Projected DSL and Cable Statistics
What is here is the projected DSL v Cable war. Nothing like competition to help cut prices.
Speed rules on information highway

Phone and cable firms are fighting for Net supremacy by boosting the data flowing into homes, Simon Avery writes in the Globe and Mail, Saturday, June 5th., 2004. With files from reporter Dave Ebner and CTV correspondent David Akin.

Twenty years ago, before the birth of the World Wide Web, Grant Berry liked to connect a modem to his computer and go "on-line." There wasn't much consumer content -- no news or gaming sites, not even eBay. In those days, going on-line meant leaving messages on virtual bulletin boards and reading other visitors' remarks. The exchanges trickled along the phone line at turtle-like speed. But there was no rush -- only one person could access the site at a time.

Today, a high-tech revolution later, Mr. Berry, a 37-year-old systems engineer, derives half his home entertainment from the Internet. On his home-made computer, he can see the Blue Jays play the Red Sox or bet on and watch horse races running at Toronto's Woodbine Racetrack. The images pour onto his screen at rates at least one thousand times faster than they did in those early days.

"It's damn fast and it comes in flawlessly," he says. "You get pretty addicted to it."

Mr. Berry, of course, is a beneficiary of war -- more specifically, the protracted and expensive speed war being waged by Internet service providers. In an effort to differentiate products and win market share, phone and cable companies have recently juiced the rate of data flow into homes by between 40 and 230 per cent -- at no extra charge to customers. And the battle of the pipes -- pitting the major cable companies (Rogers, Cogeco, Shaw) against the major phone companies (Bell and Telus) -- is heating up.

"We'll see you and raise you one -- it's like this constant, never-ending game of poker," says Lawrence Surtees, an analyst at IDC Canada Ltd. in Toronto.

The stakes are enormous. Last year, the 63 per cent of Canadian households that had Internet access spent $2.9-billion on services -- more than $2-billion of it on high-speed connections. By 2007, the IDC says, 71 per cent of households will be spending $3.6-billion for Internet access (including $3.1-billion for broadband links).

To win consumers' keyboards, cable and telecom companies are investing billions of dollars on infrastructure -- the North American estimate is $100-billion (U.S.) over the past decade. But in the age of converged voice, video and data -- cable offering voice over the Internet and telecoms offering digital TV -- the grand prize is full control of all home communications, television, phone and Internet.

Brahm Eiley, president of Convergence Consulting Group Ltd. in Toronto, calls it the "battle of the bundle or the battle of the triple play." That's why speed matters because, without it, the pipe can't accommodate the content.

Bell Canada, the country's largest carrier, says it has invested $1.3-billion (Canadian) in its high-speed network in Quebec and Ontario since 2000. With more than 2.4 million Internet clients today, that amounts to $542 per existing customer. Clearly, the players are betting on huge opportunity ahead.

So far, the race for broadband market share is a virtual dead heat. At the end of 2003, cable claimed 51 per cent to the telecoms' 49 per cent, Mr. Surtees estimates. Many analysts, however, favour cable over phone companies, citing higher speeds and better margins. "Cable companies have a noticeable competitive advantage . . . on product superiority," says Greg MacDonald, an analyst with National Bank Financial Inc.

Montreal-based Cogeco Cable Inc. provides the country's fastest residential Internet service: It doubled the downloading speed of its premium service in January to 10 megabits per second from five Mbps, nearly 40 times faster than a regular dialup connection. Most phone carriers, including Bell, are offering top speeds of up to three or four Mbps, after recently boosting them from 1.5 Mbps.

And while new users of digital subscriber line (DSL) outpaced new cable subscribers last year, the cable companies will begin adding about 10 per cent more residential broadband customers annually than the telecoms through 2006, Mr. Eiley forecasts.

But is anyone making money in broadband?

It's difficult to say, because no company breaks out profits or capital spending numbers separately. Moreover, as more services become bundled, the value of standalone Internet becomes harder to isolate.

Still, Dvai Ghose, telecommunications analyst for CIBC World Markets Inc., says it's clear that cable earns a better margin on residential Internet customers than the phone companies do. In fact, Mr. Ghose contends, telecom carriers have only begun turning a profit on their DSL consumer business in the past 12 to 18 months.

