Why AT&T's shuffling the Internet deck

Girding for the arrival of the new 800-pound gorilla, sometech execs want Uncle Sam to step in.

Watching from the sidelines as AT&T wrested away MediaOne Group from Comcast Corp., Internet executives now await the arrival of the new 800-pound gorilla to their neighborhood with a mix of uneasy anticipation that, in some instances, borders on dread.

That's because unless federal regulators intervene, AT&T (NYSE:T) will wind up exerting indirect, albeit partial, control over the high-speed data pipelines offered by @Home (Nasdaq:ATHM) and RoadRunner.

"AT&T has dropped a big rock into the middle of the stream that everybody's got to paddle around," said Jim Balderston of Zona Research Inc., noting cable's growing importance in local and long-distance phone service as well as high-speed Internet access. "This defines the landscape."

Analysts and industry executives say the resulting combination could create particular challenges for America Online Inc. -- especially if AT&T refuses to permit the online service to use its network.

Last month, AOL (NYSE:AOL) CEO Steve Case appeared before a Senate panel to press the cable industry to grant easier subscriber access to cable lines.

Under current laws, cable companies can require customers to buy both access and Internet services. AOL wants legislation that would end that requirement.

No red flags
Still, an AOL shutout is a worst-case scenario. Fifteen years after the breakup of AT&T, they say CEO Michael Armstrong is not likely to go out of his way to wave a red flag in front of government regulators.

What's more, they note that AT&T has no compelling interest to turn away potential new business offered by hosting AOL's 18 million subscribers.

"I don't why they'd shut out subscribers," said Rob Lippincott, a former AT&T official who is now executive producer of Time0, a unit of Perot Systems. "As a culture, AT&T still sees itself as a big connection utility. This is part of their manifest destiny of connecting real customers to real customers -- rather than being stuck in the middle."

Much of this debate turns on how people decide to connect with the Internet in coming years -- whether via modem, cable, ISDN or DSL. Cable modem users can access the Web at speeds up to 25 times faster than they can using normal modems. But there's still disagreement within the analyst community about which will win out and when.

AT&T betting on speed
Gartner Group, for instance, projects that half of all users will continue to access the Internet at low bit rates through the year 2003. By contrast, ZD Market Intelligence expects high-speed connections to predominate.

The budding AT&T keiretsu is obviously betting on the latter prediction -- and is in a position to help its own cause.

Last month, @Home Chairman Thomas Jermoluk dropped a broad hint about the thinking in the executive suite.

When asked whether an acquisition of MediaOne (NYSE:UMG) by either AT&T or the Comcast Group (Nasdaq:CMCSA) could lead to a combination or partnership of the two high-speed Internet offerings, he replied, "There's an opportunity for us to harmonize the two services."

Catching attention of trust busters?
In the aftermath of the MediaOne deal, AT&T's moves could create the political motivation to force regulators to invite the attention of the trust busters, according to Ken Wasch, the Software and Information Industry Association.

"I don't think there's any question that code and content companies thrive in an environment where there's competition," said Wasch. "For them to have to work with one pipeline for broadband access greatly restricts ability to reach consumer.

Coincidentally, Congressmen Bob Goodlatte, R-Va., and Rick Boucher, D-Va., on Thursday are expected to introduce bills to ensure open competition in the Internet.


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