After Billion-Dollar Build-Up, Broadband Plans are Put Off
by Dennis K. Berman & Shawn Young (Staff Reporters of The Wall Street Journal)
NEW YORK -- Call it a high-speed slowdown.
Having sunk billions into efforts to offer fast Internet connections, some big phone companies are putting the brakes on such broadband lines.
In recent days, both Sprint Corp. and SBC Communications Inc. announced retrenchments in their flagship high-speed offerings for consumers and small businesses. Moreover, AT&T Wireless Services Inc. is shutting its wireless broadband service, which served 47,000 customers, while Sprint is cutting back a similar initiative. Making matters worse, Excite At Home Corp., which delivers fast Internet connections to 3.6 million cable-television subscribers, has filed for bankruptcy, and creditors are pressuring to turn the service off.
After hitting quarterly growth rates as high as 50% last year, digital subscriber lines -- which speed Internet traffic through traditional copper phone wires -- seemed poised for a breakout year in 2001. Now the service has hit a speed bump: Growth in DSL customers slowed to 14% in the second quarter, from 20% in the first three months of the year, says consulting firm TeleChoice Inc. Cable companies, meanwhile, signed up 12% fewer high-speed Internet subscribers in the second quarter compared with the first, according to Yankee Group, another telecom consulting firm.
Not everyone has pulled back. Bell phone companies Verizon Communications Inc. and BellSouth Corp. are sticking to their goals. But even they are focusing more on selling the service to customers whose neighborhoods are already equipped for it, rather than expanding into new areas.
Having fought back dozens of independent DSL challengers such as NorthPoint Communications Inc. and Rhythms NetConnections Inc. -- both now out of business -- the regional Bell companies are finding that the broadband brass ring isn't so shiny after all. The DSL business remains mired in high deployment costs -- typically, it takes a phone company about two years to earn back the investment it makes in installing a consumer's DSL line and providing the service, says Sanford C. Bernstein & Co. analyst Jeffrey Halpern. It also faces fierce competition from cable, which already controls 68% of the country's approximately 10 million residential broadband connections. To make matters worse, the Bells are losing their lucrative second-phone-line business to cable and DSL users.
SBC is halting plans to roll out DSL service to slightly more than 100 cities, including Akron, Ohio, and Hot Springs, Ark. Such unwired communities are gearing up for a long wait. In Sammamish, Wash., a 36,000-person town just five miles from Microsoft Corp.'s headquarters, officials are holding out for Verizon to deliver DSL to make telecommuting more of an option. "We have some of the most congested traffic in the area, and DSL would help that," said Ben Yazici, the city's manager.
But even where DSL is offered, it hasn't always been easy to get. Early on, people waited months for installations and wrestled with incomprehensible technicalities between their computer and the phone equipment. The quality of DSL installations and service was often so bad it threatened to undermine the Bells' reputations.
Slowing Growth ...
Expected residential broadband subscribership, in millions
Year End 2001
Year End 2002
Cable Modem
7.0
9.6
DSL
3.3
5.0
Satellite
0.3
1.0
Fixed Wireless
0.06
0.1
Fast Internet access was supposed to become a pillar of the New Economy, enabling businesses and consumers alike to view real-time video online, download movies and music in a flash, and run demanding commercial operations. All that activity, in turn, would make workers more productive, fill new telecommunications networks and boost demand for new computers and software. Federal Communications Commission Chairman Michael Powell reiterated this week that increasing the deployment of broadband, now used by about 10% of U.S. households, is his agency's top priority. Craig Barrett, chief executive of Intel Corp., says the government ought to counter slow growth by creating a broadband initiative similar to the federal highways program and also provide regulatory incentives for broadband investment.
It was with hopes of creating millions of such broadband users that Sprint launched in 1998 its ION service, a $3 billion project to bring speedy data and voice connections to high-end residential customers and small businesses. But ION attracted only 4,500 customers, in part because technical and logistical issues slowed its rollout. Losing more money for every customer it added, Sprint discontinued the service earlier this month. Ronald LeMay, Sprint's president and chief operating officer, says the high costs of broadband have hurt its deployment. "It is not materializing in a fashion that is consistent with the best interests of the country," he says.
The most far-reaching retrenchment so far is by SBC, the San Antonio-based regional phone giant that is scaling back its $6 billion Project Pronto, originally aimed at bringing DSL service to 80% of customers in its 13-state territory by the end of 2002. "We're fairly dramatically curtailing the build," says Ross Ireland, senior executive vice president for services. SBC now offers DSL to about 60% of its customers and will continue to promote the service to them.
Executives of the regional Bell companies find themselves in a tight spot. Forced to save money to appease stockholders as the economy slows, they also risk losing some of their best customers to cable companies, which had at least a two-year head start in high-speed Internet connections.
Bell executives, most notably those at SBC, blame regulators for the slowdown, saying requirements that the Bells share their networks with rivals at a discount create a disincentive to innovation and expansion. "What we're nervous about is how much we expand this in a down economy based on regulatory trends," said SBC's Mr. Ireland.
Launching DSL has been an agonizing process for the Bells. The technology -- which involves juicing up old-fashioned phone lines for data-transmission speeds for which they weren't designed -- was tricky and far more difficult to set up than expected. The Bells now say they have resolved many of the early glitches.
To be sure, the Bells aren't coming to a screeching halt on broadband. Still, BellSouth's chairman and chief executive, Duane Ackerman, acknowledged that the company will focus on areas where it has already deployed DSL. "If you're not careful how you manage this business, you can end up with a lot of growth and very little profit," Mr. Ackerman said. With that in mind, nearly all DSL providers raised their prices over the summer, to about $50 a month from around $40, though Verizon just started a special promotion at $30 a month for the first three months.
Even more troubling is evidence that as broadband begins to go mainstream, some customers are canceling. The initial technophiles didn't need convincing about the value of a faster Web connection. But now, some mainstream customers realize they aren't taking advantage of the service. "They're saying, 'I really don't think I need to pay $50 a month to check my e-mail,' " says Imran Khan, a Yankee Group analyst. To increase the mass appeal of the service, carriers will need to cut prices. "But then you're digging the ditches deeper in terms of making your money back," he says.
Write to Dennis K. Berman at dennis.berman@wsj.com and Shawn Young at shawn.young@wsj.com |
