2 Excellent articles on winning Fast-Access Wars -and profiting by it.
tell me what you think of them....John
Winning in the Fast-Access Wars, Part 1
By Jim Seymour
Special to TheStreet.com
1/15/99 12:42 PM ET
One of the big tech stories in 1999 will be advances in the
fast-Internet-access-to-homes business. Unfortunately, the story is complex and
hopelessly confused, full of overclaims, techno-speak and hidden agendas. I could
write a book untangling the technology, claims and likely market response -- a
book which would have, roughly speaking, about seven readers. Because much of
this isn't much fun.
Actually, the tech part isn't so hard: This story is much more Gordon Gekko than
Gordon, Flash. But you have to understand some of the tech side to make sense
of the investment-opportunities side, so bear with me. I'm going to look at the tech
stuff today, and the emerging marketplace tomorrow. It will be dense reading, but
worth it; fasten your seat belts.
Fortunately for investors, it's not hard to find some companies that look like
prospective winners amid this confusion, once we untangle the claims and
geek-ology. So let's go.
The driving force here: There's a huge demand for faster Internet access. When
Compaq (CPQ:NYSE), about to come to market near the end of last year with
"ADSL-ready" PCs, conducted market research among potential customers, more
than 70% said they'd happily pony up for a faster Net connection.
No wonder. Today's fastest analog modems are rated at 56Kbs, though
connections are limited by law to 53Kbps. In practice, few PC users ever get
anything like 53Kbps, because telco line quality and the likely presence of
switches along the signal path from your home to the telco office -- switches which
flip the signal from analog to digital, and back -- severely limit performance.
Moreover, many PC users still use 33.6Kpbs and 28.8Kbps modems -- which also
rarely deliver their full rated speed.
On average, U.S. Web users probably average 25Kbps-30Kbps connections to the
Web from their homes. If that. Which leads, of course, to jokes like the "World
Wide Wait."
Three technologies are competing to replace these analog devices as we move into
the digital world: ISDN, xDSL and cable access to the Web. A fourth path,
satellite access through pizza-pan-sized mini-dishes, is being pushed by Hughes
Electronics' (GMH:NYSE) DirecPC, DirecDuo and USSB divisions, but has gone
almost nowhere and has a dim future.
ISDN has been around for two decades, and thanks both to advances in other
technologies and (mainly) the telcos' traditional and continuing stupidity, has never
taken off ... and likely never will. ISDN lets you open two "pipes" along standard
copper phone wiring, in a single phone line, each capable of carrying 64Kbps. One
can be used for voice conversations while the other is used for data
communications. Or you can "bond" the two into one 128Kbps data connection.
ISDN comes close to delivering the speed claimed for it, but in the face of faster
and cheaper alternatives, that only-slightly-better speed is no longer very
interesting.
And the RBOCs -- the former "Regional Bell Operating Companies," such as Bell
Atlantic (BEL:NYSE) and SBC Communications (SBC:NYSE), etc.) -- have
wildly overpriced ISDN lines, usually charging a monthly flat fee plus a
connect-time surcharge. It's easy to spend $100-$150 a month for mediocre ISDN
service from most RBOCs.
Needlessly high pricing arises from the core problem in buying
faster Net access from the telcos: The RBOCs are desperate to
protect their sky-high T1-line rate cards.
That needlessly high pricing arises from the core problem in buying faster Net
access from the telcos: The RBOCs are desperate to protect their sky-high T1-line
rate cards. With a T1 priced at from $1,200 to $1,600 per month in most areas,
plus a $100-$300 per month ISP charge to manage the line, plus an expensive
router on your premises to make it all work, T1s produce huge revenues for the
telcos. Anything -- ISDN included -- which threatens that gouge is anathema to the
RBOCs.
It's been obvious for years that those high T1 prices couldn't last, but the
retrograde thinking of RBOC managements across the country has led them to
embrace the old and resist the new with all their might. RBOC execs talk a good
game about the new, but with so much of their revenues wedded to the old, look
askance at anything truly new. Like digital telephony. I've looked in vain for years
for signs of a progressive RBOC CEO with the courage to truly embrace the digital
revolution and lead his or her company into the digital age. That would have been a
fabulously profitable move. But I might as well have been watching for Martians in
the U.S. Senate. (Hmm....)
