In its filings before the Federal Communications
Commission, America Online Inc. has taken a calculated -- and bold -- risk.
It is attempting to convince the FCC to open up equal
access to Internet-broadband communications as a condition of the proposed AT&T
Corp./Tele-Communications Inc. merger.
AOL's argument: By forcing consumers to take
TCI-controlled @Home Network's content service, AT&T cuts consumer choice. After
all, AOL said, why would customers buy its service -- even at a mere $9.95 per month -- if
they've already paid $40 per month for a similar service from @Home?
The proposed solution, said Dulles, Va.-based AOL, is to
treat cable pipes the same way that the FCC treats telephone wires -- mandating an
equitable conduit that's all for one and one for all. The argument has incurred the
wrath of the company that everyone has said AOL should court: AT&T, along with the
cable industry that it hopes to represent.
Why alienate vitally important potential partners in an
effort that few observers expect to succeed? While AOL may not admit it, what's
really at stake is its very survival.
"AOL wants to be 'the' consumer online
service, and they know that to survive, they absolutely must get television-screen real
estate," said Patrick Meehan, research director of new-media technologies and
Internet strategies at Stamford, Conn.-based Gartner Group.
The latest move illustrating that strategy was AOL's
deal to acquire Netscape Communications Corp. That company's "Netcenter"
Internet portal now attracts 16 million visitors per month. The merger would give AOL
control over one of the strongest consumer e-commerce sites currently serving the Web. The
next, logical step: to leverage that portal site for the coming cable-TV set-top.
"AOL has more than 13 million subscribers, but they
ain't seen nothing in terms of numbers until they get the television screen,"
Meehan said. "That's the whole point of this battle. This is the next portal
gold rush. It's why TCI bought TV Guide, and it's why NBC bought
Snap!."
That's right, television portals: the biggest,
brightest ring that AOL hopes to grab as it rides the FCC merry-go-round. In essence, AOL
wants to become the default home page when consumers turn on their set-top-driven
television screens.
The notoriously circumspect company indicated that aim this
past March 31, when Robert Pittman, AOL's president, gave the keynote address at the
Big Picture conference, co-hosted by Schroder & Co. and Variety (a sister
publication to Multichannel News).
There, before an audience of broadcast executives, Pittman
said AOL can capitalize on the Internet's acceptance as a mass medium by focusing on
software content, rather than on access services.
Understand this last point, and AOL's maneuverings,
arguments and unflagging motivation begin to take on a sharp-edged clarity.
"Next-generation Internet is next-generation NBC,
where we finally see the true convergence of the computer and home entertainment,"
said Alan Braverman, a highly respected analyst who covers AOL for Deutsche Bank
Securities in New York. "Broadband, a la @Home, gets us to that point. And
that's where AOL wants to be."
FORGET TRANSPORT CHARGES
AOL doesn't just want to be in @Home's (or Road
Runner's) space: It wants to be @Home, analysts said. Small wonder, then, that
it's shown little interest in applying its lucrative "Bring Your Own
Access" plan to the broadband front.
The plan -- which costs AOL subscribers $9.95 per month,
instead of $21.95 -- saves AOL an average of $12 per user in monthly transport fees that
it otherwise would pay to its telecommunications providers. The result for AOL is pure
gravy -- a fact that cable analysts, @Home and AT&T readily pointed out.
So why doesn't AOL want the same setup with broadband?
Due to the expected downturn in subscription charges.
"It's more than possible that five years from
now, transport charges will be one-half of what they are now," said Tom Jermoluk,
@Home's chairman, CEO and president. "This means that if you don't have the
opportunity to capture revenues from services, then you're doomed to a declining
revenue base."
With services, though, revenue can soar, thanks to a
growing list of advertisers drawn to sites that maintain their own content, programming
and direct customer billing. It's these elements that -- when combined with stellar
customer service -- create the sort of brand loyalty that keeps customers tuning in.
That's what both @Home and Road Runner have set out to
accomplish over cable broadband. It's what AOL hopes to achieve, too. All that it has
to do is to get @Home and Road Runner out of its way.
AOL'S TACTICS
In its first, most visible tactic to achieve that goal, AOL
filed two comments with the FCC. One seeks to make open cable access a condition of the
merger. The other comes down to declaring cable as a common carrier -- a fate that cable
companies fervently wish to avoid.
