Lawsuit To Prompt Long Legislative Battle

GTE Corp. last week charged that cable operators Tele-Communications Inc. (a wholly-owned subsidiary of AT&T) and Comcast were in violation of federal anti-trust legislation by tying high-speed access to the Internet service provider partly owned by the two telecom giants, Excite@Home, in a suit filed in Pittsburgh's federal court.

"GTE's contention will trigger a prolonged and arduous discussion between cable and telephone companies and Internet providers, and probably force the [Federal Communications Commission] to come to the table," said Aryeh Bourkoff, cable, telecom and media analyst at CIBC World Markets.

"It's going to turn into a big regulatory issue," promised one high yield investor.

Analysts expect the lawsuit to force the FCC into a decision regarding access to high-speed Internet connections. Last month, Miami-Dade County voted that cable operators did not have to open their systems to competitors. In a similar suit in Portland, AT&T lost the battle and was told that it must open its system.

As local governments begin to take initiative, pressure on the FCC to decide whether cable operators should open their systems to competitors is mounting.

"Companies like GTE will be making more and more noise until the FCC comes to a decision," said David Allen, high yield analyst with Morgan Stanley Dean Witter.

Outstanding bonds did not lose in response to the filing, and some market pros don't think that will happen, although others are more cautious.

Allen said that bond investors will see little effect on the value of their investments at least in the short-term, and likely even after the suit is settled.

"It doesn't mean a whole lot for bondholders," he said. "It's more of an equity issue, in that it might possibly limit a company's potential for growth, but even in the worst case, if [GTE] were to win the ability to use the network, they'd still pay, and the owner of the network will still have to be paid."

"From the bond perspective, there'll still be revenues from the Internet," Allen said. "Whether or not At Home is the ISP, the key is high speed access for cable operators."

A portfolio manager familiar with the companies, however, expressed a little more concern, saying that he sees no reason why the cable sector would escape unscathed and not come under the same type of rules that forced telecom issuers to open their systems to competitors several years ago.

And he agreed that there indeed will be winners in the game, but those winners may not necessarily be the same companies that are the household names now, he said.

In the suit, GTE alleged that the "mandatory bundling of their high-speed data transport services with the At Home ISP service is an unlawful tie" in violation of the Sherman Antitrust Act and that "customers who prefer to purchase ISP service from plaintiff GTE or another unaffiliated ISP must pay twice... and may still not be able to access all of the content otherwise available from the ISP of their choosing."

The lawsuit seeks monetary damages as well as a legislative injunction, a court order barring the practice.