TC 856 Spring 2001 Case No.2 (30 points) Due: Thursday, April 5

Transcription

1 TC 856 Spring 2001 Case No.2 (30 points) Due: Thursday, April 5 Background In March 2001, Greenville Broadband, Inc. was poised to provide high-speed access to the Internet over its cable lines. Although revenue growth has been impressive in the last ten years, it has come almost entirely from adding more television channels and charging more for these channels. Six months after the launch of digital cable, the Greenville management started to question this strategy: If we are to continue to grow, we must begin to sell products we have little or no experience with, to customer segments we have little or no experience with, based on technology we have little or no experience with. Perhaps they were not all that inexperienced in this market. High speed access to the Internet seems to be something that some people can t live without, and others just don t care about at all. In fact, that is what the cable television and cellular phone industries have been faced with. Many cable MSOs across the country are upgrading their networks in a variety of ways to offer subscribers broadband Internet service as well as digital cable. To provide Internet service, cable companies must dedicate transmission capacity that would have been used for one or more video channels. Typically, one or two channels are assigned for downstream traffic from the headend to the subscriber, and one channel is reserved for upstream traffic from the subscriber to the headend. If a cable network providing Internet access has not upgraded its facilities to allow two-way services, a telephone line is used as return path for upstream traffic. Major cable MSOs, including AT&T, Time Warner, Cox, and Comcast, have also invested in certain ISPs such as Excite@Home and Road Runner and have integrated physical transport with the ISP functions. Thus, cable modem subscribers purchase a bundled transport and ISP service. This contrasts with the telephone network, where users generally purchase ISP service separately from their transport service. By March 2001, consumers could choose from a number of ways to get into cyberspace. The majority of homes and businesses still used plain old telephone service (POTS) to access the Internet. This involved dialing up to a service provider over a modem and sending requests for data over a telephone line. The ISP then sent the data request over another telephone line to the appropriate server which, in turn, sent the requested data back to the ISP. Finally, the ISP sent the data to the individual requesting it. All of this data transmission occurred over data pipes that could transmit information from 28.8 to about 100 kilobytes per second. The running joke of the World Wide Wait was indicative of this method s key weakness: it was slow. Bottlenecks and slowdowns could occur at any point along the way. Aging telephone lines, clogged modem banks at the ISP, and overloaded servers could all contribute to a general slowdown on the Internet. Consumer demand for graphics and audio intensive web pages only exacerbated the problem. 1

2 Realizing this problem in part, and stimulated by recent development of cable modem services in large part, local telephone companies have begun to deploy new high-speed Internet access service since Due to its use of Digital Subscriber Line technologies, this new type of broadband service was collectively called DSL. There were 5 variants within this DSL family: IDSL (i.e., ISDN), HDSL, VDSL ADSL, and ADSL Lite. High speed wireless and satellite access, the new entrants to the broadband field, were also available and attractive for a number of reasons. The most significant was that they allowed for the introduction of broadband connections in metropolitan areas without having to lay miles of wires. Satellite access had the additional advantage of having a nearly unlimited distribution footprint; access was available throughout the United States in Thus, cable was only one of the ways users could get broadband access to the Internet. It was still unclear whether one technology would come to dominate the broadband market or if several alternatives could co-exist in the market. Internet Access Providers, more commonly referred to as Internet Service Providers (ISPs), provide residential and business customers with connections to the Internet, allowing them to receive and send online information. ISPs faced a difficult and competitive market in 2000, as they searched for sustainable business models in an environment marked by rapidly changing technology, low barriers to entry, a fickle consumer base, and volatile capital markets. Customers were able to choose among several access technologies with different performance advantages most notably in terms of their bandwidth including landline and wireless phones, cable television, satellites, and microwave delivery. At the same time, in the dial-up ISP market, entrepreneurs with little more than a how-to guide from a wholesale ISP, a small business loan, and a bit of pluck could start their own retail ISPs. Consumers embraced these smaller ISPs as they churned away from larger access providers in search of higher quality service. Despite the collapse of technology stocks since the spring of 2000, many believed highspeed Internet access markets had a promising future at least in the long term. Two trends were visible in that year. First, the market was large and growing, so the stakes were high. By 2000, over eight thousand ISPs in the U.S. earned aggregate annual revenues in excess of $32 billion annually and the market was growing rapidly. Second, the price for access was declining rapidly and customer churn remained high, placing pressure on the bottom line. Cable television system operators were near-monopoly distributors of signals from local TV stations and national television programming networks. By 2000, cable operators were using their two-way fiber, coaxial cable plant and high speed cable modems to deliver broadband Internet access. As with DSL, cable modem services provided an always on connection, one that did not interfere with the simultaneous reception of TV signals or with cable operators ability to use their plant to deliver phone service. Cable operators could generally provide 27 Mbps of Internet access capacity to a neighborhood of between 150 to 750 homes that shared a common coaxial line. Each neighborhood, in turn, was served by a dedicated, high bandwidth, two-way fiber optic line which 2

