Millions of people have seen the light and traded up from a painfully slow dialup connection in favor of a more robust one. For those of you resisting the evolution, be prepared to be heavily courted by providers in search of your broadband dollars. Their very livelihood is increasingly dependent on the broadband converts among us.
Billions of dollars have already been spent in the pursuit of supplying bandwidth. Digital subscriber line (DSL) technology became a booming industry in the late 1990s, one whose promise supported the venture capital requirements of competitive local exchange carriers (CLECs). Cable operators smelled the dough and started rolling out Internet service via cable modems to corner the residential market. Satellite providers, too, relined their offerings to accommodate their bandwidth-hungry subscribers. Even fixed wireless was being groomed as a technology to deliver high-speed access to the residential and business markets. Industry watchers claimed the step-up to broadband was the next wave of Internet access. Dialup would soon be viewed as the technical version of the horse and buggy.
In spite of the CLEC market meltdown, the move to broadband is already off to a good start. Incumbent local exchange carriers (ILECs) have gotten aggressive about offering high-speed service. Last year was a banner year for broadband. Estimates put the total number of broadband users in North America at about 12 million out of a possible 105 million. Some 6.6 million users signed on for cable modem service and 3.9 million for DSL service, a 58% and 68% increase, respectively, from the prior year, according to Telecommunications Reports International. In comparison, plain old online access grew from 68.6 million users to 69.3 by year-end 2001, a puny 1% increase.
But while the industry is busy celebrating the impressive broadband growth rates over the past year, they aren’t paying attention to the mountain that lies ahead. The first wave of broadband adopters were the tech savvy or telecommuter, anxious for a faster way to access the Internet. Convincing the next chunk of users—the mass market—to make the leap from their paltry speeds to a robust connection will be a much tougher sell for providers. And their desperation to accomplish this hangs in the air. Transitioning customers to premium services is crucial to many providers’ bottom lines.
Once broadband is available to all its customers, the next step for AOL is to get users to sign on for additional services.
It was all supposed to be so easy.
There had been the perception that if broadband services—provided by DSL, satellite, wireless, or cable—were made available, a user would automatically sign up. That’s not proving to be the case. Statistics say high-speed Internet access is already available to some 68% of homes in the U.S. Yet, according to the Consumer Electronics Association, only about 10% of residential users see a need to get their Internet access from a faster link. While that number of adopters is expected to double by year’s end, it will still be a drop in the broadband bucket.
That’s not good news for Internet service providers. ISPs, like online giants Earthlink and AOL, are especially dependent on transitioning their dialup customers to a broadband service. For one, the all-you-can-eat pricing on dialup service at less than $25 per month pales to the $50 providers could charge for broadband. And even more attractive is the potential of value-added services offered atop a high bandwidth connection. Applications such as video streaming—a live concert or a pay-per-view movie—could ride atop broadband connections and bring in added revenue. ISPs need to get their users used to plunking down more money per month; broadband is the first of many ways to get them to open their wallets.
There are plenty of big threats looming to independent ISPs as they fight to provide their users with faster speeds. Internet players got a big kick in the shins in March when the FCC ruled that cable operators don’t have to open up their networks to other providers. The 3-to-1 decision met with much derision from consumer groups and ISPs, who argued that content would be filtered and ruled by the cable operators and could spell disaster for small ISPs that didn’t have the funding or technology to support high-speed access to end users. Without deals from cable operators to use that broadband network, ISPs will have to deal with satellite providers still developing wireless technologies, or their nemesis’s—the ILECs and copper.
Another black cloud hanging over ISPs is the business practice of cable operators and ILECs, which are already offering broadband service. While the models today are joint ventures in marketing between access providers and content providers, the day may come when price-cutting on broadband will make a user question if he or she really needs an ISP account in addition to the access fees already being paid.
If ILECs and cable operators can successfully become content providers that offer compelling information to the end user and basic services like email and AOL’s popular Instant Messenger, all without having to partner up with the ISPs, then customers would probably lose their loyalty and stop paying their ISPs. A foreshadowing of this popped when Excite@home, an ISP supported by cable operators, tumbled financially last year and was forced to shut down. Excite@home’s partnering cable operators had to assimilate former Excite@home customers into their own networks. These cable operators learned in a trial-by-fire situation how to be an ISP and are now fervently trying to secure content to entice more users to join their services. They own the broadband network and are working on the content side. Now they have the FCC in their corner.
