As Phone and Cable Firms Fiddle, The Wintel Partners Are Burning
(Though dated, I liked the overview, especially in regard
to Fore's new partner, Intel, and thought article might be
of interest to others on this thread.)
The Wall Street Journal Interactive Edition -- December 15, 1997
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
There's no better expression of the breakneck pace of innovation in the
personal computer industry than Moore's Law -- a dictum, named after
legendary Intel Corp. founder Gordon Moore, that microprocessor
performance doubles every 18 months.
But when it comes to the rate at which communications networks are
improved, Intel executives joke about the more pessimistic Grove's Law,
named for chief executive Andrew Grove: The amount of bandwidth
available doubles every 100 years.
"If that isn't...frustration, I don't know what is," says Gary Lauder,
managing partner at Silicon Valley venture-capital firm Lauder Partners
LLC.
Indeed, leading high-tech companies like Intel make no secret of their
disappointment with the telecommunications and cable companies charged
with rolling out broadband connections -- the fat network lines that
promise to make downloading video and audio from the Internet less of a
waiting game. For bandwidth evangelists, the landmark
Telecommunications Act of 1996, which was partly intended to spur
development of new interactive networks, was a ray of hope. But that ray
has dimmed considerably since the act's passage; while some
communications companies have begun testing high-speed Internet access,
critics say the law has created frenzied competition in telephone markets
while leaving new markets like broadband Internet access fallow.
"For a long time, I looked at the Telecommunications Act as something to
support because it was in line what we wanted to do," says Leslie Vadasz,
senior vice president and director of corporate business development at
Intel in Santa Clara, Calif. "Finally, I and a number of others realized it has
nothing to do with that."
"I'm embarrassed to say it took until the middle of this year when I finally
realized, 'Hey, this was a non sequitur,' " Mr. Vadasz adds.
Not surprisingly, then, Intel and Microsoft Corp. -- the de facto overlords
of the PC industry -- have begun playing a more active role in the delivery
of broadband connections for the home. Throughout 1997, the companies
cracked open their ample war chests, making key investments in cable
companies, start-up telecommunications providers and satellite operators
in an effort to accelerate the costly upgrades required for networks to
support fast Internet access.
It's easy to understand Intel's impatience. Like Microsoft, its software
partner in the so-called Wintel duopoly, the chip giant views the Internet as
a spectacular opportunity to develop new businesses such as TV set-top
boxes. But the two companies also hope the Internet can keep their PC
operations humming. Both depend heavily on customer upgrades to
newer, zippier versions of their products -- but customers won't make
those upgrades unless they see a need to do so.
"The issue if you're Intel and Microsoft is, how do you get people to
upgrade?" says Roger McNamee, general partner with venture-capital
fund Integral Capital.
The answer, Intel and Microsoft believe, is Internet applications such as
videoconferencing, virtual reality and streaming audio. Besides providing
new sources of software sales, such applications are expected to demand
a healthy dose of chip power, ensuring that Intel's ever-faster chips keep
finding eager buyers.
But if such applications are to emerge, consumers will need something
better than the pokey 28.8 kilobits-per-second connections most use to
hook up to the Internet today. Down the road, hamstrung bandwidth could
mean hamstrung growth opportunity for Intel and Microsoft.
Cash for Cable
Cable operators have been the most visible recipients of Wintel's largess.
In June, Microsoft invested $1 billion in Comcast Corp., the fourth-largest
cable provider. Microsoft also is reportedly in talks with other operators,
including U S West Media Group and Tele-Communications Inc., about a
similar investment. Intel, meanwhile, this year made a smaller, undisclosed
investment and acquired a warrant for shares in AtHome Corp., a
Redwood City, Calif., cable Internet service provider backed by the
major cable operators.
The cable companies badly need the cash. Although their networks are
capable of awesome data transfer speeds -- 10 megabits per second, but
more often around 2 Mbps or less -- they require enormously expensive
digital equipment upgrades to support two-way communications. In areas
where two-way communications aren't available, some cable operators
have begun offering "telco-return" -- a broadband cable downlink and a
slow telephone uplink -- but most analysts consider that a stopgap
measure.
Intel, for its part, is also playing a role on the equipment-side of the cable
Internet business. It owns 12.2% of Hybrid Networks Inc., a provider of
gear for cable and wireless Internet access firms. And along with AtHome,
Intel is developing technical standards that will make it easier to plug cable
modems into PCs. Intel and Microsoft aren't placing their bets on cable
alone. From their perspective, it doesn't matter what form the bandwidth
takes as long as it's cheap, fast and reliable. "We are bandwidth agnostic,"
said Mike Conti, a senior business development manager for digital TV at
Microsoft.
