Bottleneck Breakers- Why Broadband is expensive to carriers and slow to be embraced

Efforts to wire U.S. homes with high-speed Internet access are foundering. New technology could help–if only carriers could afford
to buy it.

The much-hyped broadband revolution is sputtering. Five years after cable companies and
local phone giants first teased consumers with dreams of fat pipes beaming the Internet,
on-demand video and hundreds of other services into the home, just 15% of U.S.
households have signed up. In Canada, with lower prices and higher data speeds, usage is
almost twice as high.

By Scott Woolley Yahoo News

A big reason for the disappointment: price. The U.S. has among the highest broadband
prices in the industrialized world. Even in notoriously expensive Japan, monthly bills are
about $28 compared with $40 to $50 in the U.S. Two years ago Americans were using
broadband at 20 times the rate of the Japanese; now Japan has pulled virtually even and
soon will eclipse us.

American broadband subscriptions tripled in 2000, doubled last year and will grow 58% this
year. Many in the industry worry high prices will soon bring that declining growth rate to a screeching halt. "We’ve done extensive
surveys, and 70% of our users won’t switch [to broadband] if it costs them more than $30," says Garry Betty, chief executive of
EarthLink (NasdaqNM:ELNK – News) , which provides Internet access to 5 million customers; only 12% of them get high-speed
service and must pay at least $40 a month. He says cheaper rates or more compelling applications are desperately needed:
"Something is going to have to give for us to see greater than a 25% penetration rate."

But hope looms: New technology is steadily lowering costs and boosting online speeds. Such advances could let people
download movies straight from Hollywood studios, swap TV shows and use other sexy features that could stimulate a burst of
demand. In cable, several systems now are testing cheap technology that could grant at least a tenfold increase in transmission
speeds. In the phone business, which uses a broadband scheme known as DSL (digital subscriber line), the cost of new
equipment has fallen by 60% to 70%, says Armando Geday, chief executive of GlobespanVirata (NasdaqNM:GSPN – News) , a
major DSL chipmaker. "The average DSL speeds in three years will be four to five times faster than today, if not greater," he adds.

Unfortunately, these impressive strides may come at exactly the wrong time. Phone and cable companies invested heavily in
first-generation broadband gear. Now, chastened by slow sign-ups, overwhelmed by debt and besieged by low stock prices, they
have slashed capital spending. Total capital spending at cable operators and telcos will come in at $51 billion this year, down 45%
from last year.

Smaller competitors that spent billions on early broadband rollouts, such as NorthPoint Communications and Rhythms
NetConnections, are mostly out of business or too cash-strapped to upgrade. An uncertain regulatory climate adds to an
unwillingness to invest. Yet for consumers to see the benefits of newer broadband technology, telecom companies first have to
install it.

The lagging pace of broadband adoption has thrown the Silicon Valley set into a tizzy. High-tech executives argue that America’s
poky connections are the single biggest hurdle to a technology industry recovery. TechNet , a major Valley lobbying group, has
made its top priority the vision of "true broadband"–100 megabits per second, compared with de facto speeds of less than 1
megabit currently–for all Americans, arguing that it would create 1.2 million jobs. (Some 437,000 jobs have been lost in tech in the
past 18 months.)

Better broadband might even rescue the devastated telecom industry. Long-distance fiber networks are flooded with excess
capacity. If new broadband technologies begin sopping up that glut, the industry could get back on its feet.

At current speeds, cable and telco broadband simply aren’t fast enough to carry much more than herky-jerky video in a
credit-card-size window on a PC screen. New gear can zap data fast enough to transmit a full-fledged, TV-quality picture. Some
new chips can deliver content at 8 megabits per second; one firm even claims to have achieved the 100-megabit level, all the
speed you’d ever need.

DSL gear makers are hitting new highs in transmission speeds by squeezing substantially more data into phone lines and
sending them over longer distances. Centillium Communications (NasdaqNM:CTLM – News) says its latest chips can manage
8-plus megabits per second over distances of more than a mile–enough to supply video to several TV sets in a home, plus phone
calls and Web pages, all at once. It is ideal for dense cities, and the technology is in trial deployments.

