Post of the Day
June 8, 1999

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Subject: Some perspective
Author: Scollag

Oh Boy.

**Long Post Alert**

Background. The issue of local authority intervention in Portland was discussed at some length in late January on this board. I strongly recommend all interested Fools to go back to the following threads, as many of the arguments that were raised then are still valid:


There was also some useful discussion of AOL's open access arguments rather more recently:


These discussions were led or initiated primarily by LuxSit and OurFoolishPride, and I further recommend that those Fools who have joined the Board relatively recently should heed their present words carefully.

Cable upgrades will continue. Some Fools have suggested that HFC rollout will be delayed in the Portland area. This is wrong. Cable upgrades are part of the current franchise agreements, and are not negotiable. The upgrade is primarily intended to improve cable TV service. As an incidental consequence of HFC upgrade, it becomes possible to offer cable internet access, which I agree is not going to happen within these franchise areas.

No Broadband Cable in Portland. Inevitably, Friday's ruling WILL prevent cable internet access in the Portland franchise areas. This is not merely a threat or a snub from AT&T: the most recent brief filed by the defendants (City of Portland, County of Multnomah) makes abundently clear that open access is only to be invoked if AT&T offers internet access. IMHO, there is not a snowball's chance in Hell of AT&T rolling out @Home service in these franchises while such uncertainty exists. Please note that I do not just mean that the decision is subject to appeal: the onus is now on the local authority to explain HOW open access is to be accomplished.

How would competitive access work? This is the crucial question that is no closer to being answered by Friday's decision. According to tomorrow's Telecommunications Reports ( http://brp.com/newsletters/tr/sample.html ), Judge Panner said, "The mandatory access provision does not condition or limit AT&T's use of subscriber equipment or technology. The provision does not tell AT&T how to implement open access." (My emphasis).

From what I have read of the defendant's views, I have the impression that the intention is simply to cut ATHM out of the loop. Therefore, no revenue will be generated, and no ATHM assets will be used. Therefore, the ISP connection must be downstream of both the ATHM backbone and the local cache servers. That is, it must be closer to the client side than ATHM's assets.

Now, this is a gross simplification, but it seems to me that to be able to offer the same level of service as ATHM any competing ISPs will have to own or have access to a backbone equivalent to ATHM's, AND local cache servers.

The latter are very interesting, because they imply a very wide need for accommodation to house the machines. I do not believe that is in the power of the Local Franchise Authorities to demand co-location of competitors equipment on the MSO premises. This would mean that in addition to using the incumbent's cable, ANY ISP competitor would be able to position a headend server in the MSO's building. I cannot imagine this happening.

As for the former, an interesting paradox appears in the case of AOL: AOL has sold off its own network to WCOM, which would presumably be the real beneficiary of a move to broadband by AOL because of the traffic increase (Sun would also benefit because the host servers would need to handle increased traffic and respond faster, and I think AOL's servers are Sun these days). Local cache servers would be a very odd commodity for AOL to outsource to WCOM, so I would assume that they would own and control these directly. Yikes. Suddenly, even with the network outsourcing arrangement for backbone, AOL needs to support a much wider geographical distribution of servers. Is this really plausible as an option, given that AOL concentrates on content?

Of course, the alternative is for the competing ISP simply to have a direct local (downstream) connection to their existing network. The effect of this will be to reveal the utter inadequacies of existing ISP networks for broadband use (I include AOL in this generalisation). ATHM will harvest customers from competitors through the sheer quality of their service in comparison. In my more cynical moments, I wonder if this is why there are no cable ISP competitors in Canada, despite open access (see ATHM's SEC filings for consideration of this as a risk factor).

Who Benefits from Friday's Decision? I have already mentioned WCOM and SUNW. A more obvious candidate is USW, and the RBOCs in general. The greater the cable FUD, the greater the opportunity for DSL. Apart from these immediate candidates, it is difficult to see any other real beneficiary because the ruling creates so many paradoxes. Certainly the citizens of these franchise areas are the losers, as I think Portland City Commissioner Erik Sten realises:

"I don't think we want a cable company that isn't offering Portlanders all the services that would be available," Sten said. "If AT&T decides to appeal, if they decide not to offer this service in Portland, we have some serious thinking to do.

"At this point, I'm hopeful we'll be able to work something out."

This is taken from http://www.oregonlive.com/business/99/06/bz060501.html . The same source notes that "The decision also could affect an earlier announcement that Portland would be one of 10 cities serving as a test market for AT&T's phone service delivered by cable". Darn tootin'.

Possible outcomes. The question in my mind now is not whether an appeal will succeed, or whether AT&T will prevail, but for how long will this situation be permitted to last? I see two opportunities for potentially rapid resolution:

1. AT&T could sell the franchises concerned, but who would want to buy them with such conditions as the Commission is bound to attach to the Value-Added Services? Furthermore, this would leave outstanding a potentially damaging precedent, since we know that other Cities are examining the same issues.

2. The FCC could intervene, to make clear that this decision, and specifically the defendants' actions, are contrary to the intentions of the FCC and of the 1996 Telecomms Act.

Prediction By Wednesday at the latest, FCC Commissioner Kennard will intervene either publicly or privately to resolve the immediate issue in Portland, pending an appeal by AT&T that will overturn the precedent. Kennard sees rapid deployment as MUCH more important than short-term competition issues, and has recently stated that he believes these issues to fall under the scope of his Commission (remember how some of us panicked at that announcement? Is it possible he was already aware of the inclination of the Court in this matter, and perhaps trying to reassure investors and developers?).

Bottom Line IMHO, Friday afternoon's sell-off was irrational panic. The drop may well continue into the coming week, depending on when Commissioner Kennard's predicted intervention becomes publicly known. I see the current market for ATHM as a buying opportunity, and I expect it to be much briefer than many Fools here have suggested.

Each of us must form our own opinions, and act accordingly. Facts help.