Broadband: Cable, DSL face threats

special report Wireless and other networks pose new challenges to the duopoly.

5 min read

Digital Agenda: Broadband

Broadband: Cable, DSL face threats

July 29, 2004, 4:00AM PDT

ROSEVILLE, Calif.--For 88 years, the Roseville Telephone Company watched the telecommunications world transform the 83 square miles it served surrounding this former railroad town outside Sacramento.

Day 1: A life-saving technology Day 2: Why policies must change Day 3: South Korea leads the way Day 4: Cable, DSL face threats Bandwidth roundtable Editors' picks from Web Reporters' broadband blog Readers' feedback here News.com-Harris Interactive Poll

Then in 2002, the small company decided to join the fray and bought the assets of a fiber-optic network in bankruptcy--a move that catapulted it into the hyperspeed of the digital age. Roseville Telephone changed its name to SureWest Communications and began offering video, phone and high-speed Internet services, taking on industry giants SBC Communications and Comcast.

"We're competing with companies that are exponentially bigger than us," said Bill DeMuth, the chief technology officer at SureWest. "The competitive advantage we have over SBC and Comcast is the fiber."

SureWest is one of a handful of broadband companies that are trying to leapfrog local incumbents, using as leverage new technologies that promise a different breed of Internet access. These challengers hope to disrupt what has long been a two-horse race between cable and DSL (digital subscriber line) in most U.S. cities, yielding faster service at lower prices and encouraging the development of new businesses along the way.

The alternative broadband companies, which range from family businesses to multinational conglomerates such as AT&T, are attacking the market on many fronts. Some are building networks in rural areas that have been largely neglected, while smaller outfits are concentrating on personal customer service. Others are working to bypass the industry leaders that own the broadband pipes using next-generation technologies such as satellites, wireless networks and electrical lines.

As tempting as the potential may be, these strategies face monumental obstacles. For one, they're competing against well-established telecommunications and cable players with widespread brand recognition and seemingly endless resources. The communications landscape is littered with defunct start-ups that raised billions of investment dollars during the technology boom of the late 1990s, only to crash along with the stock market a few years later.

Satellite signals the way

Photo of satellite launch.
An Ariane 5G+ rocket launched from French Guiana on July 17 carried a satellite payload for broadband provider WildBlue Communications.
Rural Action Plan
Throught this plan, the FCC hopes to bring advanced broadband services to places beyond the reach of cable and DSL. Measures include:
  • Wireless spectrum licensing: Flexible licensing of spectrum to small service providers in rural markets.
  • Wireless Internet service providers: Free up more unlicensed spectrum and introducing technologies for small companies to market.
  • Satellite: Spur satellite companies to offer more services to rural America
  • Outreach: Spark more interest in installing rural broadband access
Source: Speech by FCC Chairman Michael Powell, February 2004
Building a beachhead

Alternative broadband providers trying to break in to duopoly markets should look to the rise of satellite TV for a dose of optimism. In the 1990s, satellite companies got established in rural areas where cable had not reached, before expanding into urban markets.

This strategy worked. After a few years, satellite technology improved, equipment got cheaper, and the industry upgraded to digital networks, with hundreds of channels. This forced the cable TV industry to spend around $80 billion playing catch-up in going digital.

TV space race

The swift growth of digital satellite TV service in the United States took rivals by surprise, but cable companies caught up quickly.

(chart) Source: In-Stat/MDR

Yet some of their ideas have found new life as the economy has recovered, especially at companies like SureWest that have picked up expensive technologies at fire-sale prices. Even in areas dominated today by cable-DSL duopolies, the prospects for growth are as vast as the Wild West--and that has rekindled the gold-rush spirit among some broadband entrepreneurs.

"There's probably more money for these things now," said Jim Penhune, an analyst at Strategy Analytics. "The flipside is that broadband is farther along than it was in 1999, and they're going up against some strong incumbent providers, who are gaining momentum themselves."

To date, most consumers have basically had two broadband choices: high-speed Net access from cable operators or DSL service from Baby Bell phone companies. By the end of 2003, either cable modem or DSL connections were used in almost all of the 22 million U.S. households with broadband access, according to research firm The Yankee Group.

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Cable and phone companies build, maintain and upgrade elaborate broadband networks in most cities. Although each municipality has different regulations, most have provisions that allow one cable and one landline phone company to offer service to their residents.

The battle between cable and DSL has intensified over the past year. The Bells have introduced price cuts and have largely kept pace with cable in adding new customers. Cable companies, for their part, have boosted their download speeds to about 3 megabits per second in hopes of counteracting the lure of cheap DSL offers.

That has left little room for other technologies to break into metropolitan markets, let alone establish a foothold. As a result, many alternative broadband companies are concentrating on rural and less-populated markets--following a path set by satellite TV operators more than a decade ago.

Bill DeMuth The competitive advantage we have over SBC and Comcast is the fiber. --Bill DeMuth chief technology officer, SureWest

In the mid-1990s, satellite TV companies launched services that targeted people in rural areas that were not served by cable. Once they were established in these regions, companies such as DirecTV and EchoStar's Dish Network took the competition an important step further by offering hundreds of television channels via digital broadcast.

"That's what made cable go out and do its $80 billion upgrade," said Rob Sanderson, an analyst at American Technology Research, who sees similar market forces at play in today's broadband business. "They want to hit the guy who's dying for broadband out in the sticks."

Broadband is in the air

Given satellite companies' initial success against cable in television, it's fitting that the industry is in the forefront of challenging the land-based incumbents in broadband.

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