New Edge Networks is one of a handful of firms with the counterintuitive strategy of bringing high-speed, or "broadband," Internet access to small towns, targeting places such as Ft. Myers, Fla., or Eureka, Calif., instead of revenue-driving cities like San Francisco or New York.
With its own service barely launched, New Edge Networks yesterday asked regulators in the state of Washington to break up local telephone giant US West. The company, New Edge says, is making it difficult to install high-speed telephone lines in rural areas that New Edge is working to service.
New Edge's difficulties, however, extend far beyond any problems it may be facing with its local rival.
Along with Jato Communications, DSL.Net and a few others, New Edge is betting that the big phone and cable companies won't spend the money to bring high-speed Net connections to rural areas for years to come, if ever. And these small companies see that as a window of opportunity.
"People in those areas want service and need service just as much as people in downtown San Jose (Calif.)," New Edge chief executive Dan Moffat said. "We've bought into the idea of bridging the geographical digital divide."
The so-called digital divide, or separation between people who can afford PCs and have access to the Internet and those who don't, has been prominent in recent news.
Yesterday, President Bill Clinton proposed a plan that would help low-income people get on the Net. But administration officials and consumer groups have also spotlighted the difficulty for people in small and rural markets in gaining easy online access.
The problem has been particularly intense for high-speed Internet services. Big phone and cable TV companies have focused on high-tech and high-population areas to introduce cable Net and digital subscriber line (DSL) services. Even there, those introductions are relatively slow--by the end of the third quarter last year, just 224,000 high-speed DSL telephone lines were in service, according to analyst firm TeleChoice.
DSL is a technology that allows ordinary telephone lines to carry high-speed Internet traffic and voice telephone calls simultaneously.
There's a simple reason the big companies aren't going for the small markets: They're expensive to serve, and there aren't many customers. For companies focused on making billions of dollars in revenue, rather than a few million here and there, that's not much of an incentive.
"There are broadband opportunities there, but they're obviously not as robust as you would get in larger markets," says Mark Rotter, executive director of US West's DSL program. "But when you only have so much capital, you have to invest where you will get the greatest return sooner."
ISPs in small markets say consumer demand is still limited, since computer users there simply haven't had much exposure to the advantages of the high-speed Net.
"We're getting a substantial number of calls from people," said Rod Lefever, president of product management for OneMain.com, a national ISP that focuses on small and rural markets. "But where we do provide broadband service, we find that a lot of people are not willing to pay the extra amount, even if it's a small amount."
But for the small DSL firms, even these crumbs left behind by the communications giants appear valuable. And while the companies are still young, they're gaining some of the support they need.
New Edge has raised more than $300 million from venture funds and high-tech firms since its birth last June, and this week announced that it was stepping up the speed at which it plans to enter new markets. It only has about 50 lines in service now--they just began turning lines on in December--but executives say demand has pushed them to move up their plans.
"As long as we can scale fast and have the capital to do it, we'll go just as fast as we can," Moffat said.
Jato Communications, which has been around nearly a year longer than New Edge, has filed to go public. It hasn't said how many customers it has, but its documents note that it posted just $44,000 in revenues for the first three quarters of last year, as a warning of how difficult it is to make money in the early stages of this business model.
But Wall Street hasn't been bullish on companies aiming at the other side of the digital divide. OneMain.com, a dial-up Internet service provider (ISP) that focuses on these second- and third-tier markets, went public and reached an optimistic $46 a share a year ago. Today, even after it has reached subscriber figures that put it close to the nation's top 10 ISPs, it is trading at just $13.
DSL.net, a company similar to New Edge, has met with a little more success, staying in the low $20s after going public at less than half that.
Analysts say that the broadband companies do have a reasonable chance of success, as long as they pick their markets carefully. Demographics inside small markets vary widely--a semi-rural farming community will have far less need for high-speed Net connections than a vacation retreat like Telluride, Colo., for example.
"It certainly seems that there's going to be more opportunity in markets where there's very little competition," Jupiter Communications analyst Zia Daniell Widgder said. "But they need to figure out the economy and demographics of the populations."
But even if they have trouble making a profit in their early years, these companies will help kick-start the high-speed Net economy in places that might otherwise have been passed by. That will give local businesses valuable top-grade Net connections, and local residents access to broadband entertainment and--in what the companies see as one of the most critical features--access to shopping options they haven't had before.
"We're looking for places like Eureka, Calif., where you can't just run down to Fry's Electronics to get electronic components," Moffat said. "You can make the argument that these people need (broadband) more then the cities do."