Interest rate fear hike eases and Wall Street breathes a sigh of relief as the broad market gains today. ISDEX gains 4.6% to 486.58 with the Dow and NASDAQ up also.
The most significant news today is a Federal Court in Oregon ruling that 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 today.
Shares of cable Internet stocks fall 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.
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.
This is what happens when two very different business models collide. Cable has always been about closed programming; Internet, open programming. Cable, pay for every thing on the table; Internet, one price all you can eat.
I think the Internet model of content carriage wins, with the best services and innovative ideas rising to the top vs. those hatched in a cable lab. The exponential growth of the Internet relies on the easy access to the world’s communication infrastructure and that if cable alone controls this broadband gateway then innovation may be stifled and we end up with the equivalent of 500 channels of HBO streaming to your PC via cable Internet.
In that scenario an eBay, Amazon, Yahoo, Priceline, etc. would probably not exist. What would? the cable company auction, bookstore, cheap flight service.
The issue is larger than cable vs. Internet, it’s really a fundamental view on Internet capitalism.
The Internet has become front and center of the world’s economy precisely because anyone anywhere with a great idea can create a valuable business and leverage the world’s existing telecom infrastructure without having to go and sign deals with the telcos, etc.
In closing, since this issue is huge and perhaps will be the biggest issue facing the Internet in the next few years, I believe that the cable operators will see exponential revenue and earnings creation by being in the wire business first and foremost (leasing lines).
In that way the cable firm, for example, benefits from every bit of data transfer through its wires, it gets paid no matter if something is sold, viewed, heard or read. If cable thought about the model they would see that controlling the wire and content/commerce limits their upside to the amount of deals they can successfully get their lawyers to handle at one time.
That puts them in the linear business of time. The Internet value creation has been about exponential, non-linear service and content creation (hypermedia, hypercommerce). It is about two guys from Stanford becoming bigger than Gannett in 4 years (Yahoo); about one former hedge fund guy becoming bigger than Barnes & Noble (Amazon.com); about something as simple as free Web-based email going from startup to $425 million sale in just over a year (Hotmail); about a half dozen software geeks armed with a few thousand lines of code headed West to form Netscape and put Microsoft to a showdown; it’s about new economics that the cable industry doesn’t understand, that the FCC may try and understand,
and what anyone running for President definitely must understand if the U.S. economy is to remain #1 in the next 20 years. Information is the currency of the future and we cannot have the equivalent of a few key bankers (the cable companies) regulating artificial supply with a global demand that’s much larger than a simple coaxial wire threaded into your home circa 1977. There is a way for everyone to win here if we can see past the wire into unfettered capitalism riding the world’s telecom infrastructure. If the FCC pursues this I would be happy to provide them with expert analysis on the new economy.