Analysis: BroadbandBy Jeffrey Rothfeder | Posted 02-25-2002
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Layerone Holdings Inc. gets paid handsomely to solve some of the most complex technical problems in telecommunications, but even it was stymied by the broadband debacle. In mid-2000, the Dallas-based company, which links the disparate communications networks of such clients as Verizon, Qwest and Yahoo!, went live with what it hoped would be a Web site that captured its image: a fast-paced start-up at the cutting edge of technology. Graphics flashed, the case studies of its clients' successes rolled like Hollywood credits, and garishly colored logos in brassy fonts pulsed on and off at random. The site, like the hype over broadband, seemed too restless to stay still for more than a few seconds.
Explains Alexander Muse, LayerOne's CEO: "We figured everyone would not only have high-speed access but also high-speed wireless access before long. So we created a Web site for the fast Internet. Twenty different telephone companies and numerous cable companies were selling broadband, so how could it fail?"
LayerOne's reasoning couldn't have been more wrong. Complaints began almost as soon as the site went up. Many of the sales people and network specialists at the telecom firms that make up LayerOne's client list work at home, where they only have dial-up connections to the Webno cable modem, digital subscriber lines, satellite or fiber optics. Their main gripe: The site's many frills made simple tasks like looking up basic technical specs and pricing information a long and frustrating experience. At first, Muse admits, he wasn't sympathetic. "We told them to get a faster Internet connection," he says ruefully. "And if they couldn't now, we told them they'd certainly be able to get one soon."
Muse changed his tune late last year, after he and his family moved to a new neighborhood in Dallasone with no broadband service, and no timetable for installing it. The first time he tried to get on LayerOne's site from his new house, he found himself staring at a screen filling at a slothful pace when all he wanted was one little piece of information. Finally feeling his clients' pain, Muse immediately ordered LayerOne's technical staff to tear down the company's site and rebuild it with simple, text-based links and no Flash graphics. The refurbished site launched in late 2001. In all, LayerOne spent nearly $100,000 on its cyberspeed detournot to mention the possible lost revenue it suffered when prospective clients simply gave up rather than wait for the old site's pages to load. "Our site was an example of Web designers and marketing people run amok, driven by a corporate strategy that was way too optimistic about high-speed Internet," Muse says. "The good thing is we are all coming back to reality now. At this point, broadband is a foolhardy and expensive technology to build your future on."
The true cost of broadband's woefully slow rollout is well represented by LayerOne's experience, which in one fashion or another has been repeated in any number of corporations.
Only about 21 million Americans had high-speed Internet access at the end of November, according to Nielsen//NetRatingsabout 20 percent of those with online access. The result: Many companies have had to shelve key portions of their business plans and tone down growth estimates tied to broadband acceptance to generate revenueor have already gone bust in the attempt. Among them: dot-com start-ups whose business models depended on broadband to pipe such technologies as interactive video and streaming media to their customers, as well as Fortune 500 firms that had planned to build sprawling portals offering enhanced e-commerce with high-bandwidth 3-D movies and music.
Meanwhile, lagging broadband deployment has slowed the growth of telecommuting and hurt the productivity of companies with employees who do work at home and are stuck with tedious dial-up connections. Productivity for workers at home increases 20 percent when they move from dial-up to broadband, according to the Institute for the Study of Distributed Work, a Sonoma, Calif.-based technology think tank. While the number of telecommuters grew from 3.4 percent of the work force in 1995 to 4.7 percent in 2000, it's been static in the past year.
Broadband's disappointing performance requires CIOs and IT executives to perform a delicate balancing act, simultaneously implementing potentially lucrative and productive broadband Web applications while also moving gingerly to offer such services in a form that takes into account the limitations of dial-up. And they must do this without completely losing broadband's high-speed advantages. With all of this, telecommunications experts fear that the worst outcome of the broadband roadblock is that it is hampering development of the next killer applicationwhich will more than likely be an offshoot of speedy access to Web data over wired and wireless networksand is hurting economic growth in the process. "At some point, you have to accept that universal broadband is good economic policy," says Rory O'Connor, vice president of strategic communications at Washington, D.C.-based Dittus Communications Inc. O'Connor is also a lobbyist for the electronics industry and a broadband advocate.
