By Jim Hu
Staff Writer, CNET News.com
ROSEVILLE, Calif.—For 88 years, the Roseville Telephone Company watched the telecommunications world transform the 83 square miles it served surrounding this former railroad town outside Sacramento.
Then in 2002, the small company decided to join the fray and bought the assets of a fiber-optic network in bankruptcy—a move that catapulted it into the hyperspeed of the digital age. Roseville Telephone changed its name to SureWest Communications and began offering video, phone and high-speed Internet services, taking on industry giants SBC Communications and Comcast.
"We're competing with companies that are exponentially bigger than us," said Bill DeMuth, the chief technology officer at SureWest. "The competitive advantage we have over SBC and Comcast is the fiber."
is one of a handful of broadband companies that are trying to leapfrog local incumbents, using as leverage new technologies that promise a different breed of Internet access. These challengers hope to disrupt what has long been a two-horse race between cable and DSL (digital subscriber line) in most U.S. cities, yielding faster service at lower prices and encouraging the development of new businesses along the way.
The alternative broadband companies, which range from family businesses to multinational conglomerates such as AT&T, are attacking the market on many fronts. Some are building networks in rural areas that have been largely neglected, while smaller outfits are concentrating on personal customer service. Others are working to bypass the industry leaders that own the broadband pipes using next-generation technologies such as satellites, wireless networks and electrical lines.
As tempting as the potential may be, these strategies face monumental obstacles. For one, they're competing against well-established telecommunications and cable players with widespread brand recognition and seemingly endless resources. The communications landscape is littered with defunct start-ups that raised billions of investment dollars during the technology boom of the late 1990s, only to crash along with the stock market a few years later.
Yet some of their ideas have found new life as the economy has recovered, especially at companies like SureWest that have picked up expensive technologies at fire-sale prices. Even in areas dominated today by cable-DSL duopolies, the prospects for growth are as vast as the Wild West—and that has rekindled the gold-rush spirit among some broadband entrepreneurs.
"There's probably more money for these things now," said Jim Penhune, an analyst at . "The flipside is that broadband is farther along than it was in 1999, and they're going up against some strong incumbent providers, who are gaining momentum themselves."
To date, most consumers have basically had two broadband choices: high-speed Net access from cable operators or DSL service from Baby Bell phone companies. By the end of 2003, either cable modem or DSL connections were used in almost all of the 22 million U.S. households with broadband access, according to research firm The Yankee Group.
Cable and phone companies build, maintain and upgrade elaborate broadband networks in most cities. Although each municipality has different regulations, most have provisions that allow one cable and one landline phone company to offer service to their residents.
The battle between cable and DSL has intensified over the past year. The Bells have introduced price cuts and have largely kept pace with cable in adding new customers. Cable companies, for their part, have boosted their download speeds to about 3 megabits per second in hopes of counteracting the lure of cheap DSL offers.
That has left little room for other technologies to break into metropolitan markets, let alone establish a foothold. As a result, many alternative broadband companies are concentrating on rural and less-populated markets—following a path set by satellite TV operators more than a decade ago.
In the mid-1990s, satellite TV companies launched services that targeted people in rural areas that were not served by cable. Once they were established in these regions, companies such as DirecTV and EchoStar's Dish Network took the competition an important step further by offering hundreds of television channels via digital broadcast.
"That's what made cable go out and do its $80 billion upgrade," said Rob Sanderson, an analyst at American Technology Research, who sees similar market forces at play in today's broadband business. "They want to hit the guy who's dying for broadband out in the sticks."
Broadband is in the air
Given satellite companies' initial success against cable in television, it's fitting that the industry is in the forefront of challenging the land-based incumbents in broadband.
Although their connections are more expensive and slower than DSL or cable, satellite companies are trying to regain ground through services such as for small businesses. The company is using a new satellite technology called Ka-band that allows two-way transfer of information.
Many in the high-tech and venture capital communities are focused on new types of wireless connections, however.
"Right now, cable and DSL are the primary means for broadband," said Emmy Johnson, an analyst at Skylight Research. "But wireless broadband has the potential to be the third leg of this broadband stool."
That's the case in Chico. With its population of 68,000, the Northern California community illustrates how smaller cities don't get picked up by the radar of the big broadband providers when they lay their expansion plans. It's just a year since SBC started offering DSL there, and just under 6 months since Comcast introduced cable broadband.
About 15 months ago, Chico resident Marty Griffin decided enough was enough. Fed up with SBC and Comcast's heel-dragging, Griffin agreed to allow Digitalpath Networks, a local broadband provider that runs a proprietary wireless network, to mount a three-foot antenna on his roof and to turn his house into a relay station. Griffin has been happy with his service and, most importantly, he got broadband before the local duopoly got its act together.
"Back then, Comcast wasn't available in my neighborhood," said Griffin, a programmer for a local rock station. "I wanted to jump on this first, and I didn't want to lock into anything long term."
