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The highway to high speed

Everybody wants to be first when it come to cornering the broadband markets

Price Colman -- Broadcasting & Cable, 5/7/2000 8:00:00 PM

The "Digital Dawn" we've been hearing about for a decade or more-a bit stream into every home-so far has proved to be more yawn than dawn.

But don't let that lull you into a false sense of cynicism. For the first time since the talk started, the digital fat pipe known as broadband may actually be carrying bits of information to a household near you. Probably 3 million to 4 million Americans, maybe even more, will be broadband subscribers by year-end. And despite the modest number-there are about 100 million U.S. households-public awareness of broadband has skyrocketed this year, and with it so has demand.

"It's not that different from the situation with DBS service," says John Alchin, treasurer for Comcast Corp. "When DBS started to blanket the market with all the advertising they did in the late '90s, we were beneficiaries. The same thing is happening with data. This is going to be a huge year for data for us."

The race to offer broadband is igniting the kind of wide-scale telecommunications competition that free-market advocates and some telecom regulators have long touted.

The high-speed data market is crucial because it's the fulcrum between the bandwidth-constrained analog past and the broadband future. Data is only a small piece of a digital future whereas, MIT guru Nicholas Negroponte points out, "bits are bits," and the pipe that's carrying them couldn't care less whether those bits are voice, video or data. Still, the momentum building behind high-speed data will probably provide the push needed to birth more-sophisticated applications, such as video conferencing, real-time game playing, even distance learning and medicine.

In contrast to traditional voice, video and dial-up Internet access, broadband is the new model, and the playing field remains wide open. For every big cable- or telephone-company player pursuing a broadband-data strategy-and they all are-there are scores of smaller, nimbler players snatching market share while the sun shines. According to a recent Paul Kagan study, "The State of Broadband: 2000," authored by Leslie Ellis, at least 10 broadband service providers-most using the DSL platform-offer service in every top-10 Nielsen market area.

Never mind that, for now, broadband translates primarily into high-speed Internet access. There are relatively few Internet-ready applications capable of fully exploiting the speed and capacity of broadband.

But that application wave is building.

"This is all going to happen, no doubt about it," says Russell Siegelman of venture-capital firm Kleiner, Perkins, Caufield & Byers. "The only question is: how fast? I don't think the demand side is holding up adoption, it's the supply side."

Top players, expansion teams

Heading into this year, cable was the undisputed big dog in the residential broadband neighborhood, leading the rest of the pack by about a 3-to-1 margin. At the end of 1999, cable had roughly 1.25 million high-speed Internet-service subscribers. On the telephone side, incumbents tallied slightly better than 400,000 residential customers. The newer players-competitive local exchange carriers focusing on data, or DLECs-add only a few thousand more.

The consensus among analysts and market researchers is that cable and DSL residential subscriber numbers will converge sometime in the 2003-05 window, when DSL will take the lead. For now, however, it's cable's advantage to lose.

There's substantial benefit in getting there first," says Robert Bennett, president and chief executive officer of Liberty Media Corp. "If cable companies can get out there and have a service offering that works, there's no compelling reason why they shouldn't get the lion's share of the business. Cable should be the dominant provider."

The current two-player game pits cable's hybrid fiber-coaxial cable platform against phone companies' digital subscriber line, or DSL, platform. But satellite and terrestrial wireless can't be dismissed.

A space-based pipe for two-way, high-speed data faces certain technological challenges, but if the industry can overcome them, satellite players such as EchoStar, Gilat, Hughes, iSKY, PanAmSat and Loral could redefine the data game much as they did with video.

Liberty; Kleiner, Perkins; TV Guide; TRW; TeleSat; and EchoStar all have taken stakes in iSKY (formerly called Ka-Star), a fledgling satellite company that intends to use Ka-band spectrum and spot-beam technology to deliver two-way, high-speed data to residential markets beginning in late 2001.

In addition to the $50 million it paid for a 12% stake in iSKY, EchoStar paid an additional $50 million for a 17.6% stake in Gilat-2-Home. Using a single dish capable of receiving EchoStar's Dish Network video signal as well as two-way, high-speed data, Gilat-2-Home will be launched commercially in this year's fourth quarter. Gilat-2-Home is a joint venture whose partners include Israel-based Gilat Satellite Networks, EchoStar and Microsoft.

At the moment, there's no competition in two-way, high-speed data from satellite. DirecPC, from Hughes Network Systems, and EchoStar offer satellite-delivered services but require a telephone link to send signals upstream. The next generation of satellite services won't require the phone hookup.

"It's correct to call it nascent, just getting going, but Gilat is deployed [internationally] and operating today," says Scott Landers, director of Interactive Television for EchoStar. "A partnership with [Gilat and iSKY] will help us devise an industry standard or approach.