So which is a better play right now for investors? Mr. Ghose favours cable. "[They] have something like 45-per-cent margins coming from their Internet business. In the case of telecoms, no one breaks it out, but if I had to guess, I'd say it was about 10- to 15-per-cent margins. . . . On a cash flow basis, cable margins look very nice. But DSL margins are coming up." Moreover, he thinks cable's market share will shrink as Bell, Telus Corp. and others improve network speed and reliability.

The longer-term investment picture is even muddier, in part because it's expected to cost the phone companies more to offer TV service than it will cost cable firms to add telephone service.

Cable companies can offer higher speeds because they use a different type of copper wiring into the home than telecoms. Called coaxial cable, it includes a centre channel that carries the signal and an outer channel that acts as a ground. Between the two is a dielectric foam-like material that insulates the two conductors.

The technology has been in use for more than 60 years, and cable providers still use it to pump TV signals into homes. Data travel over coaxial at a higher frequency than on the conventional twisted copper wires used to connect phones. And higher frequency translates into greater capacity. Coaxial cable also does a good job protecting the electromagnetic field inside, which means there is less signal degradation over distance compared with ordinary copper wiring.

But these fat cables come with a significant disadvantage: the pipes get congested if too many users connect simultaneously. Cable companies can solve the delays by adding more nodes to their network. These nodes convert signals from optical to electrical form (vice versa on the return journey). On average, every 1,500 customers require their own node, placed on a pole within 1.5 kilometres of the homes, says Denis Bélanger, vice-president of engineering and development for Cogeco.

The telecom industry faces its own technological hurdles to compensate for DSL's copper-based liabilities. Bell, for example, is testing software from Microsoft Corp. that allows interactive television services, including video-on-demand, to be sent over copper. The technology could be on the market as early as next year, says Pierre Blouin, president of Bell's consumer products group. (Bell is a division of BCE Inc., which has a majority stake in Bell Globemedia, owner of The Globe and Mail and CTV television.)

Another new technology -- a device called an OPI-DSLAM -- will allow Bell to immediately jack up its data transmission rates to six megabits per second, with the potential to move up later to 22 Mbps, Mr. Surtees says. Jointly developed with U.S.-based network equipment giant Lucent Technologies Inc., Bell plans to install 2,000 of these by 2007, extending the reach of its DSL service to 92 per cent of its customer base in Ontario and Quebec.

While Bell, Telus and smaller phone companies are rushing to play catch-up on speed, Rogers Cable Inc., Shaw Communications Inc. and Cogeco are already sitting on excess capacity. "We have a lot of room in our network," says Ron Perrotta, Cogeco's vice-president of marketing and sales. "We can crank up the speed when we want."

There are several reasons for cable companies not to go full throttle all at once: Phone companies' DSL cannot yet match existing cable speeds; boosting speed risks creating congestion on the network; many consumers don't own computers sophisticated enough to benefit from the extra speed; and, it's unlikely the average customer would notice the enhancement.

Indeed, only 10,000 of Cogeco's 235,000 high-speed subscribers now opt for the premium 10-Mbps service, which costs $69.95 a month, compared with $44.95 for standard five-Mbps service.

Mr. Berry, by all measures an informed consumer and early adapter of new technology, says the quality of his Internet experience was so good at five Mbps that he wasn't even aware when his wife Heather, who likes to play interactive card games and dominoes on-line, upgraded their service to the maximum 10 Mbps.

The telecoms, which clearly can't compete today on speed alone, are quick to make the same point. Most of Bell's high-speed customers, Mr. Blouin says, never noticed the jump to three megabits per second from 1.5 earlier this year. "If [speed] is not asked for by the customer, it's not really important," he says. "While everybody would like lots of speed, it's not necessarily needed right now."

The three levers of the market, he maintains, remain brand, price and service. Regardless of market demand, however, technology carries its own imperative, and the rush is clearly on. Consumers should buckle up for speeds of between 20 and 30 Mbps within the next few years, via either cable lines or DSL.

To drive demand for speeds, and the premium prices attached to them, cable and telecom companies are already striking deals with content providers for exclusive Web access to live sports events, concerts and movies. Grant Berry is apt to be an early subscriber. But to justify their investments and win the war, the various combatants will need to nurture more consumers like him -- a lot more.