However, rest assured, ISP executives aren’t going to stand idly by while ILECs and cable operators hunt down and pick off their subscribers. Take Bob Pittman, co-COO at AOL. Pittman sees broadband connections as the mecca for his company’s bottom line and has a plan—albeit a plan that reeks of working on too high a floor in an executive building—to take the company there.
Since its $109 billion merger with Time Warner, AOL, which currently boasts more than 33 million subscribers, has a broadband cable network on its side. The company struck deals with other ISPs, namely Earthlink, to ride on its cable network, opening the door for its AOL online service to ride on other cable networks outside of its own territories. A good offensive move.
Once broadband is available to all its customers, the next step for AOL is to get users to sign on for additional services. At the Internet World trade show in December 2001, Pittman projected that customers will be willing to fork over an eye-bulging $230 per month to AOL. What could possibly entice a user to go for a tenfold increase in monthly payments? Pittman estimated a networked household, where all computers in the home are joined as one network, would drive the increase. Networked homes will enable AOL to sell diverse content to each family member: teens will want music, parents will like the publications of Time Warner, children will opt for the movies in the company’s vault. Time Warner’s array of content would be cross-promoted and marketed and sold to AOL subscribers. Time Warner is also testing cable telephony, with trials currently ongoing in Florida. Bundle Internet, cable, and telephony service with content and you’re looking at one bundled bill that can garner hundreds of dollars per month.
I told you the plan was altitude-induced.
While some equally optimistic analysts think Pittman’s goal is reachable, it’s easy to see it will take a lot to get customers to part with what could be a monthly food bill or car payment in some households. Especially in the current dreary economy, where a 401(k) statement can be an instant depressant—and pocketbook-closer. Besides, who knows if customers want their ISP to be their cable operator and their telephone company? Another wild card is how cable telephony will deploy and if it’s a worthy enough service to be bundled with other offerings.
Content itself will remain a big hurdle for the Internet industry and the sell to broadband. Studies have shown that dialup users are happy with their connection speed for all the applications they do—like checking email, or browsing a sports site. They don’t see the need to step up to a broadband connection to access what’s on the Web. How will they, then, be convinced to spend more than $200 for broadband access that comes with their home computers networked? Application developers will have to get busy creating services and offerings that entice users to see the value in broadband connections. Some ILECs, like BellSouth, are already doing just that. Through its Web portal, available free to all Internet users but promoted heavily to its Internet customers, BellSouth teases users with applications best viewed over a broadband connection. If you want to view the latest music video, you can—just sign up for DSL service first.
Another problem for ISPs is their revenues from other sources are drying up. The advertising market, once the bread and butter of online providers, has all but withered and died. ISPs are desperate to replace those lost revenues.
That AOL-Time Warner is facing these problems head-on doesn’t do justice to its standing among competitors. The company is probably in the best position of all ISPs. With the aforementioned cable arm, the potential of telephony service offerings, and its huge customer base, it’s got a giant lead on other ISPs. Companies like Earthlink, meanwhile, have been frantically striking deals with access providers, namely Time Warner and AT&T Broadband on cable and ILECs for DSL. Without the mass customer base access providers want, smaller ISPs have much less negotiating power and are in a much rockier boat. Broadband may not even be enough to save them.
But wait. The mountain gets even bigger. Once these providers do secure a broadband customer, the tough part might just be beginning. Vendors like Broadjump, which provides OSS systems for broadband providers, say that with the adding coinage of broadband comes technical and customer service issues that must be addressed by the provider.
"Supporting broadband is a different animal than supporting dial-up," says Boyd Peterson, director of product marketing at Broadjump. In many cases, a "truck roll" is required, where a technician has to go to the residence and wire up the service. This costs the provider time and money required with a dialup connection.
But with all the added cost to roll it out, the marketing expense of enticing the customer in the first place, the truck rolls and tech support, providers still see the broadband road as paved with gold. Maybe that’s because providers know those customers who have seen the broadband light won’t ever go back to the dialup dark days.
"Once you get it," says Peterson of broadband service, "you have a higher threshold of pain you’ll endure before you’ll ever churn."
With the promise of more revenue and less churn, you can almost hear ISPs sing "Ain’t no mountain high enough" when it comes to getting broadband to their customers.
Let the climb begin.
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