Pipe Dreams

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For Bill Kenney, VP-emerging home solutions at Sears, Roebuck & Co., broadband Internet service offers the potential to take the retailer's slogan from "Sears. Where else?" to Sears nearly everywhere else.

"Broadband is a big deal," said Mr. Kenney, but "we just need to find the right applications for the consumer." While Sears won't make a major commitment to broadband until there is significant demand, the retailer has begun strategizing on such possibilities as selling high- definition digital TVs with Internet subscription services and Kenmore appliances that enable consumers to monitor them remotely.

Marketers have good reason to take a fresh look at broadband-even as they have every reason to be skeptical. Broadband refers to the technology that delivers interactive TV, video-on-demand and high-speed Internet service using a high-bandwidth pipe into the home. Technology evangelists and content providers have flogged broadband for at least a decade with few results to show for all the hype. Yet after all the blue-sky projections, there are signs the pipe dream is coming true-at least for the high-speed Internet.

By analysts' estimates, there were 10 million U.S. households at year-end 2001 with broadband Internet service, a high-speed, always-on connection delivered to the PC through cable modem; digital subscriber line over phone wires; satellite; or wireless. With 107 million U.S. households, 63% of which have Internet connections, 10 million have broadband service.

The speedy connection, which most office employees enjoy at work, will eventually make pokey dial-up Internet service a thing of the past.

For marketers, consumer broadband is slowly approaching a critical mass. By year-end, broadband will make up 20% of Internet households, according to Jupiter Media Metrix. Consider as well the fact that in January, broadband Internet usage outpaced dial-up usage for the first time when Web traffic from work and home is combined: Broadband users logged 1.19 billion hours, accounting for 51% of the 2.3 billion hours spent online, according to Nielsen/NetRatings.

Consumer awareness of broadband remains low, but it's growing. While pricing remains an obstacle-monthly costs generally range from $40 to $55-analysts believe broadband will gradually become a must-have. Consumers who experience the ease of high-speed connections at work are often driven to upgrade to broadband at home, a Jupiter report found.


One of broadband's biggest boosters, AOL Time Warner's America Online, concedes the long road ahead for broadband. "It really has not cracked into the consumer space, nor do we believe that this dam is going to break open," said America Online Chairman-CEO Barry Schuler. "It's going to be a slow upgrade process over the next five years. We think the model is to continue to focus on the growth of narrowband [dial-up service]. The vast majority of people will upgrade from narrowband to broadband."

Even now, marketers cannot afford to ignore the broadband consumer, who is generally more affluent, tech-savvy and spends more time online. The average dial-up Internet consumer stays online roughly 10 hours a week, while broadband consumers typically spend at least 15 to 20 hours a week online, Jupiter estimates. Broadband consumers also spend 67% more per person on e-commerce than their dial-up brethren, a potential boon for marketers, according to Nielsen/NetRatings.

"Increasingly, online business models will be built and marketed with the broadband surfer in mind," noted Jarvis Mak, senior Internet media analyst for Nielsen/NetRatings, in a report last month.

"There are potentially interesting marketing opportunities around the always-on connection-instant messaging and screen savers," said Jupiter senior analyst Joe Laszlo. "Broadband early on is mainly going to be about branding. It opens the door to richer branding opportunities than existed in the narrowband [dial-up] world."

Some marketers are already plotting their next steps. E-Trade Group, for example, is counting on broadband service to deliver information and data more effectively. E-Trade this year redesigned its Web site to connect brokerage, banking and financial-planning functions, including streaming stock quotes, audio and video, and on-screen help.

migration has begun

Customers with significant assets and tech moxie-in, short, the best prospects-are already migrating to broadband, said E-Trade Chairman-CEO Christos Cotsakos. "We believe it will be like any technology: It will be slow to start, but when the benefits are known, it will be adopted," he said.

However, many marketers have yet to find a compelling proposition in broadband. Retailers have "clear revenue goals they are trying to meet and don't have the R&D [research and development] budget" for projects that will not generate near-term revenue, said Scott Silverman, executive director of the National Retail Federation's shop.org.

For its part, Sears is working with the Internet Home Alliance, which includes General Motors Corp., Sun Microsystems and Matsushita Electric Corp. of America's Panasonic, to develop broadband pilot projects revolving around the networked home.

Apart from speedy downloads of brochures, product information or coupons, marketers are finding other ways to leverage broadband. For example, Ford Motor Co.'s Volvo Cars of North America already offers a tour through a virtual showroom via its partnership with Microsoft Corp.'s MSN service. The company is considering adding exclusive content and services for broadband subscribers on MSN and on AOL, with which it also has an alliance.

"In the past, people said you can't do branding online, but it [broadband] certainly allows you to put more depth in your branding ... to do experiential branding using full-motion video and true stereo sound," said Phil Bienert, Volvo's manager of CRM [customer-relationship management], e-business and future product strategy. "We've never tried to create the virtual test drive," Mr. Bienert noted, but a "a couple of years ago, I would never have considered some of the 3D modeling [due to download times]. ... Today I have fewer issues with it."

