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February 29, 1996

Bell Companies Assail AT&T's Internet Plan

By JOHN MARKOFF

SAN FRANCISCO -- A day after AT&T announced its ambitious new strategy to offer millions of consumers low-cost access to the Internet, its archrivals, the local Bell telephone companies, were crying foul.

As it turns out, AT&T plans to use a little-known loophole in the nation's telephone accounting rules that will force the seven regional Bell companies to provide Internet customers with free local connections to AT&T's network.

Unlike telephone voice calls, for which AT&T now pays the Bells billions of dollars a year in "access charges" to connect local customers to AT&T's long-distance network, computer connections made over those same local phone lines are exempt from these access charges.

That exemption is the result of a ruling the Federal Communications Commission made in 1983, when computer modems were still a novelty item and the Internet was an arcane technology experiment used primarily by military researchers and university scientists.

"The exemption from access charges was meant to be temporary exemption for what was then a fledgling industry," said Dave Dorman, president and chief executive of Pacific Bell, which provides local service in California and Nevada. "The line-services market has now matured. With giants like AT&T entering the market, it is no longer a fledgling industry, and the exemption is no longer justified."

The local telephone companies attempted in 1987 and again in 1989 to have the exemption lifted, but failed, in part because of significant consumer resistance to paying higher rates for on-line and electronic data-base services.

But now that more than 11 million consumers use the local phone network to connect to on-line services like America Online and Compuserve, and AT&T plans in March to begin marketing Internet access to its nearly 20 million customers who have computer modems, the Bell companies contend that they are subsidizing their competitors in a business they themselves plan to enter.

AT&T drew industry attention on Tuesday when it introduced plans for its new residential Internet service, which would be free for fewer than five hours of on-line time a month and cost $19.95 a month for unlimited usage.

Underlying AT&T's new strategy is the company's vision of the Internet and the World Wide Web as omnipresent information resources that will be instantly available to its customers' fingertips without requiring a separate dial-up modem connection for each use.

"We think that people will leave their telephone lines on all the time," said Tom Evslin, vice president for AT&T's Worldnet service, as the company's Internet business is called. "The Web is not useful to them when they have to wait a minute for their modem to connect."

This new model of on-line all-the-time connections would allow customers to be alerted immediately when E-mail arrives, for example, or when there are news updates. In fact, some software companies, like Pointcast Inc., plan to take advantage of such continuous Internet connections by providing software that would turn screen savers for personal computers into the equivalent of a newspaper that continually updates itself throughout the day.

But the load these open circuits will place on the local phone companies' networks represents a cost that the Bell companies contend that they should not be forced to bear.

Local telephone engineers say the modern telephone network was never designed to handle millions of computer data sessions, which tend to be longer than most voice telephone calls.

"AT&T is paying nothing for their usage," said Alan Ciamporcero, vice president of FCC relations at Pacific Bell. "It's in their interest for the connection to stay nailed up whether anyone is using it or not. That puts a lot of pressure on our network. We're simply not engineered for that kind of use."

Nationwide, long-distance carriers paid local telephone companies about $30 billion in access charges to local voice networks in 1995, according to Daniel Rheingold, a telecommunications industry analyst at Merrill Lynch in New York. In California, for example, long-distance carriers pay Pacific Bell about 3.1 cents a minute for connecting their customers to its local network. Many other Bell companies, working with more generous state regulators, are able to charge even more.

But when it is a computer modem on the line, rather than a human voice, the local call is free.

"It's a really inappropriate use of the telephone network because the voice users are being asked to subsidize data users," said Michael Kleeman, a telecommunications industry expert at the Boston Consulting Group in San Francisco. "I think the local phone companies will go to the FCC and request the commission to eliminate the exemption. If that doesn't happen, it will drive the local phone companies crazy."

But other analysts contend that in the face of rapidly changing technologies and exploding consumer interest in the Internet, the local phone companies may find it almost impossible to restructure the rate system in their favor.

"As these previously separate industries converge, the question is can you find a way to use your assets to your advantage and exploit your competitors weaknesses?" said James Moore, president of Geopartners, a consulting firm in Cambridge, Mass.

Ultimately, the local telephone companies may need to look for a technological edge that takes advantage of the fact they they -- not long-distance companies like AT&T -- have a direct connection to each customer's home. While AT&T's Internet customers can use a modem to place free local calls to connect to AT&T's network computer, the transmission speed of such connections is limited to 28,800 bits a second using today's fastest modems.

But the Bell companies can offer much faster Internet connections through special types of lines called ISDN or Integrated Services Digital Network, which offer speeds of 128,000 bits a second. An even faster circuit, called a T1 line, can transmit data at more than 1.5 million bits a second.

Already, some Bell customers around the country are willing to pay $30 or more a month for ISDN connections, or several hundred dollars a month for T1 lines. But most Bell companies are not able to offer such connections to all customers.

"We're progressively entering a data-intensive world and the local companies have to re-engineer their networks," said Jerry Parrick, president of enterprise network services for US West, the regional Bell company based in Denver.

Parrick, for one, sees AT&T's new Internet move as potentially beneficial to his company in the long run. "The Internet is a very competitive market," he said, "and if AT&T helps grow the market we're encouraging them to do so."


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