Remember NUKO are selling to customers who already have broadband networks in place. !!!!!!
The Slowdown
By Stephan Somogyi, with Brahm Eiley
June 02, 1997
Stooges are as stooges do. We've already endured too much slapstick about the convergence mania. Meanwhile, relentless stupidity continues as we contend with the tug-of-war between cable companies and telcos, each eager to blame the other knucklehead for the slowdown in the development of broadband networks.
The lost continent of Atlantis was a fabled island that, according to legend, sank beneath the waves of the Atlantic Ocean. As we enter the 21st century, we have our own version of Atlantis in broadband, a fabled technology promising unlimited bandwidth, and with it, a plethora of on-line capabilities.
Atlantis and broadband technology share a multitude of qualities. Even though they attract many true believers, they are both essentially mythical. They are considered really cool by these same believers, probably because of the incredible treasure trove just waiting to be found by intrepid adventurers. Broadband, we are assured, will lure an eager long-term audience of satisfied eyeballs and thus transform the Web into a mass medium rich in advertising and commercial transactions, one that will rival established print and broadcast realms.
Furthermore, the Bermuda Triangle, long reputed to be a link to Atlantis, is said to have caused the disappearance of untold vessels. Broadband and investment capital share a similar relationship.
The greatest disparity between Atlantis and broadband lies along the axis of time: The reign of Atlantis was in the indeterminate past; the ascent of broadband lies in the unpredictable future.
In just three years, the focus of broadband technology has moved from interactive television (ITV) to the Internet to the dubious liaison between TV and the Web. And in all instances, the agglomeration of technologies known as broadband has claimed primacy as the perfect way to deliver on the promise of a world of meganeat stuff. But no one has created a killer app for any of it or, for that matter, a reasonable way to pay for it.
In reality, the companies that are so gung-ho about broadband's consumer benefit and the concomitant consumer acceptance are in dire need of its success. The situation is much like the consumer-electronics companies' need for a new source of income from products such as DVD and HDTV because VCRs and CD players have become commodities. Broadband promises to provide a similar burst of income to cable and phone companies, as well as to purveyors of networking hardware.
So What's All This Broadband, Then?
The case the cable and telephone companies make for upgrading to a broadband infrastructure stems from being able to offer a variety of services (telephony, cable TV, high-speed data and some form of video on demand), which in theory would allow each industry to spread massive capital expenditure costs over a number of revenue streams. But no longer. "The bundling argument is not proved," says Abraham Bleberg, a broadband analyst at New York-based Goldman Sachs. "Leverage sounds nice, and many cable and telephone executives have staked their careers on this business model. But it is far from clear how far everyone is willing to get in." Until hints appear about which directions revenue will come from, no one is willing to commit to large-scale funding--a reasonable position for companies with finite cash reserves.
Another part of the dilemma the big telco and cable companies face is an ever-changing definition of broadband. A few years ago, the word was used to describe a combination of television, video on demand, and interactive and telephony services, all delivered by freshly laid hybrid fiber/coaxial cables. The cable companies, spearheaded by Tele-Communications Inc. (TCI) and its vocal chief executive, John Malone, believed they had an edge because, well, they were cable companies. The phone companies, both long distance and Baby Bells, thought they knew better because they had more experience with the type of switched network these services would require. But so far, neither faction has displayed any notable cleverness or significant advantage.
For starters, the idea was to persuade the corporate wallets involved to cough up about $300 per home on a settop box. Theoretically, based on the volume of customers, this would provide the conduit for a bundle of services that would generate revenue for the desired return on investment, as well as the fervently wished-for "gravy" dollars.
Dubious assumptions about the amount of money feeding the market aside, companies have yet to put together a compelling combination of services. The various broadband trials during the past few years have been met with consumer apathy toward the spiffy services. Consumers were inclined to heavy use only as long as a trial was free or subsidized. On their own dimes, they have said "forget it."
The telephone companies were also in the predicament of having to rethink their broadband operations. It appeared that they could not rely on business models as usual: Well-delineated and largely captive markets would not be enough to make broadband successful. But the fear of the new and unknown additional services beyond voice was great, so any plan or technology that provided the warm, fuzzy feeling of familiarity was embraced enthusiastically. Broadband-ISDN, for example, made telephone companies giddy in the 1980s. It would allow the Integrated Services Digital Network standards to be used with the new broadband cabling. One of B-ISDN's main features was that it was sufficiently similar to existing and well-understood ISDN technology, providing an amalgam of the old and new.
To date, however, ISDN has been a dud in North America, albeit fairly successful elsewhere, especially in Europe. Conventional ISDN allows two 64 kilobit-per-second (kbps) connections--containing either one voice or data connection each--to run over the same copper-wire pair that plain old telephone service (POTS) uses today.
