communities like Sebago.

It seems unlikely. After expensive years in the House, the controversial bill appears set to founder in the Senate and supporters already are turning to the Federal Communications Commission (FCC) as an alternative.

Nevertheless, the big local phone companies have won a significant victory in their effort to expand their power in high-speed Net markets, and many analysts say the tide is moving in their direction despite immediate legislative hurdles.

"Part of the value is that it's kept the Bells on the offense," said Blair Levin, a former high-ranking FCC staffer who is now an analyst for Legg Mason. "The debate is not about how to help the (smaller communications companies), the debate is how to deregulate the Bells."

Closing the digital divide
The hurricane of lobbying, TV ads and fund-raisers that swept through Washington ahead of the congressional vote last week seemed barely connected to Greene's forested Maine countryside.

There are very real issues at stake--not least of which is who will ultimately control the data and high-speed Internet markets that will one day be worth tens of billions of dollars a year.

But today's battle isn't really about Greene--at least not yet, analysts say. It's about the big local phone companies, the long-distance companies, cable companies and smaller rivals jockeying for position in all markets, urban and rural. It's a battle that's been going on since 1996 in courts, in Congress and in regulators' offices.

Before that time, high-speed Net service was almost nonexistent. Cable-modem service was filtering into just a few households. DSL was technically feasible, but the local phone monopolies instead were offering ISDN, a slower, more expensive service that few consumers could afford.

In 1996, Congress passed a bill deregulating local phone markets. It allowed many new kinds of companies to spring up offering local phone service or Internet service that competed with the giants like SBC Communications or BellSouth. Those companies, such as Covad Communications, started putting unfamiliar competitive pressure on the Bells. It also let those giants get into the long-distance market, but only if they allowed the new companies into their own formerly monopolistic markets.

Since that time, the big local phone companies have complained they're the only ones still laboring under strict regulation. Beginning in 1999, when the Internet bubble had pushed valuations of small new telecommunications companies into the stratosphere, the Bells started lobbying Congress hard to "level the playing field." They point to cable companies' lead in high-speed Internet services, saying it's not fair that cable companies aren't regulated the same way.

High-speed Internet services "weren't envisioned in the original legislation," said Bill McCloskey, a spokesman for BellSouth. "We shouldn't be forced to install them and immediately lease them out below cost."

Last week's bill, sponsored by Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., was the culmination of this effort. It would remove many of the rules that force the Bells to share their local phone networks with rivals.

That, opponents like AT&T say, would make it all but impossible for anyone aside from the Bells to use the phone networks to offer high-speed Net service. The local phone companies might find it easier to compete with cable companies, but nobody would be able to compete with the Bells, they say.

"Tauzin-Dingell would eliminate the competition that is allowed currently under the 1996 law," said Peter Jacoby, vice president of congressional affairs for AT&T.

The bill passed the House after years of lobbying, on a 273-157 vote. But it appears almost certainly doomed in the Senate, where powerful opponents such as Hollings oppose it. Hollings, who is chairman of a committee that has the power to kill the bill before it even reaches the full Senate, recently called the proposed legislation a "blasphemy" and a "total fraud."

"It's difficult to see a scenario where the bill ever gets to the Senate floor," said David Butler, media director for the Consumers Union, one of the groups lined up against the legislation.

As a result, the industry's attention has quietly turned to the FCC, Washington insiders say. The telephone companies haven't entirely given up on Congress. The local phone companies' Senate strategy is "still being formed," McCloskey said. But regulatory channels now look more promising.

Several regulatory proceedings are already under way that would reduce regulation on the Bells piecemeal, potentially limiting which parts of their networks they would have to share with rivals, and in which situations. In mid-February, the FCC also released a broader notice saying it would change the way phone companies' high-speed Net services were classified--holding out the promise of reducing or eliminating many of the rules now governing the Bells' high-speed Net service.

These activities are likely to take much of 2002 to filter though the regulatory process. But in the hands of an FCC whose focus has shifted dramatically toward deregulation since President Bush's election, they could together accomplish much of what is outlined in the Tauzin-Dingell legislation.

"We will clarify and simplify the regulatory framework for these promising services," FCC Chairman Michael Powell said in a statement announcing the new effort last month. "This is not the time for timidity."

Millions spent--for what?
The amount of money spent on the battle in the past few years, and particularly the past few months, is staggering.

The Center for Responsive Politics, which tracks political contributions, says that the Big Bell companies donated more than $19 million to legislators and political parties between 1999 and 2001. The big long-distance companies chipped in with more than $12 million.

According to The New York Times, the two sides together spent $10 million on TV, newspaper and radio ads in advance of the House vote last week--dwarfing many expensive state political campaigns.

Looming over all of this spending is the question of whether speeding broadband infrastructure spending is even the right problem. Between 80 percent and 90 percent of the United States population has access to high-speed Net connections of one kind or another, even if only through relatively expensive satellite service. Yet only about 10 percent of the country subscribes.

The President's Council of Advisors on Science and Technology is opening its own review of the broadband market, but focusing instead on this issue of limited consumer demand, not the need for faster pipes.

Indeed, analysts say it will take better mainstream applications--things like good online music services, video on demand, or online games--to convince more people to pay the $40 to $70 a month it takes to subscribe to a fast home Net connection.

Those are on their way. Napster and other legally questionable music download services have been one of the biggest factors stimulating demand, ISP executives say. Online video services supported by the big movie studios are being released this year. Authorized music subscription services are already in the market, though analysts don't expect them to reach the mainstream until at least 2003.

All of this means that the stakes are growing, and the political battle on Capitol Hill won't go away with the passage or failure of the Tauzin-Dingell bill.

"The FCC rule-making is promising, and the legislation is promising too," BellSouth's McCloskey said. "We're looking at whatever promise comes in first."

 

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