Fast internet – so what?
This case study looks at new developments in Internet access and the difficulty of developing sustainable
business models.
Source:
Fast internet – so what
By Martin Virtel
Financial Times, April 17 2001
Chapter 5
Where is the internet going? Call it lack of imagination, but the vision of the future offered by the
technology and telecoms industry is “more of the same”. For consumers and small- to medium-sized
enterprises (SMEs), this means broadband internet, a rapid, cheap and instantaneous internet connection,
generally available over a telephone line (by means of a Digital Subscriber Line, or DSL) or through cable
television.
All technologies offering better performance than ISDN are known collectively in Europe as broadband
connections. Anyone working in a large company with internet access knows what a direct connection can
(and cannot) do: websites load more quickly, files download in a fraction of the time taken by modems and,
above all, the nuisance of dialling up every time (and keeping an eye on the unit counter) disappears, since
broadband internet is usually offered at a monthly flat rate without charges for each call.
This year governments and telecom companies are putting a high priority on the development of this
technology for the mass market. Deutsche Telekom is planning to make DSL connections available to more
than 2m homes by the end of the year, four times the present number. This is an ambitious target for a
company which, at the end of February, still had a waiting list of half a million applications for DSL
connections.
Telekom is investing €1.2bn–€1.5bn (£750m–£940m) this year in the expansion of DSL. In Spain,
Telefonica has undertaken to invest €3bn (£1.9bn) in developing the network in order to bring the country
up to present European standards. Spain has only 1.1 DSL connections per 1,000 inhabitants at present,
according to the company – just one-third of the average rate for the remainder of western Europe.
In France, meanwhile, there are currently about 15,000 DSL connections, but some analysts estimate that
by 2003, 30 per cent of internet connections there will be through DSL, with 6m DSL lines in the next five
years.
Patricia Hewitt, the British e-minister, promised early this year that by 2005, the UK would have the most
highly developed broadband infrastructure of the seven major industrial countries. During the next 17
months, Denmark is also aiming to provide 95 per cent of households with DSL capability. Although this
represents fewer than 1m connections, it is nevertheless a massive project, which – as Henning Dyremose,
head of Tele Danmark, the country’s largest telecom company admits – is “receiving strong support
because of political ambitions to provide broadband capability as quickly as possible”.
In early February Danish prime minister Poul Nyrup Rasmussen promised voters that he would turn
Denmark into the world’s leading IT country.
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What is broadband really about?
So the race is on in Europe to become the first country to develop a large-scale broadband infrastructure
and hence – and this is what it’s really all about – to attract call centres, internet and other technology
companies.
For many governments, broadband internet is not just an excuse for fine phrases but also something they
are willing to invest in. Sweden, for example, is planning to put €1.1bn (£690m) worth of tax revenue into
its development with the aim of covering 98 per cent of the country’s towns and villages, while Ireland has
earmarked ó152.3m (£95.6m) to ensure nationwide coverage.
Willem Verbiest, who is developing DSL technology for the French company Alcatel, the leading
manufacturer in the world in this area, estimates (somewhat more pessimistically than the Danish premier)
that within the next two to three years 20 to 30 per cent of EU citizens will have DSL access. According to
a survey by the French market research company NetValue, South Korea currently leads the world – with
access available to 38 per cent of private households. Surprisingly, the US – with just 6 per cent – is even
behind France, where 6.8 per cent of households connected to the internet already have broadband access.
It is still unclear, however, why the spread of rapid internet access should bring economic benefits to a
country. For the vast majority of European consumers, who perhaps have experience of high-speed internet
access only sporadically at work and who would like to download pirated copies of the latest movies, the
internet is already high-speed internet. For the needs of average surfers, the price and permanent
availability of broadband technologies are much more important than the faster connection speeds
appreciated by computer specialists and video fans.
As soon as an internet connection is no longer achieved via an ISDN or other telephone line, telecom
companies can offer cheap flat rates because internet access technologies such as DSL and cable make
more efficient use of existing lines.
