Eric Nee: Band of Gold

The U.S. is the world leader in any number of critical Information Age technologies, but in one significant area it has been a laggard: consumer broadband. We’ve got backbone bandwidth to burn criss-crossing the country, but too little of it makes its way into the home.

That situation is changing—and it is changing faster than most people realize. The U.S. consumer broadband market has reached a tipping point. At the end of 2003, just 23 percent of all U.S. homes had a broadband connection; by December 2004, that number is expected to jump to 31 percent, according to Strategy Analytics, a market research firm. And the rate of growth is accelerating.

The reasons for the upsurge are many. Like most new industries, particularly ones as capital intensive as telecom, it takes time to become a solidly profitable business. But that corner has now been turned. The large up-front costs that broadband providers incurred to upgrade their networks, train their employees and market their services are now being paid for by a much larger—and growing—group of customers, thus enabling providers to turn a profit on new customers much more quickly.

In turn, that rosier financial picture is creating greater competition between telecom and cable broadband providers, and the competition is resulting in better customer service, more features, faster connections, greater availability and lower prices. Entrepreneurs are starting innovative broadband services, such as Apple Computer’s iTunes, and consumers are taking notice—and signing up at record rates.

Why? Because broadband really is better. The difference between a dial-up modem and a fast, always-on broadband connection is like the difference between driving cross-country in a rickety old car and flying cross-country in a private jet.

The explosion in the consumer broadband market is having a ripple effect on the business market as well, an effect that will only increase with time. Some of the changes in the business market are obvious, and largely positive. In the past, for instance, small companies had to pay hundreds of dollars each month for a fractional T1 line, because that was all that was available. Now that same company can get a DSL line running at the same speed for a fraction of the price it paid for the T1.

Other changes will be more challenging, especially for certain industries. The growing popularity of downloadable music from services such as iTunes, for example, could have a devastating effect on traditional CD retailers. And the video business will be next to feel the pinch. Consider the impact DVDs have already had on video-rental stores. People have taken to buying DVDs instead of renting videotapes because they are convenient, inexpensive, widely available and of higher quality. And if you want to rent, rather than buy a DVD, you can order through an online service such as Netflix, which mails DVDs directly to consumers. Now think about what will happen when consumers can download an entire movie in minutes, and store it on a home server, just as easily as they now download a song. It will be more convenient and less expensive than any present-day service—even Netflix.

Music and videos are obvious examples. But the impact of consumer broadband on business will be even broader. The question every business executive should be asking today is this: “What will it mean for my business when half my customers and nearly all my business partners have high-speed, always-on Internet connections?” The answer to that question could cause many companies to rethink the way they do business.

The day when this happens isn’t far off. Consider these statistics: First, while the U.S. trails nine other countries in broadband home penetration, it ranks No. 2 when it comes to the percentage of the total population with Internet access. (Sweden is No. 1.) As of April 2004, an estimated 70 percent of the U.S. population, or about 207 million people, used the Internet, according to Nielsen/NetRatings. Three quarters of those Internet users have dial-up connections, not broadband—but are poised for upgrade. In fact, in some parts of the country, broadband is already outpacing narrowband. San Diego tops the list, with 52 percent of subscribers connecting over broadband, followed by Boston at 50 percent and New York City at 49 percent, according to the research firm comScore Networks.

And the migration to broadband is accelerating. In the first three months of 2004, the number of DSL subscribers in the U.S. jumped 13 percent, from 9.4 million to 10.6 million. This acceleration is global. In the same three-month period, 9.5 million new DSL lines were added worldwide—a record-breaking 15 percent increase.

Even if these growth rates slow down after a year or two, it’s a safe bet that a majority of U.S. homes will have a broadband connection by 2007. And when that happens, broadband will evolve from a niche market to a mass market. And that will change everything.

No industry illustrates the challenges broadband presents better than telecom. Telcos can sell consumers more expensive DSL lines, but they also risk losing some of their lucrative voice revenues as those same consumers switch to Voice over IP—the “killer app” of consumer broadband. Just about every major telecom and cable company has announced plans to offer VoIP, and several are already doing so. The attraction? Not only do consumers like the lower prices, but VoIP also offers telcos other revenue opportunities. Because the calls come in over the Internet, it’s easy for service providers to layer on additional call management and call tracking features.

More important, VoIP will be the first widely used broadband service that will force consumers to keep their Internet connection always on—and that’s the real secret. After all, no one turns off their phone at home, and no one will turn off their Internet connection if they use it for a phone. Once that computer is always on, other businesses can and will find ways to piggyback products and services. Home security companies, for instance, will be able to expand their markets by developing surveillance systems that connect to the Internet. Healthcare companies will be able to provide home healthcare services to the sick and elderly using medical equipment that can be monitored remotely over the Internet.

“The key thing to understand is that always on also means real time,” says Paul Saffo, a research director at the Institute for the Future. To date, very few broadband applications take advantage of this, but Saffo predicts they will. Instead of passively watching television, consumers will be able to play along with Who Wants to Be a Millionaire, vote for their favorite entertainer on American Idol, and contribute live video feeds of earthquakes and other breaking news to CNN.

“It’s an obvious truism, but we have shifted from an age of mass media as defined by television, to the age of personal media as defined by the Web,” says Saffo. “TV delivered the world to our living rooms, but all we could do was watch. The defining quality of the Web is that the audience can talk back.”

Some of these ideas might sound like the worst sort of fantasizing that went on during the dot-com era. But the broadband world is real, and becoming more so every day. Companies such as Apple are demonstrating that a business can be built around broadband services. It’s time for every business to get just as creative.

Eric Nee, a longtime observer of Silicon Valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in September.

Illustraion by: John Kascht

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