TELCO DEMANDS ACCESS

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GTE Makes Antitrust Claim Vs. Cable

Washington -- GTE Corp. slammed the cable industry with anantitrust lawsuit designed to crater a business model that bundles high-speed transportwith 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 marketparticipants from conditioning the sale of one product on the purchase of another.

GTE's suit named Tele-Communications Inc. (now AT&TBroadband & Internet Services), Comcast Corp. and Excite@Home Corp., thedata-over-cable service partly owned by those MSOs, as defendants. GTE asked the court toissue an injunction and award damages.

GTE executive vice president and general counsel WilliamBarr said cable's Internet business violates the law because a cable-modem subscribercan't obtain a high-speed connection without purchasing Internet access from Excite@Home.

"It is an illegal tying arrangement or practice,"Barr added.

GTE can claim that it is an injured party because itsInternet-service provider, gte.net, can't compete head-to-head with Excite@Home for thebusiness of cable-modem subscribers.

A cable-modem customer who wants gte.net instead ofExcite@Home, Barr said, still has "to pay twice" -- a demonstration that cableis using its market power to undermine competition in the Internet-access market.

GTE chairman and CEO Charles Lee, here last week onunrelated business, said the suit was designed to pry open cable's data platform forgte.net.

"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 achoice," Lee said.

The suit came as a surprise to some, but the only thingthat should have been a surprise was the timing. In testimony before the House JudiciaryCommittee (where antitrust legislation aimed at cable is pending) in July, Barr accusedcable of violating antitrust laws.

A few weeks later, Legg Mason Wood Walker Precursor Grouptelecommunications analyst Scott Cleland penned a report called: "Antitrust: ASleeping 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? Theanswer is no. We're interested in adopting a regime of open access so that people canchoose their own ISPs," Barr said.

The cable-industry reaction was predictably hostile to yetanother legal incursion by opponents, both commercial and governmental, into its Internetbusiness.

"This lawsuit appears to be yet another illegitimatestep in GTE's ongoing effort to protect its own monopoly by seeking forced-accessregulations on would-be competitors," AT&T Corp. general counsel James Cicconisaid.

Cable lawyers who were interviewed dismissed the suit aslegal fiction that won't last long in court.

"It doesn't meet any of the legal requirements for anantitrust suit," said Paul Glist, who represents cable operators and the NationalCable Television Association from time to time on various matters. "It's clearly apolitical play."

A threshold legal matter is whether high-speed and dial-upInternet-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 thehigh-speed market, they claim less than 3 percent of the estimated 40 million U.S. homesconnected to the Internet.

"There is a clear distinction, we think, betweendial-up narrowband service and broadband services," said Henry Weissmann, GTE'soutside 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 betweenthe two products; involve market power in the sale of the first product (high-speedtransmission); and show that the "practice effects a non-insubstantial amount ofinterstate commerce."

A cable attorney said GTE couldn't meet the four factorsbecause cable does not sell transport as a separate service, whether the customer wantsInternet access or Home Box Office.

And, the attorney added, GTE will not succeed inestablishing that cable's Internet-access business is commercially separate from thedial-up market dominated by AOL, which has about 19 million subscribers.

"GTE has a constrained notion of the market. We thinkthe relevant market is the entire Internet-access market, of which we have a really smallpiece," the lawyer said.

Schwab Washington Research Group cable analyst PaulGlenchur said recent court decisions are not especially helpful in determining "therelevant 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 aweak case. "I think it's clearly laughable in some points ... To call cable amonopoly is simply ludicrous in my mind. They are just trying to launch like everybodyelse," Henderson said.

But he added that the case could delay the rollout ofbroadband and cast a shadow over cable stocks.

The GTE lawsuit could help several franchising authoritiesthat are currently fighting to unbundle cable's broadband pipe, said Joe Van Eaton, alawyer based here representing Portland, Ore., in its open-access fight with AT&T.

A finding that GTE had been injured by anti-competitivebehavior by AT&T, Comcast and Excite@Home would help the cities, Van Eaton said. Headded that even if the court finds no anti-competitive behavior, it would not undercutcities' position that federal law allows them to impose open access as a way of promotingcompetition in their local markets.

Yet Paul Kagan Associates Inc. cable analyst John Mansellsaid a loss by GTE could cause the forced-access issue to "recede into thesunset."

"Maybe it puts some cities on notice that they couldbe dragged into these kind of lawsuits, and that it's going to cost them a lot of legalbills," Mansell added.

For AT&T, the biggest danger is that the GTE lawsuitraises the specter of antitrust behavior, which could make the cities' job easier byspurring lawmakers to step in and enact legislation forcing the company to unbundle itsnetwork, Van Eaton said.

Meanwhile, AT&T last week continued to signal that itmay be softening its position on open access.

During an analyst conference call last week, AT&Tchairman C. Michael Armstrong denied that the company tried to defuse the open-accessissue by proposing a plan to the Federal Communications Commission that would allowunaffiliated ISPs onto its network.

However, he said, AT&T is looking at carrying multipleservice providers once its exclusive agreement with Excite@Home expires, but on"private commercial terms" only.

"The company early on decided to make this alife-or-death battle," Van Eaton said. "I think they've come to the decisionthat it's a dangerous battle to be in."

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