Competition, politics drive high-speed services to country
By Corey Grice
Like many high-speed Net companies, Nemont Communications has seen exponential growth in the number of phone calls inquiring about new services.
It now fields an average of three calls a day.
"I have all the confidence in the world that by the end of the year we'll have more than half of our DSL capacity filled up," said Tina Watson of Nemont, whose parent phone company serves about 18,000 customers in rural Northeastern Montana. "Because we are so remote, the need for e-commerce here is almost greater than it is in the big cities."
Nemont began offering DSL service in the small town of Glasgow in February. The company was so pleased with how quickly it signed up its first 16 customers that it expanded into four new Montana communities earlier this month.
Although the numbers remain small, high-speed Internet services are beginning to take off in rural areas and small cities where industry experts once questioned whether demand would exist and communications carriers would ever install the technologies. Fear of competition, advances in technology, and potential regulation are leading communications carriers and Internet service providers to begin building high-speed, or broadband, Internet services in these so-called secondary markets more than ever before.
For now, most of the improvements have come in smaller cities with substantial populations, but where competition is less intense. Still, even rural communities have begun to see some broadband services, analysts and executives say.
According to a September 1999 survey by the National Telephone Cooperative Association, a national organization representing hundreds of small and rural independent phone companies, 30 percent of small carriers expected to offer high-speed connections by the first quarter of 2000. The study showed that 40 percent would offer fractional T1 lines, while 30 percent would offer ISDN connections.
"I think they're seeing demand where maybe they didn't expect there to be any," said a Federal Communications Commission official charged with tracking broadband usage. "There's been a misperception about demand in rural areas. There's market opportunity outside of Wall Street and Silicon Valley."
Beyond reshaping the business landscape for communications companies, the expansion into smaller cities and rural areas carries important consequences for the disparity of Internet access between lower- and higher-income sectors of the American public--part of the acrimonious national debate that has become known as the "digital divide." The move could help bridge the gap for those left behind in the Internet revolution because of geography.
The targeting of rural markets and small cities, of course, is not based solely on altruism. The shift toward smaller markets is a result of the intense competition in the nation's largest cities, where broadband service providers are fighting for the same customers.
"A lot of the political pressures to serve the underserved markets have prompted the large carriers, like US West, to roll out in these smaller markets," said Cynthia Brumfield, author of the "Broadband Intelligence" newsletter. "Secondly, it's just the natural progression of the development of these services."
The challenge is striking the right balance between opportunity and cost. A study released last week by the National Exchange Carrier Association, a quasi-government body that administers some communications regulatory policies, estimates that 65 percent of rural phone lines will be capable of carrying DSL service by 2002. But the price to upgrade will be steep: It is expected to cost $10.9 billion.
Last week, US West said it would expand its DSL service to 30 more cities ranging from Twin Falls, Idaho, to Laramie, Wyo., most of which fall in the rural and small-town category. However, executives at the Baby Bell phone company say that "everyone" is likely to stop with this round of small cities, at least for now.
"This is about as far as we go," said Teresa Taylor, US West vice president of integrated services. At this level, there are still enough people--and, more specifically, enough people with personal computers--to justify the investment, she said. "We have done our homework there."
But if the homework is done, the test is yet to come. Covad Communications, a wholesale DSL provider, last week acquired BlueStar Communications in part to expand the company's presence in smaller markets. BlueStar provides high-speed Internet access to smaller cities and rural areas in the Southeast.
Among the many DSL providers targeting the market are New Edge Networks, Jato Communications, HarvardNet and DSL.net. DSL.net just announced it is offering high-speed Net access in more than 300 cities, most of them smaller ones, in 45 states.
Even the nation's smallest telecommunications providers, many of which serve or are owned by Native American reservations, have high hopes for broadband sales.
The short history of the broadband business shows the benefits of getting to new markets early--for defensive reasons as well as for growth. Smaller carriers are beginning to deliver broadband to smaller markets to avoid losing customers to larger competitors capable of offering a more comprehensive package of communications services.
"It's a race to get to the customers first. In a lot of ways, that's what this is," said James Mendelson, an analyst at the Strategis Group, a communications industry research firm. "Even going out into rural areas is a way to protect your market share."
And when they arrive, carriers must hit the ground running. "Once someone starts offering broadband, others will follow," said the FCC official, who spoke on the condition of anonymity. "You very quickly go from zero to three providers in many of these markets."
At the same time, Taylor and other industry executives stress that their companies must fight simultaneous battles against rival technologies in larger areas, such as cable modem services like Excite@Home and Road Runner.
"The major markets are highly competitive. In some big cities you can choose from as many as 20 providers," US West's Brumfield said. In addition, she said, "the technology is improving in the DSL space that makes serving more distant communities more economically attractive."
New technologies that can extend the range of DSL, which is more difficult to provide over longer distances, are coming onto the market and could alleviate one of the primary impediments to offering high-speed Internet access in smaller markets. Many consumers and businesses typically are located farther than three miles from the phone company's central switching facility, which doesn't present a problem for simple voice service but, until now, would render DSL service ineffective.
Some suggest that larger communications providers--particularly those facing regulatory scrutiny of multimillion-dollar mergers--may take that into consideration when weighing the benefits of offering broadband Net access in communities such as Mobile, Ala., and Missoula, Mont.
Still, as with so many other issues associated with the Internet, carriers are betting on the future. "Despite the low demand, they're building broadband anyway, because eventually the demand is going to grow," said Paul Shultz, a spokesman for the Rural Phone Association.
Although a 1998 Commerce Department study showed that the digital divide was growing, the FCC's first annual broadband study concluded in February 1999 that broadband Net access was being established in a "reasonable and timely" fashion.
The study showed that at least 375,000 residential consumers were purchasing broadband services, and many more had access to the technology. It also indicated that broadband Net access was exceeding the launch rate of earlier consumer technologies, such as cellular services and television. The FCC cautioned that it was still too early to reach definitive conclusions about the nascent market and said it plans to release a second study in about two months.
While they are encouraged by recent efforts, government officials wonder how committed the companies will be to outlying areas in the long run.
"They've taken the lowest-hanging fruit (in the big cities), and they're ready to move on," the FCC official said. "The question in my mind is how much the market is not going to do. We can be both psyched about the new rollouts and concerned about the areas that may never get advanced services. I think that's where we are."
In rural Montana, far from the national policy debates in Washington, Nemont's Watson remains hopeful. "In the long run, these services will be profitable," she said.
News.com's John Borland contributed to this report.