Demand Grows for Net Service at High Speed
By SAUL HANSELL
The New York Times
December 24, 2001
It has been a tumultuous year for providers of high-speed Internet service. Three companies that offer it over phone lines filed for bankruptcy. So did the leading provider of high-speed Internet service over cable TV systems, Excite@Home. And the largest cable company, AT&T (news/quote) Broadband, spent much of the year trying to decide its future before finally falling into the arms of Comcast (news/quote) last week.
While each of these events had some effect on customers, nothing has deterred an increasing number of Americans from signing up for high-speed — or broadband — Internet access.
"Despite the recession and the demise of many of the providers, broadband is one of the technologies that consumers continue to spend money on," said Jed Kolko, an analyst with Forrester Research (news/quote). "Given the choice, they will upgrade to broadband before they buy a new PC."
Some 10.7 million of the nation's households now have broadband access, representing about 16 percent of all households online, according to the Yankee Group research firm. A year ago, 5.6 million homes had broadband access, or about 10 percent of online households.
And some research firms put the penetration of broadband even higher — 20 percent, according to recent surveys by both Forrester and Nielsen//NetRatings.
Cable companies continue to hold an edge over phone companies in the broadband market. The Yankee Group calculates that 68 percent of broadband users connect by cable, while only 31 percent use the phone-line variant, called digital subscriber line, or D.S.L. The rest use various satellite or wireless technologies that are far more expensive and of interest mainly to customers in rural areas that have not been wired for cable or D.S.L. service.
Cable service has had a head start in most areas, is available to more customers and generally has been less frustrating to install. Then again, none of the D.S.L. companies that are bankrupt — Northpoint Communications, Covad and Rhythms — inconvenienced as many people as the 850,000 AT&T customers who were cut off at least temporarily recently after a dispute between AT&T and Excite@Home.
AOL Time Warner (news/quote), whose America Online service is the leading provider of dial-up Internet access over conventional phone lines, has been a laggard in offering high-speed service — even though AOL Time Warner is also among the nation's largest operators of cable systems. America Online — which provides content, e- mail and instant messaging — offers a version of its service via D.S.L. in many areas, but analysts say this has had very little success in the market. This fall it started introducing a high-speed version over the systems of Time Warner Cable.
David Burstein, an industry consultant and editor of the DSL Prime newsletter, estimates that America Online, which has about 30 million subscribers, has lost two million customers to cable and D.S.L. broadband providers. Once some customers start using a different provider for broadband Internet access, Mr. Burstein said, they may no longer see the need to continue paying for America Online's content and messaging services.
But Robert W. Pittman, co-chief operating officer of AOL Time Warner, said AOL was satisfied with the adoption rate for its high-speed services. "AOL never aimed at the techie early adopter users," he said. "It took three or four years for more than half of our customers to start using 56K modems," he said, referring to modems with speeds of 56,000 bits a second, which replaced earlier models with slower speeds. (Broadband systems can transmit data at speeds of 500,000 bits a second or faster.)
Mr. Pittman said that just because a consumer signed up for a rival D.S.L. or cable broadband service did not necessarily mean that AOL would lose the customer. Some four million AOL members use AOL's software (which links to its e-mail system and content) even while using other companies' high-speed networks for basic Internet access. With a majority of those customers paying AOL's $23.90 monthly fee (and the rest paying a cheaper $9.95 plan), they are a very profitable clientele because such customers place little demand on AOL's network capacity.
Mr. Pittman declined to say how sales were going of AOL's fast service on Time Warner (news/quote)'s cable markets, other than to say that adding AOL, as well as its rival, Earthlink, did not seem to slow down sales for Time Warner's existing high-speed brand, Road Runner. Mr. Pittman said demonstrating that multiple high-speed services did not necessarily cannibalize existing offerings would be critical to convincing AT&T Comcast and other cable companies to allow AOL onto their systems — a key goal of AOL Time Warner, now that it has lost out in the bidding for AT&T's cable business.
So far, however, Earthlink appears to be more aggressive and seemingly more successful in its broadband offerings than AOL has been. As of the end of the third quarter, Earthlink had about 200,000 D.S.L. customers, 90,000 cable customers through Charter Communications (news/quote), and 116,000 customers through various broadband offerings from Sprint.
Garry Betty, Earthlink's chief executive, said it was too soon to say how many customers it had attracted from its arrangement with Time Warner Cable. But the company has decided to promote cable over D.S.L. wherever it can, mainly because its agreement with Time Warner is more financially beneficial to Earthlink than its deals with most of the phone companies.
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"Customers don't care if it's cable or D.S.L.," Mr. Betty said, "and I can make more money on cable."
But not everyone thinks that broadband of either sort is profitable. United Online (news/quote), the parent company of the NetZero and Juno Internet services, has dropped its D.S.L. service and is moving only slowly to take advantage of an agreement to offer broadband Internet service on Time Warner Cable systems. United, instead, is emphasizing its $9.95-a- month dial-up, or so-called narrowband, service at 56,000 bits a second.
"Broadband is very expensive to operate, and no matter how big it gets, narrowband will still be the dominant medium for the next five to seven years," said Mark R. Goldston, United's chief executive. "As the big guys decide that narrowband is not sexy, I want to capture their users."
Cable companies and phone companies have been rewiring their networks to make high-speed service available to more of their customers. The Yankee Group estimates that 66 percent of homes with cable can now order high-speed service if they want to, while only 45 percent of the homes with phone service can order D.S.L.
But the growth in availability may be slowing, especially for D.S.L. The big phone companies are backing off plans to wire suburban and rural areas for D.S.L. because the service is generally more expensive to deliver to homes that are further away from phone company offices.
The Yankee Group now predicts that over the next few years, only 50 to 55 percent of homes will be able to get D.S.L. service — far less than the 70 percent that Yankee had been predicting earlier, said Imram Khan, an analyst at the firm.
"The phone companies now want to increase penetration on the markets they are already in," Mr. Kahn said. "Companies had been rewarded on how fast they were getting their networks up. Now investors want them to make profits."
The press for profits and the demise of competing D.S.L. companies have encouraged cable and phone companies alike to raise prices over the last year. The most common price for D.S.L. service is now $50 a month, up from $40 a month last year. Cable service is now typically $45 instead of $40.
Price, by all accounts, turns out to be far more important to customers than the technology. In a Yankee Group survey, more than 50 percent of users said they had no preference between cable and D.S.L. But the survey found that interest dropped sharply as the potential price of either form of the service increased.
Internet service providers and market researchers are still finding that signing up for and installing D.S.L. is more frustrating than is ordering broadband cable service.
"The phone companies discovered you couldn't train 10,000 installers or build a network to serve millions as quickly as they thought," Mr. Burstein said.
In general, though, once broadband service is up and running, customer satisfaction seems to be about the same for both sorts of service.
"A good cable company is better than a bad D.S.L. company, and a good D.S.L. service better than a bad cable service," Mr. Burstein said. "It's not the technology, but the company." |
