Lack of Retail Slows Modems


Cable has enjoyed a high profile in its national quest to
be the leader in high-speed-data services, but overall, the picture is less rosy heading
into the Western Show than service providers had anticipated.

Executives at service leaders @Home Network and Road Runner
expressed strong faith last week in the growth potential of the business in the year
ahead, but they made it clear that some things have to get better quickly if cable is to
maintain its lead next year. Their primary area of concern: getting standardized modems
into stores.

Despite outstanding performance in some markets where
penetration is at or above 10 percent, overall subscriber totals appeared to be well short
of where many operators and analysts had expected them to be by now.

The latest figures for @Home and Road Runner, released at
the end of September, showed them at 210,000 and 135,000 subscribers, respectively.
Officials declined to provide current totals. But based on previous-quarter growth rates,
the two services would appear to be hovering in the range of 400,000 subscribers combined
going into December, with the potential of hitting about 425,000 by year-end.

It seems likely that the two services and all other
cable-data providers combined will fall at least a little short of the 500,000-subscriber
mark at year-end -- an expectation that Bob Rusak, vice president of business development
at Road Runner, said was probably accurate.

A year ago, the usually optimistic Paul Kagan &
Associates Inc. projected that the 1998 year-end total for high-speed cable-data
subscribers would be close to 1 million, while Forrester Research put its projection at
about 700,000.

The problem is standards, or the lack of them. The absence
of modems with DOCSIS (Data Over Cable Service/Interoperability Specification)
certification is clearly slowing the pace of launches, Rusak said.

None of the 13 vendors participating in certification
testing at Cable Television Laboratories Inc. cleared the process in the last go-around,
which ended Nov. 20. And, as previously reported, there was only a slim chance that any
would gain certification during the next 30-day cycle.

The industry blamed the complexities of the software
adjustments that are required to assure that everyone is interpreting the specs the same
way for the delays.

"The problem is that we're in the midst of an
interim-technology transition limbo," Rusak said. "The issue is: Do I ramp up
with proprietary equipment, or do I ease back and wait for certified equipment, knowing
that with each customer that I don't go after, I'm foregoing $40 in monthly

So far, the Road Runner joint-venture partners -- Time
Warner Cable and MediaOne Group -- have been able to hold off on new launches,
concentrating instead on ongoing upgrades and other preparations for rollouts in unserved
markets, Rusak said.

"But if this doesn't get resolved pretty quickly, it
will put us in a position where somebody has to swallow hard and make the decision to go
one way or the other," he added.

Road Runner officials also acknowledged that the pace of
expansion within their group has been slowed by the need to integrate the newly merged
MediaOne Express service.

The companies have significantly integrated their staffs by
shifting data-service employees of the two MSOs to Road Runner at 18 regional data
centers. But the owners have still not named a CEO, nor are they likely to do so at the
Western Show, which leaves executive staffing at the group's new headquarters in the
Virginia suburbs outside of Washington, D.C., unsettled.

@Home doesn't have these issues to deal with -- at least
not yet -- as it is awaits the completion of AT&T Corp.'s acquisition of
Tele-Communications Inc., which could affect its operations to some extent. But @Home, as
much as Road Runner, needs DOCSIS certification, not only to speed launches of new
markets, but also to help drive its marketing effort.

"What I need are very strong, committed OEM
[original-equipment manufacturer] partners," said Dean Gilbert, @Home's senior vice
president and general manager. "We've proven that this service can drive customers
into the stores."

Gilbert insisted that the outlook from @Home's perspective
is extremely positive. The company saw a 43 percent increase in its subscriber base from
the end of June to the end of September, and a jump in total markets served in the United
States and Canada from 31 to 44.

"We've got several markets with more than 10,000
subscribers and penetration close to 10 percent," he said.

But Gilbert acknowledged that there was a
"bifurcation" in the market between MSOs' visions for high-speed data. There are
MSOs that are gung-ho about expanding their data-service footprints in the interest of
building the critical mass. And there are MSOs that "are focused on how to maximize
the incremental-dollar return from each subscriber, starting from zero."

