Report: ISPs Threatened By Cable Access Encroachment

International technologies research firm Arthur D. Little Inc. reported
Tuesday that online consumers’ prefer cable access when it comes to meeting
their need for speed.

The research firm reported consumer
demand for cable modem Internet access is favored by a 2:1 margin over
Digital Subscriber Line services.

The cable-connected consumer preference means that many subscribers are
ready to drop their telephone-based ISP in search of high-speed data
transfer rates. Data collection for the Arthur D. Little High-Speed
Internet Access Study was completed in mid-October through a national
telephone survey sampling of 1,004 adults.

Even though ISPs and major telecommunications carriers have accelerated
deployment of DSL services nationwide, cable access providers report that
more than one million cable modems have been installed in U.S. homes to date.

Cable modem access may be a small fraction of the 38 million households
currently utilizing online services, but the ADL study found that up to 28
percent of U.S. households would subscribe to a cable access provider and
pay $40 a month for the service. As much as 43 percent of these households
would drop their current dial-up ISP, rather than pay $10 extra to be able
to continue to use their ISP’s e-mail service, chat, and other features in
addition to cable access.

According to the report, 21 percent of the same households would pay the
extra fee to connect through both their cable and dial-up access providers.
As much as 25 percent of those surveyed, said they would postpone adoption
of the cable modem service in order to wait for their ISP to offer a
comparable high-speed Internet access solution.

Peter D. Shapiro, Little’s communications practice principal, said ISPs
fight to win open access to cable networks may be a life-or-death battle.

“America Online Inc. and other dial-up ISPs are
vulnerable. This is a major reason they are campaigning around the country
and in Washington to win direct access to cable modem users,” Shapiro said.

“AOL (AOL)
demands the same access to cable subscribers as the cable companies’ own
Internet Service Providers. Cable operators respond that AOL is just trying
to protect its dominant position as the largest ISP.”

According to Shapiro, both cable operators and AOL will benefit from a
negotiated settlement to cable network access.

“There are good business reasons for both AOL and cable companies to
resolve their differences now. AOL faces a steady
erosion of their subscriber base as this process goes forward. On the cable
side, they need to build their infrastructure to be the network of choice.”

Shapiro said a deal between AOL and cable providers would improve
the marketability of cable modem access.

“Both cable operators and AOL will benefit from a negotiated settlement.
This will improve the ability of cable operators to persuade millions of
AOL subscribers that cable modems are their preferred technology for
high-speed Internet access,” Dr. Shapiro said.

“Meanwhile, AOL and the other ISPs will be able to offer cable modems to
their subscribers who otherwise may be unwilling to wait pending resolution
of regulatory and legal battles,” he added.

Stuart Lipoff, Little’s managing director of communications practice, said
growth in online music, software, and video distribution would generate
even greater levels of demand for high-speed Internet access.

“Today, most people use the Internet to retrieve text and graphics
information but the demand for high-speed connections will grow
tremendously as multimedia Internet services become more prevalent,” Lipoff
said. “One of the byproducts of this change will be serious undermining of
the current business models of companies that today physically distribute
intangible goods such as music, videos, and software.”

The ADL study asked the likely users of high-speed Internet access which
service they would prefer, cable or high-speed access through telephone
connections. More than 56 percent of the respondents selected cable modems
as their preferred form of high-speed Internet access.

Only 26 percent of the survey participants said they preferred Digital
Subscriber Line services as high-speed connection to the Internet.

Shapiro said that cable modem access has a short-term data rate
advantage over DSL service, but that ISPs could adjust their marketing
strategies to overcome the disadvantage.

“Cable’s data rate advantage helps explain the current subscriber
preference, but it is only temporary. Telephone
companies could provide a higher ADSL data rate for a more competitive
price when they decide to become more aggressive in the consumer market.
Today the telephone companies’ digital subscriber line services are being
marketed primarily to business users, which leaves the consumer market
relatively open for cable.”

Lipoff noted that In principle, DSL services from telephone companies
should be very competitive.

“Many telephone lines are in such poor condition that they cannot support
this service, telephone companies are still moving slowly to make ADSL
available to consumers, and there continues to be a lack of a well-accepted
single technical standard for ADSL,” Lipoff said. “Also, ADSL is being left
out of moves by cable operators and by the direct broadcast satellite (DBS)
services to integrate Internet access with their TV set-top boxes to
enhance their subscribers’ TV-viewing experience,” he added.

According to Shapiro, word-of-mouth would ultimately determine which
flavor of broadband access would win the hearts and minds of online consumers.

“As cable modems become better known, and word of mouth becomes more
pervasive concerning their benefits and their cost-competitiveness, we
expect to see a decline of consumer sensitivity to cable modem cost and
growing dissatisfaction with the limitations of current dial-up services,”
Dr. Shapiro said.

According to report released by Cahners In-Stat Group last week,
worldwide ADSL modem shipments grew 74 percent in the third quarter of this
year. ADSL modems are expected to top 1.2 million shipments worldwide by
the end of the year.

Cahners further reports that cable modems posted stable growth of 27
percent still out-shipping ADSL modems by two to one. The market share
shift is indicative of the trend that supports the ADL consumer preference
report.

Marshall Cohen, AOL senior vice president of brand development, said that
AOL is confident that they are giving consumers what they want.

“Clearly we have a strategy for high-speed service upgrades for AOL
members,” Cohen said. “We ask our subscribers how satisfied they are with
AOL’s speed and 90 percent of our members say it’s fine.”

“We are in a perfect position to offer speed upgrades to our members and we
will do so through multiple platforms of high-speed access when our
customers want it,” Cohen said.

Cohen added that he questioned the validity of the ADL data. He said that
the study was conducted as a “caravan” survey, in that a research firm can
contract for a couple of questions to tag onto a random phone survey. Cohen
added that he was not saying that the data was wrong, just that leading
questions produced tarnished results.

“According to the report, about one thousand people were contacted and 28
percent said yes in response to, ‘How likely are you to get high-speed,
always-on, unlimited cable modem service for $40 a month.’ That means
roughly 280 people said yes to this leading question and anyone who said
no, did not answer any other questions,” Cohen said.

“Of those 280 respondents that said yes, the next question was designed to
determine their high-speed preference for access,” Cohen continued.

“When asked, ‘Do you prefer a cable modem which lets you stay online and
keep your phone free for calls or a high-speed telephone service that
allows not as fast of access but let’s you keep your current service
provider.’ of course you’re going to get a high response for cable modem
access,” Cohen declared, “it’s a leading question.”

Cohen said the results of the study were about as poignant as asking
someone if they like ice cream.

“If you ask someone do you like ice cream because it’s sweet, it tastes
good and they like it. The results still won’t tell you why people buy ice
cream,” Cohen said.

Further market shifts may be accelerated by the the Federal Communication Commission order last
week to alleviate second-line fee barriers to DSL services. The Advanced
Services Third Report and Order
permits competitive carriers to obtain
access to the high-frequency portion of the local loop from the incumbent
carriers.

The policy shift enables competitive carriers to provide DSL services over the same telephone lines simultaneously used by incumbents to provide basic telephone service, a technique referred to as “line sharing.”

The decision makes it less expensive for ISPs and consumers to procure the broadband services and compete and would remove a significant price disadvantage for DSL services.

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