Overview of the Broadband Marketplace

Insight gives no credence to talks of an enduring capacity glut, viewing present day infrastructure and ongoing buildouts as the normal, long-range preparation for demand-preparations that will prove necessary when market demand finally catches up with technological improvements. The financial community, however, has stopped investing for future profitability, and now has its sights trained on instant profits. Instant gratification, unfortunately, is not always possible in an industry that relies on three-year construction and build-up cycles.

As far as broadband access is concerned, investors` outlooks, and even the state of the overall global economy, have relatively no impact on users` desires for better and faster solutions. As a new tool for enjoying life, the Internet has been integrated into the fabric of US society, and it is becoming similarly integrated across the globe. New and creative uses for the Internet, including applications such as online gambling and streaming video, provide the key motivation for increased and improved access to its backbone.

We foresee consumer demand for broadband access shrinking only slightly in light of the present recession. In the near future, investors will again be clamoring to get on board the high-tech bandwagon, as broadband demand continues to grow and the "gluttonous" networks now in place and being deployed meet that demand with existing installed capacity. In the long run, any contraction in demand realized from current events-economic recession, domestic tragedy, and shifting investor attitudes-will not be sufficient to stay the predicted expansion of broadband access. Indeed, the events and aftermath of September 11, 2001 could provide an impetus for broadband access services as a substitute for traveling.

Within five years, the next stage in the broadband evolution will begin to materialize as some of the localized fiber-to-the-home (FTTH) experiments start thriving and enable the development of advanced features inconceivable using today`s access methods. At that time, the carriers with an installed fiber-based distribution infrastructure will hold the best position to take advantage of the emerging market; they will simply need to add the final fiber connections to residences and small businesses. From an investment standpoint, this could place the cable companies in a better position than the telcos, because they already will have extended their fiber plant much closer to end users.

xDSL

All of the switching and transmission equipment in the telephone network has been converted to digital, yet the simple twisted copper pairs designed for voice transport remain the primary links to customers, because the cost of replacing them is too prohibitive. Fortunately, digital subscriber line (xDSL) technology offers a method for using the existing copper pairs to also offer high-speed data services in most scenarios. Some portions of telecommunications networks must be upgraded to offer xDSL, however, because the loading coils, bridge taps, and digital loop carriers (DLCs) once used to enhance these copper networks are a burden on DSL transmission. Carriers must now either upgrade their networks or find creative ways of circumnavigating these technology issues.

Not long ago, there was considerable discussion of multiple xDSL technologies, such as G.lite (a simplified version of asymmetric DSL (ADSL)), symmetric DSL (SDSL), integrated services digital network DSL (IDSL), high bit rate DSL (HDSL), high bit rate DSL 2 (HDSL2), and rate adaptive DSL (RADSL), to name just a few. Fortunately, the industry is now focusing on just the following three technologies for most DSL deployments:

• Asymmetric DSL (ADSL),

• The single-pair high bit rate DSL (SHDSL) standard, G.SHDSL, and

• Very high bit rate DSL (VDSL).

Now that the three key data local exchange carriers (DLECs)-NorthPoint Communications Group, Inc., Rhythms NetConnections, Inc., and Covad Communications Group, Inc.-have all toppled or nearly toppled, it is easy to condemn their business models for DSL. In fairness to the DLECs, their failure is interwoven with the change in the investment model for their type of business. These companies counted on a continuing flow of capital in order to attain critical mass and become profitable, much like the cable TV companies had done during their build-up phase. The dot-com debacle stirred up the investment community, however, and suddenly, investors wanted instant gratification. This attitude led to staggering blows on Wall Street, starting with a few competitive local exchange carriers (CLECs) who were behind in fulfilling their business models. The investors` lack of patience with a few CLECs quickly spread to all of the CLECs, leading to bankruptcy filings by almost every key DSL player.

This wave, in turn, hit the big equipment suppliers, many of whom were providing vendor financing to the CLECs. With the CLECs in peril, the financial community`s concern swelled to include the telecom infrastructure builders as well. For example, Lucent Technologies, Inc.`s overindulgence in providing vendor financing was one of the big factors contributing to its recent dire financial state. Investors strangled the availability of capital, causing further industry slowing and bankruptcies, which only led to further problems for the equipment suppliers.

Cable

Many cable TV companies, also referred to as cable multiple system operators (MSOs), began offering Internet access before they had upgraded to a two-way network by using dial-up connections for the upstream path. Today, approximately 10 percent of the cable MSOs still use this method for upstream transmissions, but that number continues to drop as the MSOs upgrade their existing cable plant.

The driving force behind plant upgrades was the expansion of service opportunities. Whether triggered by competitive pressures from digital broadcast satellite (DBS), fixed broadband wireless (FBW), or DSL providers, MSOs had the desire to add new unregulated revenue sources from broadband services. New demand for broadband spectrum focused operator investment in four major areas:

• Expanding downstream bandwidth;

• Upgrading cable plant with a return path;

• Increasing network reliability; and

• Clustering cable systems.

Most MSOs were already making strides toward upgrading their distribution architecture before the Internet even became a factor, because the additional programming that could be distributed was a significant revenue opportunity in its own right.

The standard argument against cable modem service is that, since it uses a shared service architecture, users will suffer much slower speeds as more users in each neighborhood come online. This interference, however, is rarely significant. A good counterargument against DSL service is that DSL lines are dedicated to a DSL access multiplexer (DSLAM), and each user is sharing bandwidth with every other user at that point in the network anyway. At present, cable modem performance (in terms of download speeds) is superior to ADSL service.

Although the Internet service providers (ISPs) serving the MSOs were once thought to be insulated from the deleterious effects of the present economic downturn, it turned out that they were relying mostly on advertising as a revenue source, leaving most of the service revenue to the cable companies. At Home Corporation, once the largest cable ISP, is now bankrupt despite a high percentage ownership by AT&T. Road Runner, now the largest cable ISP, is shielded from view as part of AOL Time Warner, Inc., so their business results are known only to that company`s management.

 

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