America Online and the Baby Bells need each other, but new high-speed Internet partnerships could undermine the telephone companies' broadband ambitions.
The big local phone companies have been famously unsuccessful at building thriving ISP services over the last few years, while Net companies like AOL have captured millions of dial-up subscribers.
The regional Bells want to upset this balance of power, however, as consumers increasingly look for high-speed Net services. The most ambitious telcos say they want their own brands to dominate the consumer broadband market--to the extent that AOL has overshadowed its dial-up competitors.
"They've been non-performers in the ISP market," said Abhi Chaki, senior analyst at Jupiter Communications. "In the broadband market they want to make sure that isn't repeated."
The Bells know they have a long way to go. Subscribers to cable modem services such as AT&T-controlled @Home far outnumber users of digital subscriber lines (DSL), the telco alternative that allows copper phone wires to handle high-speed Net traffic.
For this reason, most analysts say that partnering with AOL, which can upgrade millions of its users to the technology, was critical. Bell Atlantic signed its marketing deal with AOL in January, while SBC Communications inked a deal with the ISP today. US West, the other leader in DSL rollouts, says it is in talks with the online service for its own broadband pact.
But some analysts also predict that broadband AOL is the death knell for the telcos' hopes of building powerful consumer Internet brands. By allowing AOL to offer competitively priced DSL service--about $42 a month for high-speed access and AOL content--the telcos undermine their ability to attract consumers to their own brands.
Forrester Research forecasts that as much as 90 percent of all DSL consumers by the year 2004--and probably earlier than that--will be accessing the Net through America Online, and not a Baby Bell-branded ISP.
The telcos themselves will eventually see the writing on the wall, and step back from their attempts to create mass-market front-ends to the service, predicted Forrester analyst Bruce Kasrel.
"Using AOL to be their broadband ISP is a smart move, so they don't get distracted into becoming content providers" Kasrel said. "That's not what they do well. They know that."
Still early in the game
The telcos are far from giving up, and still say that their own broadband names can coexist with and even succeed next to America Online.
Bell leaders in DSL have even unveiled early marketing campaigns for Net service. Bell Atlantic is touting its "InfoSpeed" service. US West highlights its "Megabit" service and says it is evolving into a company that offers "Webtone" as well as dial tone.
SBC executives say they are working on a brand name for their DSL service, which will be the focus of a high-profile marketing campaign later this year.
Meanwhile, a group of Baby Bells has been in talks with PointCast to create a consortium that would offer a @Home-like high-speed Net service in different areas of the country. A successful outcome to those talks looks increasingly unlikely, but the initial campaign underscores the Bells' interest in creating their own high-profile Net brands.
Chaki said the Bells are committed to being viewed as more than just the plumbing that brings consumers a broadband Net. "That was the reason behind the whole PointCast talks," he said. "They wanted to add value to their DSL services."
Telcos plans for broadband brands
SBC executives say they are "absolutely" committed to keeping their broadband brand name strong in the areas where they offer DSL.
The company will roll out the new service as part of a high-profile marketing campaign later this year, said Steve Dimmitt, vice president of marketing for Pacific Bell, SBC's California subsidiary.
The company is also actively looking for content partners to help fill the front end of the service, Dimmitt said. Among the companies SBC has talked to is Intertainer, the video on demand service that provides US West with video services in several trials.
US West, which is also among the leaders in DSL rollouts, appears to be less committed to having its ISP claim independent market share. It instead has focused on branding its "Megabit" DSL service in much the way Intel has pursued the "Intel Inside" strategy, selling access to ISPs with the condition that they retain the Megabit brand.
"The Megabit brand is very important to the company," said Steve Bartholet, director of US West's Megabit marketing division. "It's about creating an image of the company that is seriously into data communications."
Nevertheless, US West has been identified as one of the key players in trying to create the PointCast service, and is moving ahead aggressively with plans to offer video content over its own branded DSL services.
The success of these efforts will depend on the Bells pursuing a marketing strategy that is more coherent and targeted than past dial-up ISP efforts. Also critical will be developing relationships with video and other broadband content partners that give consumers a reason to use their services, instead of sticking with the familiar AOL, analysts said.
But backing off and letting AOL and other ISPs lead the drive for consumers' loyalty would be a better--and probably inevitable--alternative, Kasrel said. "An AOL broadband service could be a very compelling way to combat cable modems' inroads," he noted.
The Bells themselves have a history of trying, and then retreating from ambitious consumer Internet goals, Kasrel added.
"They'll put a crappy effort up, and then even if its priced competitively, [the services] will suffer," the analyst said. "I think it will fail. They're not good at that."