Excited About Broadband

Does the acceleration in subscriber growth for cable modem Internet service signal an end to the tech sector's bloodbath?
Joseph RadiganJanuary 12, 2001

(Editor’s note: “Today in Technology,” will cover the corporate technology market on a daily basis. Comments are welcome. Send E- Mails to [email protected])

It could be the three-day rally in tech stocks, but suddenly there’s a reason to feel bullish about the tech sector. It’s about time.

While the bear market has fooled us with short- lived rallies before, this time around, there’s tangible evidence that this latest rebound might stick around. If stocks sustain a recovery, then a turnaround in venture and junk bond funding can’t be far behind. Eventually the new liquidity will kick the economic cycle back into gear. The actual turnaround may be months away, but for once, there’s some good news to talk about.

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For example, cable modem Internet access provider Excite At Home announced this week that its subscriber base more than doubled to 2.95 million users in 2000. The news confirmed the dramatic growth in the market for high- speed Internet access.

Granted, Excite At Home’s good news was overshadowed by lackluster advertising growth from Yahoo!, a slowdown in new cell phone sales at Motorola and Nokia, and yet another earnings warning – – this one from Hewlett- Packard. But high-speed access is one of the New Economy’s building blocks, and the sooner it grows to a mass market, the better for everybody.

Keep in mind that At Home’s subscriber growth fell a hair short of the 3 million subscriber forecast the company issued as recently as October. Still, most of the reaction to At Home’s news was favorable. There’ve been precious few silver linings peeking out of the cloudy tech sector, but the rapid growth in cable modem Internet access is one of them.

The irony is that stocks in the high-speed Internet access business, while they performed well, generally didn’t gain as much ground as some of the market’s headier tech sectors during the wild bull run of ’99. Now, while the tech sector as a whole is struggling, the broadband sector may finally be on the right track.

One of the noteworthy aspects of At Home’s growth is that it’s occurring while the other side of the broadband coin, digital subscriber line service, has run into problems. Several DSL providers, like Covad Communications and NorthPoint Communications, had relied heavily on partnerships with the regional Bells and local ISPs, but that strategy gave them little control over service quality. The problems contributed to a downturn in the fortunes for several DSL providers.

Although the small DSL firms are faltering, the regional Bells are now aggressively promoting their high-speed service, and the customer base for DSL should soon pick up.

But until DSL really gains some traction, the bigger story is in cable modem access, which enjoys some advantages over DSL, says Drake Johnstone, a first vice president with Davenport & Co. in Richmond, Va. One is that video services will be among the multimedia applications driving demand for high-speed Internet service.

Johnstone says that since consumers are already used to getting a video service from their cable company, there’s a natural migration path.

Moreover, cable modems will share the same line as cable TV, and that will make it easier for cable companies to bundle services, offer a range of prices and services, and appeal to a broader cross section of the residential market.

Consumers can also save a few bucks by unplugging the second phone line dedicated to dial-up Internet access once their cable connection goes live.

How quickly will this growth occur? Patti Reali, a senior analyst with the market research firm Dataquest, says the number of broadband subscribers should overtake the standard dial-up access customer base by 2005. The dramatic growth in 2000 points directly toward this eventuality.

Reali says worldwide shipments of high-speed access connections totaled 2.8 million units in 1999. In 2000, the North American market alone grew to shipments of 1 million units per quarter, and At Home had roughly 60 percent of this market.

“What you have is much more awareness of broadband as a product,” she says. “The providers are starting to get the mechanics right.”

We can only hope we’re seeing the start of something real.