Worst of 2007: Broadband Expansion

Unless it’s on a list of the richest countries in the world, being ranked 20^th for anything is no reason for smiles, pride or flag waving. Yet that’s the ranking that — despite numerous IPTV deployment efforts and cable system expansions and upgrades — the U.S. of A earned last year in terms of broadband penetration, down three slots from 2005, according to Point Topic Ltd.

Broad stretches of rural America, as well as low-income urban areas, still are without broadband Internet connections, with limited hope for change as well-intentioned efforts to spread the wealth are not faring well and experts are calling for big change.

“We desperately need something completely different than we’ve seen before, programs that encourage and drive broadband deployment, but that aren’t something that comes out of the FCC,” says Tom Wheeler, managing director of funding firm Core Capital Partners, who has driven public policy with telecom and cable trade associations.

All that’s needed, Wheeler contends, is for broadband components to be included in all major government initiatives whether for sweeping health care, transportation or manufacturing undertakings.

He points to Presidential Candidate Hillary Clinton’s plan to save taxpayers some $50 billion-plus as the result of using electronic medical records, claiming other contenders have similar plans. Carrying electronic records isn’t much good without broadband, he adds.

“All such initiatives need to include some kind of broadband component where we talk about the projects requiring broadband links to be a part,” says Wheeler, the former longtime head of CTIA. “That’s the way we create a market for broadband access and get our deployment ranking up.”

Plans such as those from the U.S. Department of Agriculture (USDA) that aim to help drive broadband deployment in rural areas by providing funding are flawed, says one user, and lack the business component of which Wheeler speaks.

“The process is just so long and arduous that we actually had to take out loans to cover our expenses while we waited, and waited, for our application to be approved by the USDA,” says an executive at one rural telco who asked not to be named. “I’d strongly recommend anyone else using this program plan on doing the same.”

The USDA’s program provides funding to qualified rural telcos that can help drive broadband deployment by financing network creation, enhancement and extension.

“These telcos, more often than not, need to seek independent financing which, in this market, is not that easy,” says Teresa Mastrangelo, principal analyst at BroadbandTrends.com. “The requirements for USDA RUS loans are stringent, and the process is very long.”

By contrast, Tier 1 telcos — AT&T Inc. and Verizon Communications Inc. among them — are throwing billions of dollars at triple-play efforts while rival cablecos — most notably Comcast Corp. — are throwing technology (DOCSIS 3.0) at their respective broadband network upgrade and expansion undertakings. Lesser known operators are doing the same, but on a far smaller scale.

While these efforts can boost broadband speeds, they’re not necessarily aimed at bringing big pipes to those without fast connections.

“They have to go after existing broadband customers because we’ll be at 85 percent to 88 percent penetration by year-end, and there aren’t that many greenfields to go after,” says Mastrangelo. “Their reasons for triple play are to get current customers to buy more, raise their ARPU and keep them in place.”

And while satellite operators claim they can cover the additional 12 percent to 15 percent not reached by landline links, the take-rate is limited. “Technically, they could say they have the rest, but when you take a closer look you see that the services are very expensive, and you get relatively little.”

For its part, AT&T announced plans in June to spend an additional $1.4 billion this year, primarily for new builds, to deliver its U-verse triple-play package. As part of the spending boost, the telco awarded a GPON equipment contract to Ericsson.

One industry expert says the United States is no longer a broadband laggard in terms of homes passed and subscribers, but does agree the country is way behind when it comes to average speed per connection, claiming there are a number of reasons for the discrepancy.

Perhaps the largest reason is that the United States is one of the only countries where cable broadband links outpace DSL subscriptions, according to Jeff Heynen, directing analysts for broadband and IPTV at Infonetics Research. “And, since cable broadband is a shared technology, there haven’t really been technical options for expanding bandwidth beyond wideband channel bonding.”

Why has this channel bonding just hit the market? Heynen explains that it’s because cablecos previously had no incentive to spend the capital to expand bandwidth until the RBOCs got the relief they sought in 2004, which allowed them to lay fiber without having to share it.

“When that relief occurred, the cablecos expedited their RFI/P process for wideband technology,” says Heynen. So, three years later, why haven’t we seen more pre-DOCSIS 3.0 wideband deployments in response to the growth rate of Verizon’s FTTH-based FiOS offering?

Heynen claims nearly 45 percent of new FiOS subscribers previously were Verizon DSL users, adding that the telco claims the number is 22 percent, which he thinks is low.

“The cablecos are engaged in a two-front war, against satellite operators or HD video content and against RBOCs for broadband subscribers,” says Heynen. “The current capex emphasis is on expanding HD content by moving it over to switched digital video, with upgrades to support channel bonding finishing second.”

Wideband drops a little lower on the cableco capex priority list because of what Heynen calls “the tremendous pull-through effect of digital voice.” Comcast and Time Warner Cable continue to add new digital voice subscribers at a record pace. “Chances are that a significant percentage of these subscribers won’t switch back to the phone company even if they offer fiber, since they just switched to the cablecos’ service.” As a result, there’s less need to upgrade to wideband.

While Verizon has been making strides with FiOS, AT&T just now is starting to see healthy subscriber growth for its U-verse video-driven bundle, with weekly subscriber additions hitting the 8,000-10,000 mark recently, contended Heynen in mid-October.

Earlier this year, at the Cable Show in May, Comcast CEO Brian Roberts showed attendees a demo emphasizing the speed of DOCSIS 3.0, with his CTO Steve Craddock explaining that the cableco took key steps once it and others learned of the proposed timetables for DOCSIS 3.0 products to be available in 2009-2010.

But Comcast and its fellow cablecos wanted those higher-speed products — that will support 160mbps downstream and 120mbps upstream — sooner. Comcast execs, along with Texas Instruments, led the charge to form a “DOCSIS 3.0 rapid acceleration team” in hopes of moving that time frame to 2008-2009. Comcast declined to provide an update on the high-profile project, with a spokesperson claiming, “there’s nothing new to report.”

In the meantime, aggressive IPTV innovators, including SureWest Communications of Roseville, Calif., and Houston-based Optical Entertainment Network Inc., have launched super-high-speed Internet access services boasting symmetric speeds of at least 50mbps. They’re designed in part to lure the gaming demographic to their customer base as Internet games climb and followers realize they need high bandwidth to wipe out latency problems.

While the results may not always be positive, regulatory rulings can shape or reshape markets. The FCC’s decision that video franchising be decided by states, instead of on a town-by-town basis, has made it easier for the likes of AT&T and Verizon to roll out their TV services; but it remains to be seen whether these deployments actually bring broadband to those that don’t already have it.

These newer entrants, and the FCC ruling itself, both have been hit for allowing telcos to cherry-pick markets, deploying first in high-income areas, with little or no mention of addressing unserved or underserved markets with broadband.

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