Originally created 12/15/01

Price climbs as broadband goes mainstream



Fay Gallegos of Denver was one of tens of thousands of AT&T Broadband customers left in the lurch last week when bankrupt ExciteAtHome was allowed to pull the plug on AT&T's high-speed Internet service.

"It kind of puts you in a bind," said Gallegos, who uses the Internet for such activities as shopping online, paying bills and e-mailing. "It's not to say your life revolves around the Internet. ... but it's kind of amazing what kind of impact it has when you don't have it."

The frustration felt by Gallegos and other AT&T Broadband customers reflects how high-speed Internet use - once the domain of online stock traders, telecommuters and online game enthusiasts - is creeping toward mainstream.

High-speed Internet service, or broadband, has penetrated about 5 percent of all U.S. households, and now accounts for more than 5.2 million subscriber households, or nearly 10 percent of households with Internet service, according to Jupiter Media Metrix, an Internet research firm. Broadband offers Web-browsing and file-transfer speeds up to dozens of times faster than standard dial-up Internet access.

But analysts say that number could be much larger if it weren't for high prices, "last mile" bottlenecks, especially in rural areas - and the lack of multiple providers to further stimulate price competition.

The United States, a broadband pioneer, now trails South Korea, Hong Kong, Singapore, Canada and others in subscriber rates. South Korea alone is estimated to have a 30 percent broadband household penetration rate, attributed to robust competition, government encouragement of low provider prices and a culture that likes to communicate online.

Price is the biggest determining factor in how quickly the technology is being adopted, experts say. In the United States, high-speed Internet service typically costs $40 to $50 a month, more than twice as much as dial-up Internet access.

"We see that consumers really react in classic economics-class behavior - prices go up a little, the growth rates go down a little," said Dylan Brooks, a Jupiter senior analyst. "If we look north to Canada, where penetration is significantly higher, services are offered at significantly lower prices. Consumers have told us time and time again that they are willing to pay maybe a $5 (a month) premium for broadband, but not a $20 to $25 premium."

The industry in part suffers from a lack of providers to stimulate such price cuts. The Telecommunications Act of 1996 was supposed to spur competition in all areas of telecommunications, and competitive providers raised billions of dollars to enter the fray.

But there were a number of competitive setbacks in 2001, due to flawed business plans, dried-up capital markets and resistance by incumbent carriers.

On the telco side, alternative nationwide DSL, or digital subscriber line, providers such as Northpoint Communications and Rhythms NetConnections failed.

On the wireless side, AT&T and Sprint scaled back their ambitions to provide high-speed Internet access, while alternative provider Ricochet folded.

And the cable industry, the leader in providing high-speed service, recently suffered a black eye when AT&T Broadband's service to 850,000 customers nationwide went down.

Although most subscribers have been switched to a new network, customers such as Gallegos had to wrestle with setting up new e-mail accounts, notifying friends of their new e-mail address and wondering how many e-mails they missed in the shuffle.

"It sounds like trivial issues, but those are among the most important things for people paying $40 to $45 a month" for high-speed Internet access, Brooks said.

The economic downturn also has slowed the deployment and adoption of broadband.

Overall, about 75 percent of American households have access to high-speed Internet service via cable modem or DSL. In most cases, they have access to both. The cable industry especially has been deploying high-speed Internet access at a steady rate, partly because of the incentive to introduce high-profit digital television services, Brooks said.

But that leaves around a quarter of American households that can't get either, and wireless has inherent limitations in terms of objects and foliage that interfere with signals.

Another reason all Americans can't get broadband is that it is extraordinarily expensive to build out the technology to sparsely populated areas.

Lacking major subsidies, the reality is that "it's going to take a while and several generations of technology (advancements) for competition to arrive in rural areas," said Dan Kelley of HAI Consulting, a Boulder, Colo.-based telecommunications consulting firm.



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