This conveniently solves the ubiquitous "last-mile" problem inherent in broadband. The cost of rewiring telcos' and cable companies' backbone networks pales in comparison to reconfiguring the last bit of wiring (also called the "local loop") between the central office and the consumer's home with appropriate switches and software. Even with economies of scale on their side for the materials, upgrades to each pair of wires running into every home would be extremely labor-intensive. Any scheme that leaves that last mile untouched makes for a happy profit-and-loss statement.
ISDN's lack of success is largely because of the inability of the telcos to market it or to come up with a reasonable way for consumers to pay for it. What seemed like a straightforward case of "two lines over the same copper wire as a single line" was made insanely complicated because the telcos wanted to milk every last bit of revenue from it. Longtime San Francisco Bay Area industry observer Jeff Ubois, a senior analyst with CIR Inc., a Charlottesville, Va.-based consulting firm specializing in broadband networking, has an explanation: "A real problem for the telcos is cultural: Regulated monopolies with guaranteed rates of return, easy access to capital and 25-year depreciation schedules don't move very fast."
Internet Go Boom
Until the recent intense consumer interest in the Internet, there also wasn't a compelling ISDN application beyond its additional phone line. But even with today's huge consumer Internet interest, ISDN is prohibitively expensive compared with POTS. Phone companies charge from $25 to $450 to install the ISDN line, and monthly service charges can run $25 to $125 a month.
This wasn't the slightest bit daunting to cable companies and their hardware providers, though. After ITV fizzled and the Internet boomed, they repackaged some of the ITV settop-box technology and called it a cable modem. The pitch was that instead of using a conventional modem, you could use a similar box to plug in to the consumer's PC and the cable, and offer higher-speed Internet access. But cable-modem services depend on expensive cable infrastructure upgrades, which cost $250 to $380 per home, plus $400 for the cable modem. Cable companies charge $40 to $60 per month for cable-modem service. Upgrading for cable telephony would cost even more: about $800 to $1,000 per subscriber. If ISDN, which inexpensively used existing infrastructure, didn't take off, cable modems seem even more unlikely to generate a return on investment.
And if financial staying power is the cable industry's biggest challenge, the quality of cable-modem service remains its most critical commercial roadblock. "Maintenance and customer service are expensive and real issues for the cable companies," says Larry Yokell, president of the Boulder, Colo.-based consultancy Convergence Industry Associates Inc. "No company has yet pushed a cable system to the max, which will significantly lower the promise of speed. And cable modems are easy to crash. None of this bodes well for cable companies, especially as they try to make the service more than a drop in the bucket in initial key markets."
And cable modems must be more than a "drop" to succeed. The business scenario calls for at least 10 percent of cable subscribers to adopt the technology by 2000. Time Warner Inc., US West Media Group, Comcast Corp., Cox Communications Inc. and TCI have 40 million cable subscribers. Market researchers predict there will be between 1 million and 7 million cable-modem subscribers by 2000.
Nonetheless, cable modems are still in the cards for some. US West has 5 million cable-TV subscribers and offers cable-modem service in six markets; 20 percent of its cable system has been upgraded. The company is pursuing "a gradual rollout, an incremental approach that makes stockholders happy," says Steve Hill, senior VP of broadband data services. Cox Communications is also going ahead with its hybrid fiber/coax upgrade, but it has the luxury of geographically concentrated markets: 2.5 million of its 3.3 million customers are clustered into nine markets of between 150,000 and 500,000 subscribers each. The endeavor won't cost the company nearly as much as it would its competitors, who have more widely dispersed customers.
For some telcos, cable companies and even content providers, a decided retreat from the promise of cable modems seems in evidence. "So far, the '90s can be characterized by cable and telephone companies posturing, but not doing," says John Aronsohn, senior analyst of consumer communications at The Yankee Group, a technology-market research firm based in Boston. "A lot of decisions seem to be based on 'what my competitor will do.' But in the end, most companies have just pursued their core businesses."
Further evidence of sobriety in the broadband world began to appear in late 1996, when TCI and Time Warner scaled their broadband efforts way back. Finally, in May '97, Time Warner announced that later this year it will shut down its full-service interactive-cable trial in Orlando, Fla., in favor of a video-on-demand pay-per-view scheme. Some cable companies, including Cox, Time Warner and Comcast, have even proposed adding telephone service to their cable systems. In order to upgrade their systems to add telephony, cable companies would need to spend between $800 and $1,000 per subscriber. But cable telephony may be another solution looking for a market, and Time Warner, at least, has suspended its plans. "There is no business case for cable telephony," says David Roddy, chief telecommunications economist at Deloitte and Touche Consulting Group in Atlanta.
Meanwhile, the telcos have concluded that their futures lay in technology that leaves the last mile as is. The acronym-laden weapons have been swiftly loaded for bear, and xDSL is now "the next big thing."
X Marks the Spot
As long as five years ago, the letters ADSL began to attract attention in broadband circles. Asymmetric Digital Subscriber Line is a collective heading for technologies that provide between 1.5 and 8 megabits per second (Mbps) of bandwidth to the consumer (or downstream) and up to 2Mbps upstream, all over the standard pair of copper wire used for POTS.