That's why today ISDN -- known by a wide range of insulting terms, principally "I
Still Don't Need it" -- is toast.
The real contest is between the telcos and the cable companies, each with a
favorite new technology, most of the needed infrastructure in place, and huge
customer bases into which to sell fast access. And each with a huge hidden
agenda.
Cable outfits are pushing Internet access over their existing cable connections.
The telcos want instead to convert your residential phone line to xDSL. (The "DSL"
part means "Digital Subscriber Line," and we use a leading x to indicate that there
are actually several flavors of DSL -- ADSL, SDSL, HDSL, VDSL, etc. For home
consumption, we're talking about ADSL, or Asymmetric DSL, in which the speed
of transfers down to your PC is much faster than the speed of transfers up from
your PC to the system, and thence to a Web site.)
Cable modem access is, and will likely remain, a better bet for most users. The
cable companies typically charge about $40 per month for fast access, including
ISP charges. (They take the place of your existing ISP, and typically offer some
useless "value-added" ISP-like services. The fast access is great; the value-adds
are a joke.)
While cable modems can in theory deliver up to 10Mbps, maybe even 30Mbps, to
your home PC, in practice they're typically limited by your PC, your network card,
and cable outfits' sloth to about a twelfth or fifteenth of that -- on average, typical
speeds of 700Kbps-800Kbps. Moreover, you share the available bandwidth with
some unknown number of neighbors with cable-Internet-access service, whom the
cable company has thrown into what they call a node with you. If no one else is
on, you're likely to get the full 700Kbps or so available in your neighborhood. If
there are several other Netheads in you neighborhood, and all are using the Web at
the same time, your access speed can slow to as little as 50Kbps or so --
conceivably, even less.
Hooking up cable access is easy. You need a standard 10Mbps or 10/100Mbps
Ethernet card in your PC, plus a "cable modem." (Actually it's a router, but the
cable industry is terrified that terms such as "router" will scare away the
technophobes, so they misname the device a modem, which it manifestly is not,
because in a digital world there's nothing to MOdulate or DEModulate.... In
fairness, cable-system management may simply misunderstand what's in the
"modem" box.) The best-known cable modem today is Motorola's (MOT:NYSE)
CyberSurfr, but at the Consumer Electronics Show in Las Vegas earlier this
month, Cisco (CSCO:Nasdaq) talked about its plans to be big in the cable-modem
business, too.)
Cable companies typically provide the cable modem, folded into your monthly fee
on a lease basis, and if necessary will usually install the needed network card in
your PC for a nominal charge, as well. Initially, as cable companies scramble to
grow their customer bases before the telcos come calling at your door, you'll see a
lot of "Free Installation!" and "Free Network Card!" deals. Maybe even "Free
Modem!" too, though I haven't yet seen that.
Cable access is very quick -- most pages appear almost instantly, and even
longish downloads are rapid. For reference, TheStreet.com's home page comes
down to my cable-modem-equipped PC in about two seconds. And I can download
big files, such as Netscape (NSCP:Nasdaq) Navigator, in just three or four
minutes.
Perhaps best of all, cable-modem access to the Web is (like a T1 connection) a
continuous connection: You're always online, so you don't have that irritating
30-second series of screeches from your analog modem (properly: "negotiation")
each time you connect. (Sound odd? You don't turn your cable-TV connection off,
do you? You can always switch channels and the next one is right there, eh?
Same with cable modems.)
In fact, cable access is close to nirvana for Web users. With time, as we get jaded
and Web sites start to exploit broadband (read: fast) Web connectivity, we'll get
antsy even at 600Kbps-800Kbps, and demand more. It'll be there; it's relatively
easy and cheap for cable providers to crank-up system performance (for now they
have no incentive to do so). (Yahoo! (YHOO:Nasdaq) already has a group
assigned full-time to developing TurboYahoo, which will more fully exploit
broadband connections. The company will start creeping TurboYahoo features onto
its main Yahoo site slowly, as statistics show more and more of us have fast Net
access from home.)
The real problem with buying your Net access from your cable company is...buying
your Net access from your cable company. Many local cable outfits have a richly
deserved reputation for unresponsive customer support, and you can probably
expect that to carry over into their Net-access business. It wasn't an accident that
Jim Carrey's dark 1996 movie was called The Cable Guy.