New gear is extending DSL’s reach to suburban and rural customers who were out of range a year or two ago. Right now phone
companies are limited to serving customers near their central network offices. In the past year Centillium increased the range of it
longest DSL service from 3.4 miles to 3.9 miles. A 15% increase may not sound like much, but it allows each phone site to serve
32% more customers. (Each increase in range leads to a geometrically larger increase in coverage area.)

And the cost of providing DSL has been plummeting–savings that ultimately will be passed on to consumers. Three years ago
Globespan supplied phone companies with DSL "line cards" that could connect a single customer to its main network. This year
its cards can hook up 24 lines. It has also cut the size and power requirements for DSL equipment, dramatically lowering carriers’
operating costs.

Early on DSL was plagued by consumer horror stories of incessant delays and surly service. Those flaws have largely been fixed,
as companies such as BroadJump have released software to automate the installation process. At SBC Communications
(NYSE:SBC – News) 95% of customers now install DSL themselves, sparing SBC from having to "roll the trucks" and send out a
technician at a cost of several hundred dollars per home. Also, modem prices keep falling. The price of Covad’s (OTC
BB:COVD.OB – News) DSL modem dropped from $199 last year to $150 today and will ultimately fall to $100.

Some DSL sellers, which were hiking prices from $40 to $50 a month a year ago, now are heading the other way. EarthLink is
testing a limited-speed DSL service in two cities, for $30 a month. Covad offers a discount that works out to $34 a month for the
first year of service.

Cable systems are sprucing up, too, and could pry even greater capacity out of their fatter pipes. New gear from Westford,
Mass.-based Narad Networks , which shipped its first product in September, says it can get an astounding 100 megabits per
second to cable customers. Its approachuses a trick similar to DSL to increase data speeds. Cable wires carry video using
relatively low frequency signals; Narad devised faster chips and smarter software that tease out a separate layer of high frequency
signals traveling along the same wire. It is akin to cars speeding along an express lane elevated over a highway.

Narad says its scheme requires cable systems to rip out gear known as amplifiers and taps but adds only 4% to network costs.
That is critical, especially now, says cofounder Andrew Chapman. "There’s no cable company anywhere in the world that wants to
rip out their infrastructure again."

U.S. and foreign cable companies will offer faster connections to business customers first. Chapman says a few companies have
inquired about using the technology to reach consumers, but all are waiting until prices fall.

Breakthroughs also are coming in "broadband wireless," which bypasses old wires altogether. Hotel guests in Maui and residents
of small towns in Iowa and Montana now get broadband links over the air. Dallas-based Clearwire Technologies plans to offer
service in a major city in January, using gear from IPWireless. Sprint is likely to follow suit. "We can now deliver very cheap, very
high-speed data, and whether you’re fixed or mobile, it doesn’t matter," says Chris G. Gilbert, chief executive of IPWireless .

Promising, but the destruction in telecom is a big obstacle. WorldCom owns rights to airwaves for fixed-wireless access, and in
the summer it set a major deal with IPWireless to start installing the technology. Six hours after that press release went out,
WorldCom (Other OTC:WCOEQ.PK – News) announced it was filing for bankruptcy protection. The rollout is on indefinite hold.

The High-Speed Lowdown

DSL

LIMITS:Pricey; can’t reach many homes; too slow for video.

BREAKTHROUGH:Cheap new gear allows much higher speeds in cities, greater access to suburbs.

PROGNOSIS:Monthly bills headed below $40 as economics improve. Speeds will steadily rise.

Cable modems

LIMITS:Expensive; speed fluctuates depending on how many neighbors are logged on.

BREAKTHROUGH: New gear can boost capacity tenfold, far faster than latest DSL technology.

PROGNOSIS: Superfast access likely to hit businesses first. Consumer markets several years away.

Fixed wireless

LIMITS: Connections used to require expensive, ugly rooftop antennas.

BREAKTHROUGH: Indoor, easy-to-install antennas are now available.

PROGNOSIS: Finally a viable competitor, but main players WorldCom and Sprint-tight on cash-aren’t likely to fund a nationwide
rollout.

Satellite access

LIMITS: Requires an outdoor dish. Upload speeds are terrible. Time lags occur as signal bounces off satellite.

BREAKTHROUGH: System from Broadcom out this September can send 84 megabits per second downstream, though that
capacity will be shared by dozens of users.

PROGNOSIS: Likely to remain primarily a rural-only solution, though it will be an increasingly effective one.

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