Broadband Seesaw: Whos

Posted: 2/2004

Broadband Seesaw: Whos on Top Today?
By Dr. Judy Reed Smith

Worldwide broadband connection growth is more rapid than mobile services, with nearly a hundredfold increase from 1998 to 2003, according to data from Point Topic. Which providers  telcos or cablecos  will capture more of the consumer and small business segments depends on price, quality and regulatory advantage  the latter of which has been seesawing and might shift again in 2004.

A key decision by the FCC, in March 2002, defined cable broadband service as an information service  a classification not subject to common carrier regulation. As such, cable companies are not required to share their networks with competitors and are exempt from certain other regulations that telephone service providers must follow. The FCCs decision was designed to encourage cable companies to develop new technologies and upgrade their systems and networks in a minimally regulated environment. However, since cable modem services compete directly with DSL services provided by telecom firms, the ruling created an imbalanced playing field. Cable companies possess an advantage over RBOCs, which have to provide open network access to their rivals.

In October 2003, the 9th Circuit Court of Appeals reversed the FCCs cable ruling, declaring that cable broadband is in fact a telecommunications service and cable network operators should be subjected to the same rules that govern broadband Internet services provided by telephone companies. The FCC subsequently appealed the ruling. While the outcome of this legislation might not be predictable, the competitive landscape for broadband services will be deeply impacted by it.

WHATS AT STAKE?

If regulators force cable companies to share their networks with competitors and impose new taxes on services, competition will intensify as more ISPs deliver broadband services over cable networks. Clearly, traditional dial-up ISPs looking to penetrate the broadband market  particularly premium ISPs caught between broadband services at one end of the spectrum and value-based dial-up at the other  would benefit from gaining additional access to cable markets. (It is important to note that even though they are not subjected to network-sharing requirements, some cable companies, such as Comcast, have signed such deals with certain ISPs in certain markets.)

Additionally, with most of the 14 million cable modem subscribers in the United States lacking a broadband alternative, consumers would gain additional options if cable companies were forced to share their networks. However, cable investors would be less enthusiastic about new buildouts and upgrades. In the long run, competition could decline with only the large incumbent local players able to fund buildout activities.

On the other side, if cable companies are not subjected to the same network- sharing arrangements as the RBOCs, the Bells could remain behind the power curve in broadband adoption, effectively competing primarily on price. This is the case today, in fact. In many areas, the RBOCs have offered appealing, price-oriented promotions in an attempt to tilt broadband adopters toward DSL offerings. These offers might include dramatically reduced premium service rates, front-loaded discounts and tiered pricing plans based on connection speed. In this ongoing competition, cable companies have been doing the inverse  offering increases in download speeds while maintaining subscription rates. As of this writing, indicators suggest that the RBOCs price-based approaches are winning the race for new adopters.

There is more to this story than broadband access, however. The competitors that keep RBOC executives awake at night are, in fact, cable companies. In an increasingly bundled landscape, the cable companies, with their ultra-sticky entertainment bundles, far-reaching networks and recently accelerating entry into the telecom space, represent a much greater threat than any other form of competitor. We note with interest that three RBOCs  Verizon Communications Inc., SBC Communications Inc. and BellSouth Corp.  are beginning to deploy their own entertainment offerings, and 2004 will mark the beginning of widespread fiber-to-the-premises offerings to deliver serious video programming competition. Verizon is the most aggressive player in this area, having already awarded contracts to vendors with plans to pass a million homes this year. Hence, the game for the RBOCs, at this stage, is to eliminate whatever marketplace advantages are afforded the cable companies.

This battle is not limited to cable companies and the RBOCs. While much has been made of the triple play (broadband, programming, telephony) battles between telcos and cablecos, cable players can capture customers of all types, including those of resellers, satellite providers, ISPs and other competitors. Moreover, cable companies hold the keys to premium broadband access services and recently have overcome technical obstacles that prevented them from delivering their cable modem services to businesses. Hence, with most competitive players operating on rules for local telco network sharing, the market for broadband is divided in half, with consumers torn by two strong choices.

TOMORROWS PLAYGROUND

Broadband competition between providers of DSL and cable modem services will remain fierce throughout 2004. Telcos will likely maintain aggressive DSL pricing as they attempt to stem churn from cable company bundles and capture greater portions of new broadband services adopters. Telcos early successes already are leading to unprecedented promotional campaigns by cable providers trying to maintain their historical advantage among new broadband subscribers. While downward pricing of any sort is newsworthy in the cable modem arena, if the October 2003 ruling upheld on appeal, cable companies will face increased competition from virtually identical services delivered over their own networks. With the speed advantage effectively removed as a marketplace differentiator, the cable companies will face significantly increased pressure to reduce prices for their services. If the seesaw tilts this way, cable companies returns on investments, and therefore buildout revenue, would be threatened, essentially shifting broadband market advantage toward the RBOCs.