Warp Speed Ahead On The Net

Soon, a superfast Web. But first, a war over technology

When Michael C. Stepp got a taste of high-speed access to the Internet, it was like a drug. Starting in 1996, the federal government worker participated in a Bell Atlantic Corp. trial of digital subscriber line (DSL) technology--which zaps data over basic copper telephone wires 30 times faster than today's speediest modems. That let him hopscotch across his favorite Web sites and download software in a snap. When his wife started looking for a new house in suburban Washington last year, he told her she could buy anything she wanted--as long as it was within a DSL trial area. She ended up finding her dream house, but it was outside the range. "I regretfully said O.K. with tears in my eyes," says Stepp.

In coming months, millions of others may come to understand why Stepp got so choked up. These days, telephone, cable, and satellite companies are investing billions of dollars in new technologies that will link users to the Net at lightning speeds--as high as 250 times faster than standard modems. This month, US West Inc. is rolling out DSL that it promises will be available to as many as 10 million people in 46 cities by June. Silicon Valley startup @Home Corp., which provides high-speed access over cable networks, has doubled the number of homes that can buy its service in the past three months, to 4.5 million. By 2001, nearly 80% of U.S. households will have fast access at hand, up from 15% today, according to market researcher Dataquest Inc. "Speed is addictive," says Jeff C. Kissell, GTE Corp. vice-president for national marketing. "Most of these people would rather give up their cars than give up their [Net] speed."

Higher speed limits on the Net are long overdue. For years, cybernauts have griped that it can take several minutes to jump between Web pages--an aggravation that led to its rechristening as the World Wide Wait. Moreover, telephone and cable companies-- each with technology that could ease the frustration--seemed in no big rush to change that. The cost of providing high-speed service, as much as $2,000 per person, was just too high.

But the foot-dragging appears to be over. Why? In a word, competition. The telephone and cable companies are squaring off against each other to snatch up the growing number of Netizens, now 55 million strong and growing by 20%-plus a year. Providing Internet access is a $6.5 billion business that is expected to double, to $13.3 billion, in the next four years, says Northern Business Information.

Each camp is pushing the technology that plays to its strength. The phone companies are hawking DSL because it works over the copper phone wires already hooked up to every home and business in the country. Cable companies are pushing cable modems, which connect to existing TV cable networks.

So far, the cable companies are ahead by a nose. For one, they have some 100,000 subscribers--more than twice the number of DSL users. Backed by Tele-Communications, Comcast, and Cox Communications, @Home is offering blazing-fast connections for a mere $30 to $50 a month, in addition to cable-TV costs. That has helped it grab 50,000 subscribers, double what it had three months ago. Time Warner Inc.'s Road Runner Group and US West Media Group, which are merging, have snapped up 50,000 customers in 16 cities.

PROMISES. But the race is far from over, and telephone companies are starting to get traction. On Jan. 26, the five Baby Bells banded with computer titans Microsoft, Intel, and Compaq Computer to set a DSL standard called "DSL lite" that will make it easier for consumers to use the new technology. Since then, US West's pledge to roll out DSL in its 14-state region has been a big endorsement of the technology. "We're building the new telco," crows US West's CEO Sol Trujillo. Others are following suit: Ameritech Corp. will offer DSL in Chicago this spring. Bell Atlantic Corp., GTE, and BellSouth plan DSL offerings this year.

Egging them all on is the computer industry--Microsoft Corp., in particular. Chairman William H. Gates III is throwing his considerable clout--and money--behind both camps in an effort to get more bandwidth to homes. He figures that faster access will make it possible to jazz up the Net with more TV-like graphics and video. That in turn could draw an even bigger audience, selling more personal computers loaded with Microsoft software. "If we don't get it going, it could slow down the growth of the consumer market," says Gates. So Microsoft invested $1 billion in cable provider Comcast and backed the DSL standard. Gates also is a lead investor in Teledesic, a $9 billion satellite system that will provide ultrafast Net links by 2002.

Still, Gates may not get all that he wants--at least not right away. The phone and cable companies have both promised more than they could deliver in the past. Remember interactive TV? Or the promise of 500 TV channels? The phone companies fumbled the rollout of the last speedy transmission technology, Integrated Services Digital Network (ISDN). More than five years after ISDN became available, there are only about 1 million users, thanks to bungled marketing and troublesome installation. "We need to see whether any of this is substantive," says Brett Azuma, a Dataquest analyst.

So far, the cable players look more capable of living up to the hype. Cable modems are typically faster than DSL, although speeds vary for both. While @Home can process 3 million bits per second, the top DSL speed in use is 1.5 million bits per second. "It smokes," says Rande A. Leonard, a refining company executive in Phoenix, of his @Home service. Cable is usually cheaper, too. A top-flight @Home connection costs $50 a month, compared with $200 for the highest-speed DSL hookup. Slower DSL, however, can be had for $40 a month, and it can serve as a second phone line.

Also critical, the cable companies are in a better position to invest than they were even a year ago. Although they still can't match the deep-pocketed telcos, the cable players have benefited from Gates's investment and Wall Street's newfound faith in the industry.

PRICE PRESSURE. Still, the phone companies have several key advantages. Cable-modem users share the cable pipe with others in their neighborhood. That's a security risk because a marginally skilled hacker could dig his way into a neighbor's computer files. Sharing a pipe also means that Net speeds drop as more people use it. "It slows a little at peak times," concedes Leonard, the @Home user. Cable also may have to cede much of the business market, since most companies don't have cable-TV connections. DSL also has the advantage of being fast both in bringing data to your computer and in sending it out. More than 80% of cable modems have to send data back to the Net over sluggish phone lines.

Cable and DSL connections share one common disadvantage today: They're not available in most parts of the country. Even with US West's rollout, fewer than 25% of U.S. households will be able to use either service this year. That has opened the door for an alternative: satellite service. Hughes Electronics Corp. is selling DirecPC, which provides Net connections of 200 to 400 kilobits per second (KBPS) for $20 to $130 per month. "You can get this service in every corner of the United States," boasts Paul Gaske, a senior vice-president at Hughes.

That may be a lasting advantage in some locales. While both DSL and cable service will become available in urban and suburban regions, satellite service from Hughes, Teledesic, and others may be the only offering for rural parts of the U.S. "We absolutely get all of that," says Gaske. Although its speeds are relatively sluggish, Hughes has won some 60,000 customers worldwide. Satellite speeds will get much faster: Downloads of 10 million bits per second are possible in the next several years.

While businesses are buying the new services first, residential customers offer the biggest opportunity. The key to penetrating the consumer market will be price. A recent Yankee Group survey of over 1,900 U.S. households found that more than two-thirds of Web surfers want faster access to the Net. But fewer than 10% are willing to dole out even $40 a month, including Net access.

That means @Home and the other cable providers have a leg up, at least for now. But the phone companies won't stand pat. "For us to drive the kind of penetration that's possible, we have to drive the cost down," vows Joe Zell, a US West vice-president. With the phone and cable companies starting to slug it out, Stepp may soon have his fast Net connection back.

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