The Broadband War of 2006
Mega-mergers and explosive growth in user-generated content are raising the stakes. A battlefield guide.
by Justin Fox, FORTUNE

(FORTUNE Magazine) - Say you run a telephone company. You're spending billions to string superfast Internet connections to American homes. Why wouldn't you want to use those broadband pipes--which your shareholders paid for--to block competitors, to sell services, to sign sweetheart deals with content providers? Then again, say you run a company that has prospered (or hopes to do so) on the open-access Internet. Why wouldn't you want to keep things that way, to prevent the cable and telephone companies that dominate high-speed Internet access from unleveling a playing field that has seen such stupendous innovation and wealth creation?

That's the gist of a debate that has made the leap in recent weeks--thanks in part to AT&T's (Research) announced mega-merger with BellSouth--from arcane discussion among experts to major political issue. "Network neutrality" is what the web companies say they want, and they're lobbying Congress to make it law. The telcos, with a lot more experience at this lobbying stuff, aim to keep that from happening.

But this is more than just the standard Washington saga of corporations begging lawmakers for an unfair edge. For one thing, it's about our broadband connections, those indispensable conduits of news, entertainment, and free voice chats with your brother in Kuala Lumpur. The Leichtman Research Group counted 42.8 million cable and DSL broadband subscriptions in the U.S. at the end of 2005, up 9.6 million from a year before. With the new explosion of consumer-generated content like MySpace pages and YouTube videos, the hunger for bandwidth will only grow and grow.

The economics of the debate are not as straightforward as they first seem. If our hypothetical telco executive got his way entirely, he'd strangle the very Internet he hoped to profit from. And if the web exec got everything he wanted, the telcos might not build the true broadband links (vs. the moderately fast ones available now) needed to unleash a new explosion of online creativity and profit. It's a war, then, that we should hope nobody wins.

Lately, after a half-decade of struggle and declining stock prices, the telcos seem to have gained the upper hand. The two biggest ones keep getting bigger, with Verizon (Research) buying MCI, SBC buying AT&T and taking its name, and now the new AT&T swallowing BellSouth. Also, rulings by the Supreme Court and FCC last year freed the telcos' broadband offerings from common-carrier rules, putting them in the same lightly regulated territory as the cable companies. Telco executives have certainly been feeling their oats--last fall AT&T CEO Ed Whitacre controversially declared that it was time for Google (Research) and Yahoo (Research) to stop riding his broadband pipes for free.

To get FCC approval for the Verizon-MCI and SBC-AT&T mergers last year, the companies pledged not to interfere with any (legal) content or software traveling over their cables for two years. Top Verizon lobbyist Thomas Tauke says the company has no interest in messing with anybody's Skype calls even after that. But Verizon--which spent $15 billion last year upgrading its network (including wireless)--does want to cash in on the blazingly fast fiber-optic connections it's putting into millions of homes. One way is to offer TV over those lines, which nobody can object to; it's what cable companies do. But Verizon and the other telcos also want to cut deals with purveyors of high-bandwidth games and videos to guarantee that their content reaches customers quickly and clearly.

Verizon's Tauke describes this as equivalent to the virtual private networks that telcos already provide for corporate customers--in other words, nothing new. But Alan Davidson, who runs Google's new Washington, D.C., office, says that unless the telcos offer identical deals to all, it will be the death of the freewheeling web. "Innovation without permission has made the Internet a success for consumers," he says. "If new Internet services have to negotiate with each carrier to be seen online, that places carriers in control of Internet activity and innovation."

It's the cyberspace credo: Information must be free. Except that wealthy Internet companies like Google already pay for special software, dedicated delivery services, even their own private networks to speed content to customers. As the only significant providers of home broadband, the cable and telephone companies do possess unique market power. But will they maintain it as wireless broadband and other technologies mature? Who knows? It's just one of a lot of unknowns.

"Part of what makes the debate confusing is that neither side knows precisely what it wants to do in the future, nor wants to reveal its plans to competitors," says Blair Levin, a former top FCC staffer who now follows telecom regulation for the brokerage firm Stifel Nicolaus. This uncertainty has led people not necessarily allied with the telcos to argue that Congress and the FCC simply need to wait and see. Cisco CEO John Chambers--who sells equipment to both sides--wrote a letter on March 9 to the chairman of the House Energy and Commerce Committee urging him to avoid "detailed legislation" on the matter. This is one case where the politician's first instinct--avoid tough decisions--may also be the right thing to do.

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