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Commentary: Is broadband the next big thing?

The economic slowdown will moderate the growth of the broadband Internet access market--but only from torrid to merely hot.

    By Jay Pultz, Gartner Analyst

    The economic slowdown will moderate the growth of the broadband Internet access market--but only from torrid to merely hot.

    In 2000, the market doubled in size. This year,

    See news story:
    Is broadband Net access recession-proof?
    growth will exceed 50 percent. The slowing economy will not stop the robust expansion of the broadband market for three main reasons.

    • A huge backlog of demand for cable modem and DSL (digital subscriber line) service remains unfilled, as plenty of consumers with a high disposable income do not have access to either type of service.

    • Enterprises are just starting to realize the significant boost in productivity that broadband provides to teleworkers.

    • Broadband access continues to appeal to small and branch offices. A single broadband connection could take the place of several low-speed links and would therefore save money. Moreover, broadband connections provide not simply Internet access but also access to advanced technologies such as frame relay.

    The retrenchment of the broadband market evident over the past several months has occurred partly because of the economy but also because of a change in investor sentiment. Several independent DSL providers, such as Covad Communications and Rhythms NetConnections, have retreated from numerous markets; others, such as NorthPoint Communications, are in Chapter 11 bankruptcy proceedings.

    The economy didn't help, but many were suffering from flawed business plans before the economic slowdown began. Some DSL wholesalers suffered when some of the resellers they dealt with went out of business. In any case, too many providers had jumped into the market, so a shakeout inevitably followed. Instead of their past focus on fast revenue growth, which led the DSL independents to expand as quickly as they could, investors have now started to focus more on profits. As a result, the independents, along with incumbent local-exchange carriers (ILECs), have scaled back their plans to reduce capital outlays.

    For customers, the most concrete outcome of this situation is that the ILECs and other DSL providers have raised prices. This trend reflects the abiding unmet demand, the lack of real competition--for example, in most places consumers do not have a choice between DSL and cable modem service--and the need to boost profits.

    The ILECs and cable companies will likely come out ahead in the game. They have the resources to survive the economic downturn and changes of fortune. Interexchange carriers such as AT&T and WorldCom, which either resell or offer their own DSL services, will also do well. Finally, large Internet service providers, such as EarthLink, should prosper in the broadband market.

    In the broader view, the present slowing of growth could give broadband providers some breathing room. It will allow them to catch up with demand, to train staff, and to improve back-office processes.

    In two years, broadband could even become a stimulus for the economy as penetration reaches a critical threshold in both the consumer and enterprise markets. Consumers will want new network-based services beyond just Internet access--video on demand, for instance. Businesses will tap broadband connections to exploit the offerings of application service providers.

    After today's growing pains, broadband could become the next big thing.

    (For related commentary on the challenges and advantages of telecommuting, see TechRepublic.com--free registration required.)

    Entire contents, Copyright © 2001 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.