Publish date:

Broadband Wars Updated: Part 2

The cable providers' unfair advantage promises to be rough on the phone companies.

You've probably guessed what underlies the regional bell operating companies', or RBOCs', reluctance to compete seriously in delivering affordable, high-bandwidth connections to American homes.

Simply put, the phone companies are terrified of becoming successful at delivering broadband access via asymmetric digital subscriber line, or ADSL, technology. As discussed here

yesterday, they perceive themselves as functioning in a world of (artificially) limited bandwidth, doling it out to those who really need it. And mainly, to those who want to pay for it.

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For years, the telcos have wallowed in the fat revenue from their fast, more-or-less-one-megabit-per-second T1 lines. These fast, dedicated lines -- relics of "circuit-switched thinking," in the words of one telco exec -- typically cost $1,600 to $2,000 a month, though that's fallen to nearer $1,000 per month now in some areas.

So the idea of giving people access at that speed -- or, horror of horrors, even

faster

speeds -- for a lousy 40 or 50 bucks a month scares the heck out of them.

Repeat after me: "The telcos are fundamentally committed to defending their T1 rate cards. The telcos are ..."

And so they respond with ADSL rate cards which make absolutely no sense and are designed to discourage their customers from buying the high-speed connections those customers want.

In effect, the telcos want to do anything

but

supply you with fast, affordable Net connections.

New Day A'Dawning

Assuming the telcos ever get over their fear of flying, they face another problem.

It's not going to be terribly difficult to jack up the speed of cable-modem connections to, maybe, 8 mbps. Not a trivial job, mind you, but the technology supports that speed. Today you and I aren't demanding that, so the cable providers figure what the heck, give us 700 kilobit per second and we'll shut up. And we do.

But when we start asking for more, it's within reach.

Theoretically, telcos can do the same thing, since ADSL is demonstrably capable of delivering 8-mbps connections. The telcos are in a trap of their own making -- having installed the hardware, marketed the products and made assertions to state utility regulators. It's not going to be quick or easy for them to kick into much faster speeds, having effectively said 256 kbps or 384 kbps are really all those pesky residential customers need.

And having wired their customers' homes for that kind of service.

The guy hiding in the closet here is video-on-demand, or VOD. I'm not alone in thinking that the ability to dial up any movie you want to see, anytime, then watching that movie on your Net-connected TV, is going to be immensely appealing.

"Big,

very

big," as

William Shatner

keeps telling us in those irritating

priceline.com

(PCLN)

commercials.

VOD replaces all the ugliness of the

Blockbuster

(BBI) - Get Report

experience -- having to drive to the video store, find a place to park, search the shelves, find that your first choice is out of stock, pick something you really don't want to see, drive home, stick the video-cassette in the slot, watch the damned movie, take the videocassette out, remember to take it with you in the car the next morning, drive back to the 'Buster, park, get out and drop it in the slot.

Instead, a few beeps or clicks on the remote-control device for your Net-connection TV set-top box, and you're watching

Blade Runner

,

Mary Poppins

TheStreet Recommends

or

Birth of a Nation

. (Or for that matter,

Debbie Does Dallas

.) For about the same $4 price as a one-night video rental.

Sound good? Yeah, I thought so.

However, and with a capital "H": VOD requires somewhere between 6 and 7 mbps, depending on who you talk to, and where standards go. There's no hope for delivering good-looking full-screen movies -- at a quality level that truly replaces VHS videocassettes, let alone DVDs -- at lower-bandwidth speeds.

And the minute the masses start catching on that they can avoid the Blockbuster trip, they're going to start demanding truly broadband connections to their homes.

The cable people will be more or less ready -- or at least can be, without a massive capital investment requiring a complete rebuild of their systems.

The telcos and their compromised, dumbed-down ADSL lines, running for entirely artificial reasons at speeds slower than they should, are going to be in a terrible position.

And that, my friends, is why I'm convinced that, medium-term, the cable-modem flavor of broadband to the home is going to win out over DSL.

Not

because

AOL

(AOL)

and

Time Warner

(TWX)

jumped into bed in early 2000.

Just Asking

However, let's take this journey a little further.

  • Say that the proposed AOL Time Warner is a smart company, with smart executives. (It sure is now.)
  • Say that it sees itself, and presents itself to investors and the public, as a media company, not an ISP or magazine publisher or movie-maker or record company, nor even as an old-fashioned cable company. (It already is.)
  • Say that it wants to make a huge grab for fast-access business and all the benefits that fall out of a dominant position in fast-access. (You doubt this?)
  • Say that it has lots of cool movies of its own, from Warner and Turner. (Just look at their catalogue.)

Now just offhand, do you think that kind of company would be in a good position to kick-start the video-on-demand business, by doing the necessary upgrading of its

Time-Warner Cable

division's head-ends and infrastructure? And selling VOD aggressively to its huge cable-customer base?

And in the process, knocking the poor, stumbling telcos out of the broadband ring?

Right.

So it turns out that the AOL-TWX deal does portend big things for the growth of the broadband market in America. Just not in the way some of the 10-minute seers were saying Monday morning.

Monday morning,

Jim Cramer

said

here that AOL Time Warner has become the company you've got to own. Amen.

And God save the competition.

Talk about it

Don't forget to post your questions on the AOL-Time Warner merger on our

message boards. I'll be there again at 5 p.m. EST today to answer questions on the deal.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.