The essential thing, Gilbert insisted, is that MSOs must
think long-term and entrench themselves in the marketplace, rather than grabbing for the
immediate dollar.

This likely means that operators will need to move to lower
rates, since studies show that at $30 per month, "this business explodes," he

"It's a matter of going after market share and
becoming the dominant provider of service," Gilbert asserted. "@Home wants to be
the dominant provider of online services in our markets."

"Wider, better service," he added,"
"will generate the momentum that we all need."

CONTENT IS KEYThe two keys to building that critical
mass, he said, are a willingness to "make this a core, and not an ancillary
business," and creating a product that carries wider appeal than just people looking
for "higher performance" -- largely faster speeds -- in their Web surfing.

@Home and Road Runner have both taken important early steps
toward building broadband-enhanced content with strong consumer appeal, with @Home working
more at the national level and Time Warner and MediaOne focused more on local innovations.

Rusak declined to discuss new content developments at Road
Runner, suggesting that the company would make related announcements at this week's
Western Show, including word of "enhanced gaming opportunities."

@Home is concentrating on content improvements in three
general categories: community communications, rich media content and applications that
exploit the always-on quality of cable-data service, said Charles Moldow, vice president
of sales and marketing for @Home's @Media group. For example, he said, the company will
begin doing more to "push around audio files," supporting the delivery of audio
chat and audio bulletin-board postings.

On the media side, @Home intends to expand its news
offerings beyond the current Cable News Network file service, which Moldow said has proven
to be very popular with customers. The company also hopes to secure a deal with Major
League Baseball to provide broadband-optimized reports similar to its coverage of National
Basketball Association games, and it is exploring possibilities with the National Football
League, as well, he said.

One of @Home's biggest content coups could be the deal that
it struck with MTV: Music Television this year, which will begin to pay off in the form of
downloadable free music videos and other content starting in the first quarter.

"Eventually, we might charge extra for a premium
version of the service," he added.Although it currently offers most of its
video-enhanced content as downloadable "QuickTime" files, @Home is exploring the
use of streaming for some applications in connection with a pending "new technology
deal" that would improve bandwidth efficiency, Moldow said.

But he emphasized that for things like music videos and
news clips, downloading files in bursts rather than real-time streams remains the optimal
means of distribution, especially since such files can be locally cached and distributed
for faster access than is possible with streamed media.

Another area of expansion for @Home in the coming year is
advertising, where the company has become a resource for entities seeking to learn more
about online marketing in the broadband space.

"We can define the next generation of advertising,
where instead of being limited to banners, advertisers can make use of 100- to
150-kilobyte files to create a much more compelling user experience," said Susan
Bratton, director of advertising for @Home.

In one test, @Home has been working with three automobile
companies on video and other interactivity enhancements that allow customers to manipulate
information in the stored file without having to click through to the advertisers' Web
sites. Customers can move 3-D car images around to view the vehicles from any angle;
explore detailed information about engine or other components; and explore the color
options offered by manufacturers, she said.


With several cable systems in the Road Runner camp now in
queue to launch services, and @Home affiliate TCI just moving to wide-scale rollouts, both
providers believe that the sector's growth pace in 1999 could be explosive.

But they recognize that cable is entering a new ball game
in the online marketplace, where most customers buying personal computers are likely to
take them home and click onto the options on their screens that offer them easy access to
Internet and commercial online services.

That means that cable has to get to customers with its
message at the point of sale, Rusak said. If DOCSIS modems start rolling into the
marketplace shortly, the industry should have no trouble reaching the 1 million-subscriber
mark by the end of 1999, he added, but further delays could significantly damp that

"If you look six months down the road, new PCs with
DOCSIS modems installed could have a tremendous impact," Rusak said.

In fact, he added, talks have begun between Road Runner and
@Home on the need to work jointly with retailers so that customers can be fully informed
about the service options in their communities.

Gilbert, too, stressed the importance of the retail
marketing model, although he insisted, "I don't spend one minute worrying about"
the telcos' competitive digital-subscriber-line technology. He argued that only 25 percent
of online users will buy for speed, while 75 percent are buying for the sorts of services
that cable can offer.