AOL sows high-speed seeds around AT&T

In the Darwinian world of the Internet, America Online and AT&T are following different paths in their parallel quests to become king of high-speed Net services.

4 min read
In the Darwinian world of the Internet, America Online and AT&T are following different paths in their parallel quests to become king of high-speed Net services.

AOL, the world's largest Internet service provider, is methodically creating a patchwork of broadband Net access technologies, despite its high-profile campaign to gain access to cable TV connections. Through investments in digital subscriber lines (DSL) and satellites, AOL is attempting to reach out to millions of potential high-speed Internet customers.

At the same See related story: The new world order time, AT&T is placing all its eggs--roughly $120 billion in recent acquisitions--in one basket: cable.

AOL's various broadband deals will give it access to a whopping 31 million households in just three years--on top of its base of nearly 18 million dial-up subscribers through traditional phone lines. By contrast, AT&T could potentially reach more than 25 million homes once its various cable acquisitions are complete.

Who will take first place in this broadband race depends on a couple of key factors. Some analysts believe that AT&T is best positioned to rule the high-speed Net, because its ownership of networks gives it more control over the technology that reaches the home.

"AOL is in the back seat while AT&T is driving," said Bruce Kasrel, an Internet service provider analyst at Forrester Research. "Sure, AOL has lots of potential customers, but will we see the phone companies deliver on DSL? We'll see."

Yet AOL could find itself in a comfortable position of its own through alternative technologies if cable modem services don't realize their full potential.

"AOL's in a decent position because they don't care which platform they use," Kasrel said. "AT&T is in a little worse position because if DSL really takes off, they can't be as flexible."

Staying ahead
Already the leading ISP in today's dial-up modem market, America Online wants to position itself as a high-speed Net player, as analysts expect higher profit margins and increased e-commerce revenue from broadband connections. Plus, broadband services may begin to chip away at AOL's core dial-up business if Net users migrate toward faster surfing technologies.

"If cable takes off, that puts [AOL] in a pretty big catch-up position. That's a position they're not used to being in," Kasrel said.

To be sure, AOL would like to jump on the same coaxial cable TV lines that AT&T and others are using to deliver high-speed Internet access. The company is vigorously seeking new regulations that would force cable TV networks open to competitors. However, AT&T, after acquiring Tele-Communications Incorporated and MediaOne Group, does not want AOL or any other ISP using its expensive networks.

Blocked from cable--at least for the near term--AOL has instead looked to other broadband partnerships and investments to market its popular service.

"Our strategy has been to present the mass-market consumer with a choice of convenient, easy-to-use broadband choices, whether it's DSL, cable, or satellite," AOL spokeswoman Wendy Goldberg said. "We want to make sure AOL is available on all platforms."

AOL recently invested $1.5 billion in Hughes Electronics' DirecTV, a satellite TV service. In addition, DSL deals with Bell Atlantic, SBC Communications, and Ameritech will give AOL access to consumers through a high-speed technology that is the prime competitor to cable modems.

As DSL moves more into the consumer market, AOL will have access to a serious pool of potential subscribers. Bell Atlantic says its DSL service reaches 6 million homes, while SBC's digital subscriber lines are expected to be available to 9.8 million households by the end of the year. AOL's newest partner, Ameritech, expects to reach 8 million homes with its DSL offerings by the end of 2001.

Yet several of the Baby Bells, including BellSouth and US West, remain outside AOL's sphere of influence. While each does allow smaller ISPs to connect to their DSL services, each has said they would prefer not to see their own high-speed Internet brands subsumed under AOL's brand.

"We will continue to talk to them," US West chief executive Sol Trujillo said. "But we want to manage our own customer relationship. What we want to do is deliver our own experience to the customer."

AOL's satellite deal with DirecTV gives the company access to 7.4 million potential customers, according to a spokesman. The online giant also will have some limited cable modem service via Ameritech, GTE, and other smaller cable operators.

Cable crunch
AT&T Broadband & Internet Services, the company's cable unit, declined to give specific figures for "homes passed," or the total number of households that can potentially receive its service because their areas are within reach of its networks.

According to Dataquest, AT&T claims more than 17 million homes passed after its merger with TCI and will add 8.5 million when it closes its deal with MediaOne. After the company completes its previously announced deals with Comcast, Lenfest Communications, and other cable affiliates, its potential subscriber base should increase.

Recent cable mergers and partnerships will allow AT&T to market local voice service, a $110 billion business annually, to consumers using ubiquitous cable TV lines. But the company, via a stake in Excite@Home, also hopes to rake in revenue from data, which is expected to be a fast-growing business.

And AT&T, by buying its partners, stands to get a higher percentage of revenue than AOL, which has only entered into strategic business deals.

Yet cable Net technology has already run into some hurdles. Excite@Home, the cable modem service used by AT&T, has experienced several network-related service problems, including slow or intermittent service, in the past year.

"AT&T has a lot of clout behind it, and as long as they focus in the short term they'll be successful," said Michele Pelino, an Internet analyst at The Yankee Group. "But longer term, you can't put all your eggs in one basket and AOL, even though they're being forced to do it, seems to recognize that."

News.com's John Borland contributed to this report.