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Broadband: What Happened?


For Evan Petrie, the misery began in April, 2000. The 27-year-old computer programmer at Tribune Interactive ordered faster Internet service for his apartment on the northwest side of Chicago. But he soon discovered the wiring inside the 70-year-old walkup wasn't up to the task. It eventually took three visits over six months from the local phone company and his new Net-service provider, Telocity, to get the work finished--and before it was done, Petrie was forced to pay more than $100 for a second phone line he didn't need. "I was angry and frustrated--and I don't even really know who to blame," he says.

Maybe someday, broadband will live up to its billing as one of the great technological breakthroughs of our times. But for now, at least, there are dispirited Evan Petries all across the country. And they're all wondering what went wrong with the fledgling broadband market and what it was supposed to have spawned by now--everything from interactive sports programming on TV to DVD-quality movies on demand. It hardly helps that phone and cable operators widely advertised--some would say hyped--broadband services they can't deliver. And to add insult to injury, after helping to chase smaller new entrants out of the market over the past six months, many of the Baby Bells that provide digital subscriber lines (DSL)--together with the local cable monopolies that offer high-speed cable modems--are hiking prices rather than cutting them to spur a mass market.

The sad part is that while many consumers and small businesses--fed to some degree by overinflated claims--want broadband badly, for a myriad of technical and financial reasons, phone and cable companies have failed miserably to deliver. Five years after the Telecom Act was supposed to unleash a host of new communications services, the digital revolution is still stuck in low gear. Only 6% of households wired to surf the Web do so with a DSL line or cable modem. Those that are able to sign up often have to suffer through time-consuming hurdles and headaches before they get their speedier Internet connection--and then, often put up with spotty service when it comes.

This isn't the way the broadband revolution was supposed to play out. By now, DSL phone lines were to have been installed in up to 10 million homes, based on expectations raised by the pace of orders several years ago. Instead, there are only 2 million. Indeed, only a fraction of the 35% of U.S. households that have access to DSL and the 50% that have access to cable modems have signed up, according to market researcher Yankee Group.

The news isn't all bad. Overall broadband subscriptions should double this year, to 11 million, according to Tod Jacobs, a telecom analyst with J.P. Morgan Chase. Still, the headaches persist. The latest stem from the spate of service interruptions linked to the rising bankruptcy rate of DSL carriers such as Northpoint Communications (NPNTQ) and HarvardNet. The problems are hurting consumers and small businesses alike. In March, for example, Franchise Pictures was in the final stages of editing the now-released movie Driven when Northpoint filed for bankruptcy. Franchise was using Northpoint's DSL service to transmit digital footage of the Sylvester Stallone action flick among five separate studio buildings. Suddenly, Northpoint halted its service. The film company was forced to interrupt editing until a new provider, wireless upstart MetaWire, could be lined up. By then, production had slipped several weeks behind schedule.

Given DSL's troubles, you'd think cable operators would be able to capitalize on it to build their competing cable-modem businesses. But that hasn't been the case. Although 70 million of the country's 105 million households have access to cable TV, and about 60 million have access to cable modems, less than 10% of those have signed up for the service. That's because cable companies aren't marketing it as aggressively as the roll-out of their higher-margin digital-TV services. "I think the pace of broadband deployment on the national level, beyond a few select markets, is very disappointing," says Christine Heckart, president of TeleChoice Inc., a network consulting company.

The consequences of the broadband bottleneck go well beyond a few annoyed consumers. The development of promising new Internet services and media that were once promoted as an integral part of the broadband revolution have been halted, too.

Internet advertising and commerce, for example, are in a deep freeze. Yahoo! Inc. (YHOO) spent $5.7 billion two years ago to buy broadcast.com, which makes it possible to deliver video programming over the Web. The investment has gone nowhere so far because there aren't enough broadband users to watch such programs. Moreover, advertisers can't replace banner ads, which have been largely ineffective, with the more sophisticated, live-action ads that broadband would allow. "To think that you were going to support the development of new programming with banner ads was crazy. What were they smoking?" says Jonathan Taplin, CEO of Intertainer Inc., which provides Hollywood movies over the Web. The company, backed by General Electric (GE), Microsoft (MSFT), and others, has only 40,000 paying subscribers.