Wireless services have tremendous potential, but their history is one of mixed success at best. In the late 1990's telecommunications giants Sprint and MCI tried launching national "fixed wireless" broadband services as a way to circumvent cable and DSL.
In a fixed wireless set-up, fiber-optic cables are run to a broadcast tower and a broadband connection is beamed to a receiver mounted on the customer's rooftop. The problem with that early generation of services was that anything blocking the signal's trajectory—like a tree, or a neighbor's house—cut off Internet access, causing a number of headaches.
Sprint overpromised and underdelivered its fixed wireless technology, signing up more people than its network could handle, which led to consistent service slowdowns. The company ultimately stopped offering the service, deciding instead to wait for the newer generations of the technology that were on the horizon.
Those next-generation forms of wireless broadband are now beginning to emerge, promising to cover greater areas with stronger, more stable connections. Some of these options will come from cellular telephone companies, which are spending billions of dollars on upgrading their networks to offer high-speed data services. But among the most promising technologies is WiMax, a new wireless broadband standard that was .
WiMax networks will be built using special towers in residential areas to send and receive Internet data. That data is picked up by devices mounted on houses and is sent inside to boxes, which in turn transfer the data to PCs.
But the concept has seen strong interest recently among Internet access companies such as EarthLink and Covad Communications, which are considering WiMax as a way to offer broadband services without being beholden to cable providers or Bells for use of their cable or DSL networks.
"I think that wireless will become a dominant part of our business. There's no doubt about it," said Pat Bennett, an executive vice president of product development at Covad.
Covad has relied on traditional copper lines leased from the Bells for its DSL service, using access that has been mandated for years under antitrust policies. But the Federal Communications Commission is phasing in regulations that will not require the Bells to share new lines with outside companies.
Fearing that the Bells will charge exorbitant rates or refuse to share lines altogether, Covad and other companies that resell Internet access are looking for alternative technologies for their wholesale broadband. EarthLink has already made initial forays into the wireless market, recently in Northern California.
To the WiMax
WiMax networks are not expected to appear widely until the end of 2004 or the beginning of 2005, but tech giants such as Intel are already betting heavily on the technology. Intel plans to release chips for WiMax gear such as towers and relay stations within the next five months. It intends to include WiMax capabilities in its notebook PC processors by 2006, a move that would let companies provide Internet access directly from towers and eliminate the routers and other boxes now needed for wireless networks in the home.
Still, WiMax must clear some high hurdles, such as conflicting technical standards, before becoming a serious threat to cable and DSL. And even if WiMax or other new broadband technologies are able to establish themselves in rural areas, it is unclear whether they will be able to succeed in markets where DSL and cable are already deeply entrenched.
In the lucrative urban markets, households are plugging into cable modems and DSL services in droves. At the end of March, 28.6 million of the U.S. households with broadband subscribed to cable or DSL, out of a total 29.3 million.
"If they're already a DSL user, it takes a lot to get them to change," said Mike Paxton, an analyst at market research firm In-Stat/MDR. "Once you get someone locked into service like broadband, probably 70 to 80 percent of those people will be unlikely to change services."
Complicating matters further, cable and DSL are increasingly being bundled with hundreds of television channels, phone service and cellular discounts.
Even if alternative broadband companies are able to address such business and technology questions, they must face what is perhaps the most daunting challenge of all: regulatory politics.
In its most significant broadband measure, the FCC last year granted the Bells exclusive rights to any "advanced" fiber networks that they plan to build. That decision, outlined in the FCC's , was viewed as favoring the Bells, because they would not be required to lease such new fiber lines to outside companies that—like Covad—might want to offer rival Net services. The phone companies had been required to share traditional copper wires and fought to change that rule for many years.
At the same time, wireless and other alternative technologies have been quietly gaining support within the agency. In February 2003, the FCC drafted rules on that were interpreted as an overture to alternative companies, particularly in areas not served by cable or the Bells. And in May, FCC Chairman Michael Powell said the agency is looking to
Some of these technologies might be subject to regulation to deal with concerns such as competition for spectrum with amateur radio operators and possible interference in public safety communication. But the FCC's decision to weigh in has been considered a positive step.
"The more options that are available, and the more capabilities provided, the better off we are," Ed Thomas, chief of the Office of Engineering and Technology at the FCC, said in an interview.
In this panoply of future technologies, broadband optimists are hoping to make high-speed Net access as common as a cell phone connection, following people into their homes, onto the sidewalks, into automobiles and even inside airplanes. Only then will their vision of a genuine broadband society be achieved.
"What I think will happen with the Internet is it will disappear and become everywhere," said Geoff Ralston, chief product officer for Yahoo. "It will no longer be a 'thing.' It will be a part of our lives, part of us, part of the fabric of most of the things we do."