Copyright 1999 by The Insight Research Corporation. All rights reserved.
1.1 The Issues
While crashing costs in the long distance market can readily be attributed to the impact the new wavelength division multiplexing technology is having on operational efficiencies and network capacity constraints, in the local market the agent of change is far more fundamental. When we set out to examine the investment the local phone companies are making in broadband access, our working assumption was that we are on the cusp of a shift in usage patterns from voice to data. After more than 100 years of experience with voice, our telecommunications networks are about to deliver access to a sensory environment infinitely more rich and satisfying.
This report analyzes the key trends in the rapidly emerging demand for consumer broadband services, which we define as network access speeds over 200 Kbit/s. These services are provided by:
° local and multichannel multipoint distribution systems (LMDS and MMDS),
° integrated services digital network (ISDN)
° digital subscriber line (DSL), and
° cable modem, and
As the twin forces of deregulation and competition push the domestic public switched telephone network (PSTN) forward into a new era of broadband service, these same forces will make the future for the traditional phone companies far from certain. For example, in wireline local access, the telcos experience with ISDN has long been recognized as an unmitigated failure as high prices, technical incompatibility issues, and poor marketing kept consumer penetration rates extremely low after more than 20 years of effort. Today incumbent telcos are slowly rolling out another wideband access scheme targeted to consumers. Though we believe it unlikely they will make the same mistakes in pricing, selling, and promoting the new higher-speed DSL service, the slightest misstep will give the cable TV (CATV) industry the opportunity to gain a powerful advantage in the residential broadband market.
With ISDN, the telcos never really understood what they had and how they could take advantage of it, but the growth of the Internet is going to force them to change. Telcos now understand that with the advent of tough competition from the large cable operators, they will have only one chance to gain these additional subscribers. In the coming months, more and more telcos will begin converting their various types of DSL (xDSL) trials into commercial operations. The Universal ADSL Working Group (UAWG) said they expected to begin mass marketing their modems in time for the 1998 holiday season; however, they seem to be missing the window. Although there will always be next year for DSL, a significant portion of the potential high-speed access population will be closed to DSL if the product is delayed.
Cable TV multiple system operator (MSO) Cox Communications has found that once consumers buy a cable modem from Cox or an electronic store they are far less likely to churn and move to another wireline Internet provider, such as a phone company. Consumers who purchase access this year and pay $250-$300 for a cable modem are not likely to pay an additional $300 for a DSL modem any time soon.
The competitive turbulence apparent in wireline local access is just one aspect of an increasingly uncertain competitive picture. The main question is whether the local phone companies are ready to change their ways and become much more nimble in developing and marketing products. Phone companies are going to have to learn some lessons from the computer and consumer electronic companies. For the telcos to succeed, new products are going to have to be rolled out quickly while long-term projects have to be conceived, designed, implemented, and deliver a payoff in less than five years. The future of the phone companies depends on shorter term projects with life cycles akin to the extremely short life cycles of PCs.
The crux of this report lies in the increasing importance of broadband services as a fraction of the revenue from all the communications services to the household. Figure I-1 shows that while consumer narrowband and cable television growth rates are forecast at four to nine percent, high-speed data access is forecast to grow at an almost 100 percent rate, albeit from a very low initial volume.
Figure I-1 US Consumer Telecommunications and CATV Services Revenue, 1998-2003 ($Billions)
Figure I-2 compares the growth of the different consumer broadband services over the forecast period. The total broadband service growth rates are almost four times the rates forecast for narrowband services. Thus, it is obvious that service providers will need to deploy broadband services to sustain their future growth.
Figure I-2 US Consumer Telecom Revenue from Various Broadband Technologies, 1998-2003 ($Billions)
It is Insights belief that as we move beyond the forecast period (2005 and beyond), high-speed access growth rates will grow at an even more rapid pace than today. We base this expectation on a number of findings derived from our proprietary survey of 1,018 respondents. Among our findings were:
Males are consistently more likely to own or expect to own this set of existing and emerging broadband technologies than females.
The responses we gathered suggest that high-speed access providers, whether a cable TV company or telephone company, are going to capture at least 14 percent of households, or about 14 million unit sales by the end of 1999.
At current prices of $250-$350 per unit, we are estimating an achievable two year sales total of $4.2 billion in high-speed modem equipment sales alone.
