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Cable's Closed Connections

Posted on: Sunday, 12 October 2003, 06:00 CDT

In July of 2002, United Online, the nation's third-largest Internet service provider, launched a new high-speed service it hoped would appeal to customers ready to abandon their slower dial-up connections.

The California-based company was able to offer its new service because of a deal it had negotiated with cable industry giant Comcast Corp. There was just one hitch: The deal left little room for United to compete with Comcast on price.

"From a pure appeal standpoint, our price was really no better than other offerings out there, including the other offering from Comcast," said United Online chief executive Mark Goldston.

More than a year later, United Online has not been able to expand its broadband service beyond Indianapolis and Nashville -- the markets where it first launched. The company won't release high-speed subscriber numbers, but according to Goldston the total is an "infinitesimal" percentage of its current subscriber base of 5.2 million.

United Online's struggles to turn its deal with Comcast into a viable business comes as a federal court decision has renewed a debate over the obligations of cable companies to open their networks to rivals. The San Francisco-based 9th Circuit Court of Appeals effectively overturned a Federal Communications Commission policy that allowed cable companies to set their own rates and even exclude rivals from their high-speed "broadband" lines.

The FCC spared the cable industry from regulatory restrictions in hopes it would spur companies to invest in new broadband networks. Indeed, the industry, with 14 million subscribers, is now the nation's leading provider of high-speed Internet access, outpacing telephone companies, which are required to share their lines with competitors.

When cable companies have opened their lines to competitors, the results have been mixed.

The companies that have fared best tend to be those, like Earthlink Inc., that have negotiated deals with Time Warner Cable, which was required by federal regulators to open its network to rival Internet providers as a condition of its parent company's merger with America Online in 2001.

"We make money, they make money and the customer gets a good deal at a good price," said David N. Baker, Earthlink's vice president of law and public policy.

Earthlink also has negotiated a deal with Comcast. Baker declined to discuss the terms and conditions of the individual deals. However, he noted that Comcast has limited Earthlink to distribution in two cities -- Seattle and Boston. In contrast, Time Warner has made Earthlink available to subscribers in all 39 of its major markets.

"We continue to seek more widespread access," said Baker in reference to Earthlink's deal with Comcast.

Comcast announced its deal with United Online in February 2002, a time when it was seeking regulatory approval of its merger with AT&T Broadband and consumer advocates were lobbying regulators to impose sharing requirements on it. The company has since agreed to deals with a total of six Internet providers.

Comcast said it entered partnerships in an effort to benefit from the added marketing power. But a year and a half later, Comcast officials say they are no longer so keen on the idea. Comcast is now the nation's largest cable Internet provider, with 4.4 million Internet subscribers, and it continues to accumulate new customers at a brisk pace. In the second quarter this year, Comcast added more than 350,000 new subscribers.

"If you don't need ISPs for basic connectivity to the Internet, what value do they bring to our customers?" asked Joe Waz, Comcast vice president for external affairs and public policy counsel.

The FCC plans to appeal the 9th Circuit's decision opening cable networks to competitors, and agency officials have said they would like to eliminate similar regulations governing the telephone line-sharing arrangements.

Not everyone agrees with that approach. In a speech earlier this week, FCC Commissioner Michael J. Copps warned that the FCC's policies would allow a few cable and telephone giants to dominate the Internet. "I believe that if the commission's present mindset is fully implemented, we will look back, shake our heads and wonder whatever happened to that open, dynamic and liberating Internet that we once knew," Copps said.

Robert Carp, president of Massachusetts-based Galaxy Internet Services, began offering high-speed Internet service over Comcast's lines within the last 90 days. He is charging customers $45.95 a month -- roughly the same price that Comcast charges in the region of New England served by GalaxyNet.

Like other ISPs', Galaxy's goal is to distinguish itself from Comcast by offering added e-mail features, more capacity to store digital pictures and tighter online security.

Carp said that given the trends in the industry, he has little choice but to offer his customers an alternative to the slow dial-up connection he can provide them. Customers are moving so fast to the broadband connections dominated by big telephone and cable companies that the slower dial-up Internet access business is destined to disappear, said Carp. "It's going to be a buggy whip," he said.

Reported By TechNews.com, http://www.TechNews.com

(20031011/WIRES /)

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