Already, a host of digital-media companies, such as Pop.com, Digital Entertainment Network, and Pseudo Programs, have gone bust. Certainly, their business plans, with their dependence on advertising, were ill-conceived. But it didn't help that consumers weren't inclined to watch short films over slow dialup Web connections. "Consumers do not buy speed for speed's sake. Streaming audio or video? It's called your TV or stereo," says Barry M. Schuler, chairman and CEO of the America Online unit of AOL Time Warner Inc.

The bottleneck has also slowed the development of e-commerce. Broadband users are twice as likely to buy things online as slow-speed users, says Joe Laszlo, a broadband analyst at Net researcher Jupiter Media Metrix. AOL (AOL) generates about $7.75 a month in advertising and commerce revenue per user. That's expected to roughly double in the high-speed world, Sanford C. Bernstein & Co. said in a January report.

With such pots of gold at the other end, you'd think there would be a mad rush by telecom and cable companies to get in gear. Whatever happened, for instance, to the much-hyped plans to hook fiber-optic connections directly into homes? Fiber connections run as much as 160 times faster than DSL lines. They can easily accommodate high-speed Net access, digital TV, phone, and videoconferencing on a single line. But with the capital crunch putting telecom expansion plans on ice, these connections remain limited to expensive, urban locations and a few small municipalities such as Norton, Kansas, and New York Mills, Minn. Says Darryl Ponder, CEO of Optical Solutions, which makes optical gear for the residential market: "It will be at least 15 years before we see widespread deployment."

But even providing DSL has proven much tougher than expected, thanks to a host of technological hurdles in transforming the entire national infrastructure to broadband. DSL is a digital Internet service grafted onto an old analog phone system, and DSL gear takes up a lot of space. There's plenty of room to store it in large towns and cities, where phone companies build multimillion-dollar "central offices" for their switching equipment. But in small towns, carriers keep their gear in outdoor cabinets that have no room for DSL equipment.

In large markets, DSL is often incompatible with older copper phone lines. But carriers don't know which lines will be incompatible--and costly to convert--until they start work in each neighborhood. "We have consistently said it would take much longer to roll out [broadband] than anyone thought," says AOL's Schuler. "DSL and cable modems have unique sets of challenges to be able to roll them out ubiquitously."

Regulatory policy hasn't helped matters. SBC Communications Inc. (SBC) pulled out of Illinois' DSL market after state regulators ruled that the carrier must share its new network with rivals. The Bells complain that requiring them to share their networks with rivals puts them at a disadvantage to cable companies. In Portland, Ore., local officials tried to impose phonelike rules on AT&T's (T) cable business. But the effort was shot down in court. Some members of Congress and the Federal Communications Commission believe that a bill easing restrictions on the Bells from offering long-distance service would encourage broadband deployment. Newly appointed FCC Chairman Michael K. Powell wants to ease the regs but aggressively enforce those that remain by proposing to more than double fines for shutting out local competitors. "The commission over-regulates everything. And broadband gets caught in that," says former FCC Commissioner Harold Furchtgott-Roth.

Put it all together, and the broadband revolution sounds a lot more like a broadband bummer. Carriers say they have learned from their mistakes. "We still have a long way to go, but we've made tremendous improvement," says Fred D'Alessio, president of the advanced-services group at Verizon Communications Inc. (VZ) Those improvements need to keep coming. Otherwise, consumers like Evan Petrie, who have the patience to wait six months or longer for their service, might just give up. By Steven Rosenbush in New York, with Dan Carney and Amy Borrus in Washington, Tom Lowry and Peter Elstrom in New York, Charles Haddad in Atlanta, and Ron Grover in Los Angeles


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