12Oct98 USA: CABLE INTERNET ACCESS FACING REGULATORY BATTLE.

By Aaron Pressman

WASHINGTON, Oct 12 (Reuters) - In the race to connect homes to the Internet at super-fast speeds, the cable industry is pulling far ahead of telephone carriers, but a major regulatory battle is brewing that could shake up the field.

Within just a few years, analysts predict millions of homes will be connecting to the Internet through cable modems at speeds 50 to 100 times faster than ordinary telephone modems. Many fewer will be hooking up with the new technology pushed by telephone carriers dubbed Digital Subscriber Line, or DSL.

Cable companies see billions of dollars in potential revenue, figures boosted by the different regulations that apply to cable and telephone services.

Telephone companies are considered "common carriers" and must allow customers to subscribe directly to any Internet or online service. Typically, a customer pays the phone company a flat rate for the phone line and another $12 to $22 per month to an online service provider like America Online Inc. or EarthLink Network Inc.

But cable operators have nearly complete control over what travels down the cable line and plan to act as both access provider and online service, charging about $40 a month in addition to television charges. A customer wanting another service provider, for e-mail or to serve as host for their personal Web site, would still have to pay the full cable company fee.

Making customers pay extra to get any other service may be good for profits but it is sure to draw scrutiny from Congress and regulators at the Federal Communications Commission. The issue could also arise as regulators weigh AT&T Corp.'s proposed $48 billion acquisition of cable giant Tele-Communications Inc.

"This is a monster regulatory issue for the cable industry," said Scott Cleland, analyst at the Legg Mason Precursor Group in Washington. "Over time, the FCC has required access to any network that people want to access. The question is whether cable is going to get a proprietary pipe that no one else can access."

Online service leader America Online, with 13 million subscribers, and other Internet providers are already crying foul.

"We think that it will be a benefit to the Internet, to consumers and to competition between cable and telephone services if in fact there is an open-access model to both the telephone and cable infrastructures," AOL General Counsel George Vradenburg said in an interview.

Cable operators argue they have invested billions of dollars upgrading their networks for Internet capability and that the government has no right to require them to allow access to other service providers.

MediaOne Group Inc. , a leading cable Internet access provider, will spend almost $6 billion upgrading its network to add channel capacity and online services, explained Susan Eid, a MediaOne vice president who is their top lobbyist.

"To think of making that kind of investment and having a government agency force us to turn that over to a competitor is very concerning," Eid said.

AT&T, which has battled local phone companies for access to the local phone network, is siding with the cable industry in light of its proposed cable purchase.

"Cable is not a bottleneck facility," said Jim Cicconi, AT&T senior vice president and top lobbyist, drawing a distinction between the cable and telephone networks. "No one that wants AOL or any other service would be denied. You could get DSL ... or satellite service ... you can even add AOL to the cable."

And amendments to cable regulations added by Congress in 1996 appeared to add Internet service to the list of allowable "cable" services, the industry argues. "There's just no legal or regulatory requirement," Cicconi adds.

Currently, a vast majority of the 23 million households accessing the Internet still connect to the network over old-fashioned phone lines using modems that top out at speeds of 56,000 bits per second.

Forrester Research analyst Christopher Mines estimates about 500,000 people currently use high-speed cable services, like RoadRunner or At Home Corp. , that connect at 1.5 million bits per second. With more than 60 million households going online by 2002, almost one-quarter will use cable modems and fewer than one in 30 will use DSL, Mines said.

Just how and when regulators will grapple with the cable access issue remains unclear.

In August, the FCC asked for comments on a variety of related questions as part of its mandate to ensure that all Americans are getting access to advanced technologies like high-speed Net access. Under the Telecommunications Act, the agency must report on the issue within six months and could propose new rules at that time.

The agency could also issue a ruling if online services file formal complaints. In 1995, the agency forced AT&T and other telecommunications carriers to allow open access to a high-speed data transport service called frame relay following complaints by competitors.

And Congress could jump into the act at any time, especially if constituents start complaining. Lawmakers have in the past required cable operators to carry all local TV channels and to sell television programming to competitors that they both carry and create.

Of course, the free market may provide its own solutions. AT&T said it is discussing possibilities about high-speed access with AOL. "We have absolute openness to talk to AOL and those discussions have been going on," AT&T's Cicconi said.

((Aaron Pressman, Washington newsroom, 202-898-8312)).

(C) Reuters Limited 1998.