A Tumultuous Year for Broadband ISPs
12/28/2000
New York, Dec 28, 2000 (123Jump via COMTEX) -- The past year saw broadband or high-speed Internet access as the new mantra in the Net access arena. And with more and more people getting entrapped in the Net, the demand for broadband was no longer just hype but an awesome reality.
This new reality led to numerous players, big and small, jumping into this arena vying with each other's share. Players touting the benefits of different broadband platforms to deliver faster Net connections include cable and phone (satellite and fixed wireless companies) providers, not to mention the hundreds of broadband Internet service providers (ISPs) that mushroomed practically overnight.
Today, access speeds that were once only wishful thinking have become a reality thanks to cable, digital subscriber lines (DSL) and satellite access. And although wireless and satellite options are gaining ground in the broadband market, companies providing broadband access through cable modems and DSL are clearly the market leaders, according to experts. More importantly, consumers are benefiting from competition among cable, DSL, wireless and satellite companies offering Internet access that is dozens of times faster than the commonly used dial-up modems. This exploding consumer demand for broadband services has also made the broadband arena the hottest in the $300 billion telecommunications market.
Rosy Picture
Presenting rosy picture of the future prospects of this nascent industry, analysts with Hoak Breedlove Wesneski and Co. estimate that the broadband access services opportunity (both residential and business) will grow at a compounded annual growth rate (CAGR) of over 35% per year for the next five years, from $42 billion today to more than $185 billion in 2005, continuing to $350 billion by 2010. A Forrester Research report says broadband services revenue is projected to hit $8.8 billion by 2003, growing from $740 million in 1999.
Other analysts, splitting the high-speed market according to customer profiles, estimate that the residential broadband market in the U.S. will grow at a CAGR of 60% over the next five years to $20 billion in 2005, and continue at a 20% CAGR to $50 billion in 2010, while the market for broadband business services which currently exceeds $35 billion will grow to more than $125 billion by 2005, topping $200 billion in 2010.
The cable industry celebrated its 3 million broadband subscribers' benchmark at the beginning of June. Cable operators, due to their first-mover advantage, remain industry leaders and control about 80% of the high-speed market. Forrester Research predicts that about 20 million people will use cable to access the Internet by 2003. Nonetheless, the cable companies' share is expected to fall below 60% by 2003, as phone companies sign up about 8 million DSL subscribers. The number of customers opting for broadband access via DSL is expected to grow from 1.4 million subscribers this year, to 9.8 million in 2004. In fact DSL growth will accelerate as ISPs expand their service to include major metropolitan areas.
Some analysts say that DSL and cable modems have caught on because they arrived at exactly the right time and they meet the right customer needs. A year ago, DSL and cable companies were still charging customers as much as $400 for DSL or cable modems - related equipment and installation fees. However, this spring, companies began offering free or low-cost installation and free or low-cost equipment. As a result, sales accelerated and triggered intense competition between the cable and phone companies that led to price-cutting. This explains why the service is now available for as little as $25 to $40 per month.
Ultimately, however, analysts have perceived content-driven applications bundled with high-speed access as the winning residential broadband strategy over the next year. This should help lure customers to desire and pay for the "always-on" high-speed broadband connection.
Broadband growth may be limited by the difficulty for customers to obtain either DSL or cable connections. As of now only 4.5% of more than 50 million ISP customers in the U.S. have either cable or DSL connections, according to Telecommunications Reports International. And according to the Yankee Group, only one-quarter of the U.S. is wired for high-speed access. With installation crews stretched to the limit, getting a broadband hookup can take weeks or months.
However, competitive pricing, new services and self-install modems are fueling the industry's growth. Telecom behemoth SBC Communications (SBC), as part of its implementation of DSL services via Project Pronto, was one of the first Baby Bells to introduce a self-install DSL kit. Other key players in the DSL arena are Verizon Communications (VZ), Qwest Communications (Q), BellSouth Corp (BLS) and the DSL upstarts - competitive local exchange carriers (CLECs) - such as Covad Communications ( COVD), Rhythms NetConnections (RTHM) and Northpoint Communications (NPNT. There are other numerous resellers of the services.
On the cable side, ExciteAtHome (ATHM), the largest U.S. provider of broadband cable Internet access with more than 2 million subscribers who access its service from home, has introduced the QuickStart self install kit. Excite hopes to reach the targeted 3 million-subscriber mark by the end 2000 thanks to the self-install product. The other key cable player is the Road Runner Service - a joint venture among affiliates of Time Warner Inc.(TWX), AT&T Corp (T), Microsoft Corp (MSFT), Compaq Corp (CPQ) and Advance/Newhouse - with more than a million subscribers.
These two access providers via cable have cornered the largest market share in that arena. AT&T, which has a majority stake in ExciteAtHome, currently offers high-speed access in 26 Metro East communities and in St. Ann, Breckenridge Hills, Edmundson, St. Charles, St. Peters and Brentwood. Charter communications (CHTR) is yet another major player in this market.
Thorny Road to Success
But the road to supremacy and success in the broadband arena seems paved with quite a few thorns. The malaise that hit dot com companies seems to have hit broadband ISPs too. Recently some broadband ISPs have defaulted on payments to suppliers as they are going through a rough time trying to cope up with razor-sharp competition, huge up-front costs, lower-than-expected profit margins, a shrinking investment capital market and exorbitant advertising spending. A few are reportedly even considering putting themselves up for sale - PSINet (PSIX) is an example.