Surveys in the US indicate that broadband users (including ISDN) remain online on average four times as
long and use e-commerce much more intensively than dial-up modem users. The same applies to SMEs that
could not previously afford a permanent internet connection. Thanks to DSL these companies are no longer
reluctant to buy and sell products on online marketplaces.
For all these reasons (availability, price, transfer rate), governments and telecom companies are hoping that
broadband internet will ultimately change the nature of internet utilization. The brief history of the internet
and other related technologies has shown that improvements in quantity are generally accompanied by
improvements in quality and changes in attitude.
MP3, the audio compression procedure developed in Germany a few years ago, merely reduces the time
taken to copy music from the internet by a factor of 10. But this has been sufficient to shake up the
worldwide music industry – despite its annual turnover of $40bn (£28bn) – so fundamentally that it is not
as yet clear whether it will ever recover. But the music industry is just the tip of the iceberg, and similar
compression formats are also available for other copyright items: according to estimates made at the end of
last year, every day over 400,000 pirated versions of films are copied via the internet.
Developing new appliances
Permanently available broadband internet connections are also inspiring the consumer electronics sector to
develop new appliances, whose market potential can only be guessed at.
Kerbango, a subsidiary of the US network specialist 3com, presented a new radio last year, for example,
which looks like a 1950s wireless and is just as easy to operate; it provides AM and FM wavelengths but
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also has a button marked “internet”. Inside the appliance, connected to a DSL or ISDN line, is a PC-like
computer that can pick up any of the radio stations playable over the audio software RealPlayer.
Interestingly, Kerbango is not looking to earn money by manufacturing radios, but by compiling lists of
radio stations and providing e-commerce services of the type “press the button to order the CD containing
the song you’ve just heard”.
The US company TiVo uses a similar model for its “personal video recorder”, which it has been selling in
co-operation with the British television channel BSkyB since early this year. The appliance has
convenience features allowing viewers to skip advertisements or to rewind, stop and watch slow-motion
replays during live broadcasts. They must, however, be connected via the internet to the TiVo server,
which, for a monthly fee, provides programme summaries.
The appliance can then, for example, automatically record all the Audrey Hepburn films coming up in the
next eight weeks. Napster and other copyright pirates, on the one hand, and Kerbango and TiVo on the
other, are examples of models that are seeking to generate a major demand for broadband internet while
creating additional sources of income. Although it is difficult to estimate at present how many people will
want access to broadband internet and the new services that go with it, there are already two types of
company that are hoping the demand will exist.
First, there are internet media companies such as Yahoo!, AOL and even the software giant Microsoft.
They are investing substantial amounts of money in the development of broadband services such as
FinanceVision, AOLTV or WebTV, in an attempt to keep up their high growth rates by establishing
themselves in these potential new markets.
Internet a ‘non-profit business’?
Then there are telecom companies seeking applications for their rapidly growing and already abundant
network capacities. Through the combination of deregulation and technical progress (the amount of data
that can be conducted through a glass fibre cable doubles every 10 months), it already looks as if “internet
access in a few years will be a non-profit business”, as John Connors, the chief financial officer of AOL
TimeWarner, warned in January.
The situation of internet media companies and the telecoms industry at present can be compared with that
of car manufacturers and motorway owners in a world where most people prefer to get around by bicycle.
The technology is available, but a very low degree of penetration in Europe, together with organizational
errors, monopoly strategies by former state-owned telecom companies and the logistical complexity of reengineering networks that were not designed for broadband services, has meant that the demand for highspeed internet access is outstripping supply.
This practical situation is unlikely to last (especially in view of EU efforts at deregulation), however, and
the time will come when it will no longer be possible to put off the question of how to sell broadband
internet. In spite of the search for broadband applications, the industry is still wondering exactly what will
make high-speed internet access attractive to the mass of consumers. “The greatest problem,” writes MetaGroup in a study of the US broadband market in autumn 2000, “is currently the lack of really convincing
innovations that would incite well-off households to pay for high-speed internet access.”
