Stephen C. Garavito Room 1131M1 General Attorney 295 North Maple Avenue Basking Ridge, NJ 07920 908-221-8100 FAX 908-630-3424 February 18, 2000 BY MESSENGER To-Quyen Truong, Esq. Associate Chief Cable Services Bureau Federal Communications Commission 445 12th Street, SW Washington, DC 20554 Re: Ex Parte Presentation In the Matter of Applications for Transfer of Control to AT&T Corp. ("AT&T") of Licenses and Authorizations Held by MediaOne Group, Inc. ("MediaOne") CS Docket 99-251 Dear Ms. Truong: This letter responds to your request that we summarize our arguments rebutting claims that AT&T might use its broadband Internet access "dominance" to harm some Internet content providers by giving other providers preferential caching or favored placement on Excite@Home or Road Runner web pages. As a threshold matter, AT&T and MediaOne dispute the major premises underlying these claims: the assumptions that there is a separate broadband market; that broadband service will quickly grow into the predominant mode of access; and that cable modem services will represent the predominant broadband services. In fact, cable modem and other broadband service today is a tiny sliver of the online services market. And, as our submissions in this proceeding have demonstrated and as the Commission itself has found, cable modem services face competition from DSL and a wide range of other broadband services. DSL has been growing even faster than cable modem service, and may even overtake may cable modem subscribership in the very near future. MCI WorldCom, Sprint, Nextel, Hughes, Teledesic and others are making multi-billion dollar investments in alternative broadband technology. All available evidence suggests that there will be multiple competing broadband paths into virtually all U.S. residences well before broadband Internet services eclipse traditional narrowband services, and that no one (or two) technologies, networks or providers are poised to dominate. As we have explained in past filings, the fundamental characteristics of caching and content placement foreclose any argument that the Merged Entity could somehow "dominate" the Internet. Attempts to institute preferential caching practices would be counterproductive, because they would undercut network efficiency, angering customers; and futile, because content providers could easily turn to any one of the numerous caching services that are available from third parties to enhance content delivery. Attempts to favor content providers through favorable placement on the Excite@Home or Road Runner web pages would be similarly futile, because e- businesses have myriad ways other than those pages - including TV, radio, and print advertising, and unaffiliated Internet sites - to advertise and gain exposure. In addition, AT&T has pledged that customers will continue to be able to bypass those pages completely, and obtain "one-click" access to the content of their choice. These points are presented in more detail in the attached papers. We hope that this summary is useful as you complete your public interest review of the applications. Please let us know if you require any additional information. We are submitting two copies of this letter and the attachments to the Secretary in accordance with Section 1.1206(b)(1) of the Commission's Rules. Very truly yours, /s/ Stephen C. Garavito /s/ Susan Eid Cc: Deborah Lathen Howard Shelanski Magalie Roman Salas PREFERENTIAL CACHING WOULD BE COUNTERPRODUCTIVE AND FUTILE ? Preferential caching practices would cause network inefficiencies and result in higher costs. Caching is a dynamic, reactive process driven entirely by customer usage patterns -- i.e., the web sites that customers visit most often are cached. Caching according to usage patterns is a matter of utmost importance to the economic and efficient operation and integrity of the networks. In the absence of usage pattern caching, each time customers accessed content from popular content providers who were not "preferred providers," the content would have to be delivered over the backbone networks of Excite@Home and Road Runner, rather than from the local proxy servers. To maintain standards adequate to attract and retain customers, Excite@Home and Road Runner would have to incur the costs of leasing more backbone, which would substantially raise bandwidth management costs. ? Degrading any content lowers customers' perception of service value. A caching strategy that degraded the delivery of rival content would harm customers' perception of the value of our broadband services. AT&T's customers judge the performance of AT&T's high-speed Internet services by how fast they can access the content they want. If their experience in obtaining that content is degraded, they will think less of the service, harming AT&T's ability to attract and retain customers. ? Discriminatory caching would drive customers to other online service providers. When the Excite@Home and Road Runner exclusivity periods run, and