"Even if cable and DSL are deployed to the extent they're predicting," he adds, "there still will be areas that are underserved. We find opportunities for satellite even in [more urban] counties."

The potential market for satellite-delivered broadband encompasses 20 million to 30 million homes unable to receive cable or DSL for the foreseeable future.

"We think we'll be first to market with two-way over satellite by as much as 18 months," says Dianne VanBeber, vice president, investor relations, for Gilat Satellite Networks. "First-mover advantage carries a lot of weight. We really think the long-term sweet spot for our service offering is rural America and suburban areas that won't have access to cable or DSL."

Even terrestrial wireless-whose fortunes sagged as satellite's climbed-has been declared a real contender by MCIWorldCom, Sprint and AT & T. Together, MCIWorldCom and Sprint spent roughly $3 billion last year to acquire multichannel, multipoint distribution system (MMDS) spectrum. And AT & T in early spring launched its resurrected Project Angel, which uses excess personal communication service (PCS) spectrum to bypass telephone companies' local copper-wire loop and deliver Internet Protocol-based (IP) broadband data and voice service.

"I think that [high-speed] wireless data, terrestrial and satellite alike, is going to be a major force in residential and business markets," says Siegelman. "There is no shortage of people focused on wireless, whether satellite, broadcast or terrestrial wireless."

Tom Wolzien, the Sanford C. Bernstein analyst who co-authored the McKinsey-Bernstein report "Broadband!" in January on the status and outlook for broadband, recognizes satellite and terrestrial wireless as competition but contends their immediate impact is minimal.

"I think the Ka-band return path is probably a few years out; for the normal pocketbook, it's probably five to seven years away," says Wolzien. "On the MMDS side, Sprint and MCI WorldCom have yet to determine who their wireless equipment manufacturers will be. So it will take another 18 months to come up with the hardware. MMDS has potential but is not a player in the initial land grab."

Sleeping giants awaken

The Baby Bells, meanwhile, have moved from a dead stop in offering residential broadband service three years ago to full speed ahead this year.

For SBC Communications, the sense of urgency "escalates every day," says Executive Director, DSL Strategy and Retail, Eric Boyer. "Every day, our customers demand more and broader variety of services. Every day, competition steps into the market to address and meet customer needs. Every day, we step in with them."

The Baby Bell's DSL growth projections for the coming year are ambitious: double or triple the admittedly more modest counts at year-end 1999.

SBC may be the leader in residential DSL subscribers, but US West contends it's demonstrating how it's done.

"When it gets to execution in the [DSL] business, we're ahead," declares Matt Rotter, executive director of Megabits Services for the Denver-based Baby Bell. "All the competition confirms that our thinking three to four years ago was right on track. We're deploying this stuff as fast as we can already. We're kicking the DLECs' butts."

True for now, maybe. But the competitive landscape continues to change.

Line-sharing rules enacted by the FCC late last year require the Baby Bells to lease access to their network to DSL competitors at the same rates they charge to internal subsidiaries. In mid April, US West agreed to give data local exchange carrier (DLEC) Rhythms NetConnections free access to its lines, if Rhythms would drop its objection to the proposed US West-Qwest Communications $45 billion merger. Free access is limited to a year, but US West is likely to announce similar agreements with other DLECs to permit the merger to proceed.

DLECs such as Rhythms, Covad, NorthPoint and Jato clearly are poised to become a major irritant for the Bells. The newcomers have already demonstrated they can carve chunks out of lucrative business markets.

This year, look for them to raid the traditional Baby Bell stronghold of residential markets. In addition, they're cutting deals on the cable side. At virtually the same time Rhythms gained free access to US West lines, it also signed a deal with cable-owned Excite@Home to offer that high-speed service over DSL lines in areas where Excite@Home doesn't have a presence through one of its cable partners.

The digital land grab

Track who is spending what to prepare for broadband, and a snapshot of the current state of competition begins to emerge. Cable, telephone, satellite and wireless all are attacking the challenge with money-spending on infrastructure, technology and marketing.

Overall cable spending on broadband last year hit $11 billion, according to a recent Forester Research survey. Compare that with the $6 billion SBC Communications alone plans to spend over the next three to five years on its Project Pronto: prepping digital subscriber lines for its mammoth footprint. Then again, SBC, and the phone sector in general-excepting AT & T-are playing serious catch-up.

The McKinsey-Bernstein report estimates that cable has completed roughly 50% of the upgrades required to offer broadband, while roughly 44% of Baby Bell homes-passed could receive DSL. That doesn't mean DSL is available, simply that those homes meet the basic criteria of being close enough to a phone company central office-roughly 15,000 feet-to receive viable DSL service. Only about 25% of the 96.4 million-household Baby Bell universe, or about 25 million homes, had access to DSL at the end of 1999.

