FWIW...AOL Aims To Form Cableless Broadband Network Using Fast Phone Lines
Dow Jones Online News, Friday, May 07, 1999 at 01:12
(Published on Thursday, May 06, 1999 at 22:08)
By Thomas E. Weber and Stephanie N. Mehta, Staff Reporters of The Wall
Street Journal
America Online Inc., shut out of the bidding for cable operator
MediaOne Group Inc., is now courting the Baby Bell telephone companies
in a gambit to establish a nationwide broadband network without cable.
The focus of this effort: digital-subscriber-line, or DSL,
technology. Known as the "other" broadband system, DSL delivers
high-speed Internet access over traditional copper telephone wires.
Cable modems have attracted plenty of buzz for their ability to hook
consumers up to the Web at speeds as great as 50 times standard modems.
DSL, though saddled with a clumsy name, promises similar fast
connections over reliable phone lines.
Each of the regional Bell telephone companies has been developing DSL
for its own territory, but AOL would like to forge agreements with all
of the Bells and GTE Corp. -- and potentially unify those efforts under
the AOL brand.
"DSL is a fabulous technology," says Bob Pittman, president of AOL
and a cable-television veteran. "And the consumer already thinks of the
Internet as a telephone service." And given cable companies' poor
service records, the phone may well trump the TV when it comes to the
Net.
In the wake of AT&T Corp.'s landmark agreement this week to acquire
cable operator MediaOne, AOL is more focused on its DSL ambitions than
ever before. With the purchase of MediaOne, coupled with its recently
completed acquisition of Tele-Communications Inc., AT&T has cemented its
commitment to delivering broadband Internet services via cable lines.
Furthermore, it plans to use its partner Internet access providers, At
Home Corp. and RoadRunner, as the online service providers of choice.
AOL and AT&T may one day strike a deal ensuring that AOL will be
carried on AT&T's cable wires, but so far AOL hasn't been able to agree
on terms with any cable company. C. Michael Armstrong, AT&T's chairman,
said yesterday in a conference call that he hopes AT&T and AOL can
eventually work together: "But every time we start, there seems to be
something that stops us, and we have this falling-out, if you would."
Cable-modem customers today on the At Home and RoadRunner services
aren't barred from tapping into AOL -- as long as they're willing to pay
AOL's membership fee on top of $40 or more a month for the cable-modem
connection. AOL wants to buy the cable connections wholesale, then sell
a complete package to users. Fears about AOL's broadband strategy sent
the company's shares down 7.7% yesterday, to $119.75, and nearly 20%
since AT&T put in its bid for MediaOne last month.
Cable, though, isn't the only fast pipeline. With DSL, AOL is already
halfway to a nationwide footprint through existing alliances with Bell
Atlantic Corp. and SBC Communications Inc. It is also in talks with GTE,
U S West Inc. and BellSouth Corp., according to people familiar with the
negotiations. If it can do deals with those players, too, AOL would
blanket the country.
Perhaps just as critical, AOL is talking behind the scenes with
personal-computer manufacturers like Compaq Corp. and national retailers
so it can make the currently complicated process of purchasing DSL much
easier.
Though DSL does not require new home wiring, it does need a special
computer modem and other gear in order to boost the capacity of the
customer's phone line. It also requires another modem in the telephone
company's central office. A consumer can be online and still make and
receive calls, all on a single phone line.
Like its cable counterpart, DSL is "on" all the time: Customers need
not log on each time they want to check e-mail. But DSL still requires a
cumbersome installation process. And customers who live more than a
couple of miles away from a phone-company switching facility don't
qualify for service because the speeds degrade with distance. This means
many people in rural areas won't get the service.
The cable industry's broadband product also suffers from
shortcomings. Its installation process is equally unwieldy. Cable-modem
service is also a "shared" service, which means that online speeds start
to diminish as more families in a neighborhood sign onto the service.
And many cable lines haven't been upgraded to provide the superfast
service.
AOL, which plans to begin rolling out the technology this summer,
doesn't expect DSL to crush the cable competition. In fact, over the
long term, AOL hopes that both technologies thrive, competing with each
other and driving the cost of access down. Lower prices will help bring
more consumers online, where they can serve as an audience for online
advertisements and marketing efforts.
Today an estimated 750,000 households currently use cable modems,
while only 50,000 homes use the DSL alternative, according to Forrester
Research, a research and consulting firm based in Cambridge, Mass.
Cable companies say their services are attracting plenty of
first-time Internet users. But AOL executives believe that broadband
will appeal primarily to consumers who are already online and want to
upgrade to a faster connection. If that is true, AOL should be in the
driver's seat, with 17 million members already and more coming online
every day.
AOL Chairman Steve Case and his cohorts envision AOL members being
greeted by a special window or e-mail message announcing the opportunity
to upgrade to a dramatically faster service. Signing up could be as
simple as clicking on a button. AOL would pick up the ball and carry it
from there, contacting the appropriate telephone company and scheduling
a service call if necessary. Every transaction would be tied to the AOL
brand.
That may not sit well with some of the Baby Bells. "Customers will
know that we are the ones providing the service," Steve Dimmitt, vice
president of consumer marketing for SBC's Pacific Bell unit, says of his
company's AOL accord. Mr. Dimmitt believes his brand will be an
important component in the package.
Some wonder whether AOL is sleeping with the enemy. The Bells are
notoriously slow to roll out new technology, and DSL itself has been in
the labs since the late 1980s. AOL also would have to rely on the Bells
to maintain the telephone lines and install the service, a potentially
lengthy process.
AOL argues that while At Home and Roadrunner focus primarily on
wiring, AOL also provides original content. It plans to announce today
that it has hired TV producer Robert Harris to spearhead broadband
programming. Mr. Harris's resume includes "Magnum P.I.," "The A-Team"
and "Miami Vice."
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