The Internet disappeared at midnight on Dec. 1 for 850,000 subscribers to AT&T Broadband’s cable modem service. That’s when AT&T’s insolvent broadband partner, ExciteAtHome, officially pulled the plug, cutting off Internet access for AT&T customers as a cost-cutting measure. In the following days, AT&T scrambled to restore Internet service to its customers to try to prevent them from switching in disgust to another Internet service provider.
Never has the messiness and stupidity of the broadband industry been quite so apparent. Not that ExciteAtHome’s demise is a surprise — the company had been teetering on the edge of insolvency for months, and the main question wasn’t whether it would go out of business, but when. However, the incident does raise some questions. Why is it that broadband companies like ExciteAtHome, Rhythms NetConnections, and NorthPoint Communications (two other recent flameouts) can’t seem to stay in business? This occurred despite the investment of tens of millions of dollars, a genuine demand for bandwidth among consumers, and an array of slow-moving, sclerotic competitors (the cable TV and telephone companies) who seem to have only heard about the Internet sometime last year.
The Defogger is here to tell you not to panic. There’s nothing fundamentally wrong with broadband technology, and as sure as I write this, it will ultimately become as common as television (better, as common as electricity). Right now, according to a recent study by Nielsen//NetRatings, the number of consumers surfing the Internet at high-bandwidth speeds is greater than ever. Some 20 percent of the Net’s 106 million active users have a broadband connection at home — a record number. What’s more, Nielsen estimates that more than half of Internet users at work have high-bandwidth connections. For all but the smallest of companies, a T-1 or T-3 connection has become a nonnegotiable cost of doing business, like paying the telephone bill. (And incidentally, that’s also why so many people choose to do their online shopping from work: faster connections.)
No, the real problem is not with broadband technology, but with the inevitably cyclical nature of the business. A lot of optimism about broadband’s future — as well as incessant hype — led to a period of massive infrastructure buildup and investment, which far outstripped demand and created way too much excess capacity. Only 3 percent of the high-bandwidth fiber-optic cable currently laid in the United States is in use. The other 97 percent lies dormant. As a comparison, think about auto manufacturers producing 100 cars and selling only 3. With broadband companies sitting on that much idle inventory, there’s no way they can recoup their costs, and they’re predictably dying off as a result.
A second problem is that the government’s attempts to deregulate the telecom industry created a big incentive for companies to build backbone networks (which carry data over long distances), while creating a disincentive to build last-mile networks that would carry data to consumers’ doorsteps. Deregulation attempted to force telephone companies to share their last-mile connections, a decades-old monopoly in most parts of the country. As a result, most broadband companies figured they could simply piggyback on the telephone companies’ copper-wire networks, or partner with cable companies and use their cable TV lines (as ExciteAtHome did), so they concentrated on building backbones instead.
The problem is that telecoms and cable companies refused to give up their most valuable assets — those last-mile monopolies that they’d spent decades and billions of dollars building — even though they had been ordered to do so by the federal government. Meanwhile, cable companies like AT&T realized that they could build or buy their own backbone networks fairly cheaply, so they didn’t need partners like ExciteAtHome anymore. Result: The telecoms and cable companies are still sitting on the only thing worth having, and everybody else is left holding a bunch of worthless backbone capacity.
The third problem is that cable companies and telephone companies can’t provide good customer service to save their lives. Who can blame them? After decades of near-monopoly status, collecting $20 to $40 a month from millions of customers at a time, it’s easy to get fat and lazy. There’s just no incentive to provide good customer service — which is exactly what’s needed to persuade residential customers to spend their time and money on a balky new technology like DSL or cable modem service.
Is there any quick way out of this morass? Probably not. DSL providers will likely see a temporary lift in business as cable modem subscribers, disgusted with AT&T and ExciteAtHome, switch over to a completely different technology. But DSL still isn’t readily available in rural areas (or in many suburbs), so cable will likely keep its customers there. Companies that provide broadband Internet via satellite haven’t managed to get much of a foothold in the market yet. And with high-bandwidth connections waiting at the office, many people just don’t feel compelled to get broadband at home yet.
During the next few years, though, the number of residential broadband subscribers will keep rising, slowly but steadily. The current glut of capacity will be absorbed, the few broadband companies that survive will start to make money, and after a few more boom-and-bust cycles, broadband data connections will be nearly ubiquitous, and they will indeed form the underpinning of the next Internet revolution. In the process, however, broadband data providers will be relegated to the status of commodity suppliers or utilities — an unglamorous, cutthroat kind of business, but an immensely profitable one for those who can corner the market.
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