May 7, 1999
AOL Hopes to Trump Cable Deal
By Using Some Fast Phone Lines
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 Road Runner, 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
Thursday 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."
Falling Stock Price
Cable-modem customers today on the At Home and Road Runner 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% Thursday, 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.
'Shared' 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 Friday 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." |