Streaming audio and video over broadband helped BMW of North America gain brand recognition for its unique made-for-the-Web films (BMWfilms.com). Increasingly, movie studios offer theatrical trailers, enriched over broadband connections, to give consumers a cinematic experience even before they enter the theater. Marketers have also created online games and sweepstakes to promote their brands via the high-speed Net.

For marketers, broadband is an option. For Internet companies, it is an imperative: They have no choice except to persuade consumers, and marketers, to buy in.

No company has more riding on the broadband ramp than AOL Time Warner. America Online Chairman-CEO Mr. Schuler said that of AOL's 34 million subscribers, 3.5 million members access AOL through broadband via cable, DSL and other services. AOL is making its service available to run on top of any high-speed Internet connection regardless of brand or technology.

Time Warner Cable, meanwhile, is aggressively promoting broadband Internet in concert with AOL High-Speed Broadband and sibling Road Runner as well as independent Internet service providers such as EarthLink.

"We're working with every ISP on marketing tactics and approaches to this service. We have multiple marketing approaches," said Chris Bogart, president-CEO of Time Warner Cable Ventures. Time Warner Cable has 12.8 million cable subscribers and has signed up more than 2 million of them to broadband, Mr. Bogart said. "This is still very early days for this product," he said. "Broadband is one of those `show me' products."

betting big

AOL Time Warner, the world's biggest media company, is betting big on broadband to deliver its vast portfolio of content-magazines, music, cable network programming, movies-to drive future revenue growth. It hopes to accomplish this, in part, by packaging premium-service bundles, on-demand content and exclusive events through which it can rack up incremental subscription revenue. It's an approach not unlike that of the cable industry in its infancy and digital satellite TV providers in the mid-`90s.

But getting there won't be easy. AOL Time Warner faces the thorny task of maintaining AOL's slow-growing dial-up cash-cow business while transitioning subscribers to broadband. Only then does it make sense for AOL to sell premium subscription services and other exclusive content that will run better on a fatter pipe.

AOL is testing one such offering: AOL MusicNet, a $9.95-a-month subscription music service over broadband. It's also luring broadband users with extra goodies. This summer, subscribers to AOL High-Speed Broadband will get access to a weekly ad-supported series of musical performances and interviews before AOL lets in dial-up customers.

Some Wall Street analysts are nervous about AOL's transition to broadband. It will be "more difficult and costly than originally anticipated," said Lehman Brothers analyst Holly Becker in a recent report. Her report attributed AOL's slow progress to its lack of success in locking up deals with cable companies other than sibling Time Warner Cable. AOL's plight is not helped by the pending merger of AT&T Broadband and Comcast Corp., which will create the nation's largest cable company with 22 million subscribers.

aol time warner mission

No one articulated AOL Time Warner's broadband mission more clearly than Bob Pittman, AOL Time Warner's co-chief operating officer, when in January he told financial analysts and investors: "Broadband and digital cable are really important for us, not only for the cable and AOL divisions but for all the divisions of AOL Time Warner. We see ways in which we benefit if we can get that out there and get it penetrated."

Benefit, to be sure. Mr. Pittman said AOL Time Warner could potentially extract as much as $159 per month per household from delivering broadband access and related services such as home networking, subscription gaming, wireless e-mail service, extra e-mail and digital photo storage, additional e-mail addresses, pay-per-view events, on-demand concerts, MTV-style music packages and even access to exclusive subscription content from AOL Time Warner's stable of magazines. A broadband family service plan is expected later this year.

"The real goal for us to make money as a company, not just in the AOL division, is to get the AOL members onto broadband so we can deliver and sell broadband-enhanced services," Mr. Pittman told analysts.

While broadband Internet has been in the market for at least six years, AOL's Mr. Schuler concedes that the service remains "way out in front of the consumers," used by early adopters, professionals, small-business owners and, of course, corporate America. Mr. Schuler added: "Our strategy has been and is correct. The key is to be there for the consumers who are ready for broadband."

The question remains whether the mass of consumers will pay a hefty premium for broadband, which at about $40 to $55 a month can be more than double AOL's standard $23.90 dial-up charge. Consumer Reports' May issue offers 50 tips for saving money. No. 41: "Return to a dial-up connection for your Internet service provider unless you need a fast connection for your work."

To become wholly mainstream, industry watchers say, broadband will have to be less expensive or be part of a package that includes long distance, cable and even wireless and calling services.

Mark Kersey, a broadband-industry analyst for technology-market researcher ARS, contends price is not the key issue holding back broadband. Said Mr. Kersey: "The lack of truly compelling content has been probably the single largest impediment to widespread adoption of broadband service."

That's a problem and an opportunity. Even if broadband remains a pipe dream for some marketers, the 10 million consumers now using the service at home is an audience too big to be ignored.

contributing: mercedes m. cardona and alice z. cuneo

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