The Last Mile to the Internet

Has broadband finally arrived? Cable companies have the lead, but RBOC technology may have better economics What now for the narrowband winners? Internet access is big business. It commands more than double the revenues of the flashier Internet portal and content companies that grab most of the headlines. So far, however, providing Internet access to residential customers in the United States has been a money-losing proposition. Players are competing in two battlegrounds defined by the fundamental economics of Internet access. Over the past year, winners have emerged in each. First, there is a battle for customer relationships, in which Internet access is only one element in the broad array of content, products, and services that players deliver to consumers. America Online is the clear leader in the customer relationship battle: its 13 million subscribers account for more than 50 percent of all Internet traffic. Exploiting its early entry into the online marketplace and its ownership of both backbone network and content, AOL built a unique stronghold in narrowband Internet services, combining a critical mass of subscribers with a depth of relationship that will be difficult for others to emulate. It has since sold its backbone network to WorldCom and outsourced backbone services to GTE and WorldCom, and now focuses exclusively on managing content. Internet gateways such as Yahoo! and Excite, delivering a range of services that attract a substantial fraction of Internet traffic, are also strong contenders in the relationship arena. Internet service providers (ISPs), on the other hand, will have difficulty developing broad and deep customer relationships because they lack the skills to deliver multiple services and are late starters in the race to build customer relationships. The second battleground is to be the owner, operator, and wholesaler of the least expensive and highest-quality network access and backbone infrastructure. In this battle, WorldCom is the clear leader: it carries over 40 percent of all backbone traffic and owns the biggest worldwide network of points of presence (POPs). Although its Internet business does not report separately, it is likely that it already shows a profit. These winners aside, however, the thousands of companies that make up the Internet access market collectively lost a total of almost $400 million in 1997 as they sank money into building out their infrastructure and acquiring customers. Among the hardest hit have been the US local telephone companies known as RBOCs (regional Bell operating companies). They have invested hundreds of millions of dollars in building ISP businesses, but have neither profits nor much in the way of market share to show for it. Luckily for the RBOCs - and the thousands of other access providers that have lost out to AOL and a handful of other profitable ISPs such as EarthLink and MindSpring - a long-awaited technological discontinuity known as broadband is about to rewrite the rules of the Internet access game. Broadband is the name for a range of technologies that enable users to access the Internet at speeds of up to several megabytes per second (Mbps): in other words, up to a thousand times faster than with today's typical modems. Downloading Web pages with narrowband technology has been likened to sucking jello through a straw; broadband technologies, on the other hand, promise to deliver crisp text, video, and sound as quickly as if the user were watching television. Having overcome their initial reluctance to join the fray, cable, telephone, and satellite companies are now competing in a quickening race to deliver broadband service to personal computers in consumers' homes. This race is set to transform the users, the technology, and the economics of Internet access. In particular, the new technology is able to create a broadband last mile to the home that can be used by cable and other companies to attack the narrowband local loop in which the RBOCs have long held monopoly privileges. …