"The Baby Bells have definitely been reactive, not proactive," says Bruce Dickinson, of cable investment banker Daniels & Associates. "Then there are really a slew of DSL companies that are working very, very hard to get a satisfied customer base. The big phone companies could have pre-empted these competitors, in a sense. But because they weren't out there doing this, some other companies are making great inroads."

Little wonder that the McKinsey-Bernstein report says, "A land grab is on for the best residential customers."

Not all telcos are playing the same game as the Baby Bells and DLECs.

Long-distance providers MCI WorldCom and Sprint-which may complete their merger by year-end-together spent about $3 billion last year on companies with MMDS spectrum. Although MMDS was a huge disappointment and financial black hole in the video venue, it's considered a solid niche player in broadband.

Both Sprint and MCI WorldCom have DSL initiatives, but, with the exception of Sprint's Integrated On-demand Network (ION), they're less aggressive than the Baby Bell and DLEC thrusts. Sprint's currently offering ION in Kansas City, Mo.; Denver; and Seattle. Dallas-Fort Worth and Austin, Texas, are the next rollout sites, and Sprint intends to enter 25 additional markets by year-end. Those just happen to be the markets where AT & T is doing trials and will commercially launch the first wireless Project Angel service.

Sprint and MCI WorldCom consider MMDS a way for them to reach customers unlikely to ever receive wireline DSL. "The reach and breadth of MMDS is flexible," says Sprint spokesman Steve Lunceford. "It is one of our primary strategies. It is a much more efficient way to deliver service to consumers."

With its acquisition of MMDS operator People's Choice TV last year, Sprint gained "several thousand" wireless data customers in Phoenix and several hundred in Portland, Ore., and Seattle. MCI WorldCom is still testing the wireless data properties it acquired. Trial sites include Jackson, Miss.; Baton Rouge, La.; and Memphis, Tenn. Additional early-summer trials are expected in Boston and Dallas.

"Our goal is to have commercial systems," says Bill Feidt, program director for MCI WorldCom Wireless Solutions. "But two things are hanging over us: the FCC [two-way license] filings and getting the licenses granted, and the Sprint merger. Completion of both events will drive how quickly we can get to market."

Nucentrix, the only autonomous wireless company of any size, faces the same wait. "We absolutely intend to offer [two-way, high-speed wireless data service] to consumers," says Nucentrix Chairman Carroll McHenry. "We'll have major deployment in 2001 and 2002."

That leaves one old-line player that has largely been left behind in the digital transformation: broadcast television.

The wild cards

When former cable magnate John C. Malone completed the sale of Tele-Communications Inc. to AT & T and took the helm at Liberty Media, he characterized Liberty as "platform- agnostic." The same attitude holds true at Kleiner, Perkins, which backed the birth and launch of @Home (now Excite@Home) and now holds stakes in DSL and satellite firms, as well as a company called Geocast.

Geocast, along with iBlast, plans to use a part of television broadcasters' digital spectrum to deliver broadcast data services.

"Rather than using the Internet as a point-to-point technology, where delivery of rich media is very expensive, we use point-to-multipoint to reduce cost; that's first and foremost," says Jim Ramo, former DirecTV executive, now president of Geocast. Geocast's main broadcast partner is Allbritton Communications, which owns or operates ABC-affiliated television stations in seven markets: Washington; Birmingham, Ala.; Little Rock, Ark.; Tulsa, Okla.; Harrisburg, Pa.; Charleston, S.C.; and Lynchburg, Va. Geocast's technology partners include Thomson and Philips, both of which are expected to build signal-converter/storage devices.

Use of that digital spectrum-granted to broadcasters by the federal government-for data, as well as HDTV, equips broadcasters to compete in a world where they were rapidly losing ground, says Ken Solomon, president of iBlast.

The company is aggregating broadcast spectrum from broadcast partners including Tribune Co., Gannett, Cox, Post-Newsweek Stations and E.W. Scripps Co. In return for contributing digital TV spectrum and an unspecified cash investment in iBlast, the broadcasters receive an equity stake in the company.

"The goal is to build the next media giant on behalf of broadcasters," Solomon says, "so they can compete effectively with cable."

Geocast and iBlast are using different business models, although both intend to broadcast digital content-video, music, software, and games, for example-to consumer PCs. Both services require a digital box that connects to the PC and converts broadcast signals. Geocast intends to sell its box while iBlast will port its service through a variety of boxes, including the Sony PlayStation II and Microsoft's XBox.

Geocast and iBlast are shooting for commercial launches in early 2001.

High-speed forecast Projected growth in residential service by platform

Major league players Who has the lead in high-speed Internet access

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