Cable's New ISP Pitch: Slow It Down

There are only so many buyers for Indy-class race cars that can hit 200 mph in the straightaway. But if you want to sell a cheaper vehicle that can go 80 on the highway, you'll find a lot more takers.

That, roughly speaking, is the opportunity the cable industry faces as it tries to build the market for high-speed cable modems. Operators of cable systems are signing up plenty of customers, at $40 or $50 a month, for access to the Internet over their systems at speeds of up to 50 times faster than dial-up modems.

But within the next year the industry will start getting a sense of how many more people it could sign up for Internet service if it offered, at prices between $20 and $40 a month, download speeds slower than today's fastest cable connections but appreciably faster than dial-up connections.

If the service comes on line as fast as proponents hope, it could be good news for the cable companies and their customers -- but bad news for the local phone companies that compete to provide Internet access to homes across the country, analysts say.

What's Up, Docsis?

Enabling the service will be a new set of cable modems coming into the market -- equipment known by the industry terminology Docsis 1.1, to distinguish it from an earlier Docsis 1.0 standard.

The new equipment -- which cable equipment manufacturers have started making, a cable industry consortium has begun approving and cable operators have been installing -- will make it easier for operators to offer customers different tiers of high-speed service, or different speeds for different prices. In addition, the new Docsis standard will enable cable operators to offer Internet-type telephony over their systems, likely increasing the number of operators offering telephone service over cable, and building competition in the local market.

With companies such as AT&T's (T Quote) AT&T Broadband unit, Cox Communications (COX Quote) and Adelphia Communications (ADLAC Quote) having expressed interest in exploring tiered data service, that could mean a larger-than-expected market for data in cable, though at prices lower than the rich high-speed data connection fees cable operators are already collecting.

And that, in turn, could mean tougher competition for local phone companies, which could find it hard to offer high-speed DSL connections at comparable prices.

As Tiers Go By

In a research report last month, J.P. Morgan telco analyst Marc Crossman wrote that both revenue and margins at local phone companies are threatened by the possibility of tiered data pricing in the cable industry, challenging telcos' assumptions that their margins from DSL service will remain constant. Crossman, who covers firms such as Verizon(VZ Quote) and SBC Communications (SBC Quote), did not, however, change his ratings on the companies he follows.

But judging from the cable industry's past record, promises of new technology are no guarantee the new tier-enabling Docsis 1.1 modems could be rolled out in major quantities this year and next, as optimists hope. For example, the industry has perennially forecast that widespread interactive television was just around the corner. But a quarter-century or so after the pioneering QUBE system debuted in Columbus, Ohio, most Americans are still waiting.

In the meantime, analysts are trying to sort out the impact of the Docsis 1.1 rollout, given all the other variables -- such as Adelphia's nagging debt problems -- in the cable industry. It promises to be an anxious period for investors on both sides of the cable-phone divide.