Ops Under Pressure on Modem Front

4/12/1998 8:00 PM Eastern

New York -- The cable industry may soon face new pressures
from allies and competitors alike to accelerate its high-speed-data deployments. But MSOs
will operate without any assurances that quick fixes for issues related to its current
rollout pace are at hand.

One source of the pressure is Silicon Valley, where
frustration over the current dial-up-access bottleneck is pushing companies like Intel
Corp. to action on several fronts, including political backing for candidates who are
willing to make government support for high-speed access a top priority.

Another source of pressure, often overlooked by cable
backers, is the role to be played by Internet-service providers and competitive
local-exchange carriers in bringing high-speed-data services to the public over telephone

"I think that we're all frustrated and on the
verge of getting angry at the pace of deployment [of higher-speed access]," said
Avram Miller, vice president of corporate-business development at Intel, at a presentation
during a Kagan Seminars Inc. session here last week.

"We have a need to get to consumers at high speed, and
we're sick and tired of waiting." Miller said.

He lauded the cable industry for getting high-speed data
off the ground and for developing a soon-to-be-completed modem standard.

But while cable appears far more committed to bringing such
services to the public than the telcos are, there are "a lot of impediments" to
moving quickly. These factors include the difficulties of installation and the fact that
modems are not the type of off-the-shelf purchase option that would stimulate market
demand, Miller said.

While declining to be specific about new attempts by the
computer sector to stimulate high-speed deployment, Miller made it clear that his industry
will engage in "more public activism to put more pressure on the telcos and, to a
lesser extent, on cable."

He said he has been consulting with "people running
for public office who will make that part of their platform and who will replace any
regulators at the PUCs [public utilities commissions] who are standing in the way."

The level of telco commitment to using ADSL (asymmetrical
digital subscriber line) technology to deliver high-speed data to the mass market is a
matter of dispute. Some telcos have asserted that they intend to push deployment of
consumer-oriented services, as well as business-oriented services, on a wide scale
starting in the second half of this year, while others are signaling far less aggressive

But no matter what public commitments might be, the pace of
orders for DSL gear leaves plenty of room for skepticism.

"I'd say that in general, orders are slow at this
stage," said William Rodey, vice president of channel sales and marketing at Westell
Inc., a leading supplier of ADSL systems. "But there's a high state of intent
from the telcos."

Cynthia Brumfield, a senior analyst for Paul Kagan
Associates Inc., said, "As things now stand, telcos lag behind the high-speed-data
pace set by cable by at least a year."

By the end of 1998, telco ADSL deployments will likely be
at the year-end-1997 level that was seen in cable, with about 100,000 customers
nationwide, while cable will be close to the 1 million mark, she said.

But in Kagan's view, the telcos won't catch up
over the next eight years or so, as the subscriber base for cable data will grow to 13.1
million, or about 31 percent of homes passed by services. The telco ADSL base will grow to
only 5.7 million, or 23 percent of homes passed, in that period, Kagan estimated.

The telcos' service reach will be limited by the
technical restraints of ADSL, and ADSL penetration will be lower than that of cable due to
cable's price advantage, Brumfield said.

However, the perceived shortcomings of ADSL should not
blind cable to the urgency of getting to market quickly, said Richard Edson, senior vice
president for new business initiatives at 3Com Corp., which is supplying both the telco
and cable camps with modems and related technology.

While each approach has advantages and disadvantages
compared with the other, "both of these businesses are going to be extremely
successful," Edson said. "We won't see cable or the telcos sitting on the
sidelines and letting others take this business away from them."

What matters most in the competition to come is each
industry's ability to scale up to mass-market deployment, which includes
"offloading the modem from the balance sheet" through retail distribution, and
neither industry is at that stage, Edson said.

A customer buying a modem at Circuit City is more likely to
stick with the type of provider that delivers service to that modem than a customer with
no personal investment in the modem, Edson said, noting that this puts a premium on being
early to market with retail product.

But retail distribution for MCNS (Multimedia Cable Network
System, the cable-industry standard) modems on a mass scale won't be in the cards
until there's a massive base of customers, noted Andy Audet, director and general
manager for cable-modem business at Motorola Inc.'s Multimedia Group.

"We'll tell you that we support the MCNS
standard, but you've still got to get it into the marketplace and prove that it works
at large scales so that people can accept it as a product that will sell in retail
distribution," Audet said, adding that Motorola doesn't expect this to happen
until the fall of 1999.

Time Warner Cable's Road Runner service, which is now
installing anywhere from 125 to 250 customers per week in each of its markets, will have
to double that pace, along with the rest of the industry, if cable is to hit the
projections set by Kagan, said Road Runner president Tim Evard.

"Self-installation is a big part of being able to do
that," he said, in reference to the ability of people to buy and install their own

Other operators at the Kagan session mentioned
customer-service costs and the need to keep two-way plant in good operating order as
significant burdens on high-speed-data operations.

Evard noted that the ongoing effort to lower the costs of
internetworking across market regions and interfacing with the Internet "occupies as
much of our time as any aspect of the business."

Taking all of these cost elements into consideration, the
cumulative cash flow projected for high-speed-data service doesn't reach the
break-even point "until six or seven years out," said Michael Bresnan, senior
vice president, domestic division at Bresnan Communications.

Bresnan is now offering data services in four Michigan
cities representing 68,000 households.

Evard agreed that after factoring in the cost of two-way
upgrades, this is a reasonable expectation, although he noted that Time Warner's
upgrade agenda was not cost-based on high-speed-data returns.

The upshot of the picture for cable is that waiting for
MCNS modems is not going to substantially lessen the burdens of deployment in the short
run, leaving the industry to weigh the risks of spending more versus continuing at the
current pace. Clearly, as Bresnan noted, the assessment of the competitive challenge posed
by ADSL should not stop at the telcos.

Whether or not a particular telco is dragging its heels in
deploying ADSL, the opening of networks under telecommunications deregulation has created
an opportunity for the newcomers to exploit pent-up demand for high-speed access, as
evidenced by a growing number of ADSL rollouts by these entities in various parts of the

"We see the CLECs as being bigger threats than the
RBOCs [regional Bell operating companies]," Bresnan said. "The small-business
market is very important to us, and we see the CLECs going into that market very

Brumfield said the Kagan ADSL projections did not include
any expectations for ISPs or CLECs.

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