Another bandwidth scheme that's garnered their support is digital
subscriber line, or DSL, a technique for passing data over ordinary phone
lines at speeds averaging around 1.5 Mbps. DSL advocates argue that the
technology is cheaper to roll out than two-way cable communications, but
that hasn't exactly led to a bonanza of installations. Some telephone
companies have begun experimenting with the technology, and Microsoft
is participating in the largest field trial of DSL -- offered by GTE Corp. --
in which more than 1,000 company employees can access the Internet and
Microsoft's internal network at lightning speeds.
But overall, the telephone companies have been slow to roll out DSL,
resulting in subscribers in the "low thousands," according to Rona Shuchat,
an analyst at Framingham, Mass., market-research firm International Data
Corp. Some critics believe the telcommunications firms are more
preoccupied with grabbing bigger shares of the local and long-distance
phone markets than tapping into uncertain broadband markets, while
others suggest the companies have been slow to support DSL because it
could undercut existing, more expensive data services like ISDN and T-1
lines.
"All of this [investment], I believe, is a reaction to the slowness on the part
of the telcos to open up" broadband connections, says Jim Flach, a
partner at venture-capital firm Accell Partners in Palo Alto, Calif., which is
an investor in DSL-equipment firm Redback Networks, Inc. "One of the
things telcos have to grapple with is they make a good deal of money on
switched T-1 service. This is a tough problem for these guys."
Hurry Up and Wait
Telcommunications firms protest that they're making considerable
headway in offering faster connections. GTE, for instance, says it only
began testing its DSL service in February 1996; it plans to offer it
commercially in Washington, California and other states in the first quarter
of 1998. "We have customers willing to move their homes just to be in an
area where they can use DSL," says GTE spokesman Jim Kula.
Still, some believe the most aggressive broadband efforts may come from
start-up firms and not telcommunications veterans. Intel has invested an
undisclosed amount in a closely-held telecommunications firm, Santa
Clara's Covad Communications Co., which says it will offer DSL service
to 400,000 homes in the San Francisco Bay Area by the end of this year.
Prices will range from $90 a month for a DSL connection that provides
144 kbps speeds to $195 a month for a 1.1 Mbps offering. At those
prices, though, Covad -- founded by former Intel executives --
acknowledges the service will appeal mainly to businesses.
Cost is certainly one of the reasons telecommunications companies are
proceeding with caution. A recent survey by market-research firm The
Yankee Group indicated that 66.4% of households were interested in a
fast Internet connection, but only 27.1% were willing to pay more than
$40 a month for the service. That leaves the mass-market appeal of cable
services like AtHome -- which charges from $39.95 to $44.95 a month
for 1.5 Mbps access -- in question.
It also leaves Intel executives sullen over the bandwidth predicament:
There's not enough of it, and the broadband services that are available are
too pricey. "There are over 40 million homes with PCs," said Intel's Mr.
Vadasz. "I made the claim fairly recently that there are perhaps no more
than 20,000 homes with broadband connectivity. Somebody argued
violently with me that there are over 50,000 homes. To me that makes the
point ... That's nothing."
Other estimates are higher, though their subscriber numbers are still
minuscule. Kinetic Strategies estimates there will be about 110,000
subscribers to two-way cable modem service alone in North America by
the end of this year, a tenfold increase since the beginning of the year. But
cable modems' impressive growth figures mask the fact that only 8.7% of
North American homes are cable-modem ready -- and of that smaller set
of homes, only 1% have actually signed up. The result: Of approximately
105 million cable households in North America, less than one-tenth of one
percent have actually signed up for cable-modem services.
Still, the bandwidth rollout continues, even if at a snail's pace, and other
technologies have drawn the Wintel partners' attention. Besides its cable
and DSL holdings, Intel in February joined Societe Europeenne des
Satellite to form European Satellite Multimedia Services S.A., a
Luxembourg-based company that will deliver multimedia content to PCs in
Europe. Similarly, Microsoft CEO Bill Gates is personally backing a
low-earth orbiting satellite operation, Teledesic Corp., that promises to
provide 64 Mbps Internet downlinks and 2 Mbps uplinks anywhere on the
planet -- but not until 2002.
At the same time, Microsoft and Intel are looking beyond the PC,
developing set-top boxes that will link televisions to the Internet through
broadband connections. Interestingly, this is where fissures may be forming
in the traditional Wintel partnership: While Microsoft has pushed set-top
box designs to cable operators based on its Windows CE operating
system, Intel and Oracle Corp. subsidiary Network Computer Inc. have
proposed a separate design to a cable-industry consortium.
Some observers believe the fissures will heal and that Intel and Microsoft
will fall into line on a set-top box plan. But until the long-awaited
bandwidth explosion arrives, it's certain that the high-tech giants will
continue to grumble about the telecoms industry.
"I think there is a tremendous amount of posturing going on at a place
where the computer industry, telephone industry and cable industry meet,"
says Integral's Mr. McNamee. "The reality is that, long-term, the stakes
are really high. But it's easy to get the impression that no one is quite
certain what they ought to be doing next."
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