For Broadband, Content is King

ARS reports that the average monthly fees for cable broadband and ADSL rose to $44.95 and $51.82, respectively, in March 2002. Interestingly, the percentage of providers offering promotions increased in the first quarter of 2002 over the fourth quarter of 2001.

by Mark Kersey ARS Inc. Broadband & Cable Industry Analyst [June 12, 2002]

The first quarter of 2002 was the worst on record for the broadband industry in terms of subscriber growth. Fresh off a stellar fourth quarter that saw nearly 15 percent industry-wide growth to 12 million U.S. subscribers, first quarter growth slowed to just over 12 percent. A total of 13.5 million Americans have now signed up for broadband service, representing an adoption rate of a little more than 12 percent—based on 110 million U.S. households.

As a means of providing some perspective, the Consumer Electronics Association reports that 24 percent of U.S. households have a DVD player, making it the most quickly adopted consumer electronics product in history. Twice as many households own a DVD player as subscribe to broadband service, despite the fact that both offerings have been available to the mass market for about the same amount of time.

Despite the prognostications of many industry analysts, consumer broadband service, now entering its fifth year of widespread availability, has yet to firmly prove its value to consumers. There is much blame to be spread around for this fact, and no shortage of targets on which to place this blame. There are the usual suspects:

• industry consolidation that has led to fewer choices for consumers as well as higher monthly prices
• the Excite@Home network shutdown which has hampered cable company growth efforts; and
• a stagnating economy that has left many consumers with the feeling that broadband is a luxury item they can do without until we experience an economic rebound.

There is no question that all of these factors have played into broadband's rather sluggish growth.

Resistible deals
Perhaps most importantly in the story of broadband's struggles is the lack—or perceived lack—of truly compelling content that requires a broadband connection. The simple fact of Internet usage today is that e-mail remains the killer application for the vast majority of consumers.

Much has been made of emerging services such as MP3 (music) downloads, video-on-demand (VOD) and interactive gaming, but very few average consumers are utilizing those applications today. And why should they? The dominant record labels have all but shut down the peer-to-peer file-swapping industry popularized by Napster, and in its place have attempted to roll out fee-based services under brand names such as pressplay and MusicNet. I recently attended the cable industry's biggest tradeshow of the year in New Orleans, where I sat through a presentation by the chief technical officer of pressplay (the music download site backed by Sony and Universal). The presentation outlined the company's pricing strategy:

• The Basic Package is $9.95 per month and provides the user with 300 streaming songs and 30 music downloads.
• The Silver Package is $14.95 per month and provides the user with 500 streaming songs, 50 music downloads and 10 CD burns (pressplay is currently offering a promotional rate of $9.95 per month for the Silver package).
• The Gold Package is $19.95 per month and provides the user with 750 streaming songs, 75 music downloads and 15 CD burns.
• The Platinum Package is $24.95 per month and provides the user with 1,000 streaming songs, 100 music downloads and 20 CD burns.

Setting aside the fact that pressplay only sells through affiliates such as Yahoo!, rather than selling its own services directly to consumers, there are a couple of key points that deserve mention. The most obvious is that the pressplay catalog only contains music from artists under contract with Sony and Universal. While this is a good start, what it means for consumers is that to get a wide selection of music, they will be forced to not only subscribe to pressplay's service, but also that of rival MusicNet, which is backed by Warner Music (a unit of AOL Time Warner), Bertelsmann (a.k.a. BMG) and EMI Group. MusicNet, like pressplay, is only available through affiliates, which in this case means RealNetworks. Consumers must go to Real.com to subscribe to the "Real One Music Pass," which offers 100 streams and 100 downloads for $9.95 per month (unlike pressplay, MusicNet does not offer the CD burn feature).

A consumer who wants a selection of all of his or her current and past favorite songs will thus be forced to shell out a minimum of $19.90 per month ($9.95 each for pressplay and MusicNet), but he or she will only be able to burn the Sony and Universal music onto a CD for portability. In essence, MusicNet subscribers are paying ten bucks a month to rent Warner, BMG and EMI titles. Not a bad business model for the labels if they can get it, but where exactly is the value for the consumer? And how do the labels think that they will ever persuade file-swapping music traders to actually pay for digital music if they are only offering consumers such unimaginative deals?

