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APRIL 21, 2003
Saving the Bells' Broadband Bacon As DSL loses ground to cable, wireless technologies may be the phone companies' best hope for linking customers to the Net at high speed
Broadband Internet service is fast becoming the cable industry's biggest moneymaker: CIBC cable analyst Alan Bezoza estimates that its operating margins on high-speed data run as great as 60% before interest, taxation, and amortization. By contrast, unfavorable economies of scale mean the Bell operating companies, such as Verizon (VZ ), SBC (SBC ), and BellSouth (BLS ), continue to lose money on every DSL subscriber they sign up. Verizon Chairman Larry Babbio predicts that his company will break even on DSL once he signs up 3 million subscribers. But that would still mean increasing his roster of DSL customers by 60%, a daunting task. With their core phone business also in decline, the Bells need nothing less than a miracle to catch up in broadband. The buzz surrounding new wireless technologies such as Wi-Fi has prompted analysts to wonder if delivering high-speed Net connections over the air might be the answer to the Bells' prayers. Wi-Fi, which exploits unlicensed spectrum to deliver ultrafast connections over short distances, and its "fixed wireless" cousin, which uses a licensed part of the airwaves to send data as far as 30 miles, are cheap, easy to install, and becoming increasingly reliable (see BW Cover Story, 4/28/03, "Wi-Fi Means Business"). PROMISING TRIALS. A large niche market is developing that the Bells could have all to themselves: Internet access from rural areas -- those huge stretches of the country where cable doesn't go. "The Bells need to do whatever they can to get them back into the race," says Jim Pehune, a broadband analyst at Strategy Analytics. With more than 20 million potential customers, rural America could be their opening (see BW Online, 3/18/03, "The Magic of Wi-Fi", and 4/1/02, "The Wireless Net"). The Bells already are showing interest -- to varying degrees -- in wireless broadband. Verizon is the most aggressive: It's running two fixed-wireless field trials, in Maryland and Virginia. Both are producing promising results, according to Brian Whitton, Verizon's executive director of access technologies. A "request for proposal" has been issued to suppliers of wireless gear, and Verizon is readying a wireless rollout by yearend. "For 80% of the homes [we serve], DSL will be the dominant platform," predicts Whitton. That leaves 20% -- some 8 million homes -- that could soon get high-speed Internet service through a wireless connection. BellSouth also is testing fixed wireless as an alternative to DSL in both suburban and rural areas. On Jan. 13, it announced that it would begin a trial service in Daytona, Fla., using technology from Navini Networks, which specializes in so-called ultrawideband Wi-Fi -- a system able to distribute signals much further than the 300 feet that Wi-Fi can handle. Navini boasts that its technology costs 50% less to set up and maintain than either traditional DSL or cable Internet service. BELIEVERS IN WIRES. Only SBC is shying away from exploring wireless. While it's riding the Wi-Fi wave to an extent -- by packaging wireless access points with its residential DSL service -- it has no plans to connect customers directly to its network via wireless. "There's no advantage," declares Ed Charleton, SBC's vice-president for Internet product management, who explains that SBC's research has shown that it would cost about the same to provide wireless broadband as to upgrade existing copper network to handle DSL. Says Charleton: "We're still believers in the wired connection." It's no surprise that some skepticism about wireless broadband remains, even as its potential role as a defense against the Bells' cable rivals becomes more pronounced: Phone carriers have been burned on fixed wireless before. In the mid-1990s, AT&T (T ), spent billions of dollars to develop a fixed-wireless system -- code named Project Angel -- that was intended to circumvent the local-phone companies and cable operators for the delivery of local-phone and video services. AT&T predicted that Project Angel, which it announced in March, 2000, would offer coverage to 1.5 million homes within the year. But by the end of 2001, when Ma Bell had said it would have 10 million customers, the actual number was only 47,000. In the fourth quarter, AT&T clipped Angel's wings, writing down $1.3 billion on the project. And in January, 2002, it sold its fixed-wireless equipment to startup Netco for $45 million in cash and stock. MCI and Sprint (FON ) also cut back their wireless-data plans. BULKING UP ON FIBER. Nevertheless, Verizon remains unfazed, Whitton says, because of the advances wireless technology has made over the past few years. In Verizon's early trials, a tree or building blocking the signal between wireless tower and customer could cause a service failure. Today's technology overcomes the problem by reflecting the signal off barriers and allowing it to continue on its way. And while some software bugs remain to be worked out, Whitton says the technology is now "commercially deployable." Just when the Bells will begin a serious move into wireless broadband is unclear. Strategy Analytics' Pehune says the difficult economic environment and the Bells' mixed history with new technologies -- BellSouth even planned an ill-fated satellite video service in 2000 -- mean that management will remain cautious. Moreover, in February, 2002, the Federal Communications Commission ruled that the Bells wouldn't have to share high-speed fiber lines with competitors, as they are required to with copper phone lines. That means they have an incentive to invest in fiber, not wireless technologies, as a way to shut out competition. Still, Pehune and others believe it's time for the Bells to take action. Pehune projects that by 2006, cable will have grabbed 33.1 million broadband homes, vs. DSL's 11.4 million. An additional 5 million homes are seen as choosing new technologies, such as ultraband Wi-Fi and fixed wireless. Whether it'll be the Bells or one of a dozen startup wireless Internet service providers that end up serving these customers remains an open question. Slow and steady may win the race, but analysts say before the Bells can win, they need to enter the competition.  By Jane Black in New York Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. 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