Annual Convention News Releases Area Codes Job Board About the MTA Events Publications Committees MTA Membership Safety / Training Annual Reports Contact Us Member Resources HOME PAGE |
MINNESOTA TELEPHONE ASSOCIATION Telecommunications Guide November 2001
Slow Growth for Broadband
Service If you build it, they will come. That was the message experts sent the telecommunications industry as they touted the benefits of a highly digital future. These “seers” wanted the industry to quickly install broadband – the capacity to simultaneously handle voice, data, high-speed always-on Internet and more – because they thought consumers would quickly embrace any technology that would revolutionize the way they lived. From downloading movies faster to interactive TV to control of intelligent kitchen appliances and household electric, heating and security systems, broadband was the wave of the future. DSL (Digital Subscriber Line), a type of broadband that takes advantage of the copper phone wire already in existence, was part of the package. Broadband is still the future, but its introduction has been slowed by a cooler economy. With losses mounting and profits years away at best, investors pulled the plug on broadband-only companies building costly networks to compete against cable operators and the RBOCs (Regional Bell Operating Companies, which include Qwest Communications). The initial “bear hug” consumers gave broadband has turned into more of a vigorous handshake. Companies that invested a lot in DSL (or that continue to invest) have not recouped their costs – and may not without outside help. And despite the changed landscape, which may change further due to the tragic terrorist attack our nation recently suffered, concerns about an urban/rural digital divide remain. These concerns include two questions: Should everyone have access to broadband/DSL? If so, do we need to subsidize the process?
Broadband Today Almost 9 million American households have broadband, with the cable industry claiming about 5.5 million and DSL more than 3 million. With numbers up from 5 million households a year ago, how can growth be a problem? First, all three national DSL providers are in bankruptcy, with two out of business. Sign-up rates are down substantially and aren’t likely to rebound quickly because rates have been raised. DSL now costs two to three times as much as basic dial-up Internet. With less competition and a slowing economy, broadband providers, including the regional Bells, can be reluctant to go “all out” installing more of a very expensive technology. While independent DSL providers complain that RBOCs impeded competition (there have been lawsuits), the RBOCs say the DSL companies started with a flawed idea. Regardless of who is right, fewer customers want faster broadband Internet connections. The main reason may be the lack of a “killer app” like the recently demised Napster. “A significant number of people say they would take broadband if the price is right,” says Jack Geller, president of the Center for Rural Policy and Development at Minnesota State University, Mankato. “But most people don’t do anything that requires broadband speed. Broadband is faster and more convenient, but people get the same things without it. I think applications like Napster will push broadband, but right now the consumer seems to be saying: ‘Give me something I need to have broadband for.’ The applications that will revolutionize the way we use the Internet just aren’t here yet.”
The Urban/Rural Digital Divide? There are still digital information “divides,” especially between lower-income and higher-income people, but a recent study conducted for Geller’s center shows the urban/rural divide is at least partly a myth. The study of 1,200 rural state households found that 60 percent own a computer and 47 percent have Internet access, with 94 percent of the latter group regularly using e-mail. These results compare favorably to a report by the National Telecommunications Information Administration, a division of the U.S. Department of Commerce, that shows 57 percent of Minnesota households have a home computer (51 percent nationally) and 43 percent have Internet service (41.5 percent nationally). The numbers for the two studies may not be exactly comparable (Internet numbers change rapidly these days), but Geller believes they show that rural Minnesotans are “not lagging in the digital backwaters.” At the very least, he notes, the findings “clearly tell us that rural Minnesotans are adopting digital technology at rates equal to or above the national average.”
The Broadband Divide There may not be an urban/rural divide on the Internet. Such a divide exists when it comes to broadband access, however. The state’s Department of Administration reports that 60 percent of metro households have DSL access and 75 percent could utilize high-speed cable modems (if they bought the service). In greater Minnesota, the number for both is about 5 percent. One reason is that Qwest, by far the largest incumbent local exchange carrier (ILEC) in the state, concentrates its DSL investment where it gets the most return – in metro areas. “Some local ILECs have relatively small service areas,” Geller explains, “so they know exactly where to invest their money. For Qwest, with 14 states to invest in, the whole decision-making process – whether to invest and where – is very different.” The other factor that may limit broadband largely to cities in the near future is the low “take” or sign-up rate by rural customers when broadband is available. Statewide, that rate is between 2 and 4 percent. In fact, the study by Geller’s center found that the majority of rural Minnesota households were happy with their dial-up Internet service and not interested in its high-speed cousin. Dean Mohs, COO of diversiCOM Melrose Telephone Company, cites his ILEC as a prime example of this situation. About 70 percent of the customers in his 570-square mile, central Minnesota service area have access to DSL, but only 1 percent have signed up for it, mostly businesses. “I’m sure a lot lower price would help, but our company has a fairly large investment in DSL and we have to maintain some kind of return because we’re privately held. If I knock $15 to $20 off per month, I’d probably get more volume, but would I still make a profit?” Mohs says that a lot of people “asked us about high-speed service” when there wasn’t any, but few took it when the service was offered. “I guess people don’t see the value of more speed at a higher price,” Mohs said. DiversiCOM’s competitive operations in Sauk Center are doing better (a take rate of 10 percent), but broadband service costs less because the company installed all-new hybrid coaxial cable in a limited geographic area. Federated Telephone Cooperative of Chokio is another example of a company going forward with broadband technology on ‘faith.’ Everybody will have access by 2005, but General Manager Kevin Beyer says his co-op needs a 20 percent broadband take rate five years after it’s installed in an area to break even. So far, customers are signing up at about a 2 percent rate. In one town, three of 400 households have signed up. “In metro areas, there’s enough demand on the business side to fuel competition for broadband,” explains Geller. “In rural areas, there’s a need to aggregate demand so providers have the incentive to provide the service. You need residential, commercial, industrial and maybe government in rural areas or there isn’t enough to justify broadband.”
What’s Ahead for the Universal Service Fund? Despite low demand for DSL and other digital and next-generation technologies, rural telcos continue to deploy broadband in the hope that Congress will provide the grants, loans and tax credits needed to offset high costs. Rural telcos also want broadband supported through the Universal Service Fund, originally set up so everyone had access to telephones. The federal 1996 Telecommunications Act mandates that rural customers have access to advanced services reasonably comparable to those offered in urban areas, which is why the Federal-State Joint Board on Universal Service has asked whether advanced or high-speed offerings should be “core” services eligible for universal service support. Geller views broadband as essential for business – worthy of government help. “We beat companies over the head that they must risk their capital with a reasonable chance revenues won’t support costs,” he says. “If broadband is in the state’s interest – which I believe it is because it would tell the world we’re open for business – then the public has to share the risk because we know it won’t be profitable in rural areas now. No doubt we won’t need to share the risk later, but we need to drive the process now. How that risk-sharing is done and how much the public risks are policy decisions. There are many ways to skin a cat. I say let’s start doing it.” More information about the Minnesota Telephone Association can be found online at www.mnta.org.
(c) 2001 Minnesota Telephone Association
Published by the Minnesota Telephone Association (MTA) |