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Commentary: Challenges face Net access providers

Both cable and DSL high-speed access must adapt to the new realities of today's business and financial climate.

Both cable and digital subscriber line (DSL) high-speed access must adapt to the new realities of today's business and financial climate.

In contrast to 12 to 18 months ago, companies can no longer focus on capturing market share with little regard for the debts they run up along the way. The world has become much more fixated on near-term profitability.

The challenge for both cable operators

See news story:
Can the cable industry finish what it started?
and telecom providers is that high-speed local access markets legitimately require major infrastructure investments to get rolling. Counting on adding subscribers rapidly to offset these investments, despite the requisite increases in marketing budgets, is a fact of life.

Meta Group believes the new financial climate will force both cable operators and telecom providers to slow their plans to launch. In addition, we believe pricing will stabilize, erring on the side of conservatism instead of prices being driven down aggressively to drive volume.

However, high-speed access is still a critical long-term trend, and countries must launch high-speed access to drive progress or keep pace. It will just take longer to actually reach the average person, which most people expected anyway.

Currently, neither access technology reaches more than a small minority of U.S. households. Each has roughly 2 million to 3 million subscribers, which is less than 2 percent of the total of potential consumer and small-business customers. The competition between cable operators and DSL providers, each with their own set of advocates, benefits users overall by forcing both sides to provide high levels of service at fairly low costs.

Furthermore, these technologies are suited to somewhat different sets of customers. Long term, cable is better suited to provide the integrated mix of services--television, telephone, Internet access, etc.--that consumers want. DSL is more complicated to set up, which turns off potential home users.

However, cable-based access is not attractive to small businesses, which are not interested in many of those consumer services and respond favorably to DSL's ability to provide different levels of service at different prices. Small businesses are looking to DSL as a cheaper local-loop alternative to traditional T1 leased lines. This is also a much more benign pricing comparison for DSL providers to differentiate against. In general, the small-business market is not as price-sensitive as the service developers seem to believe, which will help DSL providers create a stronger financial model.

The major problem in the consumer market, however, is the lack of compelling services to convince even affluent households to buy either form of high-speed Internet access. This market is price-sensitive--market studies show that price resistance grows significantly if the high-speed service costs more than the combination of a second phone line and ISP subscription.

The underlying problem is that so far, the Internet has failed to compete effectively with television as an entertainment medium. Many studies consistently show that most U.S. households spend an average of five hours a day viewing television, and that time has not changed noticeably with the appearance of the Internet. The 2 percent of homes that now have high-speed access probably are made up primarily of households that are not attracted to television, but such households represent a small minority of the population.

If consumers are going to use interactive services heavily enough to justify paying for high-speed access, they have to take that time from something else--either their work, their families or television. That time will probably have to come from their TV watching, because they are less likely to take it from either of the other choices.

Success in the consumer high-speed access market, therefore, will depend first on who develops a compelling financial model for supporting the expensive infrastructure buildout that both technologies face, and second on who develops compelling applications that can draw people away from their televisions.

Meta Group analysts Jack Gold, William Zachmann, David Cearley, Val Sribar, and Peter Burris contributed to this article.

Visit Metagroup.com for more analysis of key IT and e-business issues.

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