The University Record, December 13, 1999

Cable operators will profit, not lose, with ‘open access’

By Nancy Ross-Flanigan
News and Information Services

A U-M professor has weighed in on what has been called “the biggest issue in the whole technology communications realm” with a study refuting cable companies’ claims that they will suffer if forced to allow competing Internet service providers to use their lines.

“My analysis shows emphatically that cable companies actually will do better under such an arrangement,” says Jeffrey MacKie-Mason, professor of economics, of information and of public policy. His study, “Investment in Cable Broadband Infrastructure: Open Access is Not an Obstacle,” was sponsored by openNET Coalition, a group of more than 800 local, regional and national Internet service providers, technology and telecommunications companies dedicated to promoting competition in high-speed Internet cable access.

The issue has been hotly debated in the past year, as AT&T has become the nation’s largest cable provider through a sequence of cable company acquisitions. AT&T’s aim, like that of the whole industry, is to use cable lines to provide not just TV programs, but a range of services that includes Internet access at speeds up to 100 times faster than conventional dial-up access service. Although only about one million homes currently have high-speed Internet connections, some analysts estimate the number will increase to 16 million by the end of 2002, with 80 percent of those connections being made via cable.

But upgrading the lines to provide such services is expensive. Cable operators argue that they’ll have no incentive to make the necessary investment unless they can be sure their customers also will use them as Internet service providers. AT&T, for example, would require customers who subscribe to its high-speed cable modem service to also subscribe to one of the company’s Internet service providers, Excite@Home or Road Runner. Rival Internet service providers, such as Mindspring and America Online, charge that AT&T is trying to monopolize high-speed Internet connections to homes. They’re calling for “open access”—requirements that would force AT&T to open its cable lines to other providers.

In his independent research, MacKie-Mason examined the effects of open access on cable operators’ incentives to invest in upgrades. His detailed, quantitative analysis of the costs and returns from such investment shows that:

  • Cable companies do not need to shut out competing Internet service providers to recoup their investment in cable line upgrades. Profits from the advanced cable TV, telephone and data transport services will more than reward the investment.

  • Under an open access plan for Internet service, cable companies stand to make higher, not lower, profits because they can charge other Internet service providers for the use of their lines, and because the wider selection of providers will attract more subscribers.

  • Consumers will benefit from open access because competition will force Internet service providers to offer higher quality, lower-priced service. And with more Internet service providers able to use cable lines, the variety of services available to consumers will be greater.

    “Clearly, cable broadband investment is a winner under open access,” MacKie-Mason says. “I conservatively estimate that the returns from local telephone service alone are more than sufficient to support the costs of such investment. In addition, cable companies will get revenues from selling data services to Internet service providers. Indeed, if cable companies provide open access to multiple Internet service providers, they will likely do even better than they’re doing now, because many more consumers will want to subscribe to cable modem service.”

    The full text of the study is on the Web at www-personal.umich.edu/~jmm/papers/broadband.pdf.