While race and ethnicity had an impact on interest and ownership of existing technologies, our survey did not find any discernible interest in future technology based upon race or ethnic background. No racial or ethnic differences were apparent for interest in high-speed phone lines, Internet usage, or satellite TV.
Yet as we demonstrate in Insights study entitled Telecommunications Marketing to Ethnic Groups, changing US demographic patterns are going to make marketing in the new century increasingly a question of delivering messages in a multi-ethnic cross-cultural environment.
Not surprisingly, we see interest increase as income rises for such emerging technologies as high-speed phone lines, satellite TV, and Internet usage.
The $35K+ households is something of a dividing line; households with this income level show a consistently significant higher level of interest over households with lower incomes.
Interestingly, income level has no impact on interest in interactive TV. Perhaps it is because the benefit and interest in interactivity is satisfied in some households by the Internet while the desire for entertainment is satisfied by regular or cable TV. If the interactive capability were to be improved to allow for simultaneous entertainment and information usage, then perhaps consumer preference would change dramatically.
This report is based on primary and secondary research. Primary research consisted of Insights proprietary survey of consumers as well as interviews of regulators, industry players, and academicians. The survey was weighed to account for probabilities of random selection of an individual male or female household member and balanced by age, sex, race, and education to match key US Census demographic variables. Secondary research was based on information from various regulators and government agencies, searches of news and periodical articles from newspapers and trade journals, Internet searches, research reports from a number of securities houses, and attendance at conferences and trade shows.
Insights five-year technology and expenditure forecasts were made using a macroeconomic model based on sets of equations that correlate various aspects of the economy with each other. The projections are consistent with the long-term macro model developed by Data Resources, Inc. The US Department of Labors Bureau of Labor Statistics uses their model to develop projections for industries and occupations. We have given added emphasis to the growth of the communications industry and to consumers willingness to spend for faster Internet access.
The information contained in this report is as accurate and complete as possible, based on available data. Because of the multitude of varying technologies and businesses within the online and Internet marketplace, some advances and omissions are likely. Moreover, the companies profiled in this report neither officially endorse, nor necessarily agree with, the contents of this report.
1.3 Scope of Report
This report examines in depth the driving forces and growth of the demand for broadband access among US consumers. Chapter II provides an introduction as well as an overview of some of the more critical drivers influencing the trend toward broadband access and of the three types of technologies featured in this report: xDSL, cable modems, and wireless and satellite.
Chapter III discusses the types of applications driving the demand for broadband access and estimates the size of different segments of the consumer broadband market. The Internet and the World Wide Web (WWW) are the most important drivers for this market, and therefore some of the applications discussed in this report are the innovative and new Internet-based applications that are spurring consumers to purchase broadband access. Some typical applications are:
home shopping or electronic commerce,
gaming (including gambling over the Internet), and
adult entertainment (one of the most sought after commodities).
Chapter IV discusses the three distribution media. Wireline, wireless, and satellite technologies use different methods for delivering broadband access to the consumer. Wireline technology includes all the types of technology that rely on physical wires to deliver broadband access; for example, telephone or cable wires. Wireless technology includes the differing types of wireless approaches, such as MMDS and LMDS, to deliver data and video. Discussion of satellite distribution is restricted to direct broadcasting satellites (DBS) and does not include the older C-band satellites. The description of each technology also includes a full explanation of the costs and benefits of using them to deliver broadband access. The status of market trials or commercial operations is reported on.
Chapter V analyzes the service providers for broadband access and profiles the key industry players and vendors. The report summarizes the strategies and growth prospects for all the key players and discusses how the companies plan to implement their strategies. The vendor profiles analyze the companys standing and describes their consumer broadband products.
Chapter VI discusses the results of a proprietary survey conducted in March, 1998 of over 1,000 randomly selected consumers. Their responses are analyzed by demographic criteria to show consumer interest in various types of broadband applications and requirements.
Chapter VII forecasts the growth of broadband access in three distribution media: xDSL, cable modems, and wireless and satellite. The overall growth of broadband access is provided from 1998 to 2003. Forecasts include growth in the number of Internet access subscribers, growth by type of connection, market share of competing technologies, and consumer expenditures for online access. The chapter also includes a discussion of the future of the broadband market and what telcos must do to compete successfully in this radically changing environment.
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