Paul Bruno is a longtime Charter cable modem customer. But after seeing ads for the SBC Yahoo-branded DSL service last fall, the New Fairfield, Conn., computer programmer decided to go for the 30-day trial offer and compare the two services to see which he liked better. “I went to some lengths to bring in DSL,” he says. “I wanted to see if it would provide better service. Can I connect, do I get the speed that I want and is it convenient and trouble free?” As it turned out, in his case it wasn’t trouble free. He disliked the way the service took over his browser, and he continually ran into network connection issues. (He says he did not contact SBC to troubleshoot). He disconnected at the end of the trial, and ended up sticking with his $34-a-month Charter Pipeline cable modem. Chalk up another one for speed-demon cable, which, like the hare in the oft-told fable, would nevertheless do well to guard against complacency. At the moment, when it comes to DSL versus cable modems, it is clear which service American high-speed users like Paul Bruno tend to choose. Even with the big customer gains DSL providers enjoyed last year, cable is winning nearly two out of three new residential broadband customers. Cable operators have an advantage in that they can offer high-speed service to at least 80% of their potential market, while DSL is available to just 60% of its potential market. And the certification of the DOCSIS 2.0 standard by CableLabs in April 2003 enables cable operators to offer tiered services, faster speeds and more applications than ever before. Comcast Cable’s high-speed Internet product and portal offers a good example of what the industry can do. The MSO’s high-speed subscribers get access to online storage, personal Web pages, short video clips and high speeds, as well as the requisite news, shopping and photo services available at Comcast.net, the most recent version of which was about 10 months in development. The applications, games, channels and RealNetworks’ Rhapsody music downloading service “are all driven at segmenting our customers and providing them the applications they have asked for,” says Greg Butz, SVP, marketing and business development, for Comcast high-speed Internet. “We have executed very well at a tactical level,” he adds. The fast connections—Comcast doubled downstream speeds last year to 3 megabits per second and offers a 4-megabit service as part of a home-networking package in its New England market—and the robust gaming and rich graphical experience of the portal “are what truly differentiates us at the point of sale,” Butz says. The cable industry, which loves to toot its own horn when it comes to high-speed Internet service, has gotten some free PR assistance from the Telecommunications Industry Association, which has acknowledged the advantages of cable modem service over DSL. Comparing the two services in its 2004 Market Review and Forecast, issued in mid-January, the TIA states: “Higher speeds are a key reason for the preference for cable. In February 2003, the average cable modem speed was 708 kbps, compared with 467 kbps for DSL. Cable’s speed enables users to access more pages and makes the service more appealing.” Further, the TIA notes the technical hurdles DSL faces, one big one being distance—subscribers must be within three miles of a central switching office. Another distinct disadvantage for DSL providers is average install time: DSL’s 15 days, versus cable’s 7.5. DSL’s Widening Pipe
None of this signifies that cable operators have won the high-speed war. In fact, competition over the next three years will only intensify. During that time Pricewaterhouse-Coopers predicts broadband service will have attained mass-market status, with some 50% penetration, generating broadband access revenue of $18.5 billion. That’s partly because big telecom companies like SBC and Verizon have pledged to expand their footprints—SBC plans to offer DSL in about 80% of its markets early this year—and because the advent of fiber-to-the-home (FTTH) will give telecom providers a fat pipe to rival cable’s hybrid fiber coaxial (HFC) architecture, although any scale from FTTH would require major capital investments and lengthy build-outs. As Friedman Billings Ramsey & Co. analyst Alan Bezoza pointed out in a recent research report, over the next 12 to 18 months, competitive differentiation between cable and DSL will remain limited. Cable operators’ ability to scale bandwidth needs will not become a differentiating factor until applications such as peer-to-peer file sharing and full-scale video clips become the norm. It’s been nearly a year since SBC, Qwest and Verizon began slashing prices for high-speed Internet service, partly to stem long-distance and local customer losses. E-mail, wireless phones and assorted digital messaging devices have all furthered a shift in telephone traffic away from Ma Bell’s standard wire-line service. That leaves the telecom industry, which has been in a slump since the dot-com implosion in 2000, scrambling to find new sources of revenue. After years of cutting costs, big telecom providers are once more investing in their networks and pushing into two markets dominated by the cable industry: TV programming distribution and high-speed Internet service. Internationally, DSL has begun to outstrip cable in terms of overall market penetration. Many in the industry downplay what’s happening overseas, but maybe they shouldn’t, says Dan Sheeran, SVP, marketing, RealNetworks, which is developing new applications that it hopes will make it the broadband content provider of choice. “We absolutely agree that DSL is a bigger threat than it has ever been,” Sheeran says. SBC’s fourth-quarter results back up Sheeran’s thesis. The company added 377,000 DSL lines in the December quarter—its eighth consecutive quarter of growth—to end the year with 3.5 million lines and data revenue of $2.6 billion. Contrast that with Time Warner Cable, which added 182,000 Road Runner customers, ending the year with 3.2 million HSD customers and data revenue of $2 billion. DSL offerings as low as $29.95 a month from telecom providers have gotten the cable industry’s attention. (The average residential DSL monthly fee fell to $42.82 in 2003 from $55.31 in 2001.) While some operators have in recent months offered promotional pricing—Cablevision is offering new Optimum Online customers a six-month rate of $29.95—for the most part operators say their investments in content and broadband portals, ability to tier and offer new applications through DOCSIS 1.1 and 2.0 modems, the offering of product bundles and unified billing and new services such as VOD and PVRs outweigh DSL’s price reductions. As Time Warner CEO Richard Parsons noted on the company’s Jan. 28 earnings conference call, while Time Warner Cable has experimented with offering different high-speed data tiers, at this time he sees no need to change the pricing. More for the Money
“Price is a lever that is clearly used by our competitors,” says Gemma Toner, SVP, high-speed data products, Cablevision. “All I can say is that we continue to see sales grow in the face of that aggressive pricing that was done by DSL.” Still, she notes, “You never underestimate your competitors—that’s a wise business mind-set to always be in.” To that end, Cablevision has been emphasizing its customer service, technical support and security. Our customers “want their e-mail secure, they want less spam, they want their experience made easier,” Toner says. And they absolutely want more video and more audio. Cablevision recently expanded its partnership with RealNetworks; Optimum Online customers can access 190 downloadable games through RealArcade, and after one free hour of play users can purchase individual games for $20 to $25, or a $7 monthly subscription. In an offer that ran for about 30 days last fall, Comcast offered new customers in three markets the opportunity to sign up for high-speed service at $20 a month for a year. News of the offer sparked fears that a down-and-dirty price war was brewing. Comcast, for its part, says its record HSD results say it all.
