The Coming Broadband Monopoly

Broadband networking is the twenty-first century's high-speed Internet access equivalent to the 1950s US interstate highway system. Broadband services provide high-speed access over television cables using cable modems, via satellite transmission using a dish, and over Digital Subscriber Lines (DSLs) using copper telephone wiring (both asymmetric digital subscriber line—ADSL—and symmetric digital subscriber line—SDSL) and DSL modems. Television cables and DSLs provide fast bidirectional transmission, and a satellite dish offers broadband transmission as a download only and requires a modem connection for upload. Because these two transmission types also offer fast access to content, they have the attention of industry for commercial purposes.

Within the next few years, hundreds of billions of transactions will flow annually over the Internet, and Internet access will mean empowerment and wealth. For all the recent hype over broadband, precious few Internet subscribers—something less than a million customers—have it. And getting a broadband connection to your home or office can be both bewildering and byzantine. For information about the availability of broadband Internet access, see the sidebar "Get Your Broadband Connection Here," http://www.winntmag.com/articles, InstantDoc ID 7162.

Although many influential people recognize broadband networking to be a strategic resource, no government program, such as the one President Eisenhower provided for the interstate highway system, is in place to address broadband-networking needs. In Singapore, the government has put a high-speed-networking infrastructure in place, yet the richest country in the world's implementation of broadband networking has more in common with the early US railroad system—a trunk line here and a spur line there—than it does with the interstate highway system. Other analysts hold the opinion that industry will overbuild broadband in the years to come. However, today a few companies own most of the broadband technology, and the government is giving away the digital equivalent of a right-of-way.

At the moment, the US government prefers to let the cable industry make the investment. And although the government isn't acting on broadband networking's potential, many major US companies are. The initial investment in broadband networking might cost several billions of dollars, but this amount is small potatoes compared to the potential payoff for these companies. Major companies are buying up the various broadband-service providers—particularly cable companies—and consolidating them. Foremost among these players is AT&T. The company's new dynamic chairman, C. Michael Armstrong, certainly understands that if you own the wire, you can own the programming. So AT&T is buying into both business aspects.

In mid-May, AT&T Broadband & Internet Services (BIS) won a bidding war with Time Warner, American Online (AOL), and Comcast to purchase MediaOne Group for $54 billion. This deal gives AT&T cable access to 25 million homes and phone access to 56 million homes, fixes broadband services at 10 percent of AT&T's overall businesses, and makes AT&T a dominant player in this developing industry. The deal also gives AT&T 25 percent of Time Warner Entertainment and a stake in Road Runner cable and Internet access service, a joint venture of Time Warner and MediaOne Group.

For companies that own the wires that exist in millions of homes, opportunities expand beyond Internet access. Digital convergence is the melding of computer data access with information, advertising, and entertainment that you get from other media such as TV, radio, and print. Broadband connections are the pipe over which these signals flow. Companies such as Microsoft and Sun Microsystems are racing to dominate the set-top box market, which they believe will control access to broadband and provide the selection mechanism for the content that flows over a digitally converged information and entertainment system. Set-top boxes at the ends of cable lines will operate using new specialized lightweight OSs such as Microsoft's Windows CE, Windows NT Embedded 4.0 , and Sun's Jini. Owning the set-top box market is a pet project of Bill Gates and a priority at Microsoft. The AT&T deal will also provide a boost for Windows CE (a product that isn't exactly burning up the Personal Data Assistant—PDA—market).

You might not find it surprising to learn that Microsoft contributed $5 billion to AT&T's purchase of MediaOne Group. This deal with AT&T gives Microsoft a 5 percent share of the OS set-top box installations that run on AT&T's developing cable monopoly—the veritable camel's nose in the tent. AT&T and Microsoft see set-top boxes as a gatekeeper for digital information to flow in and out of homes. In pilot cities, AT&T will run Windows CE on the first of these broadband set-top boxes, which AT&T plans to put into general distribution. AT&T can use other companies' set-top box OSs, but after Microsoft receives the first 5 million Windows CE set-top-box customers, companies such as Sun might not get a shot. AT&T is test-ing General Instrument's set-top box. The DTC-5000 contains connections for cable, Ethernet and FireWire, Universal Serial Bus (USB), telephony, an internal router (IR), audio, video, a PC card, a computer monitor, and the required power cord. But this set-top box still requires an OS, which is likely to be Windows CE.

The set-top-box deal is the consumer portion of the broadband-service potential that Microsoft is willing to openly address, but this deal might merely be the prize that comes in a Cracker Jack box. Microsoft's access to broadband networking will also provide the expressway for application traffic to flow between Microsoft and client companies. At the moment, Microsoft is taking a long, hard look at this possibility, particularly in the area of application hosting. Microsoft has a program underway to test BackOffice application hosting for Value Added Resellers (VARs). Broadband networking offers many opportunities that are hard to imagine in the context of today's system architecture.

With the browser wars raising eyebrows at the Department of Justice (DOJ), you can bet that AT&T is going to walk on eggshells until the MediaOne Group deal is complete. Broadband-service consolidation was recently the topic of conversation at the Federal Communications Commission's (FCC's) hearing, at which MCI WorldCom, AOL, and other ISPs presented their case to bar cable operators from creating exclusive broadband connections. Laws regulating the transmission of information over phone lines require a free choice of ISPs. Yet, when you purchase broadband services from AT&T, you must first buy service from AT&T's subsidiary At Home—although you can still use your ISP and pay for access twice.

AT&T made several counterarguments to the ISPs' concerns, but the primary argument is that the cable company acquisitions let AT&T compete with the local Bell companies more effectively. As Armstrong explained in November 1998 at the Washington Metropolitan Cable Club, "The Bell local monopolies charge AT&T outrageous fees to carry calls over the last mile from our network to the homes and businesses of our customers. Congress intended to give customers a choice for local telephone service. AT&T is determined to deliver that choice. And not just the resale of narrow-band facilities, but rather by investing in the broadband facilities that connect most homes in America—cable TV."

Some regulators are worried because the FCC has heard these arguments twice so far (Tele-Communications Inc.—TCI—was AT&T's first major cable company acquisition, and the MediaOne Group was AT&T's second major cable company acquisition). But the FCC's reaction wasn't surprising, because ordinarily the FCC keeps its hands off developing industries and moves in later with regulations.