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Broadband finally arrives
by J.K. Riggin
If you use the Internet from home, chances are your experience can be characterized in much the same way as the move toward residential broadband Internet access. Hurry up and wait.
Now in our fourth year of Internet hype, wildly optimistic usage statistics are actually panning out. The markets continue to respond with a steady flow of cash. The millions of Americans who experience the Internet through AOL and smaller consumer Internet service providers (ISPs), who buy and sell their wares at eBay, who order books and music from Amazon.com, who jockey for cheap airline tickets at Priceline.com -- these users are predominantly using technology that has not appreciably advanced since the early days of Internet usage.
Standard issue consumer PCs continue to be equipped with 56K modems, while nearly every other measure of the appliance's performance has improved. We've gone from 386 processors to the Pentium III. Hard drive and RAM capacity double every six months as prices drop. CD-ROM and DVD performance gets better and better. Yet, for the majority of this vast consumer market, the supposedly revolutionary and transformational experience of the Internet still feels like watching paint dry.
And despite the fact that the Internet has lived up to its hype, this is a problem. The eyeballs yet to be monetized in the friction-free (or friction-reduced) world of Internet commerce are still looking through the wrong end of the telescope.
Life's tough
It makes life difficult for Web designers like Razorfish (NASDAQ-RAZF) and Modem Media Poppe (NASDAQ-MMPT) because they have to design major-league Web sites to work in absurdly varied environments.
It makes life difficult for the wad of new dot-com companies -- from Autobytel.com (NASDAQ-ABTL) to Miningco.com (NASDAQ-MINE) to iTurf (NASDAQ-TURF) to Thestreet.com (NASDAQ-TSCM) -- because the "stickiness" (the ability to retain visitors) of their content propositions are easily compromised by long waits (media too fat for dial-up users) or boredom (media too watered-down for broadband users).
Hence the thunder and lightning from above as the giants of convergence in telecommunications have wheeled and dealed through the first two quarters of 1999 to sort out the delivery of broadband Internet service.
Activity has clustered around two major technologies for delivering Internet connectivity service: the cable television infrastructure and digital subscriber line service (DSL) over copper telephone lines.
Stay home
1998 was a good year for At Home (NASDAQ-ATHM), the leading cable-based ISP. The company increased its customer based from 50,000 to 210,000. Its US$6 billion January, 1999 acquisition of search engine portal Excite blends a rapidly growing but still-not-profitable access business with a money-losing advertising business. Despite its enthusiastic valuation and healthy growth rate, the company is probably still an acquisition away from profitability.
With its yet-to-be-approved May, 1999 acquisition of MediaOne (NYSE:UMX), AT&T (NYSE:T) will become the country's number one provider of cable television, eventually delivering local phone service over cable lines. Microsoft threw its hat in alongside Ma Bell to ensure that it gets first dibs on the operating systems of cable set-top boxes.
It's hard to reckon the short-term impact of the deal being more than new logos on customer invoices and much paper money changing hands -- another chapter in the inevitable convergence story.
On it, AOL
Arguably the best positioned among net giants to most fully leverage and benefit from broadband, AOL (NYSE-AOL) is missing the cable Internet boat. Not to worry, however, the Dulles, Va. online giant has inked DSL plays with Bell Atlantic (NYSE-BEL) and SBC Communications (NYSE-SBC), enabling AOL to begin rolling out AOL-branded DSL service as early as this summer.
The company is rumored to be negotiating similar agreements with other Baby Bells and GTE.
In early May 1999, AOL announced that it will develop Internet television services with Hughes Electronics' (NYSE-GMH) DirecTV. The deal will allow consumers to watch satellite-based DirecTV and surf the web from the same box. The service will combine digital satellite television programming with DSL Internet service. In addition, AOL recently hired MCA Television veteran (and former Happy Days producer) Robert Harris to oversee the development of broadband programming.
Forrester Research projects that 15.8 million households will have broadband Internet access by 2002. Given AOL's more than 17 million customers, the company is well-positioned to feed off of the short-term broadband hype.
Why wait?
Unlike cable broadband, DSL is being widely deployed in both residential and business markets. Since DSL uses existing copper telephone lines, there is no last mile to install or goofy network topology to untangle. This is breaking loose several investment opportunities among DSL service providers and DSL equipment manufacturers.
It's literally about a new generation of price and performance. Upstart DSL vendors are offering a dedicated 1.5 megabit symmetric DSL circuits for US$499 per month, displacing traditional T-1 lines (same bandwidth), which are priced in the neighborhood of US$1,000 per month.
Newcomers Northpoint Communications (NASDAQ-NPNT) and Rhythm NetConnections (NASDAQ-RTHM) provide DSL connections to the Internet. Although both are losing money, both companies had successful spring IPOs.
Rhythm NetConnections went public in April, 1999 at US$21 per share and its shares now hover in the 70s. Northpoint went public in May, 1999 at US$24 per share and its shares are still in the 40s.
Fellow DSL provider Network Access Solutions is poised to come out swinging, considering its US$11.6 million in 1998 revenues (its symbol will be NASC on NASDAQ). The sector favorite to date is Covad Communications (NASDAQ:COVD). The company's first quarter 1999 revenue of more than US$5.5 million surpassed its total revenueof US$5.4 million for 1998. Covad's shares have jumped to more than US$100 since its January, 1999 IPO price of US$18.
Watch all of these become acquisition targets as prices settle in the late summer.
Gear du jour
The growth in DSL use also means a strong demand for DSL equipment and services. Netopia (NASDAQ-NTPA) provides a full menu of business-focused Internet solutions and has made waves with its new DSL product line, which supports Internet service providers and network service providers. Believe it or not, Pairgain Technologies (NASDAQ-PAIR) is actually making money, mostly due to its longer track record with networking products and early research and development with DSL products. At US$15 a share, Pairgain looks like a good ride over the next few months.
Among its variety of DSL products, Tut Systems (NASDAQ-TUTS) offers a special DSL system for multiple dwelling units (such as apartment houses or university dormitories) that delivers high-speed data access to tenants over existing copper telephone wires. Tut may need a new story as its stock has been coming back to earth since a successful January, 1999 IPO.
Copper Mountain Networks (NASDAQ-CMTN) sells DSL equipment to telecommunications companies including Northpoint and Rhythm NetConnections. The company's shares rose 224% following its May 13 IPO. Watch for similar behavior from Paradyne's upcoming IPO; the company's ticker symbol will be on NASDAQ.
Don't forget, however, that telecom stalwarts like Rockwell International (NASDAQ: ROK) and Lucent Technologies (NASDAQ: LU) cannot afford to miss out on DSL. They both offer significant, though less specialized, competition in the DSL space and are worthy of attention as potential acquirers of any of the above.
It's all good
Widespread validation of email, e-commerce and Web-based enterprise applications means we just can't get enough bandwidth. Maybe Mae West was right when she said too much of a good thing is a good thing.
The question isn't really cable or DSL; both technologies have demonstrated drastically improved price and performance. The question is affordable broadband versus either traditional high-speed access or the doldrums of dial-up. And the answer is that DSL and cable will prevail because demand is coming from new and old users alike.
Businesses save hundreds of dollars a month with DSL. Both residential cable and DSL Internet offer a fundamentally more immersive online experience than dial-up.
As cable and DSL providers roll out their services in the year to come, their biggest problem will be handling a demand greater than what we've already seen.
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