Broadband: What's The Holdup?

The U.S. trails in the digital stakes. And catching up won't happen overnight

When the news hit that Comcast (CMCSK ) CEO Brian L. Roberts was trying to buy the Walt Disney Co. (DIS ), it became clear that the media industry is in for some big changes. After all, one of the main reasons for doing a deal, Roberts argued, was to deploy Comcast's cable pipes for the digital delivery of everything from ABC newscasts to cartoons and video games over the Internet -- a goal Disney Chairman Michael Eisner has long espoused. There's just one problem: U.S. broadband transmission speeds are still way too slow to offer most of the kinds of cutting-edge digital delivery over the Internet that Roberts envisions.

In fact, the U.S. lags far behind global leaders such as Korea and Japan, where broadband is far faster and cheaper, thanks to more focused national policy, less cumbersome regulation, and more densely populated regions. For a little more than $50 a month, consumers in Korea can purchase a 20-megabit-per-second Internet connection. That's 10 to 40 times faster than a typical U.S. connection. In Korea, people use the service to watch TV in a window of their Web browser while they work on a memo in their word processor. Their access to movies and games on demand grows by the day. Such online services are available to few consumers in the U.S., where a 3-megabit connection costs about $45.

U.S. cable and telecommunications companies are working to close the transmission speed gap with other countries, but it will probably take years to catch up and cost billions of dollars. Here's a look at some of the key issues:

What's the current state of broadband in the U.S.?

Broadband is available to 89% of all U.S. households, but only 18% subscribe, according to the latest data from Point Topic, a London broadband research company. The phone companies sell digital subscriber line (DSL) connections for less than $30 a month. Their typical speed is about 500k to 1 megabit, which is fast enough to surf the Web, download music, swap photos, and download brief video clips.

Cable companies offer cable modems with peak speeds of 3 megabits for $40 to $45 a month. That makes viewing video and swapping photos a little more manageable but is still far too sluggish for speedy downloading of movies.

How does that compare to other industrial nations?

The world's broadband leader is South Korea, where 73% of households subscribe to high-speed Internet. Most Koreans pay $27 a month for a connection speed of up to 3 megabits. But a few thousand choose to pay $52 a month for a 20-megabit advanced DSL connection, which is much faster and cheaper than anything available to Americans. Japanese can get some of the fastest and cheapest broadband service in the world -- up to 26 megs for about $30 a month, using souped-up DSL. Europe's speeds and penetration are similar to those in the U.S.

Why are speeds faster in Korea and Japan?

This is less about technological prowess and more about policy. For one thing, Japan and Korea made the deployment of such services a national priority. What's more, the Korean government deregulated what had been a monopolistic phone system and opened the market to competition. That set off a race among providers to wire up the nation. Moreover, they weren't hamstrung by the regulations found in the U.S. All of the above led to the deployment of faster DSL and even a limited rollout of fiber-to-the-home. Finally, Korea is more densely populated than the U.S., cramming 48 million people into an area about the size of Indiana. Koreans tend to live in big apartment buildings located near phone company facilities, making it much easier and cheaper to deploy high-speed broadband.

Why has the U.S. fallen behind?

It's partly a chicken-and-egg problem. While the telcos have experimented with faster DSL service in recent years, it has yet to catch on with consumers. Why? Because there aren't enough applications, such as online movies and games, that require higher speeds. The same holds true for the cable companies.

Then there are the telco regs. The Bells argue that archaic rules designed for traditional phone services, rather than the Internet, discouraged them from providing faster DSL. In the past, the Bells were required to share their DSL lines with rivals at government-mandated prices. And while the Federal Communications Commission lifted those regulations in 2003, the Bells complain that the rules are ambiguous because a different set of overlapping regulations still requires them to share their lines.

How can the U.S. government help advance broadband speeds?

More deregulation is the key. FCC Chairman Michael K. Powell aims to classify both the phone companies' DSL and cable operators' cable-modem operations as "information services." That would enable them to avoid additional regulations associated with old-fashioned telecom and cable services. But a federal court decision against such a policy is holding up FCC decision-making on this front. In an attempt to make content providers less leery of putting their wares on the Internet, Powell has tried to force Hollywood studios, cable operators, and consumer-electronics makers to agree on standards to protect the distribution of digital content over cable and broadcast, but it's a tough slog.

What's the future of broadband?

Widespread deployment of the kinds of speeds required to carry HDTV, for example, won't be here for years. Walt Megura, general manager of Nortel Networks Ltd.'s (NT ) broadband networks unit, says Internet connections running at speeds of 10 to 20 megs won't become available to most consumers for at least three to six years.

In the meantime, U.S. providers are only just beginning to roll out services that will match the speeds currently available in South Korea and Japan. Verizon Communications (VZ ) plans to offer 10- to 20-megabit fiber-optic connections to a scant 1 million customers this year. SBC Communications Inc. (SBC ) already offers a 6-megabit connection for $199 a month that's aimed at businesses.

What sorts of services will be available once 20-meg speeds appear?

Broadband proponents argue that an investment in infrastructure leads to all sorts of new applications. Again, Korea is the model. The broadband leader's online digital content market, which includes gaming, music, and video, has increased 61% annually for six years. It reached $4.6 billion in 2002, the last year for which figures are available.

A similar effect seems to be taking hold in the U.S. Disney's ESPN network has a product called ESPN motion, which will make high-quality video clips available online. The same technology is also being used by Disney's ABC News unit for online distribution of news. And future versions of Apple Computer Inc.'s (AAPL ) iPod, which has driven the digital distribution of music into the mainstream, are likely to do the same for video as the quality of underlying networks improves. It's just too much information to cram onto a regular DSL or cable-modem service. In short, a new era in the evolution of broadband is approaching -- one that Brian Roberts was clearly counting on when he made his audacious bid for Disney. But it won't happen overnight.

By Steve Rosenbush in New York, with Catherine Yang in Washington, Ronald Grover in Los Angles, Moon Ihlwan in Seoul, and Andy Reinhardt in Paris

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