Broadband

A REVOLUTION IN COMMUNICATION TECHNOLOGY

The Broadband Revolution

THE INTERNET IS EVOLVING TO A MORE INTERACTIVE EXPERIENCE THAT REDEFINES WHAT WE ARE DOING.

Thanks to a transformational Internet technology known as broadband chances are you'll be doing things a lot differently from the way you are now. As the Internet evolves from a narrowband to a broadband marketplace, the convulsions that the Internet has set off will be dwarfed - changing the way companies define themselves and their markets, and the way people live and work. At the center of the transformation is a group of technologies collectively known as broadband that is providing telecommunications, Internet and cable service providers with the tools to redefine their businesses and mine multi-billion dollars of new revenue sources.

Daniel Reingold, managing director of telecommunications research for CreditSuisse First Boston, calls this period the most exciting in the telecommunications industry. "With broadband access to the Internet you have greater than linear traffic growth for the first time in the history of the telecommunications industry. Telecom service traffic growth is no longer constrained to the slow rates of household and economic growth," he explains. "It resets the growth rate of the telecommunications industry."

Broadband's effect is far-reaching, extending beyond the frontiers of the telecommunications industry to accelerate the convergence of telecommunications and cable companies.

"Broadband is redrawing the lines between traditional telecommunications and cable companies," says Stuart Benington, applications engineering manager of Tellabs' Broadband Media Group, a global broadband equipment supplier.

The technology gives cable companies the tools to compete with telecommunications providers - by offering telephone services over coaxial cable - and telecommunications carriers the ability to go head-to-head with cable providers - by offering video and data over telephone wires.

"It's a revolution," says Michael Drapkin, principal of e-commerce consulting firm Drapkin Technology and chair of Columbia University's E-Commerce program. "It allows cable companies to enter the telecommunications business and traditional telecommunications companies to offer new services that provide new revenue opportunities."

Even the terms telecommunications or cable provider no longer seem appropriate. As Jason Few, SBC vice president of Broadband Communications, puts it: "We will not be just an access provider, but the premier data company in the world with a full range of value-added services to meet not only telecommunications needs but also basic communications, entertainment and education needs."

If there were any doubts that "the telephone company" as we know it was dead, Fred Briggs, chief technology officer of WorldCom, reads its obituary: "We're no longer the telephone company but the preeminent communications company enabling e-commerce and e-business."

THE BROADBAND REVOLUTION

At the center of the transformation is broadband - a range of technologies that enable access to the Internet at speeds of up to several megabits a second - 10 to 80 times faster than today's typical dial-up connection. As David Burstein, editor of Fast Network News and DSL Prime, puts it, "It's the third evolution of the Internet - fast enough to watch, not just read."

With the speed and increased bandwidth comes the ability to offer a host of bandwidth-intensive services from online software sales&ldots;to remote backup of computer data&ldots;to video and multi-player gaming.

Broadband comes in different flavors but all have the same result - much faster access time at an affordable cost - currently averaging about $40 a month plus installation with prices expected to fall. The two most common forms of broadband are digital subscriber lines (DSL) where voice and data travel over the same twisted pair copper phone lines that carry telephone calls, and cable which uses the coaxial fiber that carries cable services once it's upgraded for broadband capability. Both have enough bandwidth to work without interrupting telephone, fax or cable TV service. This means that consumers and businesses can have an "always-on" connection with no waiting to get online.

Alternative technologies include fiber, satellite and fixed wireless. Today and over the next few years cable and DSL are expected to predominate on the consumer side with DSL, fiber and fixed wireless competing on the commercial end.

Increasingly broadband has come to refer to not only the access technology but also to the infrastructure technology and equipment necessary for the Internet to handle far greater traffic and bandwidth.

Today broadband is still in the early adopter phase with about 5 percent of the U.S. online population - 2 million - having broadband access. That is expected to swell to 30 percent - or 19.5 million U.S. households - by 2003, according to the market research firm IDC. At the same time, the business side is expected to grow from an estimated current 86,000 DSL and fixed wireless subscribers to about 3 million subscribers in 2003, according to IDC.

