Cable-Access Worries Ring True to AOL/Time Warner Rivals

America Online (AOL Quote) and Time Warner (TWX Quote) say their postmerger cable TV systems will be open to Internet rivals. But if the recent history of the local telephone business is any guide, whether that means anything depends on your definition of "open."

The meaning is an important one, both to AOL and to the companies outside the AOL-Time Warner constellation that want to piggyback onto Time Warner's cable lines to offer consumers high-speed Internet access, such as EarthLink (ELNK Quote) and Juno Online Services (JWEB Quote).

In the balance are not only the completion of the merger, but also the ability of numerous Internet service providers to keep old customers, or find new ones, as millions of Time Warner cable subscribers upgrade from conventional dial-up connections to cable modems over the next few years.

History

On one hand, it appears that the Federal Trade Commission and other regulators won't approve the merger unless they're persuaded AOL Time Warner will open up its broadband pipes, at a reasonable price, to AOL's competitors in the world of high-speed Internet service -- for example, EarthLink. Plus, AOL and Time Warner insist that opening up their systems to AOL's competitors makes good business sense. So there would seem to be no obstacles to open cable systems.

Holding Steady AOL, Time Warner this year

Source: BigCharts

On the other hand, in 1996, telephone companies formerly owned by AT&T (T Quote) similarly insisted they'd open up their local telephone systems to competition in return for the right to offer long-distance phone service. But after four years, competitors complain that getting the access they're entitled to has been a never-ending, uphill battle.

And the challenges competitive local phone companies, or CLECs, have faced with reselling services they've bought from the Baby Bells appear to be the same ones that unaffiliated ISPs now face when they buy high-speed home access from AOL Time Warner: How can you be sure you're getting fair treatment from your supplier when the same company that's selling a service to you wholesale is actually a competitor of yours at retail?

The Rub

Good question, says Jonathan Askin, general counsel for the Association for Local Telecommunications Services, a trade organization of local exchange carriers. "If Burger King had to rely on McDonald's (MCD Quote) for its meat," Askin says, "it would be difficult for Burger King to compete on equal footing."

Downtrend Earthlink, Juno sliding

EarthLink says the company is learning about access conditions from Time Warner that it doesn't consider to be fair. "We have no control over the retail price. They propose very lopsided revenue sharing," says Dave Baker, vice president, law and policy for EarthLink. In addition, he says, Time Warner wants to insert itself between EarthLink and its customers -- for example, on the service's start page.

That's one of the reasons, he says, that EarthLink is happy that the Federal Communications Commission said Thursday it is launching an inquiry into issues surrounding high-speed Internet services, particularly those offered through cable modems. "We are glad that the FCC is finally doing something here," he says.

Askin says the lesson of the regulatory and legal battles over CLECs' access to local telephone systems is that regulators must be "eternally vigilant to make sure the incumbents are truly opening up the network to their competitors." He adds, "Unless a regulator clearly crosses every 't' and dots every 'i' ... [incumbents] will game the system to overcharge."

Incentives

The difficulties that local competitors have had in the past few years with telephone service portend similar difficulties for independent ISPs, says Russell Frisby, president of the Competitive Telecommunications Association, or CompTel, a trade association of competitive telecommunications providers. "It is clearly relevant, and it is a parallel situation," he says. Among the problems that competitive ISPs will face is foot-dragging on the part of cable systems such as Time Warner, he says. "The incumbent never has any incentive to open his market at a fast pace."

But the independent ISP Juno is cautiously optimistic about its relationship with Time Warner, on whose cable systems Juno plans to offer high-speed Internet access. "We have found them to be businesspeople negotiating in good faith," says Charles Ardai, Juno's president and CEO. "We haven't seen any inappropriate behavior, but we think the question is the right question to ask."

Ardai says he's hopeful that competition from DSL and wireless will hold down prices that cable systems could charge Internet service providers who want to offer high-speed access to their customers, though Ardai acknowledges that the DSL telephone technology and wireless aren't competing with cable in all parts of the country. "It's not perfect," he says, "but at least there's some competitive pressure rather than none."