Clearly, these are complicated issues that potentially
involve massive government intervention in a market that is still being formed. Whether
the FCC will, or even can, intervene remains a matter of great debate. However the FCC
acts, one thing is clear: AOL will not give up until it dines at cable's feast.
"I do think that AOL will be successful in
transitioning to broadband, although it might not be obvious today how they will do
it," Braverman said. "They have until 2001 to figure it out."
Why 2001? Because Braverman forecasts that by year-end
2000, @Home will have between 2 million and 2.5 million subscribers, and AOL will have 24
million. "That's why 2001 will be the first year that AOL really has to get its
broadband act together," he said. "That's a long time from now, and I
expect it to happen."
But is it long enough? Will the competitive landscape have
changed so radically by 2001 that the FCC will feel compelled to step in? The critical
question facing the industry hinges on whether, or when, cable will be viewed as a common
carrier, because without that, AOL can't break into the top 10 cable-served markets.
"At first, AOL has to push for common carrier so that
it can compete in the same landscape that it does now," Meehan said. "Then, the
agenda becomes how to push the portal strategy for broadband."
WILD CARD
Of course, anything potentially involving government
intervention is a major wild card, with issues of fairness and reasonableness sometimes
taking a backseat to other concerns -- like the role of "bundling" in reducing
consumer choice.
So how does the FCC view AOL's comments? First,
consider the proposed AT&T-TCI merger:
"I've not decided this issue at all," said
Susan Ness, one of the FCC commissioners reviewing the AT&T/TCI deal. "Our first
concern is that we can't contravene the law, even if we think that it's in the
public good.
"Second, we should consider whether there are
technical or other fundamental differences between cable and telephony where it makes
sense to bundle one and not the other. And last, I look at the unintended consequences to
a competitive marketplace. We shouldn't pick winners or losers. We should let the
market decide," Ness added.
Tough call? Then ponder the fact that the FCC definitely
wants to see increased competition for the most vital of all consumer services: the local,
residential telephone loop.
This was what Congress wanted when it passed the
Telecommunications Act of 1996, and it's what the FCC has been chartered to help
achieve. Right now, proponents argue that the AT&T/TCI combo offers the best
likelihood of providing consumers with such competitive choice. That's why few
observers predicted that the FCC will impose the sort of conditions on the merger that AOL
is asking for.
The commission said it will act on AT&T's
application by the second quarter of 1999, which brings up the common-carrier issue, known
in FCC-speak as "706b." Here's where things get particularly murky.
"We explicitly asked that cable not be declared a
common carrier," said George Vradenburg, senior vice president and general counsel
representing AOL before the FCC. Instead, AOL wants all of the unbundling normally
associated with common-carrier status.
How the FCC sees it: "You could say that we are
looking to see if cable should be deemed a common carrier," said John Berresford, a
senior antitrust lawyer in the commission's Common Carrier Bureau and the staff
attorney writing the report that will eventually be submitted to Congress. "That
would be the first legal step that we would have to take if we came out in favor [of
AOL's comments]."
Berresford was careful to reveal nothing of his thinking on
the subject. But, according to those familiar with both the issues and with the FCC, a
number of issues will influence the commission's decision, and the primary factor
will be competition.
Today, relatively few homes have access to two-way
broadband pipes of any sort. That will change as cable, telecommunications and satellite
companies roll out their services. Such competition will negate the need to view any one
medium (like cable) as either a monopoly or a universal service.
That's for the near term. Five or more years from now,
though, is another issue. In fact, most analysts agreed that common-carrier status could,
indeed, loom in the cable industry's future. Their only point of disagreement was how
far out that will be.
"I'd say that eventually, as cable becomes a
crucial component of communications, AOL's argument could be much more
reasonable," said Douglas Shapiro, cable analyst at Deutsche Bank Securities.
In the meantime, AOL has managed to train a hot spotlight
on the growing importance of two-way broadband communications. It's also alerted the
cable industry that it intends to participate in the industry's own game. The
question that it has to answer: How well has it been served by its current tactics?
"They were hoping that we'd run scared, and the
opposite is true," Jermoluk said. "AT&T and @Home couldn't be more
resolved to beat them in this. And so, eventually, they will want to do a deal on
commercial service. When they are, we'll be ready to do a commercial transaction that
benefits both companies."