other online service providers offer service over AT&T cable systems under commercial arrangements with AT&T, those other providers will determine their own caching policies. Any AT&T strategy that could negatively affect customer perception of AT&T's service would simply drive customers to these competing services. ? Content providers seeking to improve content delivery speed by network edge replication could simply turn to "content delivery" companies. Caching can - and does - occur at many places not controlled by AT&T, Excite@Home or Road Runner. As detailed below, there are numerous "content delivery" companies that deal directly with content providers and use their own facilities to replicate bandwidth-heavy content closer to customers. If AT&T attempted to advantage one streaming media provider by not caching its rivals, the rivals could simply obtain local caching from a third party. Third party caching would not require the cooperation of AT&T, Excite@Home or Road Runner. ? Providers of "content delivery" services are proliferating and prospering. There are numerous content delivery services available to interested content providers. Akamai has a market capitalization of approximately $25 billion; over 2000 servers (including servers collocated in the Road Runner network) with sufficient capacity to serve peak demand of the world's top 25 web sites combined; and over 200 content-owner customers, including seven of the top 10 search sites, major portals such as the Go Network, Looksmart, Lycos and Yahoo, and over 75 e-businesses including CCNB.com, discovery.com, jcrew.com and marthastewart.com. Competing services include a venture between Digital Island, Inc., Sun Microsystems, Inc., and Inktomi Corp. to provide content delivery service over a 5,000 server network that has already signed up many content providers, including CNBC.com, ft.com, Blue Mountain Arts, PBS and Value America, as well as Mirror Image Internet (with funding from Hewlett Packard), AboveNet Communications Inc., and Adero. PREFERENTIAL PLACEMENT PRACTICES WOULD NOT BENEFIT AT&T ? Preferential placement is futile when customers can bypass the AT&T home page and go directly to the home page of any portal or website. Even if some e-businesses negotiate favorable advertising deals with Excite@Home and Road Runner for favorable placement on their home pages, the e-businesses' competitors would not be at any competitive disadvantages. All customers would still be able to access the content of rival e-businesses, and would be aware of their existence through traditional advertising media or other Internet advertising. ? Most e-businesses still use traditional advertising media. There are myriad ways - including TV, radio and print advertising - for new e-businesses to advertise and gain exposure. Internet financial companies, for example, have the option of advertising in the Wall Street Journal, Bloomberg, Fortune, and Business Week. It is widely recognized that more traditional alternatives like TV and radio are much more effective than Internet advertising, which explains why e-businesses, like their "bricks-and-mortar" counterparts, spend far more of their advertising dollars on traditional media. CNET reportedly spends 91.7% of its advertising dollars on traditional media. Similarly, Priceline.com and Amazon.com spend 99.9% and 90.7%, respectively, of their advertising dollars on traditional media. Internet companies that spend heavily on TV advertising quickly achieve far greater brand awareness than those that don't.. That is why so many "dot-com" companies bought ads during the Super Bowl this year. ? An ISP's home page is just one of many places to get exposure on the Internet. Large percentages (up to 50 percent) of Excite@Home and Road Runner customers never even view the Excite@Home and Road Runner home pages. And even among those customers that maintain Excite@Home or Road Runner as their home page, most visit and spend considerably more time on popular portal sites like Yahoo. That is why Yahoo brings in almost twice as much advertising revenue as Excite@Home and Road Runner combined. ? Much advertising takes place on Internet content sites. Internet content sites such as CNET, PC World, and the Wall Street Journal generate more in Internet advertising revenues than Excite@Home and Road Runner combined. ? Alternative advertising still allows for "broadband" advertising. Numerous companies that do not themselves offer broadband Internet service have equal ability to (and do) offer placement for "broadband" (i.e., "rich media" or interactive) advertising. Recent technological advances will further strengthen the ability of a wide array of sites and providers to offer placement for "broadband" advertising. For example, content delivery pioneer Akamai now offers a service to website owners (and ISPs) that stores "rich-media" ads locally, allowing even narrowband users to view and enjoy rich-media ads. DCDOCS:166276.1(3K@S01!.DOC) Sylvia