Major Online Players Bully Jump.Net and Other Small ISPs out of the Market
By Lee Nichols
MAY 29, 2000: Well, we can't say we weren't warned.
When telecommunications companies pushed for the 1996 Telecommunications Act, they said that deregulating the industry would be good for competition. Media activists argued otherwise, predicting an Orwellian future where fewer and fewer hands would control the flow of information. Some of the smaller Internet service providers (ISPs) in Texas say that conflicts they have had with telecom megacorporations Time Warner and SBC Communications may be proving the latter prophecies to be more accurate.
Time Warner and SBC, of course, are two of the heavyweights in the communications industry, with worldwide interests in many different media. Both companies have market capitalizations of over $100 billion and are widely diversified: Time Warner seems to own the entire world, with movies, cable, television, and publishing just the tip of the iceberg (a pending merger with America Online will make it even bigger); and SBC owns several Baby Bell phone companies and is positioning itself to be a leader in the wireless communications sector.
If you live in Austin and subscribe to cable television, chances are that you get it from Time Warner Cable; if you have a non-cellular telephone, then you probably get your service from Southwestern Bell, an SBC subsidiary.
Among these companies' more recent ventures is high-speed Internet service. Obviously, they possess some muscle that your "mom-and-pop" ISP just doesn't have. And increasingly, mom and pop are contending that that muscle is being used to bully them out of the market.
Until recently, locally based ISP Jump.Net had been advertising its DSL (digital subscriber line) high-speed Internet service on Time Warner Cable, especially on stations such as CNN and CNBC. Jump.Net counted on those stations to deliver exactly the demographic that they seek, and at a better rate than airwave broadcasters.
But now, Jump.Net has been off from this media source and told they can't buy any more ads. The reason? Time Warner Cable has its own ISP business, Roadrunner, which is delivered over Time Warner's television cable (in contrast to DSL, which uses phone lines). For obvious reasons, Time Warner didn't want to sell advertising to the competition.
Jump.Net is a company that has done well for itself. It serves as a Web host to such sites as Garden.com, Bike.com, and Works.com, and has 12,500 subscribers in 90 cities, spread across 35 states. However, the 65-employee company is still a dust speck compared to the Time Warner planet, and certainly doesn't have its own cable network to advertise on.
"It has a huge impact," says Jump.Net marketing director R.W. Rushing of being cut out of Time Warner's advertising arena.
"One, there are certain target markets that we like to talk to, which are only available from Time Warner Cable," Rushing says, listing stations such as CNBC, CNN, ESPN, and Home & Garden TV. "If you want to do real market segmentation, there are no real choices aside from Time Warner. There are other TV stations, but those stations' ads are five to 10 times more expensive. It does a lot of damage to our advertising budget, and makes us less competitive.
"It's a rifle approach as opposed to a shotgun. We pay more with, say, KVUE -- at least 10 times more. A CNBC spot would cost $50 per spot on a schedule of $5,000. And that's to reach a qualified demographic -- say, high-income males that work in the Internet industry and invest in the stock market.
"We won't reach them on Judge Judy. The people who are watching that are not in a position to buy high-dollar Internet service. I'd have to go on ER for a $2,500 spot, or Nightline for probably $1,500. CNBC has a tiny audience, but everyone watching is buying my service. They have to. We are really focused on high-reliability service, people who live and die by their service."
Clearly, this raises legal and regulatory questions. It isn't simply a matter of one competing business getting the upper hand over another -- it's a matter of a company using its monopoly status in one industry (cable TV) to squelch competition in another.
"Time Warner has right-of-way agreements," says Rushing. "They should be bound by that."
But according to Michael Parks, director of the city's Telecommunications and Regulatory Affairs Department, Time Warner isn't violating either city or Federal Communications Commission rules -- because, one might be surprised to learn, it technically doesn't have a monopoly.
"It's not a legal monopoly in the sense that the city has given exclusive rights [to provide cable]," Parks says. "It's a monopoly because no other provider has chosen to come in. The city has not granted a monopolistic franchise."
In fact, Parks pointed out, three new providers -- Western Integrated Networks, Grande Communications, and Wide Open West -- have all been approved as cable providers by the city within the last month, and are currently breaking ground.
Screwed by SBC?On a larger scale, ISPs contend that they are getting screwed by SBC. The Texas Internet Service Providers Association (TISPA) has fired a series of allegations at SBC -- some of which are harder to verify than others -- but the problems in plain view are the pricing scales that SBC charges for the use of its phone lines and, because of its ownership of those lines, the leverage that SBC has to promote its own service.
The pricing scale issue is this: Under federal law, SBC must make its phone lines available to numerous companies offering DSL, apart from its own Advanced Solutions provider. Basically, the consumer pays for a second phone line -- usually just under $30 per month -- and then the ISP adds on the cost of technical support, installation, and other services, bringing the total to around $40.
However, federal regulations on pricing were lifted last year, and SBC changed its pricing, offering what it calls a "volume discount." Now, the phone line charge is $40 per month, but high-volume ISPs could qualify for the discounted rate of $29. The problem with that, says Chad Kissinger, president of Onramp Access and former president of TISPA, is that SBC's Advanced Solutions is the only company in Texas that can meet those volume requirements.
"In 1994, when we started," says Kissinger, "we could compete, because we had the same rates. We excelled at providing personal service. Now only SBC gets that rate. ... They're definitely using their assets to control the market. For such a late entrant into the market, they will soon be the biggest ISP in Texas, if they are not already."
