GP Timely article from Raging Bull on Internet access.
Look at the $$$ being spent here.......!!!!
<Picture>Eliminating the Local Bottleneck -- Is Fiber or Cable a Solution?
January 7, 1999 - 1:47 AM
By Roderick Beck
-Click here to read part one of the series.
Fiber to the Premise
One way to improve the local telecommunications network would be to replace the copper wire with fiber optic cable. In many cases this works quite well. Many corporations have fiber optic links to the Internet. If fiber works for corporations, why not consumers? The answer is that fiber is a high fixed cost.
Corporations can justify this because they provide Internet access to large numbers of employees, who are concentrated in a few large buildings. This guarantees high usage on a fiber link and yields a low cost per employee. Unfortunately, the same is not true for residential America. Despite the media hype, the density of users wanting broadband access to the Internet in a typical area is simply too low to justify the huge cost of installing fiber on each block.
In addition, there is strong public opposition to digging up the streets. RCN, a residential CLEC, estimates it will need $8 billion in capital through 2002 to build its fiber optic network in selected areas of Boston, New York City, and Washington, DC. The company's business case is based heavily on selling bundles of services because high speed Internet access can not by itself justify the huge expense.
The Cable System
Obviously one alternative to building a fiber optic residential network is to modify the cable network. Cable systems cover 70% of the nation's homes, including the prime marketing targets for high speed Internet access - the affluent and better educated suburban dwellers. Coaxial cable has plenty of capacity and at least in theory a cable Internet modem can deliver 10 megabits a second. Another key advantage is that the cable Internet subscriber are always connected to the Net, obviating the need for dialing and the associated risk of busy signals.
While many customers of @Home, the leading cable ISP, rave about blazing speed, the truth is that consumers have given the service mixed ratings. In many areas cable service is very unreliable, far less than the local phone system. Frequent cable outages have led many customers, who rely on email as much as the phone, to return to dial up access.
Cable Speeds- As Good as Promised?
Another problem is that cable modems do not in practice deliver the promised speeds. Cable infrastructure is designed for broadcasting, which means delivering the same set of video data to each home using shared transmission systems to minimize cost. While the coaxial cable in the home has huge capacity, the backbones of the cable networks do not. In other words, an Internet cable user is sharing quite limited capacity with other users. There is no 10-megabyte circuit linking each customer with the Net.
The upshot is that when many cable users in a neighborhood download at the same time, the cable network itself becomes congested, reducing a theoretical 10 megabyte connection to as little as 10 kilobits a second. Moreover, if a web site is congested, then the cable modem user will experience large delays as well. In other words, while cable Internet access is a clear improvement, it is no panacea for Net congestion.
Inverse Network Technologies has measured Web site traffic moving from one point on the Internet backbone to another at rates as low as 15 kilobits per second. The speed on the Internet backbones set upper bounds on what an end user will get, no matter what technology is used in the local network. As a result of these network problems and others, many Internet cable providers will only guarantee download speeds of 256 kilobits. Because cable systems do broadcasting, most of their fiber is one way. While the fiber can be upgraded to two-way, the upload speeds are limited to 56K or in some cases to 128K. These speeds are insufficient for high quality videoconferencing or full motion video or audio streaming.
Plagued by a Poor Corporate Culture?
Cable Internet access has also suffered from the poor corporate cultures of cable companies. There are frequent complaints about poor customer and technical service. While cable Internet service is reasonably priced at $40 to $60 a month, there are many hidden costs. A service person must pay a visit to the user to install a PC card and modify wiring inside the residence. The installation charge can be as much as $300.
Without a doubt, many of these problems represent growing pains that will disappear. Adding more fiber can eliminate bottlenecks in the cable backbones. One way fiber can be upgraded to two way. And clearly many customers love the rich experience of the @Home service. But it does suggest that cable Internet access has plenty of challenges.
Lack of Cable Internet Subscribers?
@Home had only 120,000 US subscribers as of September 30, 1998, up from 17,000 in the same quarter of 1997. This seems very low given that @Home claims its network covers 10 million homes. Either the service is not that attractive or @Home lacks the marketing muscle required to acquire customers.
Besides customer disappointments about speed and service, growth has been hamstrung by financial problems. Most cable companies have huge debt burdens, the legacy of building their networks. This limits their ability to raise the $10 to $15 billion required to upgrade the cable networks and build the crucial back office operations. For example, it costs $100 per home just to upgrade the cable to two-way.
Moreover, additional capacity must be added to avoid congestion on the cable backbones, connections to the Internet must be leased, and there is a host of equipment in the form of routers and servers to be bought.
The Battle to Build Up the Back Office
Then there is the monetary and technical challenge that cable companies face in building the back office operations needed to handle large numbers of subscribers. Cable back office operations are based largely on inflexible, legacy systems. Another major expense is the enormous labor cost of having a technician visit each new subscriber to install the service. Add on top of that the marketing costs and it is easy to see why cable access to the Internet is available only in a handful of communities.
While AT&T's purchase of TCI and investments in other cable systems will undoubtedly boost the pace of network upgrades, it will remain slow due to its labor-intensive nature. In my hometown on the Hudson, the cable company has been working on implementing Internet access for over a year and is still not ready to offer service. It is also not clear whether the entrepreneurial culture of @Home, part of the TCI acquisition, will work well with the bureaucratic, command and control culture of AT&T.
Given this host of problems, it is clear that cable Internet access will not reach the masses any time soon. I expect @Home will have roughly a half million subscribers at the end of 1999. In contrast, American Internet subscribers will probably exceed 30 million. This hardly constitutes a revolution. An interesting question is the impact on the Net of so many broadband subscribers. Will the system be able to hand the onslaught of data requests? This remains to be seen.
Will Cable Become the Future King of Broadband?
Cable Internet access does offer some intriguing opportunities. For example, linking cable Internet subscribers together using a private IP network that bypasses the Internet creates intriguing possibilities. A private IP network could deliver high quality IP telephony, videoconferencing, full motion films, interactive services, and the like.
AT&T does appears to heading in this direction with its plan to construct an integrated IP network to combine voice and data services. The key questions are whether AT&T can execute and if the return on these services justifies the effort and rich premiums paid for TCI and @Home.
-Click here to read part one of the series.
- About Roderick Beck
The Raging BullTM aims to provide a forum for investment ideas. Our articles and columns should not be construed as investment advice, nor does their appearance imply an endorsement by Raging Bull, Inc. of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances. This material is for personal use only.
Copyright 1998, RagingBull.Com
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