Hurry Up And Wait

American Demographics, June 1, 2003 by Pamela Paul

Byline: PAMELA PAUL

Over the next year, every four seconds somebody in this country will decide it's time to ante up an extra $25 to $35 a month to convert to a high-speed broadband service from a dial-up connection to the Internet. At this rate, about half the households in the U.S. will be broadband subscribers in the next five years - a total of more than 70 million homes.

In 2003, broadband will surpass the 20-million user mark, having already won over early adopters several years ago. Newton, Mass.-based research firm Strategy Analytics, Inc. estimates that 27 percent of homes with Internet access in the U.S. go online through broadband connections. The firm expects that figure to increase by 40 percent in 2003, and to exceed 70 percent by 2008.

Consumers are clearly willing to subsidize their craving for high-speed Internet access. Still, those interested in advertising through broadband services face a business challenge that looms large despite the impressive rate of consumer adoption. At issue is the question of whether broadband and its content will make it as a dual advertising and subscription revenue-driven medium - or dwell in the pay-as-you-play mode of premium channels and video on demand. Despite sign-ups reaching heights that traditionally signal advertising base legitimacy, some industry experts and advertisers remain skeptical.

For advertisers and their agencies, broadband's impressive penetration may not be enough. Granted, the significant number of subscribers should lead to more marketing messages cropping up within broadband programming and services. Combined with the alluring demographics of broadband users and their propensity to go online more often and to stay online for longer periods than average Web surfers, advertising on the Internet could become more feasible. However, those same user characteristics may mean broadband advertising will suffer from the dilemma plaguing the dial-up world: Subscribers hooked on speed may continue to click past online ads rather than click through them. According to estimates from Kagan World Media, U.S. advertising billings for the Internet as a whole - dial-up and broadband - are projected at $6.7 billion for 2003 and should reach $11 billion in 2008. (Note: Kagan World Media and American Demographics are both owned by Primedia, Inc.) Compare those investment levels with an estimated $16.2 billion for advertising on cable TV this year and an expected $29.8 billion by 2008. As proponents suggest, broadband could follow the revenue model of cable television, with its combination of subscription and ad revenue, or it may fall into the same unprofitable trap that doomed so many dot-coms.

"There will probably be some form of advertising on broadband," says Lee Rainey, director of the Pew Internet & American Life Project. "But users will also have to pay for content somehow. What will be interesting is if broadband providers get into the content subscription market, and how advertising will fit into that."

Supporters of broadband advertising, many of whom are vested in selling in broadband as a marketing medium, believe a significant level of advertising will come. "Twenty million is considered to be the critical benchmark in terms of audience, and that's where broadband is," says Dan Schwartz, vice president of worldwide advertising sales for Seattle-based Real Networks, which provides software and content geared toward broadband users. "We've now got the critical mass where it becomes an interesting proposition for advertisers."

The expansion of broadband from the early adopter to the mass market will likely transform the way in which the service is used. While most current subscribers cite speed as their primary motive for signing on, industry experts expect that as broadband becomes more of a mass phenomenon, content will become increasingly important to users - a development that could alter the landscape for online advertisers. "Right now, most people convert because of speed," says James Penhune, an analyst at Strategy Analytics. "Going into 2005, in order to attract more consumers, companies will have to offer something more than just a faster version of the Internet - better audio and video, premium services. The market will be driven by content rather than just speed."

Yet a workable future for broadband's advertiser validation hinges on program content and values that are still in the embryonic stage. As a first step, content providers are pointing to new broadband-only features. On ESPN.com, broadbanders can now view excerpts of interviews and game highlights through a high-quality video system, ESPN Motion, that's supported by advertising and category-exclusive sponsorships. In March, ABC News announced plans to offer a 24-hour news service, ABC News Live, exclusively for broadband users. It will be made available to those who already pay $4.95 per month for ABC News on Demand broadband service, and to subscribers of RealOne SuperPass, a service of Real Networks, whose entertainment and information video content is available to broadband users for a $9.95 monthly subscription fee. (Real Networks' range of broadband packages currently attracts more than 900,000 paying subscribers.) Yahoo! launched a subscription service, Yahoo! Platinum, for $9.95 per month, and a $16.95 service, SportsPak, to deliver audio and video content online. Such services Webcast content ranging from episodes of Survivor to the latest financial updates.