AT&T;’s Bid to Move Into Cable Could Lead to New Regulation

The cable industry may have reason to fear a specter buried within AT&T;’s mammoth bid for cable company MediaOne: the prospect of government regulation of the nascent cable-Internet business.

Up to now the Federal Communications Commission, which oversees the cable television industry, has taken a hands-off approach to the industry’s forays into Internet services for consumers, delivered via two companies, @Home and Road Runner.

But the FCC may soon have to grapple with a major change in how those services are delivered. AT&T; owns a controlling share of Redwood City, Calif.-based @Home, and its quarry, MediaOne, owns half of Road Runner. If the deal goes through, significant ownership stakes in both competing services will be held by the telecommunications giant.

That could be important because no competing companies exist to deliver broadband communications--high-speed, Internet-ready data links--to consumers over cable lines, which are considered the most effective medium for those services. Although the two services claim slightly more than 500,000 subscribers, a fraction of the audience that gains Web access by dialing up via telephone modem, their growth prospects over the next decade are vast.

Non-cable Internet service providers, or ISPs, including America Online, have long complained that the cable industry is trying to freeze them out of what could be the most important electronic pipeline into the home and office by allowing customers to subscribe only through the two cable-owned services.

Those complaints may gain force should the services, which use similar technologies, merge, leaving consumers with only one way to reach the Web over high-speed cable.

“That would highlight what we’re talking about, an effort by the cable industry to construct a single ISP across the [cable] gateway,” AOL general counsel George Vradenberg said in a recent interview.

AOL had asked the FCC to make open access a condition of its approval of this year’s merger of AT&T; and Tele-Communications Inc., the huge cable operator that controlled @Home. (The FCC refused.)

AOL argues that allowing the cable industry to restrict Internet service only to Road Runner and @Home would amount to discrimination and stall the growth of broadband in the home.

“Because the infrastructure of paired copper wire [that is, phone lines] has been open to everyone, there are now 5,000 independent ISPs,” Vradenberg said. “If you had waited for the telephone companies to enter the ISP market [before making their lines available to others], we’d still be waiting for the Internet.”

For their part, cable companies have furiously battled all efforts to require them to open their data networks to independent service providers, as telephone companies are required to carry data for any of the country’s ISPs.

The cable industry, in the midst of a multibillion-dollar effort to upgrade networks for two-way data transmission, is understandably loath to give up any chance to milk it for maximum revenue potential.

Cable executives argue, in fact, that it was only the opportunity to control the pipeline that initially led them to make the investment.

“The essence of our argument is that this has led to a great period in telecom development in this country,” said David G. Pine, vice president and general counsel of @Home.

Others agree that it is far too early for the government to impose rules on the data service market.

“This is such a fluid market and things are moving so fast that to start imposing regulations based on how you think things will develop will be a disaster,” said Douglas S. Shapiro, telecommunications analyst for Deutsche Bank Securities. The threat of regulation, moreover, “will deter the cable companies from making that investment and discourage anyone else who might be thinking about building the next-generation infrastructure.”

Cable operators also argue that there is no law that would give the FCC authority to force them to open their networks to AOL or any other Internet service against their will.

That appears to be true, if only because the cable regulatory laws were written before the Internet existed on a commercial scale--and thus before anyone contemplated a world in which video or other multimedia content could be distributed to subscribers outside the broadcast television model. Existing telecommunications law requires cable operators to grant access to the networks for all legitimate commercial use.

“The $64,000 question is whether the service of ISPs fits the definition of commercial use in the statute, which is defined as video programming that’s similar to broadcasting,” said Barbara Esbin, a former FCC lawyer now in private practice in Washington. “It’s a question the Internet raises without providing a very good answer, which is a problem that comes up when you make rules for old media and try to apply them to new media.”

There are signs that the cable industry is at least sensitive to the argument that all Internet services should have equal access to the home over its networks. The fear of giving opponents ammunition may be one reason there has been no effort to merge Road Runner and @Home up to now--even though the combination might make sterling business sense.

“There are big reasons to merge Road Runner and @Home,” said Scott C. Cleland, an analyst with Washington-based Legg Mason Precursor Group. “The economies of scale you would get from having one set of overhead means there are a lot of savings to be had. But the event of a merger would put a spotlight on the cable open-access issue they probably don’t want.”

Others point out that even a merged Road Runner/@Home could scarcely be considered a monopoly in the broadband market, for a host of other technologies are arriving that provide data speeds and capacities roughly equivalent to those of cable. These include digital subscriber lines, or DSL, which are available from local phone companies in many markets.

Yet it may eventually turn out that the thoroughly upgraded nationwide cable infrastructure that will exist soon after the turn of the century will be so important that regulators and lawmakers will feel the need to ensure access to it by the widest range of users. Then, some analysts say, the cable industry will no longer be able to claim it as a private playground.

“At some point, either voluntarily or by government action,” said Cleland, “they’ll have to give up that plant.”

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Michael Hiltzik can be reached via e-mail at michael.hiltzik@latimes.com.