Residential Demand for Broadband Telecommunications and Consumer Access to Unaffiliated Internet Content Providers

By Hausman, Jerry A.; Sidak, J. Gregory et al. | Yale Journal on Regulation, Winter 2001 | Go to article overview
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Residential Demand for Broadband Telecommunications and Consumer Access to Unaffiliated Internet Content Providers


Hausman, Jerry A., Sidak, J. Gregory, Singer, Hal J., Yale Journal on Regulation


In this article, we examine the open access debate in the context of cable services and broadband Internet services from an antitrust framework. Our analysis is prompted by the recent AT&T-MediaOne and AOL-Time Warner mergers, which raise issues concerning the impact of integrated cable content and Internet access to residential telecommunications. Economic analysis, demographic surveys and federal antitrust guidelines each indicate that the broadband Internet access market is distinct from the narrowband Internet access market. Emerging or competing technologies, such as satellite Internet services or digital subscriber lines, cannot discipline the broadband Internet access market over the relevant time horizons. Vertical integration increases the incentives and power of cable providers to discriminate against unaffiliated broadband content, thereby substantially decreasing consumer welfare. We conclude that the recent mergers of cable content and Internet access is the most current manifestation of the classic strategy of cable providers to control alternate channels of content distribution.

Introduction

The open access debate has simultaneously arisen in several contexts. Most importantly, open access of cable modems that deliver broadband Internet services has been examined in light of the completed AT&T-MediaOne merger and the proposed AOL-Time Warner merger. The issue also has arisen in the context of federal agency proceedings and congressional hearings on Internet policy. Finally, open access has been argued in the context of cable license transfers at the municipal level. To address the issue of open access in an antitrust framework, one must first address the question of market definition. If broadband services represent a distinct antitrust market, as we argue in this Article, then it is at least possible for a dominant provider of those services to exercise market power. Unless that conjecture is proven, however, all of the associated anticompetitive harms that have been articulated by rival broadband content and broadband conduit providers should be ignored.

In this Article, we consider the effects of broadband access on residential telecommunications. In particular, we concentrate on cable modems and digital subscriber line (DSL) offerings. We consider the competitive interaction for Internet usage of narrowband residential access and broadband access. We also consider the economic incentives and actions of the providers of narrowband and broadband access with respect to limiting the usage of broadband access. We further investigate the potential competitive effects for cable television, a sector of the economy where to date system operators have been able to exercise significant market power.

Much of the intellectual debate has resulted from the exchange between us and Professors Janusz A. Ordover of New York University and Robert D. Willig of Princeton University, whom AT&T retained as expert witnesses in support of its acquisition of MediaOne, a larger cable television multiple system operator (MSO).1 We disagree with the analysis of Professors Ordover and Willig in two major respects. First, Professors Ordover and Willig improperly combine broadband Internet access and narrowband Internet access into one large Internet access market. Second, Professors Ordover and Willig erroneously dismiss the anticompetitive effects of the AT&T-MediaOne merger. In particular, the merger will allow AT&T to control the development of broadband content, software, and customer equipment, hindering the efforts of alternative broadband technologies to compete and subjecting consumers to higher e-commerce prices.

At the time of the merger, AT&T was the nation's second-largest cable MSO.2 AT&T also controlled Excite@Home Corp., the largest provider of residential broadband service with over 1.15 million subscribers in May 2000.3 Excite@Home had (and still has) exclusive contract rights to provide residential broadband service over the cable facilities of its three principal equity holders, AT&T, Comcast Corporation, and Cox Communications, Inc.

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