"It's not going to happen over night or the next few years. But eventually every household online will be using broadband," says Joe Laszlo, an analyst at Jupiter Communications.

 Mark Winther, group vice president of worldwide telecommunications at the research firm IDC, puts it into perspective. "Broadband is bigger than the Internet because it's always on and incredibly cheap. It's not just a better, faster form of telecommunications but a fundamental change in how users use it and how service providers run their businesses."

Adds Drapkin, "Broadband makes the Internet become part of everyday life and makes e-commerce much more viable. Systems like the Web had always been limited by bandwidth. But once you take away the limitations, there are fundamental shifts in how businesses and consumers use the services."

"We haven't seen anything yet," he continues. "My prediction is that we'll have companies on the scale of an Amazon and Yahoo that will figure out incredible ways of using these big fat pipes."

ENORMOUS POTENTIAL

To get a pipeline into the new revenue sources, a battle is heating up on the Internet access side among cable, telephone and satellite companies to deliver broadband services to personal computers in consumers' homes and to small and medium-sized businesses.

"The potential is enormous," says Tom Morgan, president of SBC Communications Consumer Markets.

"Believe me, we wouldn't spend $6 billion of shareholders' money if we didn't believe that broadband takes us from being the premier telecommunications company to being the premier communications company, providing not only voice but data, technology and content services." SBC is investing $6 billion in bringing broadband to 31 million households and businesses in an initiative it's dubbed Project Pronto. By the end of the year, it expects to reach 18 million households and businesses.

"It's an absolutely exploding market. We had 3,000 customers in 1998," says Richard Wong, vice president of marketing of Covad Communications, the leading nationwide provider of DSL services. "We had 57,000 customers at the end of 1999 and 100,000 as of April 2000. We've doubled in four months and expect this explosive growth to continue." External financial analysts expect Covad to grow to over 300,000 lines by the end of this year, a growth rate of 500 percent."

What's fueling the demand?

On the consumer side, analysts say it's clearly a desire for high-speed, always-on Internet access, and the fact that broadband negates the need for a second phone line.

On the business side, the market is focusing on small to medium-sized businesses and telecommuters in larger firms. Those segments had been locked out of high-speed Internet access because they couldn't afford the typical $1,000 to $2,000 a month charge for T-1 or T-3 leased lines that large companies bought to connect branch offices. Broadband, in comparison, can cost as little as $40 a month plus around $100 for installation and a few companies are even offering broadband service for free with advertisements or waiving installation fees. And until the Internet took off, there was no compelling reason for smaller firms to have broadband access.

NEW INDUSTRY

Analysts say that broadband opens up a whole new industry - remote application servicing. In the future, applications will reside in network hosting centers where application service providers (ASPs) will maintain and manage the software eliminating the costs of managing it internally. "Today you have to buy Microsoft Office and upgrade it every once in a while. Instead you can go to an ASP who will manage and maintain it. It will start off with HR and financial and Word. And for some companies it may include customer management, logistics, CRM and supply chain applications," says Jennifer Pigg, executive vice president of the Yankee Group, a research and consulting firm.

"We haven't begun to scratch the service in terms of applications," adds Klein. "Procurement, purchasing and delivery can be automated. Business needs this to remain competitive." The Yankee Group estimates the application service provider business will be an $11.3 billion market by 2003, according to Harry Tse, Yankee Group vice president.

Indeed, even today service providers can't meet the demand for broadband on the consumer and business sides. "The longer a consumer is on-line, the more interested he is in adopting broadband," says Meredith Rosenberg, director of Consumer Market Convergence at the Yankee Group.

"Broadband is unique because the demand is already there," says Alan Brody, program director of the Silicon Alley iBreakfast Club. "It's a pent-up demand situation that is bringing audiences that have been educated on slow dial-up Internet services to digital TV-like quality."