Dennis, DSL Taking Off Big Time, Newsbyte News Network (Aug. 17, 1999); http://www.uswest.com/news/012600.html. Vito Racanelli, AOL-Time Warner Deal Leaves Baby Bells Unjustly Shunned, Baron's (Jan. 15, 2000) (Exhibit 3). On caching, see, e.g., September 17, 1999 Reply Comments 73, 92; Medin Declaration (submitted with Reply Comments) 19-20; November 24, 1999 Response to Commission's November 3, 1999 Request for Additional Information No. 23; December 14, 1999 Ex Parte Reply Comments 26-28; Medin Reply Declaration (submitted with Ex Parte Reply Comments) 15-19; Ordover/Willig Reply Declaration (submitted with Ex Parte Reply Comments) 51-52. Regarding access to content, see, e.g., July 7, 1999 Transfer of Control Application 84-86; Medin Reply Declaration (submitted with Ex Parte Reply Comments) 14; Ordover/Willig Reply Declaration (submitted with Ex Parte Reply Comments) 45-50. If a streaming media provider, for example, wanted to improve delivery of its content to Excite@Home subscribers, it could simply collocate its servers at Excite@Home's peering points with MCI or any of the many other backbone providers with which Excite@Home interconnects. The streaming media provider could deal directly with MCI or it could hire a third party content delivery service that operates such collocated servers. In either case, AT&T would have no way noticeably to degrade performance from the rival provider (absent blocking all content from the rival's website, which AT&T has pledged not to do). See http://www.upside.com/texis/mvm/print-it?387e33d00&t+/texis/mvm/people/story; http://www.akamai.com/service/network.html; http://www.akamai.com/news/press537.html; http://www.akamai.com/news/press010500.html; http://www.akamai.com/news/press 010600.html. http://www.digisle.net/customers/all_customers.shtml. Inktomi also has an arrangement with Verio, Inc., the world's largest operator of business and e-commerce Web sites, under which Inktomi will provide Verio with content delivery infrastructure. See http://www.inktomi.com/ new/press/verio.html. See http://www.infoworld.com/articles/el/xml/99/12/21/991221elmirror.xml; http://www. mirror-image.com/press/frame_latest.cfm?news_item_id=35; http://www. mirror- image.com/services/ overview.html; http://www.adero.com/index.html. Richard Tomkins, Caught in a Tangled Web of Confusion, Financial Times, (Jan. 21, 2000). As one commentator puts it "Before the Internet, advertisers understood how to reach people effectively through both print and electronic media. They knew where to run ads, how to apply creative talent, and how to measure and understand the results. On the web, they haven't figured it out yet." Peter Schwartz, Internet Advertising is Going to Change. But How?, Red Herring, at 76 (Feb. 2000). See Morgan Stanley, The Internet Data Services Report, pp. 42-45 (http:// www.msdw.com/ techresearch/inetdata/index.html). Forrester Research estimates that the typical dot.com company spent 63.4% of its ad dollars in traditional media in 1999 (with that number going up to 73.8% in 2004). See Jennifer Gilbert, Gaining Credibility and Trust Central to Online Strategies, Advertising Age Interactive Special Report Supplement, p. 72 (November 1, 1999). AP reports that Internet-related companies bought $277 million in TV advertising in just the first 9 months of 1999. David Bauder, NBC Leads the Way with Richer Viewers, Internet Users (January 25, 2000). See Jennifer Gilbert, Gaining Credibility and Trust Central to Online Strategies, Advertising Age Interactive Special Report Supplement, p. 72 (November 1, 1999); Top 25 Internet Advertisers, Advertising Age, p. 41 (September 27, 1999); Amazon.com 10-K (March 5, 1999). See Sylvia Dennis, On line Ad Growth Will Fail to Topple Broadcast Dominance, Newsbyte (Jan. 26, 2000) (Exhibit 11) (quoting Fletcher Research analyst Caroline Sceats). Kathryn Kranhold, The Real Action: Ad Bowl XXXIV, Wall Street Journal, at B1 (Jan. 28, 2000). Jupiter Communications estimates that 50% of persons that visit the Excite portal also visit Yahoo (but that only 27% of those that visit Yahoo visit Excite). Jupiter Communications, Portal Deals, Fig. II.20 (July 1999). See also id. (estimating that 32% of visitors to the Excite portal visit MSN; 42% visit Infoseek; 43% visit Netscape; 40% visit Lycos; and 24% visit Alta Vista). See The Strategis Group, Advertising on the Internet: 1999, Figure 9.7. See Morgan Stanley, The Internet Data Services Report, pp. 42-45 (http://www.msdw.com/ techresearch/inetdata/index.html). See http://www. akamai.com/service/howitworks.html. Bluestreak.com's E*banner 2.0 service employs a "bandwidth sniffing" technology that senses the speed of the end user's modem. The customer's computer then downloads only the discrete pieces of the ad that are needed in real- time. See http://www.bluestreak.com/pressrelease2.asp. (footnote continued from previous page) (footnote continued on following page) To-Quyen Truong, Esq. February 18, 2000 Page 3