Leader of the Pack While Still Not Ubiquitous, Cable Modems' Speed, Deployment Far Surpass DSL
The hype machines are in overdrive promoting
the best technology and carriers' strategies to
get broadband access into the home. While
most believe that integrated services digital
network (ISDN) has gone the way of the
dinosaur, some new species of high-speed
data transmission methods are evolving. The
two prime contenders in the battle to win the
business of residential users seeking a faster,
direct path to the Internet are digital subscriber
line (DSL) and cable modems. At this early point in the game, cable
modems are way ahead of the pack.
"Cable wins on price, performance and availability," says Andrew Davis,
a market analyst for the Tempe, Ariz.-based consultancy Forward
Concepts Co. "Broadband Access in the Local Loop '98," a report by
Forward Concepts, predicts that cable modems will dominate DSL for
residential broadband access well into the future. (See chart, "North
American Residential Broadband Access.") For-ward Concepts predicts
that by the end of 1998, there will be about 360,000 cable modem
subscribers, growing to 1.2 million by the end of 1999, 3.4 million in
2000 and eventually reaching about 9.6 million by 2003.
Incumbent telcos and some competitive local exchange carriers (CLECs)
are banking on DSL services, which can run at speeds of up to 8
megabits per second (mbps) downstream and 1mbps upstream over
existing copper phone lines, to reign supreme. Then there are the cable
companies, which are upgrading their systems to two-way hybrid
fiber/coaxial (HFC) cable, which allows users to connect to the Internet at
peak speeds of 10,000 kilobits per second (kpbs).
By the end of this year, only about 18 percent of North America's 11,000
cable systems will be equipped for two-way HFC, Davis says. Progress
in deploying cable modem service may be slow, but it's surely outpacing
DSL offerings. With more than 350,000 cable modem users anticipated
by the end of the year, "that's a factor of 10 over DSL," says Michael
Harris, president of Kinetic Strategies Inc., a Phoenix-based Internet
research company. Most of the major cable operators, such as Time
Warner Cable and MediaOne Group, plan to have all of their systems
upgraded by the end of 2000.
Cost to consumers is another issue that sets cable modem service apart.
While pricing for residential DSL offerings still is being developed,
industry observers note that initial commercial rollouts will cost customers
about $70 a month. Cable modem service, on the other hand, typically
costs between $29 to $45 a month, depending on whether customers buy
or rent the modem, or subscribe to the cable company's video services.
Cable modem vendors report large increases in the amount of the
modems they are shipping. In 1997, only about 190,000 modems were
distributed by all vendors, according to Kinetic Strategies. Kinetic
projects this year vendors will ship about 550,000 two-way cable
modems in North America, and top 1 million by 1999 as
industry-standard modems begin to hit the shelves at retail stores.
Motorola Multimedia Group alone has sent out 170,000 modems since
the beginning of the year, according to Gary Granger, the group's director
of marketing. Another major vendor, Bay Networks Inc. (which
purchased cable modem pioneer LAN City), has shipped a total of
200,000 modems.
Despite the fact that cable companies are adding about 1,000 new
subscribers a day, penetration rates in markets where cable modem
service is offered are dishearteningly low. At mid-year 1998, there were
only about 250,000 cable modem subscribers, even though the service
was available to more than 12 million homes, Kinetic Strategies reports.
(See chart, "U.S. Commercial Cable Modem Launches.")
"The low 'take rates' experienced by the cable companies remains one of
the significant flies in the broadband ointment," according to the Forward
Concepts report. The typical penetration rate is about 2 percent to 3
percent because cable companies are rolling out the service on a
node-by-node basis and limiting their marketing until the entire system is
cable modem-ready.
Image: U.S. Commercial Cable Modem Launches
But to be profitable, penetration rates need to be on the order of 10
percent to 15 percent, Davis says. RoadRunner, an Internet service
provided in the cable franchises of Time Warner Cable and MediaOne, is
slowly getting close to those levels. The service reports that its penetration
rates are about 2 percent after one year in a market. Of the 30 or so
markets where RoadRunner service is offered, 11 have more than 6
percent penetration, with three of those 11 hitting the 9 percent mark.
Part of the reason for limited cable modem service rollout and low
penetration rates is that cable companies don't want to end up like
America Online Inc. (AOL), which attracted so many new customers so
quickly that its network couldn't keep up with the demand. "Cable
companies don't want to oversubscribe their network, so they're moving
slowly," Davis adds.
Industry watchers say there are a couple of factors limiting the acceptance
of cable modems. For one, there's not yet enough broadband content on
the World Wide Web. Secondly, most residential Internet users seem to
be satisfied with the speed of dial-up connectivity for a $19.95
all-you-can-eat price. So consumers may not yet see much benefit in
spending upwards of $30 a month to connect to the Internet, industry
analysts believe.
But once potential customers see the speed, they see more value in the
cable modem service. "It's a highly visual sale. People have to see it to
want to buy it," Harris says.
For that reason, cable companies' primary marketing efforts have been
hands-on demonstrations. "We noticed that people needed to see the
speed," says Tom Nagle, director of data services at Cox
Communications Inc. As Cox begins providing cable modem service in its
markets, it does live demonstrations of the technology at shopping mall
kiosks or in tents at community events. "There are education issues," he
adds.
