"Whole Lot O' Shakin' Goin' On!" - Industry Trend or Event

Computer Technology Review, July, 2000 by Joshua Piven

Internet tomorrow won't look like today

This article is the second in a two-part series. The first part appeared in the June issue of CTR.

A broadband Internet with regionalized services has serious consequences for small ISPs. Without content, hosted applications, or other value-adds, smaller providers are likely to go the way of the Dodo. Lacking the huge revenue streams (or inflated stock prices) of their larger competitors, independent ISPs will be unable to secure compelling content, and will be forced to rely on monthly fees or Web hosting, two areas which are already shrinking sources of revenue. What infrastructure analyst Jim Metzler refers to as the "AOL Time Warner Internet Century" will be a content-rich, multimedia experience that only the largest companies will be able to provide. (Indeed, a parallel shake-out is already occurring: Internet start-ups are fast losing their huge market valuations and only the sites with mega traffic and market share continue to thrive.)

In addition, a related trend is just now beginning. As the Internet has evolved, the importance of "last-mile" control has increased rapidly. After all, he who owns the wire into the home controls what goes on that wire and the ways information travels on it. When control of the curb wire is paired with control of the backbone, the business advantage is enormous. Today, only one company, AT&T, is about to have end-to-end control of its network (see below); everything else comes down to peering points and negotiated service agreements.

Keynote Systems' Lloyd Taylor believes we will see further consolidation, as backbone providers try to snatch up RBOCs or vice versa, depending on size and market share. This is the general conceit behind the AOL Time Warner Internet Century: AOL and TW content delivered through TW cable. Both companies figured out that it's better to control both sides of the connection rather than one or the other. It is also the logic behind last year's spate of mergers and acquisitions among the big backbone companies.

The same evolutionary process is likely to occur with broadband Internet access and broadband content: consolidation means more reliable content streaming, easier set-up and network maintenance, and more consistent technical support. AT&T's decision to purchase MediaOne's cable infrastructure is further proof, if any were necessary, of the value (in this case, $58 billion) of the curb wire. (At press time, a ruling by a U.S. Court of Appeal limits the number of households a single company may reach, a ruling which may affect the AT&T-MediaOne merger. The merger had not cleared the FCC or the DOJ as we went to press.)

Regulation Likely

But vertical integration presents new business and competitive issues which today seem increasingly likely to require some future form of regulation. As backbone providers sink more and more capital into their infrastructures, they will need to recoup these costs by developing fee models based on either content or usage profiles. Today's content-rich, high-traffic Web sites (think Yahoo!) demand advertising price premiums and use these premiums to develop additional content. Similarly, the most desirable content of the broadband future will be supported by both advertising and new fee-for-usage-based models, whereby backbones providers will charge one another depending on the nature and popularity of the content they exchange.

This trend will also adversely affect independent ISPs, who will increasingly be forced to shoulder more of the financial burden for the services that their customers enjoy. The willingness of consumers to absorb additional charges from their ISPs for broadband content and services is an unknown at this point.

Today, backbone providers are still in the early stages of developing models used to determine the market value of the various components that make up an Internet connection. For example, in terms of financial importance, what is the ratio of capacity to reach (scope of the network) to content to value-added services (QoS, security)? These are issues that may eventually face regulators as they try to create fair pricing models that prevent vertically integrated giants from cornering the market and inflating prices. Thus far, the FCC has shown timidity when facing mergers or acquisitions among the various cable, cellco, telco, and backbone providers; nearly everyone has been approved. In a decade the Commission may be facing enormous anti-trust problems as a result of its current policy of rubber-stamp regulation.

In addition, the Web's lack of privacy controls and abuse of consumers' rights is very likely to bring some form of government control in the future, particularly as broadband becomes widespread. In late May, the Federal Trade Commission gave up on its previous policy of allowing Internet sites to regulate themselves. Robert Pitofsky, FTC chairman, said that self-regulation, without legislation, is unlikely to provide consumers with the protection they deserve. The FTC report says, in part, that "the Commission concludes that while self-regulatory efforts have achieved some real progress, the lack of broad-based implementation of [consumer] protections online requires legislative action in order to fully protect consumers' personal information and build public confidence in electronic commerce." Several members of the Commission had dissenting opinions.