Wired Wars: Cable vs. Internet
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This is big enough of an event that I wanted you to sit down with it Monday morning and consider it carefully, it expands on my analysis from Friday. In lieu of emailbag (which we'll take Tuesday), the future of the Internet may be at stake in a significant way.
Oregon is known for being wet, and the home of Nike and the Trailblazers. Perhaps there's more than irony to the fact that if we put these three ingredients together last Friday it produced a potential watershed moment for the fleet of foot clearing a path to the future.
Specifically an Oregon Federal court ruling that local AT&T/TCI cable lines carrying Internet traffic must be opened up to non-cable companies, a boon to ISPs such as AOL (NYSE:AOL), EarthLink (NASDAQ:ELNK) and MindSpring (NASDAQ:MSPG), all stocks on the up Friday.
Shares of cable Internet stocks fell with @Home (NASDAQ:ATHM) hit the hardest down 10% to $94.50 per share. AT&T (acquiring TCI, a majority owner of @Home) will inevitably fight the ruling in appellate court. AT&T's (NYSE:T) was off 1% on the news.
True to some extent, part of ATHM's (the company and stock) appeal has been the exclusive nature of its agreements signed with the cable companies to provide high-speed cable Internet access via their systems.
I believe the reason AT&T made a bid for TCI was to provide next-generation communications services. And that's the quandary.
If AT&T withdraws its bid for TCI then a huge potential capital infusion to create highspeed cable Internet networks may get delayed from lack of investors wanting to step up to the plate. A big plate.
I've mentioned before the $36 billion it will take to upgrade the U.S. cable systems for two-way flow. One industry leader told me that $6 billion had been spent so far. Where's the other $30 billion coming from? AT&T certainly has some cash flow.
I believe that the closer the telcos get to providing all sorts of services that the likelier the FCC will step in and rule either that 1) a wire is a wire and just as telephone lines may be leased to others so must cable lines be or 2) the tremendous cost of upgrading a cable system for two-way services should give those paying that cost (the cable companies) the right for exclusive or preferred services on those systems.
Or both. Open the wire and have preferred status for x number of years, or a better rate on network services to payback capital expenses on network buildout. Sell city bonds to upgrade it city by city. There are solutions.
This is what happens when two very different business models collide. Cable has always been about closed programming; Internet, open programming. Cable, pay for everything on the table; Internet, one price all you can eat.
To be fair I don't think AOL nor any ISP has the right to have access to a line for free, nada, nothing. AOL taking its 17 million dial up subscribers and transplanting them on a cable hot coaxial wire at AT&T's expense is not business either. That's charity.
The key issue at the center goes beyond wires and speaks to the nature of Internet capitalism, of the phenomenon of entrepreneurs from across the world being able to leverage a global communications infrastructure, a level playing field of ideas brought to market, a market riding a wire.
The marketplace in this platform determines the winners. That's how Yahoo has more users than Gannett;how eBay beat the classifieds; why Amazon rewrote the book on commerce; because they all had more or less equal access to throwing their ideas against the wall (the end users, people) via this global telecom infrastructure that's there for people to use, to connect.
They didn't have to go ink a deal with the cable firms to do so. They didn't have to go ink a deal with AT&T, MCI or the Bells either.
Lease a line from the network backbone provider or an ISP reseller and you're in business globally today. AT&T, MCI, etc. all get paid from leasing lines.
For entrepreneurs it means having a market for business at pennies to the pound, dollar, peso, ruble, yen, quan, lira, deutschemark.
The world's phone system talks to each other; the world's cable systems don't and there's a long way to go before they could or will, both technically and financially speaking.
Does any one stock gain or lose? While the market Friday reacted in its own knee-jerk way I believe the real litmus is not court rulings, FCC decisions that may come, or lobbying from ISPs. It is in a fundamental belief that allowing great ideas a global stage is a key feature of the Internet and value creation.
In keeping with that approach, can AT&T or any other investor expect to get a return on investment if it spends to upgrade cable systems for Internet?
The model's already there: just as the telcos today generate exponential revenue by selling network lines to 4,000 ISPs and countless businesses. It's why the Internet succeeded and why interactive TV failed. Innovation fueling demand; demand fueling innovation.
Does @Home win or lose? It boils down to execution, customer service, branding. The firm has pioneered broadband media experiences on the cable Internet. My opinion says the barriers to entry to providing that are higher than you may think.
AOL cannot simply uproot 17 million dial-up subs and plant them on coaxial and expect 17 million smiling faces unless that experience is a great one.
The experience matters most. The practical, everyday reasons why someone uses or doesn't use a service. AOL is an expert at dial up, will it be an expert at broadband? AOL's Bob Pittman comes from cable. But cable industry programming isn't broadband Internet.
For the past 5 years great ideas have been funded. Venture capitalists daily scour thousands of business plans and invest in promising startups at a record pace. Wall Street has been enamored with Internet stocks for similar reasons. Borderless e-commerce riding that humble twisted pair wire installed when your grandparents were born.
Venture capitalists and Wall Street, as well as scores of entrepreneurs the world over all assume a global platform for business will continue, a telecom/wired/wireless infrastructure that brings the world one mouse click away from the rest of the world.
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