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Turn on the afterburners

Net access breaks the sound barrier. Cover story hed: Turn on the after-burners dek: Net access breaks the sound barrier. by Phil Davies

The universe of high-speed Internet access is a smaller place today than it was a year ago. Most of the upstart DSL wholesalers and wireless broadband vendors that once challenged local telephone companies in the broadband market are either bankrupt (NorthPoint Communications, Teligent) or struggling to survive (Covad Communications). Telecom behemoths such as Qwest Communications International, AT&T Corp., SBC Communications, and AOL Time Warner are in firm control, intent on building out their high-speed cable and DSL systems one city block and neighborhood at a time and crushing any opposition with big-budget marketing.

No wonder broadband prices are on the rise: SBC of San Antonio raised basic residential DSL rates from $40 to $50 last spring, and AT&T Broadband jacked up the price of its cable service 15 percent, to $46 a month. Businesses and consumers alike have complained about shoddy service, particularly at the hands of the regional Bell operating companies (RBOCs, or “Baby Bells”).

Meanwhile, the usual machinations of business are having their effect on companies and consumers. AT&T Broadband, the target of a hostile takeover bid by Comcast Corp. in July, plans to become a separate company next year, providing high-speed Internet access exclusively through AT&[email protected] Time will tell whether the new entity can keep its revenues growing at an 11-percent annual clip amid the resulting distractions and consumer confusion.

Years of telecom consolidation have left small and medium-sized enterprises (SMEs) and home users with two basic options for readily accessible, reliable high-speed Internet access: DSL from Qwest , SBC and the other ROBCs; or cable service from AT&T, Time Warner Cable, Comcast, or Cox Communications. The biggest losers in this duopoly are SMEs, less than 6 percent of which have high-speed Internet access, according to The Precursor Group, an investment research firm in Washington, D.C.

Most SMEs are stuck with DSL, because of cable’s mainly residential footprint. And pity entrepreneurs craving broadband in small cities or towns; they’ll be hearing that dial-up screeching for a while, despite expansion efforts.

But somewhere on the telecom horizon, hazy from the smoke rising from dozens of funeral pyres, there’s the hope of wider choice, lower prices, and better service for SMEs and home users hooked on speed. AT&T and Sprint are moving forward with their own national DSL initiatives. And long-term, wireless technology may be the answer for millions of exurban and rural Netizens ignored by the Bells and cable giants.

‘Last mile’ dominance

It wasn’t supposed to be this way. The Telecommunications Act of 1996 was intended to foster healthy competition in local phone service and Internet access by forcing the Baby Bells to share their local lines–the copper “last mile” that connects homes and businesses to the public switched network–with any telecom provider that asked. The RBOCs were barred from offering long-distance services until the Federal Communications Commission (FCC) deemed their local markets competitive.

Five years later, a truly free, dynamic telecom marketplace has failed to materialize. Rather than giving ground to smaller, more agile firms such as NorthPoint and Focal Communications Corp., the Bells grew ever larger and more powerful through mergers, and wielded that power in a tenacious rear-guard action against would-be invaders of the local loop. When competitors tried to exercise their colocation privileges, the incumbents stonewalled, citing technical challenges, tight budgets, and back-office glitches to justify provisioning delays. Today the four RBOCs that survive from the breakup of AT&T in the early 1980s–Qwest, SBC, Verizon Communications, and BellSouth–own about 88 percent of 185 million local lines in the U.S.

That virtual chokehold on the last mile has been the mega-Bells’ greatest weapon in the broadband wars, enabling them to methodically roll out DSL in major cities, going after businesses and home users in downtowns and dense, affluent neighborhoods.

SBC, a $50 billion-a-year conglomerate formed by the 1997 union of Southwestern Bell and Pacific Bell is the country’s largest DSL provider, with more than 954,000 customers in 13 states. Qwest has acquired 306,000 DSL customers in 74 cities since buying US West in 1999. New York City-based Verizon–formed from the merger of BellAtlantic, NYNEX and GTE–and BellSouth (the only Bell that has stayed aloof from M&A frenzy) have also leveraged their pervasive infrastructure to sell hundreds of thousands of DSL accounts.

All the Bells offer faster, pricier DSL connections geared to SMEs in addition to basic 640Kbps service for consumers. Qwest’s Professional DSL package invites small businesses to “ride the light” at speeds up to 7Mbps, backed by service-level agreements and 24/7 tech support.