It is easy to say what doesn’t work, however. Application Service Providing, for example, by which
software is not installed on company servers but rented from an ASP (Application Service Provider) and
accessed through a broadband connection, has not taken off as expected. For a long time ASP was regarded
as a very promising model for telecom companies looking to obtain additional revenue from their
investments in expensive infrastructure, but in the last three years the predicted boom in this market has
simply failed to materialise.
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Partnerships with media groups
Media – films, music and games – are currently regarded as the best way of arousing mass interest in
broadband internet access. Of all the former state monopolies, the Spanish Telefónica company has
ventured furthest along this path with its participation in television stations and purchase of the Dutch
production company Endemol.
In the same vein, the French Vivendi group has purchased the film and music company Universal. For
Deutsche Telekom, broadband also means expansion into the media business, although it has made clear its
intention merely to select and put together applications rather than produce them itself.
With its successful Big Brother/Gran Hermano format, Endemol has shown the rest of Europe how the
internet can be incorporated into a media marketing strategy. The pictures from the self-contained house in
which participants were required to live were broadcast 24 hours a day on the internet, with some cameras
being visible only by logging on to specific providers.
Big Brother, the only success story to date, also reveals the weaknesses of this model. Broadband internet
was not required for marketing and the format soon began to lose its public appeal; in Germany, at least,
none of the spin-offs (Big Brother on a desert island, in a bus, at a disco) has been as successful. “The
simple voyeur format is no longer enough,” says Fred Kogel, head of Kirch Media-Entertainment, a
subsidiary of the German media conglomerate Kirch.
It remains to be seen which formula will be successful in the future. Except for media giant AOL Time
Warner, no companies operate profitably in the two sectors – both internet access and the provision of ecommerce and other internet services.
Finally, the powerful, formerly state-owned monopolies throughout Europe are getting in each other’s way
in the development of broadband internet. This has been the case in the US, too, where cable and DSL
suppliers in the past few years have been spending “more time competing with each other than in
expanding the broadband network”, as one magazine wrote last year in an analysis of the reasons for the
slow start to the broadband revolution.
The problem of deregulation
Deregulation in Europe is the most difficult aspect, in both technical and legal terms. DSL, the commonest
broadband technology, uses what is known as a “local loop”. Legally, the situation is clear: since January 1
2001 the established telecom companies have been obliged to lease this last remnant of their monopoly to
the new rivals.
In practice, these new companies are having not only to lease these local loops but also either to lease
further capacities (including their own exchanges) or to invest by installing their own appliances in the
exchanges and connecting them to their own lines.
The ex-monopolies therefore have an unending range of possibilities for thwarting the unwelcome
competition by means of technical regulations and routing tariffs, and thus for keeping control of
broadband internet business a little longer.
The monopolies v the challengers
A bitter struggle has therefore erupted in practically all EU countries with regard to the copper wires from
the exchange to the user. The story is the same everywhere: on one side are the ex-monopolies such as
Telefónica, France Telecom, British Telecommunications and Deutsche Telekom, who charge their rivals
high rents for use of their subscriber lines and attempt to defend their monopoly any way they can.
On the other side are challengers such as QSC, Colt or Arcor, who are trying to win customers and keep
down prices as much as possible. It would take a radical step – for example, the splitting of France
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Telecom, British Telecommunications or Deutsche Telekom into two completely independent branches
responsible for local loops and networks – to resolve this conflict.
Few among these operators, however, favour pursuing such a radical step. The regulating authorities in
Europe – Oftel in the UK or RegTP in Germany – have restricted themselves to date to establishing prices
and conditions for transactions between the new telecom companies and the former state-owned
monopolies so as to create a market.
Additional reporting by Annie Counsell and Scott Payton in London, Jamal Henni in Paris, and Ulrike
Sosalla in Hamburg
© Martin Virtel
Questions
1. Discuss the implications of ‘always-on’, high-speed broadband access for B2C companies.
2. If you were developing a strategy for a media organization, what actions would you suggest
they should take based on the article and your knowledge of the e-environment (Chapter 4).
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