The Wall Street Journal

October 29, 2001

After Billion-Dollar Build-Up, Broadband Plans Are Put Off

By DENNIS K. BERMAN and SHAWN YOUNG Staff Reporters of THE WALL
STREET JOURNAL

NEW YORK -- Call it a high-speed slowdown.

Having sunk billions into efforts to offer fast Internet
connections, some big phone companies are putting the brakes on
such broadband lines.

In recent days, both Sprint Corp. and SBC Communications Inc.
announced retrenchments in their flagship high-speed offerings
for consumers and small businesses. Moreover, AT&T Wireless
Services Inc. is shutting its wireless broadband service, which
served 47,000 customers, while Sprint is cutting back a similar
initiative. Making matters worse, Excite At Home Corp., which
delivers fast Internet connections to 3.6 million
cable-television subscribers, has filed for bankruptcy, and
creditors are pressuring to turn the service off.

After hitting quarterly growth rates as high as 50% last year,
digital subscriber lines -- which speed Internet traffic through
traditional copper phone wires -- seemed poised for a breakout
year in 2001. Now the service has hit a speed bump: Growth in DSL
customers slowed to 14% in the second quarter, from 20% in the
first three months of the year, says consulting firm TeleChoice
Inc. Cable companies, meanwhile, signed up 12% fewer high-speed
Internet subscribers in the second quarter compared with the
first, according to Yankee Group, another telecom consulting
firm.

Not everyone has pulled back. Bell phone companies Verizon
Communications Inc. and BellSouth Corp. are sticking to their
goals. But even they are focusing more on selling the service to
customers whose neighborhoods are already equipped for it, rather
than expanding into new areas.

Having fought back dozens of independent DSL challengers such as
NorthPoint Communications Inc. and Rhythms NetConnections Inc. --
both now out of business -- the regional Bell companies are
finding that the broadband brass ring isn't so shiny after all.
The DSL business remains mired in high deployment costs --
typically, it takes a phone company about two years to earn back
the investment it makes in installing a consumer's DSL line and
providing the service, says Sanford C. Bernstein & Co. analyst
Jeffrey Halpern. It also faces fierce competition from cable,
which already controls 68% of the country's approximately 10
million residential broadband connections. To make matters worse,
the Bells are losing their lucrative second-phone-line business
to cable and DSL users.

SBC is halting plans to roll out DSL service to slightly more
than 100 cities, including Akron, Ohio, and Hot Springs, Ark.
Such unwired communities are gearing up for a long wait. In
Sammamish, Wash., a 36,000-person town just five miles from
Microsoft Corp.'s headquarters, officials are holding out for
Verizon to deliver DSL to make telecommuting more of an option.
"We have some of the most congested traffic in the area, and DSL
would help that," said Ben Yazici, the city's manager.

But even where DSL is offered, it hasn't always been easy to get.
Early on, people waited months for installations and wrestled
with incomprehensible technicalities between their computer and
the phone equipment. The quality of DSL installations and service
was often so bad it threatened to undermine the Bells'
reputations.

Slowing Growth ...

Expected residential broadband subscribership, in millions.

Table with 3 columns and 5 rows

Year End 2001 Year End 2002

Cable Modem 7.0 9.6

DSL 3.3 5.0

Satellite 0.3 1.0

Fixed Wireless 0.06 0.1 table end

Fast Internet access was supposed to become a pillar of the New
Economy, enabling businesses and consumers alike to view
real-time video online, download movies and music in a flash, and
run demanding commercial operations. All that activity, in turn,
would make workers more productive, fill new telecommunications
networks and boost demand for new computers and software. Federal
Communications Commission Chairman Michael Powell reiterated this
week that increasing the deployment of broadband, now used by
about 10% of U.S. households, is his agency's top priority. Craig
Barrett, chief executive of Intel Corp., says the government
ought to counter slow growth by creating a broadband initiative
similar to the federal highways program and also provide
regulatory incentives for broadband investment.

It was with hopes of creating millions of such broadband users
that Sprint launched in 1998 its ION service, a $3 billion
project to bring speedy data and voice connections to high-end
residential customers and small businesses. But ION attracted
only 4,500 customers, in part because technical and logistical
issues slowed its rollout. Losing more money for every customer
it added, Sprint discontinued the service earlier this month.
Ronald LeMay, Sprint's president and chief operating officer,
says the high costs of broadband have hurt its deployment. "It is
not materializing in a fashion that is consistent with the best
interests of the country," he says.

The most far-reaching retrenchment so far is by SBC, the San
Antonio-based regional phone giant that is scaling back its $6
billion Project Pronto, originally aimed at bringing DSL service
to 80% of customers in its 13-state territory by the end of 2002.
"We're fairly dramatically curtailing the build," says Ross
Ireland, senior executive vice president for services. SBC now
offers DSL to about 60% of its customers and will continue to
promote the service to them.

Executives of the regional Bell companies find themselves in a
tight spot. Forced to save money to appease stockholders as the
economy slows, they also risk losing some of their best customers
to cable companies, which had at least a two-year head start in
high-speed Internet connections.

Bell executives, most notably those at SBC, blame regulators for
the slowdown, saying requirements that the Bells share their
networks with rivals at a discount create a disincentive to
innovation and expansion. "What we're nervous about is how much
we expand this in a down economy based on regulatory trends,"
said SBC's Mr. Ireland.

Launching DSL has been an agonizing process for the Bells. The
technology -- which involves juicing up old-fashioned phone lines
for data-transmission speeds for which they weren't designed --
was tricky and far more difficult to set up than expected. The
Bells now say they have resolved many of the early glitches.

To be sure, the Bells aren't coming to a screeching halt on
broadband. Still, BellSouth's chairman and chief executive, Duane
Ackerman, acknowledged that the company will focus on areas where
it has already deployed DSL. "If you're not careful how you
manage this business, you can end up with a lot of growth and
very little profit," Mr. Ackerman said. With that in mind, nearly
all DSL providers raised their prices over the summer, to about
$50 a month from around $40, though Verizon just started a
special promotion at $30 a month for the first three months.

Even more troubling is evidence that as broadband begins to go
mainstream, some customers are canceling. The initial
technophiles didn't need convincing about the value of a faster
Web connection. But now, some mainstream customers realize they
aren't taking advantage of the service. "They're saying, 'I
really don't think I need to pay $50 a month to check my e-mail,'
" says Imran Khan, a Yankee Group analyst. To increase the mass
appeal of the service, carriers will need to cut prices. "But
then you're digging the ditches deeper in terms of making your
money back," he says.

Write to Dennis K. Berman at [log in to unmask] and Shawn
Young at [log in to unmask]


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