—16—

Companies that control proprietary architectural standards have an
advantage over other vendors. Since they control the architecture,
they are usually better positioned to develop products that
maximize its capabilities; by modifying the architecture, they can
discipline competing product vendors. In an open-systems era, the
most consistently successful information technology companies
will be the ones who manage to establish a proprietary
architectural standard over a substantial competitive space and
defend it against the assaults of both clones and rival architectural
sponsors.

8

A company in this position can and will resist change, in order to keep doing what it knows best.

41.

This was the problem with the telephone company prior to its break up by the

government. The telephone monopoly enjoyed substantial returns from its existing network

architecture. The fear of regulators was that these returns would make it unwilling to experiment

with other architectures that might better serve communication needs. As we have said, there is

at least some evidence that AT&T in fact resisted the emergence of the Internet because it feared

its effect on AT&T’s own business model. Certainly it resisted the development and

interconnection of other technologies to its telephone network. The regulators who pushed to free

the telecommunication network believed that the market would choose differently from how

AT&T, as controller of the network, would choose.

42.

Time has proven these regulators correct. Once freed from the strategic control of

an entity that had a particular business plan to protect, the communications network has evolved

dramatically. The competitive process was enabled by making the network neutral about its uses,

and by giving competitors access to the network so that they could compete about its best use.

The same wires that AT&T used to send analog voice only are now being used to deliver stock

8Charles R. Morris and Charles H. Ferguson, How Architecture Wins Technology Wars, Harvard Business Review
86, 88 (March April 1993) (emphasis added).

—17—

quotes, music, fantasy games, reference information — in short, the whole content of the

Internet.

43.

The lesson from this explosion of innovation is critically important. An

architecture that maximizes the opportunity for innovation maximizes innovation. An

architecture that creates powerful strategic actors with control over the network and what can

connect to it threatens innovation. No doubt these strategic actors might behave in a pro-

competitive manner. There is no guarantee that they will interfere to stifle innovation. But

without competition or regulation to restrict them, we should not assume that they willsomehow

decide to act in the public interest.

III.

The Proposed Merger of AT&T / MediaOne

A.

The Threat Posed by Bundling

44.

As we stated at the start, we do not question the merits of a merger between

AT&T and MediaOne in principle. AT&T’s argument that such a merger will enable much

greater competition in local telephony may prove persuasive; the efficiencies of a merger for the

supply of broadband access may prove persuasive as well. Our sole concern is the architecture

that AT&T and MediaOne propose for broadband access. As they have described in their papers,

cable broadband will prevent users from selecting an Internet Service Provider (“ISP”) of their

choice. Instead, access will be technologically bundled with ISP service. The network will thus

discriminate in the choice of services that it allows. This kind of discrimination may have

profound consequences for the competitive future of the net.

45.

To see the problem with this architecture, we must first understand the importance

of an ISP. ISPs serve a number of functions in the existing narrowband residential market. Some

ISPs focus primarily on access to the Internet. Customers, through their local telephone

—18—

exchange, connect to the ISP; the ISP serves Internet access at speeds limited only by the local

telephone exchange. Some ISPs supplement this access with promises of user support — both

the support to assure the Internet connection is maintained, and in some cases, support with the

use of certain Internet applications. Some ISPs further supplement this access with server

capabilities — giving users the ability to build web pages on the ISPs servers, or support more

expansive Internet activities. And finally some ISPs provide, or bundle, content with access. The

most famous of these is America Online, but other ISP/content providers have included

CompuServe and Prodigy.

46.

This existing narrowband residential market is extraordinary competitive.

Customers have a wide range of needs that customers have in this market; the market responds to

this range of needs with different packages of services. Nationwide there are some 6,000 ISPs. In

any particular geographic region, there can be hundreds that compete to provide service.

47.

The functions performed by ISPs, however, are not fixed. They have no inherent

“nature.” Hence as bandwidth changes from narrow to broadband, we should expect the range of

services offered by ISPs to change. As throughput becomes more critical in video services, for

example, we could imagine ISPs competing based on the caching services they would offer. Or

as the character of the content available increased, we might imagine some ISPs catering to

certain content (video content) while others specialized elsewhere (new users).

48.

The functions of ISPs, then, must not be conceived of too narrowly. Their

importance, for example, has little to do with hosting “home pages” on the World Wide Web, or

the portal sites they might now provide. Their importance is in the range of services they might

bundle and offer competitively — from content (including video and audio services) to help