January 13, 2000 12:40 PM PST

AOL struggles with delayed DSL service

One year after America Online inked a landmark venture for high-speed Internet access with Bell Atlantic, the Net leader has yet to offer widespread consumer service.

The Internet giant had also signed a similar agreement with SBC Communications and other local phone companies to offer digital subscriber line (DSL) services to AOL's more than 20 million customers nationwide.

Yet AOL and its local telephone You've got Time Warner partners have only introduced the service in a few test markets since the original deals. And in a move to complete its broadband strategy, AOL this week agreed to merge with Time Warner, the nation's largest cable company. That deal will allow AOL to offer high-speed Net services over Time Warner's extensive cable networks.

AOL has spent much of the last year looking for ways to pipe its content over high-speed networks, as more consumers demand faster and cheaper Net access. Earlier in the year AOL agreed to offer service over Hughes Electronics' DirecTV satellite system. But overall, AOL has focused the most attention on trying to win access to cable networks.

Despite this week's cable deal, AOL says it's still committed to DSL but wanted to test the services extensively to make sure consumers won't be frustrated with difficult installations or other problems.

"We are very much committed to (the telephone companies') broadband platform," AOL's general counsel George Vradenburg said. "We will have a bigger rollout this year."

Yet the delays highlight general problems the big local phone companies have had making broadband Net services as widespread or popular as cable modem services like Excite@Home. Analysts and recent studies say that cable Net access leads DSL, both in deployment and subscriber rates.

DSL allows existing phone lines to carry high-speed Net traffic and voice calls simultaneously. A low-end service offers data transfer speeds more than 6 times faster than the fastest dial-up modem.

Since late last year, the online giant has been testing its co-branded service in a handful of markets, gauging consumer reaction to the installation process and its ease of use, AOL said.

"We need to try to ensure that it is as easy as possible for the consumer on every front," AOL spokeswoman Wendy Goldberg said.

Part of the difficulty has been that each phone company uses a slightly different--and incompatible--version of the high-speed DSL technology. Thus AOL can't simply provide its users, whether they live in New York or Los Angeles, with a single DSL upgrade kit.

Executives say that once these technological issues are ironed out, the service will be launched across Bell Atlantic territories as planned. AOL's proposed merger with Time Warner won't eliminate AOL's desire to also reach Bell customers, the local carrier said.

"This takes a little bit of time. You have to do it market-by-market," Bell Atlantic spokesman Al Edwards said. "But the fundamental relationship is beneficial for both companies. They recognize that Time Warner isn't everywhere."

But AOL may have other motives. A study jointly released by McKinsey & Co. and Sanford C. Bernstein today said telephone companies were still well behind cable companies in deploying broadband services.

Cable modem services were able to reach about 52 percent of U.S. households, compared with just 23 percent for telephone companies. Cable services claimed about 1.6 million subscribers, compared to about 225,000 consumer DSL users.

Part of the disparity is the lead cable claims as first-to-market for deployments and consumer marketing. Leading Net-over-cable service Excite@Home sold itself as a fast and easy way to surf the Net in late 1996. Only last year did Bell firms begin to ramp up their marketing efforts.

Despite projects like SBC's ambitious $6 billion plan to expand its high-speed Net services, analysts expect the Baby Bells to lag behind cable companies for some time.

PaineWebber downgraded several phone company stocks yesterday, partly on expectations the companies would have to invest considerably more in their high-speed data businesses to keep up with cable.

This lag has given Excite@Home a strong jump in the market, allowing it to reach more than one million users despite the occasional service glitch. But cable modem services have also focused on ease of use more than the telephone companies, creating interfaces similar in some ways to America Online's user-friendly system, analysts say.

"It has to do with the marketing strategies of the two entities," said Zia Daniell Wigder, an industry analyst with Jupiter Communications. "Excite@Home went out to promote their service in shopping malls, while the Bells put advertisements in their phone bills."

All of these issues have helped give DSL a reputation as a service geared more toward early technology adopters and sophisticated computers users, analysts say.

That ease-of-use issue has apparently been the primary stumbling block in bringing AOL to the telephone companies' systems. But analysts agree that AOL will ultimately continue its relationships with the phone companies even if it has been distracted by its push for cable access.

"I think they will continue to work with the DSL companies, but it won't be a priority," Wigder said. "Cable is set to lead in the race for consumer households, and its unlikely to lose that lead."

 

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