Broadband is also a compelling hook for telecommunications companies. "Broadband becomes an excellent way for telecommunications companies to retain their most attractive customers," says Charles White, of TNS Telecoms, an international telecommunications market research firm. "Our ReQuest™ survey (quarterly US survey) shows that those consumers expressing the most interest in broadband are the heaviest users of telecom services."

Broadband technology has been around since the mid 1980s. But it is only recently that technological advances, the Internet revolution and increased competition from deregulation have made broadband not only feasible - but inevitable.

BRAVE NEW BROADBAND WORLD

"The single largest factor pushing broadband is the Internet," says Fritz McCormick, a Yankee Group analyst. "The fact that all these functions are now done online is pushing residential and business customers to move their activity online."

Consider what a brave new broadband world will look like:

"Services will come in different strata. First will be productivity, then communications, then entertainment," says McCormick. "We'll see hundreds of different applications for different markets and consumers. They will be limited only by the imagination of people developing them."

On the productivity side. Remote back up of services so PCs can be backed up using a broadband connection. Businesses will be run over the Internet with access to new versions of software through ASPs.

On the communications side. Home gateways with multiple phone lines. People will have four to six lines that can be routed to different rooms in the house. Unified messaging services with e-mail and voice in the same box will be commonplace. Data will be routed through the home networking technology to appliances and TVs. "It won't be so PC-centric," says McCormick.

On the entertainment side. Video on demand, on-line games and live Webcasts will become more of a mass market.

Indeed, the brave new broadband world is already beginning. WorldCom, a $37 billion communications company with operations in more than 65 countries, has plans to deliver broadband services to businesses and consumers, allowing them to access voice, data and video over the same line.

WorldCom estimates that the e-commerce industry will be a $7 trillion opportunity by 2004 and is shifting its focus to help its customers compete in the new e-economy. As part of the shift, WorldCom is building the world's first "local-to-global-to local" broadband network to carry the additional traffic e-commerce is expected to generate. Briggs estimates that the company will grow its backbone traffic as much as 800 percent a year by 2003. "It's the equivalent of adding today's network everyday just to keep up with the growth," says Briggs.

According to Briggs, broadband high-speed connections will drive e-commerce, because it will open a "whole new world" of e-business applications, which today are constrained by limited bandwidth options. He imagines a day in the not-so-distant future, when broadband will deliver telephony, several video channels and high speed Internet access all on a common communications pipe into either the home or business office.

"We're blazing a trail to make our customers even more successful in today's data-centric age," says Briggs.

"By leveraging and building upon our core strengths, we are positioning the company as the communications leader enabling the broadband, data-centric economy," says Briggs.

Already, WorldCom is readying its customers for the digital e-economy with services like Business Class IP, allowing companies to transform their existing private data networks for business-to-business e-commerce with outside trading partners.

"We will not only deliver networking and hosting. We will provide all the e-commerce capabilities... from building Web sites...to portals... to customer service, security and management," says Briggs. "We'll provide whatever our customers need to compete in the fast paced digital world."

To enable high-speed access to the network, WorldCom today delivers DSL access to its customers and soon will introduce MMDS (Multichannel Multipoint Distribution Service) fixed wireless services to extend the reach of its network to underserved, rural markets.

BREAKING THE BOTTLENECK

To date, the Internet has been restricted by two bandwidth bottlenecks. One is that the predominant way people access the Internet - a dial-up connection - can be very slow - like "sucking jello through a straw" is what the consulting company McKinsey & Company has called it. The other is that once connected, traffic often moves too slowly across the Internet.

"Think of the Internet as a super highway surrounded by local access roads," says Wong, "where a tie-up anywhere can slow down the whole system." Speed up both and the "World Wide Wait" becomes a turbo-charged mass medium ripe for communication, entertainment and e-business.

For that reason, Internet access providers, like Covad, SBC and cable companies as well as new Internet distribution companies, are addressing both problems - building the "final mile" access using a range of technologies from fiber to DSL to cable and fixed wireless, and the infrastructure to create broadband networks.