Both cable access and ADSL have big hidden gotchas.
On the cable side, it's security. Conceptually, your PC connected to a cable
modem is actually a node on a network. That means that if, say, a neighborhood
teen-age hacker lurks on a similarly cable-connected PC, he can with relative ease
get into your PC, read your files, run programs, erase your hard disk. "Personal
firewall" answers are on the way -- and for now, Windows users can greatly
decrease their exposure just by turning off file sharing in Windows 95/98 -- but for
now, cable-access users live in an insecure world. @Home (ATHM:Nasdaq) has
already faced a security problem in the San Francisco area.
On the other side of the fence, the RBOCs are finally making Big Moves to
establish ADSL service as the preferred fast-access choice for consumers. Since
the first of the year we've had announcements such as the Bell Atlantic
(BEL:NYSE) deal with America Online (AOL:NYSE) for a joint venture to deliver
ADSL service for AOL customers in BEL's five-state area for $20 per month (on top
of AOL's $21.95 monthly charge). We've seen SBC (SBC:NYSE), aka
Southwestern Bell, talking about ramping-up ADSL availability in its service
areas: Texas, Missouri, Kansas, Arkansas, Oklahoma. We've seen PacBell
(SBC's satrapy in California) announce a rate cut of from $89-$329 to $49-$159 for
its existing home ADSL service. And so on.
After years of punting and avoiding the issue, the RBOCs are finally awakening. At
the same time, out of about 500,000 fast-access-to-the-home customers in the
U.S. today, about 475,000 have cable modems; ADSL connections hold only
about 5% of the market. ADSL obviously has a long way to go.
In theory, ADSL is a very appealing alternative to cable modems. It has a
maximum download speed of about 8Mbs -- better than a T1 line -- and an upload
speed of 758Kbps (more than enough, because you're usually just sending brief
commands, such as a URL address, upstream). ADSL uses the existing copper
wiring in your walls. It can easily deliver voice and data service on one line, so you
don't have to pay for a second, separate, datacom line.
Unfortunately, few U.S. customers will see anything like that speed. Because the
RBOC's are lining up behind an intentionally crippled flavor of ADSL called G.lite,
which at its very best can deliver 1.5Mbs down to you, and 512Kbps upstream.
G.lite ADSL has one huge advantage for the telcos: no "truck rolls." Standard
ADSL requires a POTS ("plain old telephone service") splitter both at your home
and also at the telco's office, as an interface to the analog system, to give you
voice service. Which means the telco has to send a truck to your house to install
that splitter -- about a five-minute, turn-four-screws job, The telcos hate truck-rolls,
which they see as a huge, irritating and ultimately unnecessary expense. So
they're backing G.lite ADSL to save the one-time cost of a truck-roll to your home.
A 1.5Mbs link to the Web -- about the real-world performance of an expensive T1
line -- is still darned fast, and beats today's typical cable-modem speeds. So
what's wrong with G.lite ADSL from the customer's perspective?
Beyond the needlessly compromised performance, thanks to the telcos' traditional
fear of undercutting their T1 revenues, it's the ridiculous pricing. Look closely at the
RBOCs' new ADSL offers, and you'll find that they either cap service at 256Kbps or
384Kbps, or they're offering "tiered service," with 256Kbs for $50-$80, and faster
service -- often capped at much less than full G.lite ADSL rates -- for $150-$175 or
more.
In other words, the telcos' gouge continues. Less for more. Because they're scared
of giving you a better deal. For users, the ADSL gotcha is fierce: ADSL only works
if you're fairly close to the nearest telco switching office. The usual maximum
distance is three to four miles as the cable flies. And if you're more than about
three-quarters down that line, performance inescapably falls off: You may not get
even the capped speed.
No matter what your local telco may tell you in those cutesy inserts with your
monthly phone bill, remember that this contest is not a technology issue: It's a
monopoly's pricing decision. (And you thought Microsoft (MSFT:Nasdaq) was
heavy-handed!)
So who wins here? Which technology will prevail?
I think both will survive and prosper. This isn't going to be VHS/Betamax, where an
inferior technology overwhelms and crushes a superior one. Despite the market
machinations, we're going to see very large installed bases of both cable modems
and ADSL modems over the next few years.
Tomorrow we'll look at how you can make money in this messy market, no matter
which side prevails. |
