How the Telecom Act gave birth to broadband

The sweeping legislation, originally designed to allow local and long-distance phone companies to get into each other's businesses, did not create the notion or the technology behind high-speed Internet lines. But it effectively set in motion a series of market-driven events that accelerated development of cable, DSL and other technologies that could have taken years longer to reach the consuming public in any significant numbers.

"Without the Act you'd probably still have Excite@Home (athm) and the cable guys, but they wouldn't be facing the same price competition from DSL," said Joe Laszlo, a broadband industry analyst at Jupiter Research. "Overall there would probably be far fewer households with a broadband connection."

As a result of the intensifying rivalry between cable and DSL, about 70 percent of the nation's households can subscribe to a broadband service today, up from about 20 percent as recently as 1998, according to industry estimates. Even some of the country's most remote regions are getting fast Internet access, places where regular phone service once took years to reach.

And as the gap narrows between the two leading high-speed Net technologies, the fate of the race may rest with a player that is neither the kind of local phone company nor long-distance carrier targeted by the telecom law: AOL Time Warner (aol). With interests in both camps, the media conglomerate will have vast influence over the future of the entire broadband industry as its decides which technology to back in coming months.

"Did the Telecom Act have any value? It put some framework together," said Mark Peden, a DSL industry technologist, board member of the DSL Forum and vice president for technology marketing at Simpler Networks. "The cable guys and, to a lesser degree, the CLECs helped light a fire under the Baby Bells."

So how, exactly, did a law aimed primarily at telephones end up as a major catalyst for today's multibillion-dollar broadband Internet industry?

As with so many other industries that have faced regulation and deregulation, the answer lies in a complicated series of events involving political interests, corporate strategies, technological progress and, most important in this case, the American consumer.

The Telecom Act was mainly designed for Baby Bells to offer long-distance phone service and for long-distance companies such as AT&T (T) to offer local phone lines. Communications providers could offer new services and expand beyond their geographic fiefdoms, provided they open their networks and businesses to competitors.

For all its rhetoric, the law has largely been noted more for its failures and continued bureaucracy than for improvement of competition and services. What did make enormous strides, however, was the unstoppable growth of Internet usage worldwide.

AT&T's bombshell buyout
At the time the Telecom Act was signed into law, most long-distance and local phone customers in the United States were signed up with AT&T and the Baby Bells that were created in a preceding round of deregulation, the breakup of Ma Bell a decade earlier. Not surprisingly, these telecom veterans were largely thought to have a tremendous advantage over anything else carried over their phone lines, including Internet access.

But while these companies were locked in fierce battles over local and long-distance service, a spate of broadband upstarts began to offer high-speed Internet connections to businesses--threatening to take away a key source of income for phone companies that had gone hitherto unchallenged in this arena.

AT&T responded with a bombshell, the $48 billion purchase of cable giant Tele-Communications Inc. in 1998, a deal that provided an entry to the cable broadband market as well as the primary goal of breaking into local phone service. The Baby Bells, in turn, were inspired by the most powerful motivator of all: fear.

"It's the fear of losing their customer base," said Norm Bogen, director of broadband research at Cahners In-Stat Group. "Once (the customer) has cable, the chances of them switching to DSL are slim."

That wasn't all. Suddenly, the Bells found themselves in a classic squeeze between a behemoth cable operator and a band of aggressive DSL upstarts armed with a seemingly endless supply of venture capital fed by the booming economy. Among them were Covad Communications, NorthPoint Communications, Rhythms NetConnections and other cable modem and satellite competitors.

These challengers forced action by the notoriously sluggish Bells, which had been characteristically slow to expand broadband Net access--a pace that some critics charge was intentional to preserve their high-priced lock on the market at that time.

"The Telecom Act of 1996 opened up a wave of funding dollars that went into both the developers and manufacturers of these DSL technologies and infrastructure, so it was an opportunity that presented itself only based on this new legislation," said Ed Pinkham, president of Getspeed.com, an online database of broadband availability. "The Bells are being driven in large part by a defensive stance vs. cable modems. And the (wholesale competitors) certainly drove market awareness."

The renewed commitment by the Baby Bells such as Verizon Communications and SBC Communications (sbc), in addition to price cuts, encouraged cable operators to continue their arduous network upgrades, necessary before offering high-speed Net access.

The astronomical stakes of this competition are directly reflected in the bottom lines of all companies involved. Just this week, for example, AT&T reported lackluster numbers for its long-distance phone business but higher growth projections for its broadband and wireless divisions.

Even so, recent government figures indicate that the cable industry's lead may be slipping. As of June 30, DSL connections increased by 157 percent from the end of 1999 to nearly 1 million, while cable connections rose 59 percent to about 2.2 million, according to the Federal Communications Commission.

By various estimates cable today claims more than 4 million U.S. customers, while DSL claims about 2.4 million customers. Jupiter Research, a technology market research firm, projects that 11.8 million households will have DSL service and 13.8 million households will have cable-modem service by 2005.

Both cable and DSL lines provide "always on" connections, meaning that subscribers don't need to dial in once their computers are turned on. Cable modems can offer faster downloads but, as part of a shared network, their speeds can decline as more people log on. DSL lines are not shared, but their speeds can vary widely and are limited by distance, making the connections available only to about 60 percent of the nation that lives within roughly 3 miles of the phone company's facilities.

'Emboldened' Bells consolidate
Still, some industry critics say deregulation has helped expand broadband access only for businesses, not consumers, and has encouraged consolidation.

"We do not see tremendous competition developing in the residential broadband market. The Act has emboldened the Bells to go into data for business customers," said Andrew Schwartzman, president of Media Access Project, a public-interest law firm. "We've seen very little of the promised competition and a lot of the feared consolidation."

Although smaller competitors have signed up their share of customers, SBC and Verizon (vz), both products of megamergers, have led the way in recruiting DSL subscribers, according to various totals. Many of the broadband competitors and small ISPs are in serious financial peril.

Covad (covd) has laid off many workers, and NorthPoint filed for Chapter 11 bankruptcy protection. Others, such as PSINet and Flashcom, have sold off assets or warned of dire funding situations. Flashcom also had layoffs, and Telocity was acquired recently. Others are also hurting.

Some analysts suggest DSL won't surpass cable modems anytime soon, but few are willing to speculate whether one will be significantly more dominant than the other. In addition, they contend, growth rates for both technologies are held back only by infrastructure limitations.

"I have trouble thinking of any good reasons why both technologies won't continue to exist," Jupiter's Laszlo said. "I have trouble seeing either technology being driven out, and I think the competition is good."