The latter path, also known as a back channel, is important not because every consumer wants to be a content provider, but because broadband services need a way for consumer choices to be sent upstream. This has always been an issue for cable broadband as well, especially if consumers want features such as on-line game-playing with others on the network.
ADSL is only one of an alphabet soup's worth of digital subscriber line schemes collectively known as xDSL. HDSL (high bit-rate), IDSL (ISDN-speed), SDSL (symmetrical) and VDSL (very high bit-rate) offer many and varied bandwidths and features. They share two critical features, though.
All of the xDSL technologies run over that ubiquitous copper pair and will allow phone companies to migrate data traffic. Because of the Internet's popularity, volume is exploding off the overloaded conventional POTS equipment and onto new xDSL hardware. This means consumers would have to stop using their POTS modems and buy xDSL hardware. The main differences among the xDSL schemes, besides bandwidth, are the lengths of the copper wiring they can run on reliably: Higher bandwidth means shorter distances. The quest for the perfect balance continues.
Avanti Dilettante
All the broadband players have pinned their hopes of making loads of money on providing greater bandwidth to the home at the lowest possible cost to themselves. CIR's Ubois points out that "if you want to justify network investments, you need to describe a killer app. But that can make you look silly because the best use for bandwidth is only obvious in hindsight."
Plausible killer apps are hard to find. ISDN didn't have one and therefore didn't get far in North America; not even the Internet has been enough to make ISDN widely successful. With broadband, there's even more bandwidth: Will people pay extra to download their e-mail from America Online at megabit speeds? (Assuming AOL could even deliver it at that rate.) Hardly.
The cable companies are retrenching and focusing on their core markets. At the same time, those markets are under successful attack by direct broadcast satellite (DBS) companies. DBS has more than 5 million subscribers; this is projected to triple by 2000. In an effort to offer competitive variety, TCI and its market compatriots are struggling to eke every last channel out of their extant cables with the help of digital video and its compression.
Meanwhile, the telcos have two problems to contend with while considering fiber: the cost and their ongoing political headache, the 1996 Telecommunications Act and the Federal Communications Commission. The FCC has proposed cutting by a third the $25 billion in access fees the local telcos have been getting from the long-distance carriers. "The FCC has created a disincentive for investing in infrastructure, leading most telephone companies to hedge," says Bob Barada, San Francisco-based Pacific Telesis Group's VP of corporate strategy and development. With a third of the telcos' access revenues awaiting FCC and state court decisions (which could take until the year 2000 to resolve), "there is a lot of concern about where we invest our money," says Greg Theus, director of network planning at GTE Telephone Operations, a division of GTE Corp. "There is a lot of hype on broadband. And, really, how many people are going to buy it? We are all playing the wait-and-see game to [determine] if there is enough demand."
For now, telcos are pursuing xDSL in an effort to at least provide bandwidth, even if it's unclear what's going to be streaming through it. Some of them are still fiddling with delivering video over xDSL. "All the bandwidth increases into the home have come from improvements in chip technology. Modems have gone from 300bps to 57,600bps in 15 years over the same analog infrastructure. This speaks volumes about how much help the telcos have been," Ubois says. "If the telcos deliver xDSL services with the same levels of dedication, competence and agility as they have ISDN, it will be a long time coming."
Broadband has always had a favorite technology of the moment--in many ways like the interminable parade of management fads, but with billions of dollars tied up in it.
Broadband companies can't sell their wares to consumers because they can't decide what it is they want to sell, and market conditions change before internal deliberations can get a full head of steam. Even when presented with an obvious application such as Internet access, they can't make the numbers work to deploy it. In a recent Jupiter Communications LLC study, "Midband and Broadband to the Home," analysts concluded that 56kbps modems will dominate the Internet-access market during the next five years, with a projected market of about 20 million users.
With non-high-speed access a fraction of the price of broadband, Jupiter may be correct. Then the question becomes, is the content on the Web interesting enough to substantiate the need for high speed? "Content drives the Internet market, but the killer app is e-mail, which doesn't need speed," says The Yankee Group's Aronsohn. "Broadband is merely the hype to get people excited about the Net."
The current melees involving HDTV and the meeting of PCs and TVs, as well as TV-based Internet and Web access, do nothing more than stir things up further. At the end of the day, the fog that is broadband shows no sign of lifting soon. And Atlantis is still just a watery dream.
Stephan Somogyi is a San Francisco-based writer and consultant. He has written for The Economist, I.D. Magazine, CNET's news.com,The Financial Times, and the London Daily Telegraph's Connected section. This is his first article for Upside.
Toronto-based writer Brahm Eiley has written for many publications in Canada and the United States. He recently won Andersen Consulting Canada's special award for business-technology writing. Eiley's last article for Upside was "Let Your Fingers Do the Surfing" in January. |
