June 26, 2001 1:30 PM PDT

ISPs fight for more than DSL scraps

Independent Internet service providers are mounting a mini-revolt against SBC Communications, saying the phone giant is trying to cut them out of the future of the high-speed Internet business.

Since last December, SBC has been working with the ISPs to renew their contracts for high-speed DSL lines. Typically, the service providers lease phone lines and the service so they can offer their own customers broadband connections.

But the new terms offered by SBC are sparking waves of resentment, letters to regulators, and early mutterings about lawsuits. The ISPs say the phone giant is pushing a new policy that would cut them out of revenue from services such as video on demand, music subscriptions or videoconferencing--precisely the products that analysts say will drive demand for high-speed Net connections.

More ISPs are saying they won't stand for it and are refusing to sign the new contracts.

"It is a blatant attempt to get us out of the DSL business," said Lisa Bickford, chief operating officer of InReach Internet, an ISP that offers service throughout most of California. "And it is successful."

SBC says it values its ISP relationships, and it is not locking them out of anything. But the company is changing its network in order to provide more types of services over the high-speed connections, and this means that ISPs will likely have to share the connections with other content providers, a representative said.

"SBC works with 200 ISPs, and they're an important channel for us," SBC representative Shawn Dainas said. "This (new) architecture opens opportunities for the entire industry to benefit." That means consumers, businesses and ISPs too, Dainas said.

Although it's a relatively obscure battle over who gets to do what with phone lines, the implications for the future of independent ISPs and the high-speed Net are broad. The phone companies and cable companies like AOL Time Warner are setting themselves up as the sources for video, music subscriptions, gaming and other services they hope will finally deliver on the promise of the high-speed Net.

ISPs are walking a delicate line moving into that world. They hold the connection to individual customers but lack the market power to negotiate big deals with media companies that will allow them to offer this type of service on their own. Allowing SBC to use part of what they have seen as their own DSL connection for these new services could further undermine their existence, they worry.

According to the ISPs, SBC is asking for new rights as part of the contract. Previously, the ISPs had effectively bought access to the full data "pipe" that provided the high-speed Net service. Now, for about the same price, they're being asked to give Pacific Bell--part of the SBC network--rights to provide their customers with the new services that analysts say will become key offerings driving people to broadband: video on demand, videoconferencing, and so on.

These services would go over the same lines the ISPs are buying, and the contract says the bandwidth available for anything else might be reduced as a result. The ISPs would not be compensated for this.

"They would be using bandwidth that I am paying for," Bickford said. "We told them in no uncertain terms that we would not pay for it."

Analysts say the fight is a critical one for ISPs, which need to be able to set a foothold in the world beyond simple connections if they are to survive.

"If you look at the business model for independent DSL ISPs, they're not making much money on the (connections) alone," said Pat Hurley, a DSL analyst with TeleChoice. "The ones that are making a splash are the ones offering (extra) services on top. That's really the future for anyone who wants to make money."

Conflict: Nothing new
ISPs and the big local phone companies have a history of conflict. Independent service providers have long complained that the Bells charge too much for bandwidth, offer poor customer service, or use their market power to compete unfairly.

The DSL issues are coming to a head in large part because of the evaporation of competition in the high-speed Net business. Until recently, ISPs had been able to get their high-speed connections from one of the bigger wholesalers, such as NorthPoint Communications, Rhythms NetConnections or Covad. But now NorthPoint is out of business, Rhythms is flirting with bankruptcy, and even Covad is struggling financially.

The remaining options are few. Cable companies are not offering access to their cable networks for Internet service, and wireless options are not typically as technologically advanced as DSL and cable. Thus, ISPs are increasingly being pushed toward the big local phone companies if they want to offer high-speed service at all.

SBC notes it has done far more than any of its competitors to allow ISPs to offer high-speed service. Echoing the lobbying battles that have raged from Washington, D.C., to city halls across the country, the company notes that it is the cable companies that are truly shutting independent ISPs out of the broadband market. The phone companies are at least providing access, the company says.

The company has also worked to "level the playing field," eliminating volume discount rates for ISPs that bought a large number of lines--a provision that had chiefly benefited its own ISP division.

Some ISPs note that SBC's decision to raise its own DSL rates earlier this year has lessened some of the financial pressure on them. But that wasn't enough to ease current concerns.

The California ISP Association has complained to the Federal Communications Commission. InReach's Bickford said she has written angry letters to the FCC, to California state regulators, and to Pacific Bell.

The ISPs refusing to sign the new contracts are still working under their old contracts, which technically expired last December. But SBC is changing its pricing policy, and companies that don't sign the new contract will be cut off, according to letters the phone company has sent to ISPs about its plans.

For now, at least, the ISPs hope that regulatory and public pressure can change a business course that worries them.

"It's a sales model that makes no sense in a competitive world," said David Simpson, an attorney for the California ISP Association. "But ISPs are trying to survive in a near-monopoly structure for DSL."

 

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