The other complaint revolves around the partnerships between SBC and the other ISPs for the use of the lines. TISPA says the ISPs were under the impression that their companies would be promoted on equal footing with SBC's DSL service -- something which was required by law at the time the contracts were signed. Since then, that regulation has been lifted, and SBC isn't necessarily under any obligation to promote competing companies.
However, TISPA says that even though SBC's actions are now legal, they are not what was agreed to in the contracts -- the ISPs signed up expecting a level playing field, and say that the agreement should still be in force.
Dave Robertson, current president of TISPA and general manager of Stic.net, says that the agreements were made "with the belief that, No.1, on their Web page, we would be listed equally with them, so that people would have an option to go to their partners as well, and would not be funneled directly to Southwestern Bell Internet service exclusively ...
"No.2, when you called the Southwestern Bell line to find out about DSL telephone service, they would get a lead, we would get a lead, the next partner would get a lead, the next one, the next one, and it would round-robin in an efficient and level playing-field manner. Now that we've signed our contracts and obligated ourselves to very expensive pipelines into the Bell cloud on a monthly basis, they've immediately turned around and chopped up those agreements and are trying to grab as much of the business as they can, any way they can do it, both legally and illegally."
Further, Kissinger asserts, Advanced Solutions "doesn't really exist" -- that is, the company doesn't maintain the degree of separation from SBC's other companies that is required by law. "Almost all of their outside contracts go back to SBC," he says.
Kissinger also alleges that SBC won't make promises to customers about when DSL lines can be installed, unless the customer is requesting SBC's DSL service; that orders to set up lines for customers using competing providers have been lost; and that customers seeking lines for competing DSL services have been told that their lines couldn't support DSL; but later, after specifically requesting SBC's DSL, have been told their lines can support it.
SBC spokesperson Saralee Boteler says she's fully aware of TISPA's gripes, but adds that she thought several of the issues had either been resolved or were nearing resolution. She also denies that SBC's volume discount policy is in any way designed to force smaller ISPs under.
"While it is true that our separate subsidiary qualifies for this [volume discount], as they have pointed out, other volume purchasers such as AOL also qualify," Boteler says, adding that "less a dozen" companies currently use the discount. "What they probably haven't mentioned is that over the last several weeks, under the informal direction of the Texas PUC [Public Utilities Commission], we have been in very close contact with the ISPs and indeed are in negotiations to resolve the problems. ... One of the things we are discussing and trying to get the individual companies together on, much like the insurance industry, is if they can perhaps pool their orders together and qualify for volume discounting."
Boteler says that not only is SBC not trying to monopolize the market, they actually count on their "partners" for income: "We have ambitious goals for ourselves as a company in terms of rolling out DSL to customers. The only way we are going to make those sales and installation numbers is with the help of additional sales channels such as our ISP partners. They provide a unique opportunity for us to reach markets where we wouldn't necessarily have a formal market presence -- for instance, rural markets." Small ISPs, Boteler says, "are vital to that roll-out effort. It doesn't make sense that we would want to put them out of business."
Regarding the validity of Advanced Solutions as a separate company, she says, "It most certainly does exist. ... [The spinoff] was part of our merger agreement, for approval of our merger with Ameritech last fall. ... By law, it may contract with SBC for certain functions. Those are very heavily documented and regulated. ... Under the merger conditions and our pending long-distance application, how we market, sell, and install our services is under a microscope. Those firewalls have to be there."
As for the complaint about marketing, Boteler says that SBC has established separate customer call-in lines for DSL line installation and for SBC's DSL service provider. If a customer asks about DSL in general, she claims, he or she will be provided with a full list of potential ISPs; if they call asking specifically for SBC, "it's because that person has received a mailer ... and has called about SBC service. They go to a separate set of operators and sales representatives."
However, that was not our experience; when a Chronicle staffer called about having a DSL line installed, no mention was made of other potential providers, and he quickly found himself an SBC customer. And who would be the provider? Southwestern Bell; no mention was made of "Advanced Solutions," a name which is also very difficult to locate on the SBC Web site. (Boteler says that Southwestern Bell is still in the process of transferring its Internet customers over to Advanced Solutions.)
Boteler also says that line installers show no preference for SBC customers, and any employee who did so would be subject to disciplinary action. And she says that some customers' lines need to be "conditioned" for DSL, so that the first time a customer calls in, his or her lines may not be usable, but later, they could be ready.
Of course, none of the controversies would exist if Congress hadn't done the bidding of the big companies when it wrote the 1996 Telecommunications Act -- passed with almost no discussion in the mainstream news outlets, which are owned by those very companies.
The mergers and deregulation that followed have created a media industry which is, oddly enough, anti-entrepreneurial. According to University of Illinois professor Robert W. McChesney, author of Rich Media, Poor Democracy, this corporate expansion raised the barriers to enter the media business so high that only the most enormous of firms can compete.
"The moral of this story is, if you're not big, you can't survive," McChesney told the Chronicle. "If you want to survive, get bigger. This market is not set up for lean, mean entrepreneurs. ... The law is set up to enhance the power of huge companies.
"I wouldn't be surprised [if cases such as these] are the rule of thumb everywhere, because if I were a shareholder [in a large corporation], I would be upset if they didn't take actions such as this. ... The problem isn't that there are bad people running these companies, it's that we have a system which makes bad actions rational."
This is the reality of the modern media industry. The only way you can survive is to own one of everything, so that you can cross-promote each of your businesses on the others.
The bottom line, Robertson says, is that SBC could "re-monopolize the network in America, and they will take away the consumer choice that we enjoy now with some of our services. How would you like to not get Internet service from anyone but the big one or two?"
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