December 14, 2000 1:00 PM PST

FTC decision forecasts future of cable Net access

The Federal Trade Commission's unanimous approval Thursday of America Online's proposed merger with Time Warner offers the first significant rules in the United States for regulating competition in the emerging area of high-speed Internet access.

The consent decree applies only to the AOL-Time Warner deal; other cable owners are not bound by it. But the compromises hammered out in the final agreement could set a framework for how Internet broadband carriers will be forced to deal with rival services, legal experts say.

"This will almost certainly influence the debate over open access," said Bob Lande, a professor at the University of Baltimore Law School and director of the nonprofit American Antitrust Institute.

Lande said the task of setting industrywide regulations for broadband carriers would most likely fall to the Federal Communications Commission, which must also approve the AOL-Time Warner deal. Although that decision is pending, the agency so far has indicated little interest in ordering sweeping constraints--such as those worked out between AOL, Time Warner and the FTC--on companies that own high-speed Internet cable networks.

Under Thursday's consent decree, AOL will be held to three primary conditions. It must offer one rival broadband ISP access to its cable system before AOL can begin such service, followed by at least two additional services within 90 days. It is prevented from disrupting the flow of content being provided to consumers through rival ISPs or interactive TV services on its network. And it is required to offer AOL's digital subscriber line (DSL) services equally to all subscribers.

Industry observers expressed cautious optimism that the FTC had settled key competitive questions.

"I think (the FTC) has done a fairly good job in addressing many of the concerns we expressed to them," said W. Scott McCollough, an attorney for the Texas ISP Association, which represents 600 ISPs. "They tried to give us every opportunity to get on the system."

AOL competitor EarthLink, which signed an access deal with Time Warner before the FTC decision, also praised the consent decree.

"EarthLink is pleased that America Online and Time Warner have agreed to a settlement and that the Federal Trade Commission has voted unanimously to approve their merger," said Dave Baker, vice president for law and public policy at EarthLink. "Today's FTC decision helps ensure that Time Warner Cable customers will have real choices in broadband Internet providers and content."

Lande offered a more cautious appraisal of the deal, calling it a "reasonable" settlement considering the risks of a court battle. But he said the final agreement was as much of a compromise for the FTC as it was for AOL.

"You can talk about certain things (regulators) seem to have gotten, but the devil's in the details," he said. "The FTC has added provisions to make (AOL) negotiate (with competitors) in good faith...but there could be problems with enforcement."

A long, rocky road
The issue, frequently referred to as "open" or "forced access," has simmered for two years since first being raised as part of AT&T's acquisition of Tele-Communications Inc.

ISPs and consumer see story: Open-acces fight dead?advocates, among others, have lobbied for equal access to the high-speed Internet networks operated by cable TV companies. Most major cable operators, such as AT&T, Comcast and Charter Communications, have economic interests in an affiliated broadband ISP, such as Excite@Home or Road Runner, two of the largest such companies. Some cable critics are concerned that consumers could be blocked from content or that the cable-owned ISPs will be granted preferential placement. Others say consumers will be forced to pay for a cable ISP regardless of whether they prefer to use the service.

Cable operators initially argued that they built the networks at great expense and should be allowed to use them as they please. The cable industry later warmed to the idea of carrying third-party ISP traffic, even recognizing it as a potential new revenue stream, but argued that there is no need for regulatory interference. Rather, competition would necessitate that cable operators strike marketplace-driven agreements to maximize content and ISP partners or risk losing to similar services such as DSL, wireless or satellite.

James Speta, an assistant professor at Northwestern University law school and an open-access critic, summed up the cable industry's stance recently in the winter 2000 edition of the Yale Journal on Regulation.

"The nature of consumer demand for a broadband access platform, which will be strongly responsive to the variety of content services made available over the platform, makes open-access rules unnecessary and potentially counterproductive," Speta wrote.

In an effort to prove their willingness to embrace equal access, several cable operators already have struck alliances with major ISPs and are testing the technical feasibility of adding multiple ISPs to their networks.

Although AOL is the world's largest dial-up ISP, with about 26 million subscribers, the company was eager to secure a high-speed Net access strategy. So AOL took the lead in trying to open private cable networks.

Now some federal regulators believe that open access is a good idea and that anything short of an open-access requirement could stifle the growth of the broadband Internet.

Why the FTC?
Ironically, the Federal Trade Commission has become the first government agency to rule definitively on cable open access.

For months, open-access proponents have encouraged another federal agency, the FCC, to regulate cable Net access or at least provide guidance to local municipalities, a handful of which have imposed their own requirements. But after several studies, the FCC maintains that the cable industry is moving toward equal access on its own, and a "hands off" approach is best for now.

Differing opinions abound about why the FTC has taken such a keen interest in cable open access when the FCC, the federal agency with the most direct authority over the cable industry, has largely steered clear.

"The FCC has no authority whatsoever to get into broadband," said Gartner analyst David Rendell. "The (1996) Telecom Act was a voice act. Only voice (service) is regulated."

Analysts and industry watchers say the FTC, which approaches the issue from Creating a media titan an antitrust perspective, brings a different mandate. Some say the FCC operates far more publicly and therefore is open to greater outside scrutiny than the FTC.

"It's a different environment at the FTC. This is an enforcement proceeding, which is much more removed from political pressure," said Andrew Schwartzman, president of the Media Access Project, a public-interest law firm and a supporter of open-access requirements.

"Congress has micromanaged" the FCC, Schwartzman said. "But by tradition, the antitrust laws have been regarded as above political pressure."

Schwartzman said the FCC largely approves mergers after a close look to ensure participants meet federal law, hold communications licenses, and have other legal requirements in order. However, the FTC rarely scrutinizes most mergers unless it has a significant reason to be concerned with issues of competition, he said.

"The handful that (the FTC) picks out to look at, they look deeply at," Schwartzman added.

AOL and Time Warner had offered a plan for opening their networks to competing ISPs. Some suggest the FTC looked long and hard at whether to accept their proposal or simply block the merger in the name of Internet competition.

To block or not to block
"The question before the FTC (was): Is a consent decree that gets some sort of open access, even if it's not perfect, more desirable than blocking the merger? It's a very tough call," Schwartzman said. "If it doesn't provide nondiscriminatory access to small and medium-sized ISPs, it's not good enough."

The cable industry, according to some, had expected the FTC to approve the merger with some conditions to accommodate ISPs.

Robert Sachs, president of the National Cable Television Association (NCTA), said that any open-access conditions imposed by the FTC on AOL Time Warner would be "somewhat of an anomaly."

"I would expect the conditions applied to be unique to that transaction" and not applied to other cable operators or the industry as a whole by any government agency, he said.

Sachs cautioned that see story: Find a broadband providernegotiating an ISP access deal under pressure from policy-makers is far different from doing so in a usual free marketplace environment. But the cable industry is hopeful that regulations will remain favorable.

"We anticipate a continued period of regulatory stability" for the cable industry, Sachs said, noting that more than 20 states examined the open-access issue this year, and all of them either tabled the idea or rejected it entirely.

News.com's Patrick Ross contributed to this report from Washington and Jim Hu contributed from New York.

 

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