“Our future success can be driven in terms of our historic performance,” says Comcast’s Butz. “I think we have out-executed day in and day out,” he adds. In addition to all the services one might expect, such as e-mail, Web browsing, shopping, news, weather, sports, photo services and the all-important gaming applications, Comcast’s portal offers the ability to customize and view short video clips—in an application the company calls “The Fan”—from an array of content providers including Associated Press, AtomFilms, G4, E!, TechTV, IFC, Planeta and Style Network. Steve Gorman, VP, high-speed Internet marketing and product management at Cox, is succinct in his characterization of the DSL competition in Cox’s footprint. “The desperate marketer dickers with price,” he says. “It’s challenging for them to compete on the same playing field,” he adds. “They are going to try and venture out with partnerships that haven’t worked in the past,” he says, referring to marketing partnerships telecom providers have forged with satellite companies. Don’t Look Back
There is no doubt that the stakes are high in the fight for high-speed customers. For operators, revenue from cable modem customers represents a major source of growth and profits. Revenue from video services at Cox, for example, represented about 64% of the company’s total revenue in the first nine months of 2003, compared with 70% in 2002, while data revenue accounts for 15% of total revenue, up from 11% in 2002. Furthering their efforts to stay ahead of the competition, operators are investing in market research and developing tiers to attract, in addition to heavy Internet users, dial-up users who go online only for email. The dial-up subscriber base of 45 million is ripe for offerings that are priced right. Adelphia, which added about 300,000 HSD subscribers last year, bringing its total to 1 million, has three research projects underway, says president and COO Ron Cooper. Results from those projects, expected after this issue went to press, will influence product enhancements, marketing strategy and sales and promotional activity. By June, Adelphia will have 95% of its cable plant upgraded, up from just 72% when Cooper and CEO Bill Schleyer came on board. “In more than a quarter of our footprint we were unable to sell service,” Cooper notes. “Our inability to be in the market coincided with a ramp-up of DSL competition. Having said that, in 2003 we really accelerated our overall marketing efforts.” Cable’s programming savvy will also help it keep its HSD edge. “Because of the television business, they know how to aggregate,” says RealNetwork’s Sheeran. “We think this is a tremendous advantage.” Further, cable brands are already associated with programming in consumers’ minds. But when it comes to broadband content, there is too little of it. The biggest content owners—Viacom, Disney and Time Warner—are still wary of the Internet. As Kevin Carton, head of PricewaterhouseCooper’s global media and entertainment practice, points out, “The content owners have recognized for a long time this is two-edged sword. It can be exploited, and it can be stolen.”
Meanwhile, the cable and telecom industries have a huge appetite for content, especially looking ahead as speeds increase and the service reaches critical mass sometime in 2006 or 2007. Add to that a younger generation seeking to do more online, and it’s a given that cable and telecom companies will make some big bets on content. The key to differentiation therefore may be exclusivity—and more speed. At current speeds of 3 megabits downstream, broadband can offer VHS-quality video streaming and uncompressed audio streaming as well as very fast Web pages, software and audio applications, multiplayer gaming and sub-VHS quality video streaming. But to get to near-DVD-quality video streaming, speeds have to be at least 4 megabits per second and 8 mbps for DVD-quality video streaming, according to research from the Yankee Group. “A lot of current thinking is that speeds of 50 to 100 megabits is achievable,” says Howard Pfeffer, VP, broadband technology, Time Warner Cable’s Road Runner unit in Herndon, Va. “The trend looks like people are going to want to consume more bandwidth, not less.” Pfeffer adds: “If you look at the capabilities of the HFC network and the abilities you are given with DOCSIS to provide better user experience for specific applications, that’s what’s driving a lot of our future direction. I’m not particularly worried that we’ll get leapfrogged by telecoms.” If speeds of 100 megabits are not out of the question, as Cox’s Gorman says, the question becomes: How do you make money? “That continues to be an elusive question,” says Gorman. As the broadband economic model evolves, cable operators will adapt. One thing is clear, however: The willingness of consumers to pay for content and services will be closely watched. “There is upside there,” Cablevision’s Toner says. “But what’s the magnitude of that upside? Beats me.”