3 terminated at a node where an opto-electronic converter modulated light waves from the fiber optics lines into radio waves that could be propagated over coaxial cable lines (and vice versa). Since the bandwidth of fiber optic lines was so great, capacity constraints were encountered only in the last mile of the cable operator s network, where coaxial lines were employed. The bandwidth available to each customer at any given time depended on the number of other users online. Hence, cable modem service typically was quite fast during off-peak hours, but could slow during busy periods. Although most cable operators sold a service that relied on a customer s personal computer for data display, by 2000, in certain areas it was also possible to access the Internet on a television set through cable lines connected to a set-top converter box. Other companies, such as Microsoft s WebTV unit, used existing telephone lines instead of cable plant to deliver narrowband Internet services to TV sets. Some industry observers thought that integrating TV viewing with Internet access would revolutionize the way that consumers interacted with television programming and advertising; for example, they expected viewers to access web pages or download video-mail for later viewing by clicking on tell me more icons that could be overlaid upon traditional advertisements, or to chat with friends online while jointly viewing a favorite TV show. In 2000, cable operators sold access services primarily through two affiliated Broadband Service Providers and Roadrunner. Most major cable operators held equity stakes in one or both of these BSPs. Thus, BSPs were effectively industry cooperatives that maintained both Internet access equipment within cable system headends and marketing, customer service, billing, and other operations related to the Internet business. Through the 1990s, cable operators were not required by law to wholesale their Internet access services, even though they were near-monopolies like the local phone companies. By 2000, however, cable companies were facing mounting regulatory, legal, and political pressure to provide such access to competing ISPs; federal authorities, notably the Federal Trade Commission, has preconditioned their approval of two transformational mergers involving cable companies (the acquisitions of Time Warner and MediaOne by AOL and AT&T, respectively) on so-called open access. The debate over open access centered on how to define cable modem service within the existing regulatory framework in the telecommunication services industry. An open access policy would require that nondiscriminatory access to the cable network be provided to ISPs that are not affiliated with the cable company, so that they can offer their own Internet services to cable modem subscribers. Cable operators have consistently argued against open access mandate. The debate is highly contentious, with some parties claiming that the very nature of the Internet lies at the heart of the dispute. There have been a few contradictory court decisions on open access mandate since Although the issue is far from being settled, the most definitive of these rulings to date came in June 2000, when the U.S. Court of Appeals for the Ninth Circuit held that cable modem service is not a cable service and further stated that it is a telecommunication 3

4 service. And after years of a hands-off policy approach with respect to open access to cable infrastructure, FCC decided to explore issues surrounding high-speed access to the Internet over cable facilities in the aftermath of confusing and contradictory federal court opinions that have classified cable modem service in varying manners. On September 28, 2000, the Federal Communications Commission (FCC) released a Notice of Inquiry (NOI) entitled In the matter of inquiry concerning high-speed access to the Internet over cable and other facilities (FCC ; GN Docket No ). In this inquiry, FCC wanted to ascertain the appropriate legal and policy framework for cable modem service and the cable modem platform. The Commission sought input on the extent to which open access is necessary to benefit consumers or otherwise achieve policy goals such as the goals of promoting competition, deregulation, innovation, and the deployment of high-speed services. (The Notice of Inquiry is available from the FCC s website at Assignment 1. Should the Greenville system launch this new project for high-speed Internet access service now? Why or why not? To help your corporate management make this decision, you (general manager of the Greenville system) will prepare a report within a week. In essence, your corporate headquarters want answers to the following questions: First of all, what is the current state of broadband data service market? How competitive is cable modem service vis-à-vis all other alternative technologies for broadband service? How will cable modem service deliver benefits to consumers? For businesses? How rapidly will the innovation diffuse? How widespread is consumer interest in cable modem likely to be? Is fast Web access likely to be broadly valued or will it appeal only to computer junkies? What is your estimate of diffusion rate within a year? 2. In response to the FCC s Notice of Inquiry, BCI (Greenville s parent company) wants to file its own position paper that addresses concerns surrounding open access. Read the Portland case that had discussed the classification of cable modem service in the context of the open access debates. In the Portland decision (216 F.3d 871, 2000), how did the Court of Appeals for the Ninth Circuit classify cable modem service? Explain why the Ninth Circuit so classified. What implications would such classification provide for the open access debate? How will it affect cable operators business plans/incentives to upgrade their cable plant in preparation of high-speed Internet service over cable network? As general manager of the Greenvill system, how would you attack the argument for open access from a technological, operational, and competitive strategy point of view? Presenting your position paper, make sure that you are well aware of the opposing views/concerns. 4

5 How to Get the Portland Case Document For the Portland decision (216 F. 3d 871, Ninth Circuit, 2000), go to the MSU main library site ( The search procedure is described below. Click on Electronic Resources. Then, choose Lexis-Nexis on the next window. Click on Connect to Lexis-Nexis Academic Universe. Select Legal Research. In the following page, click on Federal Case Law under the Case Law section. You will need enter some specific information to narrow down your search. Type in City of Portland in the Keyword box, type in AT&T in the box for Narrow Search with additional terms. Choose Court of Appeals in the Court box pull-up menu. Also specify the year 2000 for your document search period. Then, click on Search. This will bring up 3 documents of which the last document (AT&T vs. City of Portland) will be used for this case. 5