Broadband push may trample dial-up ISPs

Cable and telephone companies are going to war for consumers' broadband business, promising Net video, telephony, and other high-speed services. Yet the industry push for a high-speed Internet may force thousands of regional and local dial-up ISPs out of the game, as they can't yet access cable networks and find it difficult to compete with telcos' high-speed offerings.

The crush may not happen soon, however; analysts predict that dial-up users will still outnumber broadband users by nearly 2 to 1 in 2003.

"Broadband is definitely going to hurt [ISPs] in markets where broadband is available," said Bruce Kasrel, an industry analyst with Forrester Research. "It's not easy for them to become broadband [providers]."

High-speed digital subscriber lines (DSL) or cable modems allow a user to plug a computer directly into the network of telephone or cable wires that pass a home, allowing for an "always-on" Net connection.

Yet this feature makes it difficult for anyone but the major local telephone and cable companies to offer direct connections to high-speed networks, forcing dial-up ISPs to cut deals with the companies to get into the broadband market.

Telephone companies, which are subject to regulatory rules that force them to resell elements of their networks, have signed on with some Net service providers to offer DSL. Bell Atlantic and SBC Communications have signed agreements with America Online, BellSouth has signed a letter of intent with MindSpring, while other smaller ISPs are negotiating their own high-speed telephone access for subscribers.

But this is far from a perfect option for the dial-up ISPs.

"It's a lot more work than being a dial-up ISP," Kasrel said. By reselling a telephone company's high-speed service, the ISP depends on the telco for customer service, equipment maintenance, service quality, and many of the technical functions that ISPs have traditionally done in-house. This makes it much harder for a small ISP to add its own value to the telco's service, he added.

On the cable side, traditional ISPs are largely shut out. Big cable companies like AT&T and Time Warner allow only affiliated services like @Home or Road Runner to use their networks.

ISP lobbying groups have asked Congress and federal regulators to force cable companies to open their networks, but the appeals have gained little ground. ISPs continue to lobby in Washington, however, and will bring up the issue as regulators review AT&T's merger with MediaOne.

"If you keep the networks open--not just cable, but telephone networks, too--then the little guys will have a chance to compete," said Dave McClure, executive director of the Association for Online Professionals.

Second-tier shakeout?
Of all the dial-up ISPs that now dominate the market, America Online is the only one likely to survive the transition to broadband relatively unscathed, analysts say.

AOL has signed deals to make sure its subscribers will be able to get DSL service in as many places as possible, and has made some initial moves toward satellite and wireless access. The Net giant has been the chief lobbyist behind a campaign to open cable networks.

Meanwhile, second-tier providers such as EarthLink, MindSpring, and Prodigy all have been doing their best to gain their own access to broadband networks. All have signed deals with DSL providers, and MindSpring and EarthLink each have relationships with small cable providers.

"We're really trying to gain access to all networks for our subscribers," said Ed Hansen, a MindSpring spokesman.

But they too will face steep competitive pressure over the next several years, as cable services may become less expensive than DSL, Kasrel said. AOL has the leverage of tens of millions of subscribers to offer cable companies if they open their networks, an advantage the second-tier players lack.

"Those guys may have to merge into a single company to make it work," Kasrel added. "As independents, I don't think they can make the cable companies care about them."

Forrester predicts that the number of people switching to broadband service from traditional dial-up will pass the number of new dial-up subscribers in 2002.

By 2003, more newcomers to the Internet will be signing up on broadband services than over dial-up lines, the company predicts. This will happen as computer companies start bundling broadband access devices like Ethernet cards along with computers instead of traditional modems.

"They're going to get people hooked," Kasrel said. "The dial-up guys are going to be left out in the cold."