Cable Modems and DSL: Broadband Internet Access for Residential Customers

To date, most residential customers to the Internet have used dial-up modems with a top speed of about 56.6 kbps [kilobits per second]. In the past two years broadband access has become available via cable modems offered by the local unregulated cable provider and via digital subscriber lines (DSL) offered by the local regulated telephone company (the incumbent local exchange carrier [ILEC]) and competitors who resell DSL using the ILEC facilities. Cable modems and DSL offer access speeds about 10–30 times higher than dial-up access and are termed “broadband Internet access.” Although Federal Communication Commission (FCC) regulation requires ILECs to sell the use of their facilities to competitors at below-cost prices, no regulation of cable companies has occurred. This outcome is curious given that cable companies have a significantly greater incentive to distort competition as a result of their unregulated monopoly profits from their cable operations. This asymmetric regulation by the FCC has led to the “open- access” debate. The open-access debate involves the question about whether the cable providers should be required to provide access to competing broadband Internet service providers (ISPs) or whether cable providers can use exclusive contracts with their affiliated ISPs. Here, we consider the economic incentives and actions of the providers of broadband access with respect to limiting the usage of broadband access, including 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.

Currently, AT&T is the nation’s largest cable multiple system operator (MSO). AT&T also controls Excite@Home Corp., the largest provider of residential broadband service, with over 2.3 million subscribers in November 2000. Excite@Home 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.), which collectively account for over 35 percent of the nation’s cable subscribers. Similarly, Time-Warner is the second-largest cable provider and has an exclusive contract with Road Runner, the second-largest provider of broadband Internet service, with 1.1 million subscribers. The competitive implication of the exclusive arrangements are straightforward: to access an alternative broadband ISP instead of the ISP affiliated with the cable provider, a user of broadband cable access has to “pay twice.” Alternative sources of delivery for video programming provide a competitive threat to the significant market power of the cable industry. Previously, the cable industry has unsuccessfully attempted to control access through control of satellite delivery of video programming, the first alternative medium for multichannel video programming. This attempted strategy was blocked by the Department of Justice (DOJ). Control of broadband Internet delivery of video programming, the second alternative medium for multichannel video programming, arises from cable-provider control of cable broadband access. Internet “video streaming” competes and will compete even more in the future with video programming offered by cable systems, satellite companies, and television broadcasters.

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