Washington -- GTE Corp. slammed the cable industry with an
antitrust lawsuit designed to crater a business model that bundles high-speed transport
with content-rich Internet access.
The suit, filed in federal court in Pittsburgh last week,
claims that cable's Internet business runs afoul of laws that prohibit robust market
participants from conditioning the sale of one product on the purchase of another.
GTE's suit named Tele-Communications Inc. (now AT&T
Broadband & Internet Services), Comcast Corp. and Excite@Home Corp., the
data-over-cable service partly owned by those MSOs, as defendants. GTE asked the court to
issue an injunction and award damages.
GTE executive vice president and general counsel William
Barr said cable's Internet business violates the law because a cable-modem subscriber
can't obtain a high-speed connection without purchasing Internet access from Excite@Home.
"It is an illegal tying arrangement or practice,"
GTE can claim that it is an injured party because its
Internet-service provider, gte.net, can't compete head-to-head with Excite@Home for the
business of cable-modem subscribers.
A cable-modem customer who wants gte.net instead of
Excite@Home, Barr said, still has "to pay twice" -- a demonstration that cable
is using its market power to undermine competition in the Internet-access market.
GTE chairman and CEO Charles Lee, here last week on
unrelated business, said the suit was designed to pry open cable's data platform for
"Any customer should have the right to pick gte.net
... even if they're using a cable modem, or they should be able to go directly to AOL
[America Online Inc.]. It's a matter of opening the market and giving the consumer a
choice," Lee said.
The suit came as a surprise to some, but the only thing
that should have been a surprise was the timing. In testimony before the House Judiciary
Committee (where antitrust legislation aimed at cable is pending) in July, Barr accused
cable of violating antitrust laws.
A few weeks later, Legg Mason Wood Walker Precursor Group
telecommunications analyst Scott Cleland penned a report called: "Antitrust: A
Sleeping Giant in the Cable Open-Access Debate."
Barr, a former attorney general in the Bush administration,
said GTE wasn't using the court case as leverage to gain access to cable lines.
"Is GTE interested just in cutting a deal for GTE? The
answer is no. We're interested in adopting a regime of open access so that people can
choose their own ISPs," Barr said.
The cable-industry reaction was predictably hostile to yet
another legal incursion by opponents, both commercial and governmental, into its Internet
"This lawsuit appears to be yet another illegitimate
step in GTE's ongoing effort to protect its own monopoly by seeking forced-access
regulations on would-be competitors," AT&T Corp. general counsel James Cicconi
Cable lawyers who were interviewed dismissed the suit as
legal fiction that won't last long in court.
"It doesn't meet any of the legal requirements for an
antitrust suit," said Paul Glist, who represents cable operators and the National
Cable Television Association from time to time on various matters. "It's clearly a
A threshold legal matter is whether high-speed and dial-up
Internet-access platforms are separate services or competitors in the same market.
Although Excite@Home and fellow data-over-cable service Road Runner have 90 percent of the
high-speed market, they claim less than 3 percent of the estimated 40 million U.S. homes
connected to the Internet.
"There is a clear distinction, we think, between
dial-up narrowband service and broadband services," said Henry Weissmann, GTE's
outside counsel with Munger, Tolles & Olson in Los Angeles.
Weissmann said GTE had to meet a four-part test to prevail.
He said the case had to involve two separate products; involve a tying arrangement between
the two products; involve market power in the sale of the first product (high-speed
transmission); and show that the "practice effects a non-insubstantial amount of
A cable attorney said GTE couldn't meet the four factors
because cable does not sell transport as a separate service, whether the customer wants
Internet access or Home Box Office.
And, the attorney added, GTE will not succeed in
establishing that cable's Internet-access business is commercially separate from the
dial-up market dominated by AOL, which has about 19 million subscribers.
"GTE has a constrained notion of the market. We think
the relevant market is the entire Internet-access market, of which we have a really small
piece," the lawyer said.
Schwab Washington Research Group cable analyst Paul
Glenchur said recent court decisions are not especially helpful in determining "the
relevant market" in the kind of case filed by GTE.
"The jurisprudence in tying cases is kind of in flux.
That whole area of law is a bit fluid," Glenchur added.
Janco Partners cable analyst Ted Henderson said GTE had a
weak case. "I think it's clearly laughable in some points ... To call cable a
monopoly is simply ludicrous in my mind. They are just trying to launch like everybody
else," Henderson said.
But he added that the case could delay the rollout of
broadband and cast a shadow over cable stocks.
The GTE lawsuit could help several franchising authorities
that are currently fighting to unbundle cable's broadband pipe, said Joe Van Eaton, a
lawyer based here representing Portland, Ore., in its open-access fight with AT&T.
A finding that GTE had been injured by anti-competitive
behavior by AT&T, Comcast and Excite@Home would help the cities, Van Eaton said. He
added that even if the court finds no anti-competitive behavior, it would not undercut
cities' position that federal law allows them to impose open access as a way of promoting
competition in their local markets.
Yet Paul Kagan Associates Inc. cable analyst John Mansell
said a loss by GTE could cause the forced-access issue to "recede into the
"Maybe it puts some cities on notice that they could
be dragged into these kind of lawsuits, and that it's going to cost them a lot of legal
bills," Mansell added.
For AT&T, the biggest danger is that the GTE lawsuit
raises the specter of antitrust behavior, which could make the cities' job easier by
spurring lawmakers to step in and enact legislation forcing the company to unbundle its
network, Van Eaton said.
Meanwhile, AT&T last week continued to signal that it
may be softening its position on open access.
During an analyst conference call last week, AT&T
chairman C. Michael Armstrong denied that the company tried to defuse the open-access
issue by proposing a plan to the Federal Communications Commission that would allow
unaffiliated ISPs onto its network.
However, he said, AT&T is looking at carrying multiple
service providers once its exclusive agreement with Excite@Home expires, but on
"private commercial terms" only.
"The company early on decided to make this a
life-or-death battle," Van Eaton said. "I think they've come to the decision
that it's a dangerous battle to be in."