Eliminating the bottlenecks is creating business opportunities not only for the providers but also for equipment manufacturers like Tellabs, a $2.3 billion company that is helping companies like AT&T and Media One and international telecommunications operators build and run their broadband networks more efficiently.

To offer broadband services, both cable and telecommunications companies are upgrading their systems at the customer site and at the head-end where the central equipment resides. Tellabs' CABLESPAN product for example is allowing cable providers to transform their coaxial cables to carry data and voice in addition to video. The market for voice and data over cable networks is expected to grow at a compound annual growth rate of 57 percent, according to Benington, expanding from $1 billion in 2000 to $6 billion in 2004.

Tellabs' CABLESPAN equipment, says Benington, helps cable companies transform one-way cables into two way high-speed data networks. "Think of an FM radio and how you get different frequencies on different channels," says Benington. "That's a good analogy to how our equipment works. Cable companies using our equipment can have one set of frequencies for video, another for voice and another for data. And because it's modular cable providers keep their costs down by adding equipment in stages rather than all at once."

Or as Dave Kowolenko, general manager of voice services for MediaOne, Northeast, part of Media One Group, one of the world's largest broadband cable companies, says, "Tellabs' CABLESPAN platform enables us to provide a bundle of telephony, data and cable TV services to both residential and business customers while cost-effectively managing the growth of our network."

Similarly, outside the US and Canada, Tellabs through its MartisDXX system is enabling public network operators to speed up their existing networks without adding costly infrastructure. "TELLABS is the only provider that has the team and know-how to modernize and integrate our existing network," says Armando Silberman, general manager for COMSTAT, a major Argentinian data transmission supplier.

At the same time broadband companies are partnering with content distributors to host content on their broadband networks and improve the user experience.

"If we put content right into our network it's a much higher quality and more interactive experience," says Few, of SBC.

SATELLITE OVERLAY

Another solution is to tie the Internet into a satellite broadcast network - in effect, bypassing the crowded Internet backbone and assuring high-quality video.

Cidera, Inc., through its proprietary software, is pioneering the use of high-speed satellite technology to deliver broadband content to the edge of the Internet.

Cidera's solution transforms the Internet from a point-to-point system that bogs down when millions of users try to access the site - think Victoria's Secret's runway show - to an infinitely scalable broadcast.

"We're helping enable the Internet to be a true broadcast environment as audio and video really take off," says Cidera's CEO Richard J. Hanna. "There's no way anyone can make a living doing video on demand unless the Internet bottleneck is avoided," says Hanna. The problem, Hanna explains, is that the Internet was not built to efficiently handle large Webcasts or streaming media. "If a thousand people today want a video, 1,000 copies are sent at once over the Internet."

Cidera's approach: "With our system, one copy is sent to satellite and broadcast everywhere," says Hanna.

"It's no more work for the satellite if a thousand or a million users request content," says Hanna. "We've effectively bypassed the Internet."

Not only is Cidera eliminating Internet tie-ups, but it's also improving quality. "Not only do we avoid the backbone and final mile. We also transmit our messages with virtually zero packet loss because of the high-quality of satellite delivery."

The market for delivering broadband-intensive content such as streaming media is expected to soar, growing from virtually zero now to $2.5 billion in 2004, according to Internet Research Group.

"We will help this sector of the Internet explode," says Hanna, whose company's customers include Bell Atlantic, Road Runner, Akamai, Cisco Systems, Inktomi, Intel and other major content providers, aggregators and distributors. By the end of the year Cidera plans to expand beyond North America, opening service in Latin America and Asia.

In addition to helping its customers better manage demand, Cidera allows companies to rent capacity as demand ebbs and peaks.

NEXT GENERATION NETWORKS

To handle high-bandwidth traffic, service providers are building fiber optic networks that have very large capacity. At the same time, however, as network capacity increases, that creates another problem - how to effectively manage all the new traffic spawned by Internet services and data communications. Agilent Technologies, an $8 billion global, diversified technology firm, is helping its customers ensure that the telecommunications infrastructure remains robust enough to meet the needs of the exploding Internet, data and wireless traffic.