The Bells swear that they’re cooperating with competitive local exchange carriers (CLECs) such as Covad and McLeod USA, hiring more technicians, upgrading their facilities, and putting DSL orders on the fast track. “Qwest has always been a strong proponent of opening up our network to the competition,” declares Murray Smith, vice president of DSL for Qwest. In fact, the only incentive for the Bells to open up the local loop is the carrot of long-distance data services dangled by the Telecom Act. To date, none of the baby Bells have satisfied the competitive conditions of the Act.

The coax alternative

The cable moguls represent the only real broadband competition for the Baby Bells. After years of dithering, cable providers such as AT&T Broadband and AOL Time Warner have finally figured out that there’s money to be made in swift Internet access, especially when it’s juiced with multimedia content. Like the Baby Bells, cable companies have grown stronger through mergers and acquisitions–without the burden of government price controls and market barriers. They supply about 70 percent of high-speed home Internet hook-ups.

“The RBOCs aren’t really worried about the CLECs anymore,” says Pat Hurley, an analyst with TeleChoice, a telecom consulting firm based in Tulsa, Okla. “They either are or very much should be worried about the cable companies, especially in the residential market.”

Over the last three years, Denver-based AT&T Broadband has swelled into the country’s biggest cable provider, with more than 1.1 million high-speed Internet customers in 16 markets. Ma Bell spent more than $120 billion to build its coaxial empire, buying cable vendors Tele-Communications Inc. and Media One Group and acquiring a controlling interest in national ISP and content provider [email protected] It has spent $12 billion more annually to upgrade its network to handle two-way IP traffic. AT&T Broadband concentrates on the residential market, playing up its 1.5Mbps upstream speed in ads (“Think DSL is fast? Think faster. Think cable.”) and promotions.

Time Warner, already a force in broadband when AOL acquired it last year, has since redoubled its efforts to become the king of connectivity. Joining forces with the world’s largest ISP created an obvious opportunity to funnel Net-savvy content to customers through initiatives such as AOL Plus, AOL’s high-speed Internet service. Through Road Runner, its proprietary ISP, Time Warner Cable provides Internet access to 1.2 million mostly residential customers in 25 states. Road Runner Business Class–available in a handful of cities including Los Angeles, New York City, and Portland, Maine-offers greater speed, up to 4Mbps in some markets, and connectivity for multiple computers and e-mail accounts.

“We think we have a better product [than DSL],” spokesman Mike Luftman says. “When we market [Road Runner] in any given area it’s available to anyone passed by our wires. That’s not true of DSL; there are certain limitations on it technically.”

In many ways cable technology is superior to DSL; for about the same price home users can surf at more than twice the speed of basic DSL, although bandwidth diminishes with increased traffic. And as Luftman notes, access isn’t limited to locations within a few miles of a telco central office. But as owners of vintage Sony Betamax VCRs can attest, the best technology doesn’t always win. Cable is primarily a residential network, designed to pipe entertainment into living rooms, not office suites. “I personally don’t think the cable companies are competing for a lot of small-business customers,” Hurley says, “because they’re just not in the same physical locations as businesses.”

Whether cable firms will continue to exert pressure on the Bells depends on how thoroughly they can dominate the residential market, and how quickly they can extend their hybrid fiber coaxial lines to downtowns and suburban office parks where SMEs connect to the Net.

So near, yet so far

Cable is the spur driving the Bells’ efforts to boldly go where no DSL has gone before. Determined to satisfy the suburban appetite for broadband before the cable firms do, SBC and Qwest have launched initiatives designed to shatter the technology’s distance barrier. Both involve moving devices known as DSL access multiplexers (DSLAMs) from central offices to small, climate-controlled units located closer to outlying customers.

Through its $6 billion Project Pronto program, SBC plans to activate more than 17,000 “neighborhood broadband gateways” over the next two years, build more central offices, and push fiber into thousands of commercial buildings. The project will almost quadruple the range of the company’s DSL network, extending service to 77 million people. “We made a commitment from day one that we were going to go out to all our customers–80 percent by the end of Pronto,” says SBC’s Fletcher Cook.

Qwest announced a less ambitious outreach program last spring that would bring about 6 million homes and businesses in 14 states within DSL’s orbit by the end of 2002. Qwest has pledged to make space available at its “remote terminals” for competitors–a legal obligation that may drive up costs.

But the Bells and cable companies show little inclination to extend their networks beyond the country’s top 100 metro areas. “If I lived in a tier-two or -three city, I might not be expecting [broadband] any time this year or next year,” Hurley says.

The best prospect for getting broadband in the boonies sometime in the next five years is two-way satellite, a technology being developed by small, scrappy companies such as DirecPC, Starband

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