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Broadband Week for April 12, 1999
More Warning Signs Of Slow Rollouts
By FRED DAWSON April 12, 1999
New York -- The cable industry appears to be heading into treacherous waters on the high-speed-data front, failing to fully exploit its opportunities in advance of the rollout of consumer-friendly digital-subscriber-line services.
It now looks like the best that the industry can hope for in terms of retail distribution of its modems is spotty support by late 1999.
Even worse, despite the fact that demand is much stronger than anticipated, the industry as a whole remains unable to pull out all of the stops in marketing the service where it's available, due to deficiencies in the field support that's needed to keep up with the potential installation pace.
These points were clearly etched last week in two days of discussions here at a conference presented by Kagan Seminars Inc.
Notwithstanding bullish projections by Kagan analysts -- 1.6 million cable-data customers by year's end and a growth trend that anticipates twice as many cable-modem users as DSL users through the next 10 years -- the tenor of remarks by operations and vendor representatives speaking at the meeting was that the cable industry is far more vulnerable to competition than these numbers suggest.
"The biggest drag on the cable-modem business is the need for people to install modems," said Bob Rusak, vice president for business development at Road Runner. "Those truck rolls are holding the industry back from a much faster ramp-up."
Despite cutting installation time to around one hour and improvements that, in many cases, allow a single worker to handle the cable wiring and modem installations, there aren't enough trained personnel available to keep up with the additional demand that would result from an all-out marketing push, Rusak said.
As a result, even though Road Runner has marketing procedures in place that could quickly add 500,000 names to the list of waiting customers, it can't put all of those procedures to work, he added.
As it is, penetration of cable-data services is outpacing expectations, led in part by consumer response to the availability of low-cost personal computers and in part by awareness of broadband, which has been attracting online newcomers to cable-data services.
"We're seeing 5 percent penetration of homes passed in less than nine months from the date of launch," Rusak noted, adding that operating cash flow was hitting breakeven within 12 months, with operating margins sometimes exceeding 45 percent.
Indeed, Doug Semon, principal Internet-system architect for Time Warner Cable, said his company is hitting "greater than 14 percent in some systems." Citing Kagan projections calling for 3.3 million cable-data subscribers by year-end 2000, he added, "I personally think that those numbers are low."
But while surging use of the Internet, sales of PCs and awareness of broadband benefits cable, the same factors will also aid providers of high-speed services over various DSL platforms, including the consumer-friendly "G.Lite" system, which is slated for market introduction this summer.
"We know that it's coming," said Ann Ivancie, director for Internet-marketing operations at AT&T Broadband & Internet Services (formerly Tele-Communications Inc.). "We know how important it is to be first to market and to be able to install customers quickly."
Retail availability of "plug-and-play" cable modems pegged to the DOCSIS (Data Over Cable Service Interface Specification) standard has long been seen as a key to meeting the DSL challenge. But it now appears that G.Lite modems and other DSL flavors will be hitting retail shelves as fast as, if not faster than, cable modems, due to the fact that computer manufacturers -- led by Dell Computer Corp. and Compaq Computer Corp. -- have already begun shipping some PC models with DSL modems built in.
Where cable is concerned, 1999 will be the year of "retail crawl," said Carol Swartz, marketing director at Motorola Inc.'s multimedia group.
Most other participants commenting on this question agreed. "If we end the year with [modems in] a few hundred stores, we'll be really happy," said Paul Satzinger, director of business development for @Home Network. "This is a year of foundation laying and continued leasing while we figure out how to make this thing sing."
So far, only two vendors' DOCSIS modems have been certified by Cable Television Laboratories Inc. The delay in completing the initial certification process linked to DOCSIS version 1.0 has slowed the availability of product that retailers could put on their shelves and delayed certified modems that could be embedded in PCs -- vital to successful retail distribution.
"The goal was to have modems on the shelves last Christmas," Rusak said, "and here we are approaching summer and still struggling to complete certification."
Rusak hinted at the growing disgruntlement over the certification process that has been voiced privately by other operations and vendor executives as they await wider availability of DOCSIS modems. "We could get into a pretty long discussion about the whole issue of the merits of how the certification process was set up," he said.
Increasingly, the coupling of modems with PCs is seen as the key to a breakout for DOCSIS in retail distribution, representing a shift from earlier thinking, when achieving retail support for distribution of the stand-alone modem was viewed as a major first step.
"I think that there has been some oversight on this question," Rusak said. He noted that the chairman of Circuit City Stores Inc. had told him that the burden of proof was on the industry to show how a cable modem would generate more revenue per square foot than whatever the store has to take off the shelf to make room for it.
"Let's not get overly enthralled about the [stand-alone] retail model," Rusak advised.
An important key to a successful retail push is self-provisioning, meaning that the modem -- even if it's easily installed by the customer or embedded in the PC -- must also be able to "shake hands" with the local cable-headend equipment and be certified automatically, without a lot of work by the consumer.
"That's probably the other big hurdle that we have to clear in '99 in terms of retail distribution," said Richard Rasmus, vice president of Comcast Corp.'s Comcast Online Communications. "We face some of the same challenges that the cellular industry did."
Further stifling the move to retail is the insistence by retailers that they receive "residuals," or a percentage of ongoing service revenues, in addition to the point-of-sale margin on the equipment.
Retailers are entering discussions with operators calling for residuals in the same 2 percent to 6 percent range that they've been accustomed to getting in the cellular business, Rasmus said.
"This is the biggest sticking point," he said, adding, "No residuals at all is Comcast's position."
The justification for residuals in cellular was that the retailer is often the point of contact for unhappy users and, hence, the key to customer retention. But that model doesn't hold in cable, Rasmus said.
"When the customer has problems, he calls us," he noted. "He's not going back to CompUSA."
The retail issues must be resolved quickly, asserted Tom Hagopian, vice president for interactive products at Cablevision Systems Corp. He took issue with those who seem sanguine about consuming another year to get the retail positioning right, noting that Cablevision has the luxury of leveraging its ownership of retail chain The Wiz to push modem sales.
"We're going for it in '99," Hagopian said. "I'm not sure that we have the luxury of a year of leasing modems with the competition that we see coming."
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