Complex Battle Brewing Over Consumer Internet Access

The first round of the battle to connect consumers to the Internet is over, and America Online has won. With almost 10 million subscribers, AOL is an order of magnitude larger than its nearest rivals, and has made a mockery of those who predicted its demise.

The dynamics of Round 2, however, are very different.

Over the next few years, AOL, independent Internet service providers, cable television companies and telephone companies--each wielding a different menu of technologies and services--will be aiming not only to win customers, but to define the very nature of the Internet for consumers.

I won’t even try to pick winners and losers here. The Internet access business has defied all common-sense analysis so far, and in assessing the prospects of the various players I see potentially fatal problems everywhere. Instead, I’ll point out a few key forces to keep an eye on.

First, let’s consider quickly the recent past. The World Wide Web began to drive the growth of the consumer Internet around 1994, and a few established companies and a host of tiny start-ups offered to connect people to the network at what became a consensus price of $20 a month.

This soon presented AOL and other so-called online services--notably CompuServe and the Microsoft Network--with a major problem. Online services had their own content and their own proprietary technologies that were separate from the Internet, and they charged by the minute. How could they compete? And how could anyone make money at $20 a month?

Many expected AOL to crash and burn. Similarly, independent Internet access providers--especially small ones--seemed to have no future. The telephone companies appeared destined to dominate the communications part of the business.

Instead, AOL grew at a furious pace, Pasadena start-up Earthlink Network and a few other independents roared ahead, and the phone companies acted as if the Internet was a mildly interesting sideline rather than an important business--and got the results they deserved.

There are two crucial lessons in these unexpected developments, and both are important to what happens next. First, never underestimate the importance of marketing. Receiving enough free AOL disks to shingle your house might be annoying, but it has worked: Relentless, almost recklessly expensive marketing has been the centerpiece of the company’s growth.

It’s also true that AOL--despite middling technical support, periods of horrendous network performance and exploitative billing practices--has done an excellent job of creating a service that’s accessible, comfortable and efficient for a wide range of customers.

Which points to the second lesson: focus. Earthlink is perhaps the best example here: Offering what’s essentially a commodity product, the company has combined good marketing, good service, good capital-raising ability and good attention to strategic detail to grow from nothing to almost 400,000 subscribers in just three years.

SBC Internet services, by contrast, has 230,000 customers in its seven-state region. AT&T; has more than 900,000, though some are getting it as a free trial.

So, what about Round 2? The big new kids on the block are the cable companies, who promise to use their fat wires to offer Internet access at speeds as much as 100 times faster then the 28.8 Kbps that’s now standard over telephone lines.

This promise has been out there for a while, but there’s some evidence that it’s now starting to become a reality. Cable companies around the country--including Cox, Media One, Charter and others in Southern California--are rolling out cable modem services.

Microsoft has declared its belief in cable with a big investment in Comcast, and is in talks with other cable operators. And @Home Networks, controlled by a consortium of big cable firms, is loudly declaring that its elaborate Internet-over-cable system will own the future.

The cable proposition really has several components. On the simplest level, it’s just very high speed Internet access. But @Home and other cable networks will also be developing new services that take advantage of the higher speeds.

At the same time, the cable industry is trying to develop standards for a new kind of set-top box that will combine cable modem capabilities with digital compression, which in turn would increase the number of video channels.

The family TV--or the computer--could thus become a portal for traditional TV, Internet access and a vast range of entertainment and information services that haven’t been invented yet. (Microsoft is investing because it wants to control the software that controls that box.)

This sounds great. The problem is that it requires enormous investments by the cable operators to upgrade their plants and buy new equipment.

Dean Gilbert, senior vice president and general manager of @Home, talks as if his company has already won the war, and Wall Street--which currently values @Home at an incredible $2.2 billion--seems to agree. Yet @Home currently has a paltry 26,000 subscribers. In 1995, it predicted it would have more than a million by now.

For all the brave talk, no cable operator has yet shown that cable modem service--in which many users share the cable capacity, rather then having their own telephone link--will work well on a mass scale without extraordinary investment.

These questions, combined with the relatively high cost to consumers--around $40 to $50 a month--the cable industry’s poor service record, and my general philosophy that new infrastructure usually emerges more slowly than expected leads me to believe that cable won’t dominate anything for some time to come.

Independent Internet providers, not surprisingly, tend to agree. And so do the telephone companies, which have their own high-bandwidth solution for regular telephone lines known as xDSL. GTE, for example, has launched an xDSL trial in Marina del Rey that gives some apartment dwellers Net connections more than 30 times faster then a regular modem. Other telephone companies have similar efforts underway.

If we look at all this in the context of the lessons above, a few conclusions emerge.

For starters, no one is going to win on better technology alone. Cable modems, xDSL and even emerging satellite and wireless systems will all play a role in providing high-speed access. Lots of people--especially the large number who won’t want to pay a premium--will still rely on dial-up lines, where the new generation of 56-Kbps modems are already speeding things up.

Focus will be remain critical. The telephone companies, with all their competing agendas, have yet to show they understand just how different the Internet arena is from their traditional business. As Mike McQuary, president of Atlanta-based independent access provider Mindspring puts it, the telephone companies don’t know quite what to do with the “two tattoos and a nose ring” employees who are at the heart of many Internet enterprises.

Lack of focus is what led to the Microsoft Network’s spectacular failure to become a major player: the software giant has too many other priorities. AOL, which is moving aggressively in the content area, will have to remain wary of distraction.

Good marketing will be fundamental. The appeal of multi-megabit access speed might seem obvious to people in the business, but the 80% or so of the population that isn’t online still needs to be shown why they need the Net at all. And e-mail, the Net’s true “killer application,” works just fine at 28.8.

Clearly, the telephone companies have a potential marketing edge, since they can sell into their existing phone customer base. The cable companies, facing the threat of satellite TV, rightly see the Internet as a major opportunity and already have high-capacity wires in many homes. But as the results of Internet access’ first round show, even obvious advantages don’t always translate into success.

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Jonathan Weber (jonathan.weber@latimes.com) is editor of The Cutting Edge.