By David Shook
There's little doubt that America Online's (AOL ) merger with Time Warner (TWX ) will give the combined company enormous clout in selling broadband Internet access in markets where Time Warner provides cable service. But the merger hoopla can't obscure a basic -- and potentially costly -- shortcoming in AOL's strategy. While the company has focused single-mindedly on cable, a rival technology called digital subscriber line (DSL) is becoming a potent rival to cable Net access. And AOL has been painfully slow to adopt the technology.
DSL, which is provided via phone lines, allows the same sort of superfast Internet access that cable modems do. Because Baby Bells have finally gotten their acts together, DSL growth has recently surpassed that of cable modems, which have had sales dragged down by equipment shortages, say industry sources. Cable is expected to surpass DSL growth again this year. But both technologies will likely play a big role in delivering the next generation of home Internet service. And being able to offer both would be a big competitive advantage for AOL -- as well as for rivals such as Earthlink (ELNK ) and Microsoft (MSFT ).
Yet AOL, the world's largest Internet provider by a long shot, with 29 million members, is still trying to define its strategy. While Time Warner is a big cable company, it has less than 20% of the nation's cable market, which means AOL may need DSL for much of its broadband growth over the next few years.
AOL ignores DSL at its peril, for rivals have already figured this out. Earthlink, experts say, is way ahead in implementing DSL services. The company, which has about 4 million subscribers, is expected to announce broadband subscriptions of more than 200,000 last year in its upcoming financial summary. Most of those customers have DSL. By contrast, Dave Burstein, editor of the respected industry Web site DSL Prime, figures that AOL has fewer than 30,000 DSL customers. "AOL may be waiting for DSL technology to mature, or it may be putting all its chips in cable broadband," adds Earthlink Executive Vice-President Mike Lunsford.
AOL may just be preoccupied with a potential deal to acquire billions of dollars in cable assets from rival AT&T (T ). "My guess is that the merger with Time Warner, and, more importantly, negotiations with AT&T have delayed AOL's DSL strategy," Burstein says. "Those negotiations may determine how much AOL Time Warner invests in DSL." However, talks with AT&T, prompted by its need to satisfy antitrust requirements related to its acquisition of Media One last year, appear to be at an impasse. Without those cable assets, "DSL may prove even more important for AOL," Burstein says.
AOL admits that it has been quiet on its grand plans for DSL but not for broadband in general. "It's a little premature to talk about our plans," says AOL spokeswoman Marta Grutka. "AOL wants to offer the best possible service where available." If fast, reliable cable or DSL service isn't available in some markets, the company will find other ways to deliver its services -- such as through satellite Net access from Hughes Network Systems, she says. The company likes to say it's "service agnostic," meaning it'll seek broadband customers from many conduits.
Grutka points out that AOL already sells DSL service on a very limited basis through the Baby Bells Verizon (VZ ) and SBC Communications (SBC ). But those deals are nowhere near AOL's original goal, announced in 1999, of offering DSL in conjunction with SBC and Verizon in at least 21 states.
You can see that by testing the service yourself. If you use AOL, plug in the keyword "AOL Plus" on the service and try signing up for one month of free broadband coverage on AOL through a promotion that suggests it might be available nationwide. Type in some major area codes in New York, Michigan, Arizona, or Illinois and up comes the following message: "Your phone service does not currently support AOL Plus. We should be available in your area soon."
Meanwhile, the Baby Bells are finally starting to sell DSL at a rapid clip. The technology is essentially a fast modem that sends a digital signal over a wide frequency using telephone connections. Like cable modems, it has limitations. With demand soaring, there are often long delays in getting either service installed. And in some cities, DSL is unavailable or less than reliable. BellSouth (BLS ), for example, has said it will triple DSL coverage this year from 200,000 subscribers to 600,000. But the company has also admitted that it had a disappointing start. Verizon, meanwhile, just announced that it had 500,000 DSL customers by the end of last year -- short of the 700,000 the company had initially predicted. But the telco anticipates strong growth in 2001.
The trick for AOL will be to structure deals with these and other regional telecom companies in a way that makes DSL service profitable for both sides. That will give the phone companies a strong incentive to provide good service. Yankee Group analyst Rob Lancaster says DSL should eventually become a substantial part of the company's "AOL Anywhere" strategy.
But AOL can't afford to dally for long. Soon, customers will begin clamoring for broadband because of the huge advantages it allows in downloading video and music. Much rides on whether AOL can achieve that broadband growth through DSL or cable broadband -- or some combination of both. Ultimately, it will determine whether the company preserves its position as the most influential player on the Internet. And right now, the DSL prong of its strategy is pretty limp.
Shook covers AOL for Business Week Online
Edited by Thane Peterson