The hope now is that the impetus to build high-speed Internet access will come from the big players, such as Microsoft and AOL Time Warner, who will benefit most from its increased acceptance, and not from the government or the local phone and cable companies that control the last mile. But even that will have to wait for a stronger economy and the lessening of the mountains of debt taken on by the telecom industry in the past five years.
A Short History of
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 brinkamong them Covad Communications Group, Inc., At Home Corp., NorthPoint Communications Group Inc. and Rhythms NetConnectionsbecause 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 ISPsAt Home, Earthlink Inc., Covad and a couple of dozen morereceived 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 competitionthat is, among the Baby Bells and the long-distance companiesbut 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 companiesand similarly testy disagreements in the cable industryhas 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 productsand not necessarily a prioritythat 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 jobsfrustrating, 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.
In business-to-consumer applications, the delay in broadband is having an even more serious impact. Many companies are hesitant to develop innovative contentwhich is essential if the Internet is to keep growing as a commercial mediumwithout high-speed lines to deliver it. Executives at CareerSite Corp, a six-year-old Ann Arbor, Mich.-based company that manages Internet help-wanted pages for newspapers such as Crain's Detroit Business and trade associations like the Florida Banker's Association, had hoped by now to be able to offer more advanced Internet features, such as live video job interviews, that could potentially generate a lot of additional revenue. But that part of its business plan has been shelved for now because clients refuse to sign up for anything more than the bare-bones classified listings. "We've tried to sell advanced services, but the acceptance rate is pretty near zero," says Owen Medd, CareerSite's chief technology officer. "Without high bandwidth, the most you can do is offer real-time chats. For interviews, that's not a particularly good option."
Facing similar broadband disappointments, many technology chiefs have given up waiting for the high-speed Internet. Instead, they're building their Web sites primarily for the larger dial-up audience while in some portions offering a richer experience for broadband customers. People with broadband surf the Internet 25 percent more often than dial-up subscribers and spend 23 percent more time on the Web, according to Nielsen//NetRatings. As a result, there is a greater window of opportunity to lure broadband users into purchasing somethingor at least to gain their loyalty for future product sales and promotions. For that reason, even though there is only a relatively small group of people with high-speed Internet access, most companies feel there is some gain in not ignoring them.
BellSouth's Web portal, for instance, which offers the usual array of channelspersonal finance, autos, news, entertainment and the likehas clearly marked links sprinkled throughout indicating areas specifically designed for "fast-access users." Features include video demonstrations of new cars, streaming audio news reports, music downloads to accompany stories about new CDs, even movie trailers. The next step for BellSouth will be to publish a dynamic, up-to-the minute guide that lists all the broadband content on the site so high-speed Internet users can see immediately what's available. "The whole aim is to keep people on the site longer. So while we aren't abandoning our dial-up users, we want to give our broadband subscribers relevant content," says Stan Yeatts, BellSouth's vice president of Internet and portal services. "If we get the customer experience right, revenue will follow."
For other companies, BellSouth's approach is not a viable option, because their business depends on providing dial-up users as well as those with broadband access an experience that isn't painfully slow and uninviting. Their challenge is to juice up the speed of Internet access with technological sleight of hand so it appears they're operating at a comfortably fast speed. A dozen or so companiesAkamai Technologies, Inc., Inktomi Corp. and Transfinity Corp., among many othersoffer caching and compression hardware and software that anticipates which information people need and then stores it on a server for instant delivery. This avoids the slow process of having to download fresh data every time it's asked for.
Companies like Global Knowledge Network, Inc., a Cary, N.C., Web-based training firm, are perfectly suited to take advantage of these technologies. Because Global Knowledge offers what are essentially scripted courses over the Internet, primarily for IT certification and continuing education, the company knows what data, graphics and video presentations need to be shown to students and in what order. Using data compacting software, the company lines up content on its server in stages so that when the student is ready to view it, it's already being sent to his computer. "That at least eliminates the lag even for the bulk of our students working from home on dial-up," says Eric Goldfarb, Global Knowledge's CIO.
