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February 1, 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
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.
Dr. Judy Reed Smith is the CEO of ATLANTIC-ACM, a research
consultancy serving the telecom and information industries. She can be reached
via e-mail at [email protected].
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