Jittery nature
Another technology widely associated whose growth prospects are closely intertwined with those of broadband is video-on-demand (VOD). VOD is a technology that we in the industry have been hearing about for years but has yet to really catch hold as a fee-based service. Cable companies such as Comcast and Cox Communications have recently rolled out VOD to select systems around the country, but such efforts have focused on television-based VOD.

For this discussion, we are more interested in Internet-based VOD. Probably the best-known Internet VOD company is Intertainer, headed by Jonathan Taplin, a Hollywood veteran who was once Bob Dylan's road manager. Intertainer charges between $1.99 and $3.99 for movies-on-demand and $7.99 for a basic tier of TV programming with unlimited access. The company recently announced that it has signed up 85,000 customers who spend an average of $14.95 per month on Intertainer's VOD services.

The problem for video over the Internet, however, has always been one of quality. Streaming video has never quite overcome the challenge of how to improve the interminably jerky video frames that often come across as more of a slide show than a smooth video clip. Clearly frustrated with the quality of today's broadband connections,

Intertainer's Taplin has vocally advocated for a government-mandated definition of broadband at a dedicated rate of 1 Mbps download so as to provide for better connections for his company's streaming VOD services. However, we believe that the problem for VOD providers like Intertainer is more fundamental to their business models. While the PC is fine for viewing short video clips or even a half-hour television program, does the average consumer really want to spend two hours watching a movie-on-demand on a screen a fraction of the size of a regular TV set?

While te PC works well for the (illegal) file swapping of new releases and yet to be released movies such as the new installment of Star Wars, the economic viability of a business model built around Internet VOD remains unproven. Even if the issues surrounding quality were resolved, it seems unlikely that Internet VOD will become the true killer app for broadband.

Searching for a killer
So what content features will drive broadband subscription rates? Home networking, while not exactly a content application, certainly has the potential to become a factor in the adoption of broadband, particularly as the number of multiple-PC households continues to increase.

Streaming audio targeted at a specific user group, such as what Major League Baseball is doing with Internet radio access to nearly all baseball games through MLB.com, could gain traction within the targeted interest group. Remote home security video monitoring could likewise gain a following among homeowners. Interactive gaming could be a real sleeper, as companies such as Microsoft have invested millions of dollars in building broadband capabilities into game consoles such as the Xbox, and video gaming is already a multi-billion dollar industry. Online photo sharing services such as Kodak's Ofoto are also gaining in popularity and are a great way to visually share moments with family and friends that otherwise might be missed.

All things considered, it is more than likely that the true broadband killer app has yet to emerge. Each of the above mentioned services will have some moderate amount of commercial success, but none appear poised to become the dominant content features that will truly compel people to sign up for broadband. Just as dial-up Internet access became widespread when people realized the value created by the ability to effortlessly communicate with other people via e-mail and Instant Messaging, average consumers will begin to see real value in a broadband connection only when an application emerges that enables better human communication.

AOL Time Warner CEO Dick Parsons recently speculated that such an application might be video Instant Messaging, which would combine the wide popularity of existing IM services with the ability to actually see the person that you are IM-ing. I'm thinking of someone like my grandmother, who has little use for broadband now but would jump at th e chance to communicate with her grandchildren across the country in a manner that allows her to see as well as talk to them.

What is clear is that as long as broadband prices are increasing while the economy stagnates, it will take some extremely compelling content to jumpstart broadband subscriber growth. Over three-quarters of the country could sign up for broadband if they were interested, but only just over one in ten actually have. Without improved content, those numbers are unlikely to rise significantly in the near future, a factor that should weigh heavily in the minds of cable and phone companies that have spent billions of dollars in upgrading their networks for broadband over the last several years, but have yet to see any real return on that investment.

In the final analysis, the source of and answer to most of broadband's problems today is one and the same—in the land of broadband, content is king.

— End