Such jury-rigged solutions are not a long-term fix, Goldfarb admits. He says his ultimate dream is a broadband-based Web that will allow him to turn over to the student control of what he's looking at in the classroom and let him choose what he wants more information about. He could click on a 3-D image of the hardware he's studying, for instance, and get precise schematics and internal depictions of the equipment.
Such fantasies may yet come true, if industry prognosticators have it right. According to Forrester Research, even with broadband's stuttering record, upwards of 50 million households will have high-speed Internet access by 2005. That seems hard to believe, however. To reach those numbers, many experts say, the federal government would have to essentially mandate widespread deployment of broadband. That's a long shot considering the FCC's record of inaction and the government's lack of any real interest in considering some of the more creative ideas to jump-start broadband, such as giving subsidies to people to choose their own high-speed Web provider while providing tax breaks to companies that roll out broadband networks. "The government is missing the point that the broadband debate is much bigger than just an argument about deploying a new technology," says Karen Kornbluh, a Markle fellow at the New America Foundation. "It's about productivity, the future of the high-tech industry, and innovation." Yet recent reports in The Wall Street Journal suggest that the Bush Administration is planning a policy statement on the issue, including money to promote rural broadband access and a proposal that the FCC loosen the rules on the Baby Bells' investment in high-speed access. Whether the move will help jump-start the industry is anyone's guess.
Wireless networks, especially the next-generation 3G digital technologies, could be the answer to breaking the broadband logjam, according to some experts. The telecom companies are motivated to install these networks because they're counting on them for so-called mobile commerce, which would let people purchase travel tickets or groceries, conduct banking transactions and locate the nearest French restaurant on their cell phones. With 3G links throughout the country, they could serve as wireless broadband hookups for the last mile from the curb to the desktop. But no one expects 3G to be widespread for five years or so. In fact, 3G spectrum sales have been pushed back to at least 2004.
There is one business imperative, however, that could change the broadband landscape much sooner. Major content providers, whose growth is being stymied by the slow Web, may finally take the lead in goading telecom companies to speed up the Internet. There are already promising signs in the escalating rivalry between America Online and Microsoft Network, the two biggest Web portals, both of which are keenly aware that growth in usage and revenue depends on broadband. Without it, potentially lucrative e-commerce and music and video downloads will never get off the ground. To ensure that it does, AOL Time Warner Inc. has begun to aggressively market broadband services through its sister company, Time Warner Cable, and has released a new version of its software incorporating advanced entertainment and e-mail capabilities that require high-speed access to use it to full advantage. Meanwhile, Microsoft has signed agreements with Verizon, BellSouth, Qwest Communications International Inc. and SBC Communications to market MSN to 90 percent of the households currently capable of receiving DSL, and to twice as many additional potential DSL subscribers within the next few years.
Even with the battle between AOL and Microsoft heating up, the bulk of visitors to most company sites dependent on the Web for revenue will continue to get there by dial-up lines for at least the next few years. Consequently, the Web content strategy that most CIOs will have to grudgingly continue to live with is one that satisfies dial-up users without alienating the broadband audience. However, now that companies with the most vested interest are demanding broadband rollout, there's some light at the end of the tunnel. No one ever got rich betting on broadband before, but with Microsoft and AOL's money on the line, this may finally be the time to beat the odds.
Jeffrey Rothfeder writes frequently about business, security, environmental and technology issues. Comments on this story can be sent to email@example.com.
The Federal Communications Commission, headed by Michael Powell, oversees U.S. broadband and telecommunications policies.
The Institute for the Study of Distributed Work is a think tank that focuses on issues related to telecommuting and the use of technology in nontraditional work environments.
The New Networks Institute is an independent consumer group that monitors how the breakup of AT&T and the creation of the Baby Bells as separate entities impacts telecommunications subscribers.