Nagle also notes that cable companies have to answer questions about
why the service is better than dial-up, and address reliability issues not
only because of cable's tarnished history of video outages, but because
cable modems are a new technology.
Along the same line, @Home Network, a distributor of high-speed
Internet services, and its technology partner Cisco Systems Inc. have
taken their show on the road to shopping malls across America. The
"Cable Internet Revolution Expo" will visit 12 cities to show consumers
the apparent benefits of using high-speed, dedicated Internet services.
The expo will be promoted by some of @Home's 17 cable partners,
including Cox, Comcast Corp. and Cablevision Systems Corp.
Hands-on marketing isn't the only thing cable companies are relying on to
spur growth of cable modem acceptance by consumers. The industry also
is in the process of completing the standardization of modem technology.
Once this process is complete later this fall and the new modems hit the
market, cable companies won't have to be saddled with debt from the up
front capital required to buy proprietary modems.
"The modem is a large up front cost for us," says Joe Waz, vice president
of external affairs at Comcast. The company pays its vendor, Motorola,
about $300 per modem, then leases the hardware to customers. "We're
not encouraging customers to buy the modem now," he adds, noting that
once standard modems are available, consumers will be able to buy their
own at potentially lower prices. While modems initially may cost about
$300 in the retail environment, many industry executives believe the price
will fall to about $200 within the next year or two.
The "Broadband in the Local Loop '98" report notes that standards,
which will allow modems to work no matter the service provider, not only
will drive the costs down, but also will allow broadband modems to
follow distribution channels--such as retail electronics stores or within a
personal computer (PC) equipment package--that have proven successful
in the computer and communications industries.
While there are several cable companies offering Internet service
independently, a majority of carriers have aligned with one of the two
major cable Internet service and content providers: @Home or
RoadRunner, which was created by Time Warner. Currently @Home
brings Internet access to 17 cable company partners, while RoadRunner
provides services to the systems served by Time Warner Cable and
MediaOne.
Among the partners of @Home are Comcast, Cox, Jones Intercable Inc.
and future AT&T Corp. company Tele-Communications Inc. (TCI). Cox
is perhaps one of the earliest providers of cable modem service. It began
its service in 1993, in conjunction with Prodigy, using Zenith cable
modems in San Diego. In 1996 Cox became one of the founders of
@Home and began offering service in Orange County, Calif. Cox now
provides cable modem services to about 30,000 homes in eight markets
including Orange County; San Diego; Phoenix; Norfolk, Va.; Providence,
R.I.; Oklahoma City; Omaha, Neb.; and Meriden, Conn. Nagle says that
service will begin in New Orleans by the end of 1998 using the new
industry standard modems.
Currently Cox's @Home offering costs $44.95, including modem rental
and installation, or $29.95 when the customer purchases the modem
outright. Cox sells the Bay Networks modem for $399. The Motorola
modem costs $340.
Comcast first began offering its service in the spring of 1997 in Sarasota,
Fla. Cox now provides service to 25,000 customers in six more markets,
including Baltimore; Howard County, Md.; Philadelphia; Union and Essex
counties, N.J.; and the Detroit suburbs. Cox will have cable modem
service in another four markets by end of this year, but declined to say
which ones. Cost of service ranges from $39.95 to $49.95, depending on
whether the customer subscribes to Cox's video service.
Jones initially started its own Internet service, the Jones Internet Channel,
in the Virginia cities of Alexandria and Dale City. But, as a result of a
lawsuit with one of its strategic partners, Jones recently opted to partner
with @Home. With the Jones Internet Channel, the carrier secured 4,000
cable modem customers from its base of 450,000 video customers, says
Jim O'Brien, president of Jones Intercable. O'Brien adds that Jones is
now converting its current customers to @Home, and will expand into
other markets in 1999.
Pricing for the Jones' @Home service has not been finalized, but O'Brien
says he expects it to be in line with the $49.95 that Jones charged for the
Internet Channel. Jones also is considering giving discounts to customers
who purchase packages of its video, phone and Internet services.
TCI has operations throughout California, as well as in Hartford, Conn.;
Denver; the Texas towns of Garland, McKinney and Stonebridge;
Arlington Heights, Ill.; Seattle; and East Lansing, Mich. The company,
however, did not return requests for interviews about future cable modem
deployment plans.
The RoadRunner Internet service initially was founded to provide access
and content to Time Warner Cable. In December 1997, Time Warner
joined forces with MediaOne, which had operated its own service called
MediaOne Express since 1995. Time Warner says that some other,
unidentified independent cable companies are in discussions about joining
the Road-Runner alliance. Time Warner is using Motorola modems in its
systems throughout Ohio; upstate New York; San Diego; Tampa Bay,
Florida; Oahu, Hawaii; and Memphis, Tenn. Toshiba modems are being
used in Portland, Maine and El Paso, Texas. The service costs between
$35 and $45 a month. MediaOne offers high-speed data services
throughout its territory, using Bay Networks modems. Markets served
include suburban Boston; Chestnut Hill, Mass.; Salem, N.H.; suburban
Detroit; Ann Arbor, Mich.; Chicago; Atlanta; Jacksonville, Fla.; Broward
and Dade counties, Fla.; and Los Angeles. Together, Time Warner and
MediaOne hope to have all of their systems upgraded by the end of
2000, passing 27 million homes that could potentially buy their cable
modem service. |
