The Internet: Filling The Need For Speed

The scramble is on to supply fatter data pipelines to the home

When Ken Kasner moved to Centerville, Va., from upstate New York last year, the biggest sacrifice his family had to make was leaving behind the thick coaxial cable for his computer. A high-speed "broadband" Internet connection via cable modem--a service called Roadrunner--had changed Kasner's life. Instead of watching TV, the systems engineer would spend hours nightly playing computer games with his five-year-old daughter, doing research, and clicking through Web sites just as quickly as TV couch potatoes channel-surf. "We always kept the Internet on, like the radio," says Kasner. He's already preregistered with Roadrunner Computer Systems Inc. to resume the service when it arrives in Virginia next year.

What's good for the Kasners is good for the nation--at least when it comes to getting the most out of electronic commerce, which many economists view as a linchpin of America's high-tech future. "If we can get broadband to the home faster, E-commerce will grow faster," says Federal Communications Commission Chairman William E. Kennard. "And American business will stay on the cutting edge of this trend worldwide." Adds Michael Malaga, CEO of broadband startup NorthPoint Communications Inc. in San Francisco: "Between now and the millennium, broadband access to the Internet will become as important as electricity was at the turn of the century."

For that prediction to come true, a lot has to happen in 1999. At the moment, the broadband Internet access that the Kasners learned to love is not available to the vast majority of American homes. And, as millions of consumers try to shop at and other online outposts during this first truly online Christmas, cybertraffic over conventional phone lines has slowed to a crawl--spawning the catchphrase "shop till you get dropped." If that bottleneck persists, the development of E-commerce could be crimped.

But there's reason to believe that the new year will indeed bring a huge advance in the availability of broadband. From Silicon Valley to Washington, technology experts, business execs, and policymakers are swarming on the problem. On Jan. 28, the FCC is expected to start laying down rules for how the cable operators and their rivals, the phone companies, will deploy these new services. And not a minute too soon.

The industry, meanwhile, is pounding on the FCC's doors with urgent demands. Cable companies, which are spending $33 billion to gear up for broadband, don't want their new services regulated. The Bells say they can't unleash fast Internet services without getting into the long-distance market. They also want exemption from rules in the 1996 Telecom Act that could tie their hands in these new businesses. Meanwhile, America Online Inc. has told regulators it must have access to the cable operators' high-speed pipes on reasonable terms.

AT&T and its pending merger partner, cable giant Tele-Communications Inc. (TCI), aren't eager to open up their lines to AOL; they want to give their own Internet service first dibs on their fast cable network. Behind the scenes, however, AOL and TCI are trying to negotiate an amicable arrangement.

The FCC is trying hard to create policies to speed up the arrival of broadband service--but without giving any of the players a particular edge. "We're working desperately to create a competitive dynamic so the cable, wireless, and phone industries work up a sweat competing to deliver broadband services to the home," Kennard says.

Already, cable operators and local phone companies are vying in the market. The telcos are revving up, but in the next two years, cable is likely to hold the lead. Coaxial cable is better suited to carrying high-speed traffic than ordinary phone wires, and the services are also cheaper (table). Right now, of the 25 million American households online, less than 500,000 have the cable modems that are needed to get data traffic over cable. The TCI-controlled @Home network--the largest cable Internet service--has only 210,000 customers. But it's growing 40% to 50% a quarter. Time Warner Inc.-controlled Roadrunner, with 160,000 subscribers, adds 4,000 every week.

At the same time, phone companies are bringing out a technology, digital subscriber line, or DSL, that can send broadband traffic over ordinary wires. The industry will soon standardize a low-cost DSL modem, which Compaq Computer Corp. and others plan to build into some PCs. As a result, says Data-quest, the ranks of DSL subscribers could zoom from just 50,000 now to 5 million worldwide by 2002, putting the telcos and cable companies in a dead heat.

HOBSON'S CHOICE. But the phone companies say upcoming FCC rules could stall their plans. Concerned about the Bells' potential clout in local Internet access, regulators are floating a choice: Resell your DSL service to rivals at a discount or spin it off to subsidiaries. The Bells hate this idea and have enlisted powerful allies in the computer industry to lobby Congress against it. But with Internet traffic eclipsing voice on phone networks this year, telcos can't afford to dawdle. Ameritech Corp., for one, has opted to set up a subsidiary. If a phone company doesn't get into data now, says Ameritech CEO Richard C. Notebaert, "you're going to miss the wagon."

Perhaps the biggest indication that broadband is coming of age is cybergiant America Online's entry into the race. AOL, which offers its service mostly via slow dial-up modems now, needs to boost speed for 14 million subscribers or it could lose customers to the fast Internet service offered by @Home and Roadrunner. AOL has been engaged in DSL trials since April with GTE, Pacific Bell, US West, Bell Atlantic, and BellSouth.

But phone partners aren't enough for the online titan. It's battling to get a better deal with the cable operators. Right now, TCI sells the @Home service along with the broadband connection for $40 a month. Any user who wants AOL must pay an extra $9.95 a month on top of that. AOL complains that TCI's bundling of Internet access with @Home puts other online services at a disadvantage. It has asked the FCC to require AT&T-TCI to sell its high-speed service at wholesale rates to AOL and to other Internet companies. "We're perfectly prepared to compete with @Home on the merits," says AOL General Counsel George Vradenburg III.

The FCC may choose not to decide the issue when it reviews the proposed $48 billion AT&T-TCI merger. Instead, it could address it this January, when it begins exploring rules for the entire cable industry. AT&T and TCI say the AOL request jeopardizes their deal by undercutting the returns on the $1.8 billion invested to upgrade TCI's cable plants for speedy data transport. "No one will make these investments if they're required to make it available for anyone else that comes along," says AT&T Senior Vice-President James W. Cicconi.

Telcos also face big investments and big risks. And DSL technology has some snags, says Yankee Group analyst Jim Wahl, including not working over long distances. But Americans don't much care if their high-speed pipe is a TV cable or a phone wire. Nor do the digerati, it seems. At Microsoft Corp., which has over a billion dollars invested in fast-cable assets, engineers praise GTE's budding DSL service which they use to log onto the office network from home.

In the same way, mainstream Americans will welcome competing services in an expanding market. Satellite and digital TV broadcasters, among others, are also scrambling to provide fast Net access. Don't think of the broadband battle as a boxing match, advises Royce Holland, CEO of Allegiance Telecom. He says it's more like a golf game, where everybody is trying to get the best score. The more companies enter the fray, the more likely that consumers like the Kasners will emerge the victors.