The Broadband Barrier
Telecommuting — in high demand — needs some help.

By Edward B. Driscoll Jr., a writer based in San Jose, Calif.
October 5, 2001, 8:00 a.m.

n a recent NRO Financial Symposium on the technology sector, a number of industry experts stressed the need for increased telecommuting as result of the September 11 attacks. Larry Buchsbaum of The Yankee Group said "The ability to get people to fly is going to be severely hampered for a long time," which makes telecommuting and the ability of businesses to disperse their people and operations "strong alternatives to business as usual."

However, telecommuting will also be hampered for some time by two critical issues: a nationwide lack of broadband access, and the bottleneck of the current maximum speed of that broadband. The events of September 11 make the need to reduce or eliminate both of those problems even more critical. But how?

Adam Thierer, director of telecommunications studies at the Cato Institute, says that this crisis "screams out for the need of some sort deregulation to take place sooner rather than later, precisely because the current regulatory status quo is not getting us where we need to go, as quickly as all of us hoped. And that problem is not being remedied by keeping the current rules in place, or making them stronger, or increasing penalties or fines, or regulatory burdens, as some policy makers have suggested.

"Indeed, the opposite would be the better way to go," Thierer continues, "freeing up broadband from its many requirements, and allowing companies to deploy however they wish. Unfortunately, however, the opponents of deregulation outweigh and outnumber the proponents of deregulation at this time."

Jim Glassman, host of www.techcentralstation.com, believes that the ideal solution would be to finish the job of the 1984 break-up of AT&T's monopoly, and to "take the last monopoly, which is local service, and apply structural separation to that as well, because I think that's the only way you're going to end up with the kind of competition that you need."

And more competition is what will put broadband access in more businesses and residences, which is the first necessary step towards wide access to telecommuting.

Breaking the Bottleneck
While increased broadband access is critical, the speed of the data moving through that broadband has to be dramatically increased, to further aid its role in business. Bandwidth has reached a temporary speed limit of a few megabytes per second, as that's about all the typical "high-speed" cable modem, DSL, and satellite connection can do. The actual Internet itself needs a serious tune-up, which it may just get in the next few years. And that tune-up could give the tech sector as a whole a serious nudge in sales.

For static pages and low-res photos, the web's current best speed of five or sex megabits a second is blindingly fast. For audio and video on the Internet, it's slow and pokey. For example, even with a cable modem, it still takes a noticeable amount of time for that Rush Limbaugh audio clip to download. And the current bandwidth makes many business applications just too slow and unreliable to be cost effective when used remotely by telecommuters.

This lack of bandwidth is also preventing a number of even more advanced business and consumer applications from getting off the ground. These applications include HDTV-quality video conferencing via the Internet, HDTV-quality video on demand, and — from the business perspective — complex Internet-enabled programs.

Michael Turzanski, the deputy director of the Advanced Internet Initiatives Group at Cisco Systems, Inc., says added bandwidth could lead to new ways of using computers in the business world. For example, national or global businesses, whose computers sit idle when their stores or offices in earlier time zones close, can tap into those computers and combine their processing power.

A lack of new applications that can run on current speeds is also a reason why high-speed ISP stocks are currently in the doldrums — or worse. Excite@Home recently declared bankruptcy and was forced to sell its core cable modem business to AT&T. There isn't the killer consumer app that HDTV video-on-demand would naturally provide to get people excited beyond those already immersed in the Net.

Bet on the Baby Bells
Long term, answers are on the way from a variety of sources designed to radically expand the amount of bandwidth available from fiber optics and other "fat pipes." But for individual investors focusing on the next quarter or two, Craig Shere, a CFA and an investment officer specializing in telecom services for Standard and Poor's, says that "the leveraged, pure-play broadband carriers that have been crushed by the incredible decline in pricing for broadband, are going to be hurt. These companies thought, 'we'll build it, and the world will beat a path to our door,' and bet the farm. Well, now the farm is being repossessed."

In contrast, Shere says that the companies that will benefit over the coming months are those that include broadband as part of a diversified communications strategy, particular those Baby Bells with strong local service provider cashflows. Two companies that S&P feels positive about are Broadwing, the old Cincinnati Bell, which S&P has a 'buy' rating on, and Qwest, which acquired US West in 2000. S&P has an 'accumulate' on Qwest.

Shere's research suggests that normal capacity utilization in the world's fiber optic broadband system could be achieved by 2003. Assuming that the stock market discounts that capacity nine or so months in advance, by the first or second quarter of next year, these more diversified broadband survivors "will pick up the pieces when the market finally corrects itself."

Because more and more industries are using broadband to communicate and send data, there's no question that growth is there and broadband, over the longterm will flourish. But, as Shere says, the sector is too young to know if it will always have a boom/bust cycle like other technology sectors, or if there's some way to smooth out the ride.