Ruling Weakens Cable’s Hold on Swift Net Access

In a blow to AT&T; and other large cable TV companies seeking to dominate high-speed Internet services, a federal judge on Friday ruled that those firms cannot prevent America Online and other Internet providers from offering services over cable lines.

The ruling, which applies only to the Portland, Ore., area, is the first to uphold the hotly debated right of local governments to require cable companies to allow access to Internet competitors.

It strikes at the heart of one of the most contentious issues in the development of the “information superhighway.” That is the question of who will pay for and profit from the roll-out of high-speed access to the Internet and related services.

If it is upheld, the ruling would allow Los Angeles and other cities to mandate the same access. The Los Angeles City Council will vote on the issue June 28.

In theory, consumers would have more choices, better service and lower prices as more firms compete to provide Internet service over cable lines. But the cable industry contends that only by keeping the exclusive right to offer Internet services to its customers can it justify spending billions of dollars to make cable wires Internet-ready.

So-called broad-band Internet access over cable wires can deliver data as much as 100 times faster than over phone lines. That speed is the key to providing such services as video on demand, interactive advertising and shopping.

AT&T;, the largest long distance telephone company, has bet its future on the potential for delivering services over cable, undertaking a series of acquisitions that will make it the largest owner of cable television systems in the U.S.

An AT&T; spokesman called the ruling by U.S. District Judge Owen M. Panner, which upheld Portland’s right to set conditions on the transfer of a local cable franchise to AT&T;, “inexplicable” and said the company would file an appeal.

Local Officials Say Ruling Empowers Them

Local officials said the ruling gives them the power they need to regulate cable.

“This is an area in which federal regulation is way behind the local jurisdictions,” said Erik Sten, a Portland city commissioner. “It supports the local ability to do what’s best for our community.”

AOL pronounced itself “very pleased” that the court “endorsed the right of cities to protect consumer choice and competition in cable-delivered Internet services.”

Broad-band access to the home is coveted by such conventional Internet providers as America Online. AOL, which has 17 million subscribers who connect mostly via slow home telephone modems, has financed a multimillion-dollar lobbying effort to persuade Congress and the Federal Communications Commission to open the cable infrastructure to all providers.

So far the cable industry has won a string of regulatory rulings favoring its exclusive right to offer Internet access to its subscribers. The cable operators insist that to recoup their investment they must retain that right.

At the moment, broad-band service is provided to fewer than 2 million customers via two cable industry consortiums, the publicly traded @Home Inc. and Road Runner, a unit of Time Warner Cable. But that number is expected to grow exponentially over the next few years.

Judge Panner’s decision seriously undermines that exclusivity. The cable operators, he said, “have no contractual right . . . to exclude competitors.”

AT&T;, AOL May Seek an Agreement

“I have no doubt that if this decision is upheld, broad-band deployment will come to a grinding halt,” said Blair Levin, a former FCC official who is now a consultant to @Home. “But I doubt that it will be upheld.”

Some observers said that the prospect of a lengthy court battle might encourage AT&T; and other leading cable firms to reach a private agreement with AOL.

“This could be the encouragement AT&T; needs to work out a deal with AOL,” said Tom Wolzien, an analyst at investment management firm Sanford Bernstein & Co. “It’s been in both their interests for a long time.” AOL, he said, would get the high-speed access it craves, and AT&T; would gain access to AOL’s 17 million customers.

AOL already has such agreements with local telephone companies that provide broad-band lines to consumers. Traditionally, however, phone companies have been regulated as utilities, with public service responsibilities generally not imposed on cable system operators.

Panner’s ruling was costly to investors in broad-band stocks, especially @Home, which lost $10.75, or 10.21%, to close in Nasdaq stock market trading at $94.50. AT&T; lost $0.875 to close at $53.375 on the New York Stock Exchange.

Internet service providers, on the other hand, were sharply higher. AOL gained $12.25, or 11.58%, to close at $118 on the Big Board.

The Portland case began when AT&T; applied for a routine approval of the change in cable franchise control resulting from its acquisition of Tele-Communications Inc. At public hearings, Internet service providers testified that the cable firm’s intention to offer only @Home to its customers would drive them out of business.

Portland and Multnomah County officials then enacted laws requiring that, as a condition of acquiring TCI, AT&T; give competing Internet providers the same access to the cable network as @Home. AT&T;’s challenge to those laws was effectively struck down by Panner’s opinion.

Many other cities, including Los Angeles, Denver and Dallas, have considered requiring AT&T; to open the cable networks to Internet service providers as a condition for approving the transfer of TCI’s franchises. Most cities deferred to the FCC because they viewed the open access issue as federal in jurisdiction.

But one regulator in Los Angeles said the Portland ruling “resolidifies” the local authority’s determination to take up the issue.

As part of its examination of the TCI acquisition by AT&T;, Los Angeles officials ordered a study of whether the cable network could be open and how it would work as an open platform.

Cable franchises also come up for renewal in Los Angeles beginning in August, giving the city another chance to review the question.