Broadband—in search of a business model: carriers everywhere are getting mixed results in the broadband challenge. Sure, they're racking up DSL subs—but the rivers of premium video, games, sport and other content have yet to flow - Cover Story

Telecom Asia, Oct, 2002 by Robert Clark

It's nearly a decade since the Time Warner group announced a bold plan to begin paving the "information superhighway" with a video-on-demand pilot for some lucky consumers in Orlando, Florida. The trial, when it finally got underway in December 1994, consisted of VOD movies and home shopping services to 4,000 homes, with equipment supplied by Silicon Graphics and Scientific Atlanta.

Yet though the Full Service Network (FSN) was the first serious attempt to bring broadband into the home, today it is no more than a footnote. Viewers were turned off by the clunky interface and limited content, and it was dogged by technical problems, delays and cost over-runs. By the time it was shuttered in January 1997, it had run up a tab of about $100 million.

The trial concept was also unexpectedly sideswiped by the sudden popularity of a new way of chewing up bandwidth called "the Internet" (to prove that it "got" the Internet, Time Warner eventually hooked up with AOL ...)

Since then, of course, the Net has become the core driver of growth in bandwidth demand, yet today carriers are feeling their way forward in creating a viable business delivering data and services across a high-speed broadband link.

For the last ten years the impulse driving telcos has been the deep fear of commoditization--that in future they will be reduced from cyberspace toll-keepers to mere trucks on the superhighway hauling mountains of raw bits. With rapidly shrinking long distance margins and flat growth in local, the imperative to build new business is even more critical.

The bad news for telcos is that today they are overwhelmingly still bit carriers. The good news is; it's not necessarily a bad business to be in--at least for the next two or three years. And even though carriers have had limited success in building a business beyond connectivity, they are still in the race.

The industry has learnt a good deal since Orlando. That project was based on the popular convergence concept of the day, that TV and telecoms were becoming one, and that video content alone would create the broadband business. In Asia, PCCW learnt the same hard lesson with a VOD-over-ADSL service that eventually shut down in July this year.

"There was a lot of talk about content driving the business. People understand [now] that that was not sufficient. You need to get a mass of people using broadband to create the opportunity for applications to be developed," says Omar Khalifa, general manager of broadband online services for Telstra.

In other words, broadband is really an eco-system comprising the regulatory environment, network, service providers, applications and users. Each component needs the others.

Official prodding

For now, the focus is an building the basic network platform for broadband. Adoption rates are still fairly low and virtually all the revenue comes from connectivity. in most cases, connectivity means DSL and almost always ADSL, the high-speed digitization of a copper line enabling a maximum downstream speed of 2Mbps--6 Mbps.

Broadband take-up is highest in Asia--and the world--in Korea, with an estimated 9.86 million connections, almost half the region's total of 20.9 million (see chart).

Korea's broadband development is the result of a good deal of official prodding and incentives. This year, for example, the government has extended low cost loans of $121 million to support further broadband network expansion.

Yet for all the expense and effort, the return seems minimal for the carriers themselves. While they've profited comfortably from the buildout phase, they haven't positioned themselves strongly in the application or value-added services segments.

Market leader KT Corp--indeed, the world's largest broadband carrier--has 47% market share and an EBITDA margin of 40%, yet according to merchant bank UBS Warburg, its ARPU is forecast to increase from $38.20 this year to $40.40 in 2005.

As a recent Yankee Group report observes, it is time for the Koreans to "invigorate the broadband market with a new set of broadband experiences".

It's an important example, because for carriers all over the world, the strategy is similar: first rollout broadband on a mass scale, targeting consumer markets. The next phase is to bundle new premium services--video, games, entertainment and other apps. Yet for now, most carriers are entrenched in phase one.

"Yes, the telcos are struggling because they have invested so much in the infrastructure," notes Pacific Internet CEO Tan Tong Hal. "Not just the access, but also the content as one of the drivers. Big telcos are not used to driving content."

The problem is that by serving consumers on a mass rollout carriers are aiming for where the margins are the thinnest, if not an actual loss leader. Shanghai Telecom, for example, is offering "all-you-can-eat" broadband service for a bargain-basement price of RMB80 ($8.90) a month. More typically, PCCW offers a standard rate of HK$298 ($38.20) a month.

Equilibrium

Competition is also driving prices down. "While the growth is in data, the profit margin is very low and practically non-existent in some services because of excess capacity and competition," observes To Chee Eng, Gartner Dataquest principal telecom and Internet analyst. "In contrast, there's still profit in telephony. It will take a while before carriers find an equilibrium."