As a result of this turmoil, analysts feel that many struggling ISPs eventually will be acquired or could simply go out of business. Mark Langner, an analyst at Epoch Partners, is reported to have said, "There are 500-700 broadband ISPs clamoring for market share. They've all been given venture capital to go out and build a brand. And a lot of ISPs made some bad decisions about how to spend that money over the past 18 months, and now those chickens are coming home to roost."
This malaise has also caused trouble for several wholesale suppliers of DSL lines. Besides cutting its workforce, Covad also recently restated its quarterly results after nearly 14 ISPs defaulted on bill payments. NorthPoint Communications recently revised its third-quarter revenue 20% below where they were initially reported and it suffered when local phone giant Verizon Communications (VZ) canceled its $800 million DSL merger pact with the company. Nothpoint slashed 19% of its workforce and its stock has tumbled.
In fact, even before NorthPoint's debacle, investor concern over deteriorating revenues have caused a dramatic tumble in stock prices of companies like Covad, Rhythms Netconnections and New Era of Networks (NEON), which are currently trading at an abysmal $1 in the stock market.
Among other the smaller players facing similar financial pressures and tumbling stock prices are struggling ISPs, ICG Communications, which has finally filed for bankruptcy, Ziplink, which shut down operations, and Flashcom, which was one of the errant ISPs which failed to pay its bills to Covad and recently refused to take calls about billing and service. New Edge Networks, a provider of high-speed access in smaller cities and rural markets, eliminated 135 workers last month.
However, given the explosive growth of broadband, the malaise has surprised analysts. Cahners In-Stat Group predicts that DSL and Cable modem subscription revenues will hit $13 Billion by 2004; as compared to the just over $1 billion in 1999, and that consumer cable modem and DSL access subscribers will grow 77% between 1999 and 2004. Many feel, however, that as the entire industry was targeting the same set of customers there was a definite possibility of a contraction among competitors. In fact many analysts now believe that this current malaise may lead to consolidation in the ISP industry and that ultimately it will only be the giant access providers such as America Online (AOL), EarthLink (ELNK) and Microsoft's( MSFT) online service MSN who will survive the rat race.
According to the Meta Group, the reason for this state of affairs is quite simple, both cable and DSL high-speed access companies must adapt to the new realities of today's business and financial climate. These companies can no longer ignore the near-term profitability factor and just focus on capturing market share with little regard for the debts they run up along the way - something they have been doing for the past year and a half.
Other analysts feel that the local phone giants, the Baby Bells, have begun flexing their muscles to finally take charge of the DSL market; they have begun an aggressive move to step up DSL deployment. In this endeavor they have ditched their smaller CLEC partners who have been struggling with intense competition and price-cutting.
The only salvation for the DSL CLECs may lie in expanding their businesses to include value-added services. Rhythms CEO Catherine Hapka is reported to have said her company is "fundamentally a telecom infrastructure business. What's changed is the market - the meltdown of the NASDAQ, meltdown of telecom, meltdown of DSL."
But many analysts still feel that there is no need for serious concern. Despite the woes of smaller players, the broadband market is booming. Other analysts feel that broadband stocks, like many in the communications and technology markets, are likely to remain depressed for some time.
Other Broadband Options
As for the other broadband options, the Hoax, Breedlove and Wesneski & Co. report predicts that eventually DSL and cable modem technologies will fail to live up to their potential and that DSL, cable and ISPs will be severely affected if they do not switch over to a more promising access technology in the next few years.
Broadband satellite networks may claim to provide a global footprint but have yet to prove themselves especially in the face of tremendous competition from terrestrial services. According to the Hoak Breedlove report, currently the direct broadcast satellite industry serves 13 million U.S. homes. The key players in this industry are Hughes Network Systems(GMH), a division of General Motors, Gilat Satellite Networks (GILTF) and Echostar (DISH, DISHP), all of which promise two-way VSAT high-speed Internet access to the home in the near future.
Analysts estimate revenues from broadband satellite services to rise from the current $200 million to $37 billion in 2008. But most providers of satellite Internet access services promise to deliver high-speed connections to the nation's most rural and isolated areas by about 2005. Teledesic, which promises to be a "global, broadband Internet-in-the-Sky," promises to have services available in 2003. And Spaceway, which represents Hughes' next generation of broadband satellite delivery systems promises service earliest by 2002. Only Pegasus Communications (PGTV) began to offer high-speed Internet access to rural households under an agreement with Hughes recently.
On the other hand fixed wireless service providers may very well storm the broadband market as early as next year. They could achieve a stupendous 165% CAGR by 2007. The fixed wireless broadband market will grow from a few thousand early adopters at present, to more than 6 million subscribers representing revenues of $3.7 billion by 2005, doubling by year 2007 to 12 million subscribers and accounting for revenues of $7.5 billion, according to the Hoax, Breedlove and Wesneski & Co.
Rapidly advancing technology and a benevolent regulatory environment provided by the Federal Communications commission (FCC) has given a big boost to this infant market segment. This has been a shot in the arm for the efforts of telecom giants MCI WorldCom(WCOM) and Sprint (FON) as both have been seriously looking at high-speed without wires. Both companies together have shelled out $2.2 billion to acquire MMDS licenses, which will enable them to cover 50% of the estimated 115 million U.S. homes.
Conclusion
In the long run, the best broadband access solution for both the business and residential markets will be fiber. And given the enormous opportunity and potential of the broadband market, there will be room for many access technologies to taste success.
Ultimately, however, the consumer, who will get more services for less money, will reap the greatest benefit of all this hype and fierce competition in the broadband market. The question is, who will be positioned best to "connect" the world? Right now, it's anyone's call.
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