Formerly part of Hewlett-Packard but divested to concentrate on its core businesses including data and telecom businesses, Agilent is helping companies design, build, operate, maintain and manage the next generation communications networks and services.

"Agilent's strengths in data communications and telecommunications and its involvement in all aspects of the technology lifecycle are allowing it to help telecommunication companies, manufacturers, ISPs and other service providers meet the skyrocketing demands for bandwidth and create the next-generation global communications infrastructure spanning across wired and wireless worlds," says Donna Bastien, strategic marketing manager for Agilent's Communications Solutions Group.

"Our expertise in all different networks and technologies helps companies bridge between legacy technologies and new broadband technologies," adds Bastien.

Agilent's end-to-end solutions include: test and measurement equipment to build, install and maintain complex telecommunication and IP and wireless networks and services, RF and fiber-optic components for wireless and wire-line data communications and telecommunication networks and systems that monitor the health and improve the reliability of networks.

Agilent has also developed the Photonic Switch, which is an important breakthrough in making the all-optical network a reality," Bastien says. "This first-of-its-kind switch will make it possible for manufacturers and network providers to create the next-generation broadband networks more efficiently and quickly."

Other companies are building their own networks and interconnecting with other networks to avoid the Internet congestion. Enron, a $40 billion natural gas and electric company, is using its market-making expertise, to become a broadband services pioneer. Voted the most innovative company in FORTUNE magazines's latest America's Most Admired Companies™ survey, Enron has built the Enron Intelligent Network, a fiber-optic network optimized to deliver high-bandwidth (broadband) applications. By the end of next year, the Enron Intelligent Network will span the globe, with points of presence across Europe, North America, South America and Asia.

To solve the Internet congestion, it's not enough just to have fat pipes. "You can't just throw bandwidth at the problem," says Joe Hirko, CEO of Enron Broadband Services, a wholly-owned subsidiary of Enron.

"We're solving the two main problems of the Internet - congestion and local loop access," Hirko explains. "By having our own network and interconnecting with other networks, we can avoid the inherent Internet bottlenecks. And by using our distributed computing architecture we can move content to the edges of the network and as close to the end-user as possible, ensuring the best possible quality."

Enron is using its network to serve broadband content - like video, or streaming media - for content providers like Atom Films. All part of its mission, says Hirko, "to transform the Internet experience - from a text-based platform to a new broadband world."

Mika Salmi, founder and CEO of Atom Films notes, "Enron's streaming solution and intelligent network are helping us to set new standards for the delivery of creative entertainment."

Building on its knowledge of trading natural gas and electricity, Enron in May, began trading fiber-optic bandwidth on its online marketplace, EnronOnline, allowing customers to purchase bandwidth capacity when they need it.

"This is a fundamental shift in how people view bandwidth," says Hirko. "Trades closely match demand and can be closed in minutes rather than months. The ability to scale to meet demand and to provision bandwidth on a real-time basis will revolutionize the way broadband assets are used."

BANDWIDTH FOR THE SMALLER COMPANY

To bring high-quality broadband telecommunications service quickly and affordably to the 500 million small to mid-sized US companies, Teligent, Inc. has built its own networks using a combination of wireless and fiber technology.

"We've created the whole space of broadband wireless and clearly are the pioneers," says Hamid Akhavan, Teligent chief technology officer.

Teligent, a $2 billion public-traded company, offers service in 41 top US markets and is working with international partners to provide service in Europe, Asia and Latin America.

Says Akhavan: "No one has deployed more than we have domestically and internationally. We are recognized as the global, fixed wireless leader.

"Before only large businesses could get the type of services we're offering. Now any Teligent building can get Internet access, enhanced video and data as well as local and long distance calling - all from us and at a very economical price."

The advantage to business: "We're facilities-based. We're not reselling Bell telephone company services," says Akhavan. "That means high-quality, very competitive rates and first-class service."

