Broadband about-face

[Steven]

Broadband about-face

By Jim Hu

Staff Writer, CNET News.com

December 24, 2002, 1:30 PM PT

The broadband race is making a U-turn, as Web giants such as Yahoo, MSN and now America Online head away from plans to run their own high-speed Net access services and move toward branding partnerships with the Baby Bells and other heavyweights.

Faced with economic realities and the reluctance of broadband providers to rent their pipes for "leased-line" services, AOL and the others hope to package their Internet products as a front end for services essentially run by their network partners.

AOL announced plans along those lines last month, falling in behind Yahoo and MSN. And analysts believe such partnerships are likely to take off next year, fueling growth in an industry that has faced high costs for both providers and consumers.

"I think 2003 has to be the year that a large portion of the transition to getting more broadband access for Internet services comes forward," said David Joyce, an analyst at Guzman & Company.

The impact on consumers is not yet entirely clear, but analysts said the trend bodes ill for dial-up Internet providers such as AOL and Microsoft's MSN, which may wind up playing only an auxiliary role in the coming broadband world.

The deals, however, offer ISPs and Web portals immediate entr?e into an arena that has been jealously guarded by the cable networks and the Baby Bells, which together own most of the physical lines needed to put high-speed Net connections into homes. In return, network owners gain marketing muscle to push costly services that have grown more slowly than many had hoped.

The branding strategy marks a significant reversal for ISPs such as AOL and MSN, which in the past have entertained plans to compete head-to-head with the cable companies and Baby Bells on leased lines. While such deals have not been ruled out, EarthLink remains the last major ISP in the United States that is aggressively pursuing leased-line deals for now.

AOL, Microsoft and Yahoo all declined to comment for this report. EarthLink was not available for comment.

Factors contributing to the shift include concerns among ISPs that broadband is too expensive and will cut into margins, along with equal fears that they will get left behind if they don't get into the high-speed access game quickly.

But analysts said the branding strategy carries risks as well, as broadband providers on the back end push their own competing services, or use their muscle to broker deals granting them control of key aspects of relationships with customers, such as billing and customer service.

"The question becomes how do AOL, Microsoft and Yahoo prove their value to the plant providers?" said Kaufman Bros. analyst Paul Kim, referring to cable and DSL companies. "It's only at the option of the plant providers to get these deals done."

High-speed stakes

AOL, MSN and Yahoo have all amassed millions of users--some who pay them to access the Internet and others who view their content and use their services. For users, the promise of broadband is the chance to not only surf the Web faster but also access snazzier content, such as movie clips and digitally streamed songs.

More importantly, the Big Three need to establish a broadband presence because more of their users are living in a high-speed world. This fact is especially critical for AOL, which over the years has grabbed 35 million dial-up subscribers but has watched subscriber growth stagnate.

The hard part is catching these users as they upgrade to broadband in their homes. Not only must AOL and the others convince their dial-up users that upgrading to broadband is desirable, the companies must also convince users that upgrading through their current provider is the best option.

That can be a struggle, for a number of reasons. First, none of the major ISPs offers broadband services in all markets in the United States, complicating their marketing efforts. Secondly, the ISPs must compete with local cable and phone companies that offer similar services, frequently at cheaper rates. At $54.95 a month, AOL's standard broadband service is among the most expensive in the industry.

Throw in resistance among cable and DSL operators to share networks with rivals, and the switch to branding rather than leased-line service makes even more sense, according to analysts.

"The reality is (the cable companies) invested billions of dollars in network upgrades, and they're determined to retain most of the economics," said Matthew Harrigan, an analyst at Janco Partners.

Shaking hands

All of these factors have contributed to a change in the broadband plans of some Net companies. Instead of trying to convince broadband companies to sell them access, Internet companies have conceded the notion of complete control and have instead begun pursuing partnerships.

For these partnerships, AOL, MSN and Yahoo have developed, or are developing, high-speed versions that they can package with broadband access. Yahoo was the first one to step into this business when it struck a deal with SBC Communications in November, 2001 to produce a cobranded service. Launched in September, SBC subscribers get a customized Web browser powered by Yahoo as part of their DSL package. Yahoo will also allow people to choose from a handful of its premium services.

MSN has also taken steps in a similar direction through its partnerships with Baby Bells Verizon and Qwest, and cable company Charter Communications. Like Yahoo, MSN will offer a "unique" version of its online service customized for broadband, although details of its broadband service remain murky.

These deals have set the stage for AOL's own transformation. Earlier this month, AOL said it would back away from buying wholesale cable or DSL access. Instead, it would follow Yahoo's and MSN's lead and develop a high-speed version that will be sold with broadband providers or as a standalone product.

This standalone version, AOL's "Bring Your Own Access" offering, charges $14.95 a month for people to access AOL from a different Internet provider. MSN and Yahoo executives have also signaled their willingness to sell BYOA versions as well.

Judging from statements by Internet executives, these deals may be just around the corner. Richard Parsons, AOL Time Warner's chief executive, said the company may announce deals with cable providers by the end of the year. Yahoo CEO Terry Semel expressed confidence that DSL and cable companies will want to strike deals to carry services from all major Internet companies.

Excite@Home complex

Whether this rhetoric produces any tangible results remains to be seen. Despite longstanding beliefs that partnerships are on the horizon, only few broadband companies have embraced the partnership idea. Internet companies need multiple deals because broadband providers are limited by the geographic markets where they exist.

So far, it's been slow going. Yahoo has not announced any new broadband deals despite assurances that its SBC product will attract more partnerships. The CEO of AOL Time Warner's AOL division, Jonathan Miller, also said he plans to focus on cable deals because of Yahoo's and MSN's momentum with SBC, Verizon and Qwest.

The hardest nut to crack will be the cable companies, according to analysts. Unlike telephone companies, cable companies are not required by law to rent their pipes to third-party providers. More significantly, cable companies learned painful lessons during the dot-com boom when Excite@Home, the high-speed ISP supported by the biggest players in the cable industry, floundered last year. Since then, the appetite for a content partner has diminished.

"The lesson (from Excite@Home) is that they can do that themselves," said Mike Paxton, cable analyst at market research firm In-Stat/MDR. Cable companies "can provide the front-end services that they thought before needed specialized expertise."

In other words, broadband companies do not need Internet companies to expand their offerings. Broadband providers are witnessing growth in their services without the need of a splashy home page branded by AOL, Yahoo or MSN. Furthermore, Internet companies have only begun to offer a reason for people to turn to their broadband versions, since their current incarnations are not vastly different from their narrowband products.

"As long as people are happy with cable modem product, there's no reason economically for cable operators to bring in a third party," said Janco's Harrigan.

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