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.)