Teligent also prices its services to meet a company's needs. For firms not requiring dedicated service, Teligent offers an economical shared service. And for companies needing higher bandwidth, it sells industrial strength solutions. "We let our customers pick and choose according to their needs," says Akhavan. "We're flexible and scalable."

Eric Makos, founder and CEO of TownCompass.com of Seattle, Washington, which provides information products for handheld information devices, noticed a difference with Teligent immediately. His company has Teligent local, long distance and SmartWave DSL™ service.

"We are very, very happy with Teligent," Makos said. "Teligent has been very responsive, providing a high degree of customer service and savings. We see our relationship with Teligent as a partnership."

NEW BUSINESS MODELS

Beyond speed, broadband fundamentally changes the Internet experience and the economics of the companies.

"It's not just a faster connection," says Drapkin. "The question is what do you do with the faster connection. What new things will come down the road? How will it fundamentally affect society and business?"

Don Peppers, partner of the customer relationship management consulting firm Peppers and Rogers Group, says broadband will make it easier and easier for companies to satisfy customers. "Imagine a call-center staff that is available by video via the Web or a video display of the best way to use a complicated product. Broadband will help transform automation from the sterile format of a machine into a richer, more human interaction."

Similarly, says Wong of Covad "By early 2001 when we complete our enhanced broadband services, we'll be able to offer video on demand, video conferencing, high quality video and interactive gaming."

Broadband also is breaking down the lines separating content and service providers, says Paul Palumbo, senior research analyst with Digital Broadcast and Programming/Webcast Track. "These two sides of the revenue model (content and service) need each other to be successful," says Palumbo.

VORACIOUS DEMAND FOR BANDWIDTH

Although much has been made of the impact of broadband on the consumer, the technology is at least as powerful for the business world.

It makes business incredibly efficient, says "William B. Klein, equity analyst and director of Wasserstein Parella, an investment banking firm. "Procurement, purchasing and delivery can be automated in a real time sense. Businesses need the bandwidth, the hosting facilities and the applications that broadband makes possible. They need this to remain competitive."

What also makes broadband such a powerful technology is that it is filling a limitless desire for bandwidth.

"Business customers have a voracious appetite for bandwidth," says Roderick S. Beck, research analyst of investment bank Broadmark Capital. He notes that businesses spent almost $10 billion dollars in broadband access in 1998 in the form of local private lines. "The demand for affordable bandwidth access is exploding due to the wealth of new applications such as fast access to corporate LANs, fast Internet access, Web hosting, and corporate Intranets," says Beck.

To indicate just how fierce the demand for bandwidth is, Klein notes that it has a price elasticity greater than two to one. "For every dollar bandwidth declines on a per unit basis, demand goes up twice as much," Klein says.

Those who seek the opportunities inherent in the broadband revolution have the opportunity to change the economics of their business.

"It's opening up new revenue possibilities, says Few. "On the retail side, we can provide services and applications on top of our DSL service. For example, we can sell a distributor of movies the ability to house his content locally on our network. For the end user, we can offer videos on a pay per view basis.

"And for business customers, we can realize revenue through wholesale relationships and partnerships to distribute content to customers. We can realize revenue on both ends of the transaction - from the supplier to the end user."

For Covad, it's changing the company's business model from high-speed access to broadband solutions company. "We were founded to provide high speed Internet access and networking through DSL but through the future we will provide a whole suite of services on top of that," says Wong. To do that, Covad has formed alliances with a number of cutting edge content companies and will be introducing content hosting services - a new revenue source - that improves the end-user experience.

The arrival of ever faster broadband service will continue to breakdown divisions among telecommunications, Internet service and cable providers - and in the process transform the way people live and work. The enormous changes and opportunities are only beginning to be felt. If anything is a sure bet, "It's that we haven't seen anything yet."

Produced by: Joyce Reynolds
Written by: Wendy Marx
Designed by: SJI Associates, NYC
Consultant: Paul Palumbo
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