By PETER SHAPIRO &
FRED GOLDSTEIN
Cable operators, America Online Inc. and other
Internet-service providers seeking direct access to cable modem users are
engaged in an increasingly vigorous debate. The cable industry has put forward
solid arguments as to why such access should not be imposed by regulators. Even so, cable has a compelling
business reason to work out mutually advantageous terms with AOL and other ISPs.
Cable should ask, where is its greater business interest? Is it in its investment in cable controlled ISPs or its network infrastructure?
Cable ISPs represent a tremendous opportunity for cable to provide multimedia transactions, subscription and advertiser-supported Internet services. For example, great expectations for Excite@Home are reflected in its recent market capitalization of about $14 billion despite ongoing losses and a relatively small, albeit rapidly growing, revenue base of $96 million reported for the first six months of 1999.
However, despite their great promise, the cable ISPs do not account for a significant part of operators' investment, asset value or future market prospects. The high prices paid per cable subscriber in recent MSO acquisitions derive primarily from the value-creating potential of cable's unique broadband network infrastructure. Cable networks -- because of the services they enable and the subscribers they connect are the core assets of the cable industry, both today and for the future.
For AOL’s 18 million home online subscribers and the 14.5
million served by many other ISPs, at
present direct high-speed access is either unavailable or offered only via
digital-subscriber line, wireless or
satellite connections.
Users considering cable
modems must either give up their investment in their electronic mail address
and other amenities provided by their current ISPs, or go along with paying
their fees in addition to full cable- ISP charges. Placing potential
subscribers in this bind undermines the achievement of a critically important
goal: to build market share for next-generation services over cable's broadband
infrastructure. Much worse, it promotes market penetration by competitive
broadband-network infrastructures.
On balance, it is in
cable's strategic business interest to encourage AOL and other ISPs to
recommend and support cable modems for their subscribers, who comprise the
vast majority of Internet users?
AOL has said it prefers
its customers to be able to sign up for high-speed service without knowing how
this service will be delivered, leaving it to AOL to select and implement a cable or DSL
connection.
Cable operators respond
that AOL already can be accessed via the cable platform, and it is that
company's own choice to charge $9.95 per month to its
"bring-your-own-access" customers. For an AOL subscriber, although this fee allows access to some
proprietary content, it also pays for some AOL services that are duplicated by
current cable-ISP services.
To find middle ground between
AOL and cable will require creative thinking on both sides, so each can
"own" an important part of the customer. For example, cable operators
might offer network access rates that are the same whatever the subscriber's
choice of ISP. These will need to be less than today's full service rates, in
order to leave some margin for the ISPs.
The cable operators
might enclose an ISP billing insert with the cable bill. They could continue to
market the cable affiliated ISP services along with cable modem connections;
however, they would now also respond to requests for cable modems from
subscribers of independent ISPs.
Operators would continue
to install and manage the cable-modem connections. Any agreement with AOL and
other independent ISPs would need to recognize that cable is not subject to
common-carrier obligations and should end the ISPs' campaign in legal,
regulatory and political arenas. Cable systems' exclusive contracts with the
cable-controlled ISPs will need to be revised, taking into account the
legitimate interests of any non-cable stakeholders.
The search for middle
ground will be halfhearted if either side thinks it already holds a winning
hand politically. In fact, neither side does. AOL and the other ISPs need to
recognize that they will benefit from being able to serve their subscribers
via cable modem connections without going through protracted and uncertain
political and legal battles.
For cable, it is
important to appreciate the political resonance of the open access mantra,
which says that cable-modem users should be able to pick their own ISPs
without suffering a cost penalty if they select other than one of two
cable-controlled services.
The open-access idea has
attracted political support at local, state and national levels. It is
consistent with many years of political and regulatory decisions, which compel
telephone companies to provide access to "last-mile" local telephone
loops. That cable and telephone companies are very different may not be fully
appreciated in the political arena.
One straw in the wind
was a July decision of the Canadian Radio-television and Telecommunications
Commission requiring "incumbent cable carriers ... to file proposed
rates for higher speed access services supported by costing information ...
[to] enable competitive providers of retail Internet services to offer
higher-speed Internet services using cable infrastructure."
Canadian cable operators
and ISPs are now testing and debating how to implement this ruling. While they
work this out, the CRTC has required cable operators to provide ISPs with
access to cable-modem customers at a 25 percent discount to cable retail
rates.
In the U.S., the Federal
Communications Commission has taken a different path, claiming pre-emptive
jurisdiction while advocating legal and regulatory restraint. However, it is
risky for the cable industry to rely indefinitely on the FCC's will or on its
ability to pursue this course.
Technical and
operational obstacles to the provision of direct ISP access will need to be
resolved.
Several technical
approaches have been proposed to enable direct ISP access. One would be to
establish separate channels within the RF spectrum in which an ISP could
provide a totally independent data service. This is highly unrealistic, since
cable systems lack sufficient capacity - especially upstream capacity - to
dedicate separate channels to individual ISPs.
An alternative approach,
which shows reasonable chances for success, is to allow all ISP traffic,
including that of both independent and cable-owned ISPs, to share the same channels
and to be sorted based on each subscriber's unique address information.
Today's cable modem
subscribers receive their backbone connectivity via the cable operator's ISP.
In an "open cable" environment, the subscriber's chosen ISP will
provide backbone connectivity. This will require the different ISPs' traffic on
the cable to be sorted out and handed off to the right destination provider.
GTE Corp. demonstrated
this capability with its Redback Networks subscriber management system, a
specialized router capable of sorting out multiple networks from cable's
single, shared LAN-like backbone. Although legitimate questions have been
raised concerning the GTE trial, it does represent a good first step.
With multiple ISPs
sharing a single bandwidth pool across the cable operator's common access
plant, every provider will get the same grade of service. AOL and other
independent ISPs can be assured that if the cable operator doesn't provide
enough access bandwidth, its own cable-affiliated ISP will suffer equally.
Cable operators face
real technical and operational challenges that must be recognized by AOL and
other independent ISPs. For example, cable operators have to manage the rate
of new subscriber hookups and the introduction of new applications in order to
maintain acceptable quality of service. They must plan and control the
evolution of homes per fiber node, and manage the outside plant work required
to add cable-modem subscribers.
Bandwidth utilization
must be carefully monitored, and bandwidth reserved for new applications. This
includes applications now being introduced -- such as telephony -- and others
which have yet to be defined. Cable operators will need full control over the
upstream path, a vital, difficult-to-manage resource whose performance is
fragile.
For all of these
reasons, any agreement with AOL and other ISPs must include a high level of
cooperation and coordination, no less than now exists with the
cable-affiliated ISPs. Appreciation of mutual interests should help to make
this more achievable than it now appears.
Peter Shapiro and Fred Goldstein are senior consultants in the Communications, Information and Electronics practice at Arthur D. Little Inc. Their colleague, Stuart J. Lipoff, also contributed to this article.
(Published in Multichannel News, October 18, 1999. Obviously we’re no longer at Arthur D. Little.)