Baby Bells rattle ISPs

At stake is more than ISPs' fragile business models. Competition means lower prices and often better service for consumers. With fewer network providers or ISPs in the market, there will be more opportunity for higher prices on everything from basic dial-up service to the fastest business connections.

The relationship between the local phone companies and their rivals--smaller telephone companies and ISPs--has never been good. But as the smaller network companies tumble into oblivion, ISPs say they are under renewed pressure from the local phone companies.

In some places ISPs say this takes the form of advertisements telling potential customers not to trust smaller companies. They also report the Bells are making slow progress in offering the network connections ISPs need to offer service to their customers.

But nowhere have the large phone companies been more aggressive than in Congress, where in recent weeks they've pushed hard for a new bill that would make them much more powerful in the high-speed Internet market.

"The Bell companies have been invigorated by the troubles facing the competitive industry," said Jason Oxman, senior counsel for Covad Communications, a DSL (digital subscriber line) provider that offers service to ISPs and directly to ordinary customers. "But they've been invigorated in the wrong direction."

The local phone companies say they are only trying to level a regulatory playing field that has long favored their competitors in the high-speed Net business, in particular AT&T and its fast-growing cable modem service.

Taking advantage?
ISPs have walked a tenuous financial line for years, as network costs and competition have whittled profit margins to the bone. Many have gone out of business or launched consolidation drives under pressure from larger competitors like AOL Time Warner, EarthLink or the phone companies, even before the current wave of economic malaise.

But a critical element in their survival, ISPs say, was the existence of the smaller companies offering data and network services, keeping prices affordable. Helping this was a string of decisions from federal regulators that has forced the local phone companies to give competing companies access to home and business telephone lines.

This safety net for ISPs becomes doubly important as the digital world moves toward high-speed connections such as DSL, which requires even more dependence on the phone lines and networks provided by the big local phone companies. And that's where the real warning signs are beginning to develop, ISPs and analysts say.

"Now, with the markets in retreat, the (rival phone companies) and ISPs are at risk," said Probe Research analyst Allan Tumolillo. "While competitors are being starved for capital, the (big local phone companies) are in a position to roll out a strong regulatory agenda whose goal is to undermine whatever remains of the current crop of competitors and make the business a little more bleak for those that survive."

An advertisement that recently ran in the Des Moines Register illustrated the dangers faced by independent ISPs and high-speed service providers in this economic market.

The ad took the form of a poster for a fictional DSL provider, "Buzz DSL," with an "Out of Business" sticker slapped sloppily across it. "Seems like DSL Providers are falling left and right," the ad text ran. "Make sure yours isn't one of them…Qwest won't disappear in the blink of an eye."

ISPs said the ad crossed the boundaries of fair competition and complained that Qwest was taking perceptions of the downturn too far.

On the ground, phone companies and ISPs say the big phone companies have continued to drag their heels in adding network connections and services needed, but they have at least been moving forward slowly.

"The phone companies have been implementing (new competitive rules) slowly and begrudgingly and throwing a lot of obstacles in the path," said Washington, D.C., attorney Mitchell Lazarus, who represents ISPs. "There is motion in the right direction, but slow."

Lobbying for reversal
While sluggish motion and pointed advertising are happening on the local level, a battle in Washington threatens to rewrite the rules in a way ISPs say would be disastrous to their businesses.

Bell companies are pressing hard on a bill they say would allow them to offer broadband services more widely and compete more fairly with rivals like AT&T. As a part of its proposal, the bill would relieve the local phone companies from some of their obligations to rival companies. The bill would also remove regulation that limits what the Bells can charge for pieces of their network that the ISPs use to provide even ordinary dial-up service.

A massive lobbying push from all sides has focused on the bill in recent weeks.

The local phone companies say they're getting a bad rap and that they're actually helping the ISPs on the ground and with the bill. They do allow a wide variety of ISPs to offer high-speed service, while cable companies give few or no choices, they note.

"If cable companies are allowed to be the dominant players in the high-speed market, they would have a much bigger stranglehold on what ISPs can offer," said Susan Butta, a spokeswoman for Verizon Communications.

Nevertheless, ISPs are chiming in, saying the bill would make it difficult for smaller rival phone companies to exist and could wind up boosting prices on the networks needed to offer basic Internet service.

"It would be like a one-two punch for ISPs," said Sue Ashdown, executive director of the American ISP Association. "It's horrible."