A Short History of

By Jeffrey Rothfeder  |  Posted 02-25-2002 Print Email
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A Short History of Failure

The victims of broadband's failure to catch on are by no means members of an exclusive club these days. In the past year, the business world has been rocked by stories about once-cocky companies that have collapsed into Chapter 11 bankruptcy or are teetering on the brink—among them Covad Communications Group, Inc., At Home Corp., NorthPoint Communications Group Inc. and Rhythms NetConnections—because they ran out of cash before they could make money selling broadband services. It was a series of alarming failures in an industry that by every mid-1990s estimate was supposed to have wired virtually every household for broadband by the year 2000.

Things started out simply enough. The 1996 Telecommunications Act was designed to stoke an upsurge in broadband access by requiring local phone companies to upgrade the last-mile infrastructure to allow for high-speed data applications and then share those networks at a discount with potential rivals. In return, they would be allowed to compete in long-distance and other services. Riding the promise of that legislation, a spate of start-up broadband ISPs—At Home, Earthlink Inc., Covad and a couple of dozen more—received backing from venture capitalists who viewed them as close cousins to the dot-coms and certain to thrive as Internet use increased. Like the dot-coms, many of these companies then went public, raising millions of dollars in exceptionally successful IPOs. At Home, now in Chapter 11, raked in nearly $100 million when it issued shares to the public in July 1997. On its first day, the Redwood City, Calif.-based company's stock opened at more than double its $10.50 offering price, reaching a high of $99 in April 1999.

But the enthusiasm for broadband ISPs waned by the end of the decade as one dot-com after another floundered, dashing the dream that widespread and unlimited Internet use would spur explosive growth in demand for broadband service. The disappointing reality set in: Under a more sober assessment of Internet usage forecasts, it could take an ISP at least two years just to earn back the cost of installing and maintaining each consumer high-speed line. And that's without even considering the price of the network upgrades and high-end technology needed to make cable and phone systems capable of handling broadband. With those included in the equation, by 2000 even the most optimistic estimates showed that it could take 10 years or more before any of the broadband ISPs became profitable. That realization shut off the venture capital spigot, and as shares in broadband ISPs plunged, secondary offerings became virtually impossible.

Adding to the misery were the bruising turf wars between the ISPs and their cable and telephone partners. According to the broadband firms, cable companies like AT&T and Baby Bells like Verizon and BellSouth Corp. blocked the ISPs from having the access to their networks that was needed to roll out broadband quickly and efficiently over wide regions. "The phone companies were being deliberately obtuse," says Covad co-founder and general counsel Dhruv Khanna. "[The 1996 Telecommunications Act] said that we should get nondiscriminatory access to phone company facilities."

In private, the Baby Bells don't completely disagree with this assessment, but in their view the legislation was flawed. "What other companies are asked to subsidize a bunch of start-ups?" asks one BellSouth executive. "It's corporate welfare, and we're doling out the money."

The Federal Communications Commission, which oversees telecommunications legislation, has refused to get in the middle of this dispute. The agency has strenuously enforced wireline competition—that is, among the Baby Bells and the long-distance companies—but has given only lip service to supporting high-speed Internet access. Pressured by lawmakers, who themselves have been beset by telecommunications lobbyists, the FCC has mostly failed to enforce regulations calling for open access to central office facilities and infrastructure for broadband ISPs before the Baby Bells can enter other markets, as the 1996 act demands. This stalemate between ISPs and the phone companies—and similarly testy disagreements in the cable industry—has completely tangled up any chance for the smooth rollout of high-speed Internet wires nationwide. As a result, the ISPs had to cut their ambitions and trim their estimates for growth. Many ran out of cash and folded; others are hanging on by their fingernails.

That, of course, leaves much of the broadband market now in the hands of traditional communications companies. But to them, high-speed Internet access is just another one of their products—and not necessarily a priority—that has to compete internally for marketing and development resources with cable TV, local, regional, long-distance and wireless phone services, business networks and telecommunications consultant operations. And they have to satisfy investors that this combination of operations has significant profit prospects.

So it's no surprise that with the economy slowing, Sprint recently discontinued its money-losing ION broadband service. Meanwhile, SBC Communications, Inc., the San Antonio-based regional phone company, has curtailed its $6 billion project to bring DSL to 80 percent of its retail customers in its 13-state territory by the end of 2002. Currently, 60 percent of SBC's customers have access to DSL, but few have signed up. At $50 a month, it seems, many consumers are balking at the cost.

The bleak broadband environment has had an impact throughout corporate America as the full promise of the Web has essentially gone into hibernation. In some cases, the repercussions, while important, are subtle. Microsoft Corp., for instance, discourages telecommuting for employees living in Sammamish, Wash., a 36,000-person town five miles from corporate headquarters, because Verizon has still not installed DSL lines there. So Microsoft staffers have to sit in some of the worst traffic jams in the area to get to their jobs—frustrating, unproductive hours that could be better spent working on their computers at home. "Certainly the growth of telecommuting would be higher than it currently is if more people had access to broadband," says Charlie Grantham, chief scientist at the Institute for the Study of Distributed Work.



 

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