More Warning Signs Of Slow Rollouts

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New York -- The cable industry appears to be heading into
treacherous waters on the high-speed-data front, failing to fully exploit its
opportunities in advance of the rollout of consumer-friendly digital-subscriber-line
services.

It now looks like the best that the industry can hope for
in terms of retail distribution of its modems is spotty support by late 1999.

Even worse, despite the fact that demand is much stronger
than anticipated, the industry as a whole remains unable to pull out all of the stops in
marketing the service where it's available, due to deficiencies in the field support
that's needed to keep up with the potential installation pace.

These points were clearly etched last week in two days of
discussions here at a conference presented by Kagan Seminars Inc.

Notwithstanding bullish projections by Kagan analysts --
1.6 million cable-data customers by year's end and a growth trend that anticipates
twice as many cable-modem users as DSL users through the next 10 years -- the tenor of
remarks by operations and vendor representatives speaking at the meeting was that the
cable industry is far more vulnerable to competition than these numbers suggest.

"The biggest drag on the cable-modem business is the
need for people to install modems," said Bob Rusak, vice president for business
development at Road Runner. "Those truck rolls are holding the industry back from a
much faster ramp-up."

Despite cutting installation time to around one hour and
improvements that, in many cases, allow a single worker to handle the cable wiring and
modem installations, there aren't enough trained personnel available to keep up with
the additional demand that would result from an all-out marketing push, Rusak said.

As a result, even though Road Runner has marketing
procedures in place that could quickly add 500,000 names to the list of waiting customers,
it can't put all of those procedures to work, he added.

As it is, penetration of cable-data services is outpacing
expectations, led in part by consumer response to the availability of low-cost personal
computers and in part by awareness of broadband, which has been attracting online
newcomers to cable-data services.

"We're seeing 5 percent penetration of homes
passed in less than nine months from the date of launch," Rusak noted, adding that
operating cash flow was hitting breakeven within 12 months, with operating margins
sometimes exceeding 45 percent.

Indeed, Doug Semon, principal Internet-system architect for
Time Warner Cable, said his company is hitting "greater than 14 percent in some
systems." Citing Kagan projections calling for 3.3 million cable-data subscribers by
year-end 2000, he added, "I personally think that those numbers are low."

But while surging use of the Internet, sales of PCs and
awareness of broadband benefits cable, the same factors will also aid providers of
high-speed services over various DSL platforms, including the consumer-friendly
"G.Lite" system, which is slated for market introduction this summer.

"We know that it's coming," said Ann
Ivancie, director for Internet-marketing operations at AT&T Broadband & Internet
Services (formerly Tele-Communications Inc.). "We know how important it is to be
first to market and to be able to install customers quickly."

Retail availability of "plug-and-play" cable
modems pegged to the DOCSIS (Data Over Cable Service Interface Specification) standard has
long been seen as a key to meeting the DSL challenge. But it now appears that G.Lite
modems and other DSL flavors will be hitting retail shelves as fast as, if not faster
than, cable modems, due to the fact that computer manufacturers -- led by Dell Computer
Corp. and Compaq Computer Corp. -- have already begun shipping some PC models with DSL
modems built in.

Where cable is concerned, 1999 will be the year of
"retail crawl," said Carol Swartz, marketing director at Motorola Inc.'s
multimedia group.

Most other participants commenting on this question agreed.
"If we end the year with [modems in] a few hundred stores, we'll be really
happy," said Paul Satzinger, director of business development for @Home Network.
"This is a year of foundation laying and continued leasing while we figure out how to
make this thing sing."

So far, only two vendors' DOCSIS modems have been
certified by Cable Television Laboratories Inc. The delay in completing the initial
certification process linked to DOCSIS version 1.0 has slowed the availability of product
that retailers could put on their shelves and delayed certified modems that could be
embedded in PCs -- vital to successful retail distribution.

"The goal was to have modems on the shelves last
Christmas," Rusak said, "and here we are approaching summer and still struggling
to complete certification."

Rusak hinted at the growing disgruntlement over the
certification process that has been voiced privately by other operations and vendor
executives as they await wider availability of DOCSIS modems. "We could get into a
pretty long discussion about the whole issue of the merits of how the certification
process was set up," he said.

Increasingly, the coupling of modems with PCs is seen as
the key to a breakout for DOCSIS in retail distribution, representing a shift from earlier
thinking, when achieving retail support for distribution of the stand-alone modem was
viewed as a major first step.

"I think that there has been some oversight on this
question," Rusak said. He noted that the chairman of Circuit City Stores Inc. had
told him that the burden of proof was on the industry to show how a cable modem would
generate more revenue per square foot than whatever the store has to take off the shelf to
make room for it.

"Let's not get overly enthralled about the
[stand-alone] retail model," Rusak advised.

An important key to a successful retail push is
self-provisioning, meaning that the modem -- even if it's easily installed by the
customer or embedded in the PC -- must also be able to "shake hands" with the
local cable-headend equipment and be certified automatically, without a lot of work by the
consumer.

"That's probably the other big hurdle that we
have to clear in '99 in terms of retail distribution," said Richard Rasmus, vice
president of Comcast Corp.'s Comcast Online Communications. "We face some of the
same challenges that the cellular industry did."

Further stifling the move to retail is the insistence by
retailers that they receive "residuals," or a percentage of ongoing service
revenues, in addition to the point-of-sale margin on the equipment.

Retailers are entering discussions with operators calling
for residuals in the same 2 percent to 6 percent range that they've been accustomed
to getting in the cellular business, Rasmus said.

"This is the biggest sticking point," he said,
adding, "No residuals at all is Comcast's position."

The justification for residuals in cellular was that the
retailer is often the point of contact for unhappy users and, hence, the key to customer
retention. But that model doesn't hold in cable, Rasmus said.

"When the customer has problems, he calls us," he
noted. "He's not going back to CompUSA."

The retail issues must be resolved quickly, asserted Tom
Hagopian, vice president for interactive products at Cablevision Systems Corp. He took
issue with those who seem sanguine about consuming another year to get the retail
positioning right, noting that Cablevision has the luxury of leveraging its ownership of
retail chain The Wiz to push modem sales.

"We're going for it in '99," Hagopian
said. "I'm not sure that we have the luxury of a year of leasing modems with the
competition that we see coming."

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