News

Forum: Wireless Internet -- No Threat to Cable

10/25/1998 7:00 PM Eastern

High-speed wireless Internet access is no threat to the
cable industry, at least today. (This discussion does not refer to low-speed pager access,
which provides news on the move and little more.)

Although there has been much talk and some limited
implementation of wireless Internet services, there has been a tendency toward hype over
anything wireless. Cellular and PCS (personal-communications services) have made wireline
services seem old-fashioned. However, wireless is not the ultimate answer for every
application or for every environment.

High-speed wireless Internet has few advantages over
wireline service and, from a service-provider standpoint, it has a number of
disadvantages.

CAPITAL ISSUES

Cable-modem and ADSL (asymmetrical digital subscriber line)
services have a major advantage in that established corporations back both with adequate
cash flows for investing in new business segments.

Eventually, of course, they expect data services to
generate revenue, but for now, they are able to invest the necessary money for the two
technologies to get on their feet.

Wireless Internet operations do not have the advantage of a
long gestation period, during which they will be sustained by a parent company's cash
flow. Most MMDS (multichannel multipoint distribution service) companies, for example, do
not have particularly good cash flows.

Some LMDS (local multipoint distribution service) backers
do have substantial cash flows, but in the recent Federal Communications Commission
auction of LMDS licenses, most companies placed a very low value on the right to offer the
service, suggesting that few expect it to be the "killer app" for broadband
access.

INFRASTRUCTURE ISSUES

In all Internet infrastructure layouts, the appropriate
switches and routers must be installed. Both cable-modem and ADSL services are operated
over plant owned by the cable operator or telco, while wireless Internet operates over the
airwaves, where it has the advantage of being designed for broadband service from the
start.

Both cable operators and telcos built their systems without
the expectation of offering two-way, broadband services, so their plants must be upgraded.
Wireless Internet does not have this problem.

But the wireless Internet advantage is not as great as it
might initially seem. First, bandwidth must be purchased from the FCC or leased from
another service provider. And if a potential wireless Internet provider appropriates
spectrum already used by the company for other services, then the company loses the
benefit of such revenues in starting up its wireless Internet business.

Second, cable companies are well on their way toward
upgrading their networks, and telcos have designed broadband models to compensate for many
of the problems in their plants.

Thus, wireless Internet companies will not get head starts
in most major markets. In fact, in many markets, cable-modem service and ADSL will be
established before wireless Internet access is implemented.

Many users with the greatest need for high-speed-data
service will already be subscribers to cable or ADSL.

MARKETING ISSUES

Both cable operators and telcos can include advertising for
new services with the invoices that they send to existing subscribers. Even when no bill
is included, customers will generally open up such mailings. However, mailings from
wireless Internet providers bear unfamiliar names, and they could be left unopened.

While all Internet-service providers may send out the same
number of mailings, cable operators and telcos have higher numbers of people actually
looking at the various enclosures.

Cable operators and telcos have a much greater ability to
generate hype, because their parent companies are generally large and well-known.

This is what has happened with cable modems and, more
recently, with ADSL modems. Numerous articles in the popular press have appeared about the
services that cable modems and ADSL can provide. Wireless Internet is sometimes mentioned
in these articles, but it is rarely featured by itself.

Even when the parent company is not large – say, a
small cable company or a CLEC (competitive local-exchange carrier) -- companies offering
these services benefit from press generated by their larger brethren. The words
"cable modem" and "ADSL" have almost become brand names. When the
cable operator markets its cable modem, potential customers have a good idea what it is,
how it works and what it can do for them.

SUBSCRIBER COSTS

On a per-subscriber cost basis, there is little difference
among the various technologies, but the wireless Internet carrier must place more of the
initial cost burden on the subscriber.

Much of the initial cost to the cable company – and,
to a lesser extent, the telco -- is attributed to upgrading the plant. This must be done
-- especially in the case of cable companies -- before the service can be offered.

The telco can, in many cases, upgrade on a line-by-line
basis, as in the case of adding repeaters to T-1 lines. But a major upgrade requires tasks
such as extending fiber, which must be done on a neighborhood-by-neighborhood basis, as is
the case with cable.

With the wireless Internet company, much of the initial
cost is in customer-premises equipment. Currently, for true two-way wireless Internet
service, CPE is more expensive because of the need for a transceiver, as well as a modem.
In some cases, an external antenna is required.

Where the upstream path is over an ordinary phone line,
service costs are comparable to cable-modem service, and the CPE costs are less. Pricing
starts at $50 per month for service, plus $100 to $200 for equipment. Where the wireless
connection is two-way, monthly service for a single user runs in the $70 to $100 range,
plus $400 to $800 in CPE costs and $150 for installation.

Cable companies and telcos, with their much better cash
flows, can afford to purchase the equipment themselves and lease it, as cable companies do
with set-top boxes. Some sell equipment to subscribers at subsidized prices.

Telcos and cable companies are in much better positions to
recover costs over time. Even at unsubsidized prices, the CPE for cable or ADSL does not
exceed $400.

The big advantage for wireless Internet comes in the
multiuser (business) market. Wireless Internet companies can service a number of users at
a relatively low cost. CPE costs can be allocated over a larger number of users.

For 10 users, the monthly fee starts at around $300, with
the CPE cost starting at around $600. In contrast, cable modems do not allow multiple
users because of shared bandwidth.

THE CURRENT

MARKETPLACE

For individual usage, cable-modem service has a head start
in many parts of the country. Soon, ADSL will be a major competitor. Wireless Internet
access exists in some markets, although in many cases, the companies involved lack the
funding for extensive marketing.

In general, cable-modem service has the biggest head start,
followed by ADSL. Wireless Internet access will be a competitor in many places, but it is
not likely to be No. 1.

Make no mistake, there is a place for wireless Internet
access. That place will likely be in supplying high-speed Internet connections to small or
midsized businesses. For them, initial equipment costs are not high when compared with
other multiuser options.

Cable companies should not be worried about wireless
Internet or ADSL service providers stealing subscribers: They should be concerned about
these competitors getting to market before them, and they should concentrate on rolling
out services as quickly and as aggressively as possible.

Remember, all things being equal -- price, service and
bandwidth -- customers do not care which access method they use. They are only interested
in having the Internet delivered to their screens at a particular speed.

All things being equal, cable modems, ADSL and wireless
Internet have the same chance of being chosen by new entries to cyberspace. But existing
customers for non-Internet services will tend to stay with their current service provider
– again, all things being equal.

The main questions are: How long will it take before all
things are equal, and where will cable be when they are?

Marc Liggio is a senior analyst with Allied Business
Intelligence Inc. in Oyster Bay, N.Y.

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