Broadband Stalls With Net Economy

With one of the biggest trees in the broadband forest leaning at a perilous angle, technology managers, telecom carriers and policy makers are debating the shallow root system of the entire Internet economy

With one of the biggest trees in the broadband forest leaning at a perilous angle, technology managers, telecom carriers and policy makers are debating the shallow root system of the entire Internet economy.

[email protected], the nations biggest broadband service, is tottering on the edge of bankruptcy and adding fuel to the raging debate about how to jump-start broadband deployment and get millions of Americans to pay the price. Leaders of technology companies who see ubiquitous broadband as critical to an economic rebound are impatient for legislators and regulators to get on with a solution.

Some observers say the fundamentals of the broadband business may be faulty.

"I think this really calls for a much deeper evaluation of what business model would work in this market," said Bill Bandt, an Andersen consultant, in reference to [email protected] troubles. "Im not sure if all the buzz and all of the expectations and dreams were generated by customers who were begging for e-products and services or whether it was being pushed by companies."

Bandt believes [email protected], now trading at penny-stock levels, has lots of company in the Field of Dreams school of business. For most of the failures, the plan could be summarized as: "If you build it, they will come."

Since 1996, the cable industry has spent $50 billion to upgrade networks to handle two-way services, said Michael Willner, CEO of Insight Communications and chairman of the board of the National Cable and Telecommunications Association. "Deployment is successful, but the actual take-up rate is slower than we would like," he told a crowd of technology executives and policy makers at the Progress and Freedom Foundations Aspen Summit last week. "About 10 percent of customers are taking broadband."

At the end of June, the NCTA reported there were 5.5 million cable modem subscribers out of 65 million homes able to receive the service.

AT&T President David Dorman was one of numerous speakers at the gathering who pointed to concentrated market power in the hands of the regional Bells for stifling innovation among content providers.

"Except for high-speed Internet access, there are no killer applications driving demand for broadband today," he said. "That may be why, today, so few families subscribe to broadband services where they are available."

The best way to stimulate development of content and services to drive demand is with a marketplace full of competitors that are all looking for the killer app to attract customers to their networks, he said.

On the other side of the debate, Tom Tauke, Verizon Communications top public policy leader, said the way to stimulate investment is by letting the Bells behave "like a real business" in broadband. "We need a broadband policy that will allow us to take the risk of investing in new equipment and technology without being required to share the rewards with competitors who have borne none of the investment risk," he told the crowd gathered in Aspen.

Ironically, [email protected] got into trouble, in part, because of its $6.5 billion in investments. First, the company spent heavily on the Excite portal to add content to the original @Home network; then on other expensive content plays, including $780 million for, $425 million for and $89 million for database marketing division MatchLogic.

Since the Net slump began last year, [email protected] has been unsuccessfully trying to rid itself of the Excite side of the business, said Mike Paxton, a Cahners In-Stat Group analyst.

Now [email protected] is forced to support a portal with advertising and e-commerce. With online advertising falling dramatically, [email protected] has seen that revenue drop by more than 50 percent.

Also afflicted by a balkanized ownership structure, the Redwood City, Calif., Excite has struggled to chart a course through the infighting of cable powers AT&T, Cox Communications and Comcast. In a costly resolution to the boardroom power struggle, AT&T agreed to buy out its cable partners to establish control of Excite. Now, AT&T is trying to avoid sacrificing its broadband unit to a lowball bid from Comcast.

Some industry insiders caution against viewing the future of cable Internet, much less mass broadband deployment, through the experience of [email protected]

"Its not that the cable modem business has a problem," says Mike Luftman, spokesman of AOL Time Warners Road Runner cable Internet service. "This is a great business."

And venture capitalists are investing millions of dollars in voice over broadband technologies.

Meanwhile, AT&T is working on a new strategy to reach into the homes it lost in the 1984 divestiture.

The company paid $130 million earlier this year for the assets of NorthPoint Communications, the first of the big three DSL wholesalers to fail. "Ill be the first to tell you it was a bargain," Dorman said. "NorthPoint invested over $1 billion."

Now AT&T plans to invest billions of dollars more, integrating NorthPoints assets into its network to reach the 85 million families living outside its cable networks. The company is working through pitfalls — multiple truck rolls and the like — in two test markets, before using DSL technology as a platform to provide a variety of services, including multiple phone lines and high-speed Internet access.

"Over the next year, we intend to roll out an aggressive program for small businesses and consumers," Dorman said.