Special Features 1999: The Year of Broadband?

By Jeff Fischer (TMF Jeff)

(Dec. 21, 1999) --1998 was dubbed "the coming of age for e-commerce" because that was the year electronic commerce was first embraced by the teeming consumer masses. But that was peanuts compared to 1999. In 1999, at least six times as much money was spent on e-commerce than 1998. So, you could argue that e-commerce truly only began to come of age this year, not last year, and that it will be coming of age for several years. And you could say that last year, 1998, e-commerce was merely placed on the map.

The same is arguably true of broadband in 1999. This year broadband, or high-speed Internet access, was put onto the map. Many people are already claiming, far prematurely, that 1999 was "the year of broadband." More accurately, this was the first year that broadband began to be more prominent in the news because it has become clear how vitally important broadband is to the Internet's future. So, this year was only a beginning to what will become an immense industry.

A majority of Internet users continue to use narrowband connections, but even as they are doing so, new networks are being piped into their homes -- new networks that can increase the speed of Internet connections 10 times over. All narrowband consumers are going to be marketed broadband connections beginning in earnest in 2000. At first, many consumers may delay switching to new technology, but as the Internet's content becomes increasingly dependent on broadband's speed, consumers will embrace broadband with widespread arms.

The number of broadband converts is already in the millions, but this is only a whisper of what is ahead. Up from an estimated 2 million users as we end 1999, broadband is expected to be used by over 13 million people by 2002, and by a giant 131 million people by 2007. The three primary means of broadband Internet connection are currently cable modem, digital subscriber line (DSL), and satellite, with wireless, fiber optics, digital cable, and fixed wireless all in the running, too. Jupiter Communications estimates that by 2002, 12% of North American households will sport cable modem access, 6% will have DSL connections, and less than 2% will use satellite. Meanwhile, fiber-optic networks are likely to be utilized tremendously in the years following 2002.

When it comes to Internet Service Providers, or ISPs, the leading Internet cable provider is Excite@Home (Nasdaq: ATHM), with over 1 million subscribers, followed by privately held Road Runner with about one-third as many subscribers. A clear DSL dominator has not yet emerged, but America Online (NYSE: AOL) is very likely to be it. AOL has partnerships with Bell Atlantic, SBC Communications, and other companies such that it nearly blankets the country with DSL access. With its partners, America Online will make it extremely easy for its 18 million members to switch to DSL -- easy enough, in fact, that DSL may surprise analysts and surpass cable as the predominant broadband technology.

In satellite, early leaders are Hughes Electronics (NYSE: GMH), which is a division of General Motors, and Echostar Communications (Nasdaq: DISH), among several others. Finally, in wireless and fiber optics, there are a slew of primarily young companies building for a grand high-speed future (a list of many follows). Some will succeed. Others will be acquired or dissolve like a Rolaids.

The Biggest News?
AT&T (NYSE: T) didn't spend over $120 billion on cable properties without good reason. The company expects to earn a return on investment. One way that it can do so is to open its cable lines to various Internet service providers. AT&T announced that it will begin doing so in July 2002, after its exclusive contract with Excite@Home expires. The status of AT&T's cable (open access or closed?) was hot news all year and will likely continue to be debated. AT&T's agreement to open its cable to MindSpring (Nasdaq: MSPG) in 2002 isn't enough to please most detractors.

It isn't surprising that AT&T will eventually open its cable. It is simply good business. Excite@Home's stock tumbled on the December news, even though Excite@Home promises to lead in cable Internet access despite the status of AT&T's cable in 2002. Excite@Home has exclusive deals with cable partners outside of AT&T that cover some 60 million homes, and the company will likely continue to be the number-one ISP over AT&T's cables, too, even after this cable opens to competitors. Some competitors will even be paying Excite@Home for cable use. However, as long as the stock market is spooked about the "open access" news, Excite@Home's stock will probably waver for a while. We'll check back next year to see how it fares longer term.

Most of the other large industry news is still taking place beneath the surface, so to speak, as new networks are being built under the ocean and under our city streets. In the process of building, hungry young companies like Qwest Communications (Nasdaq: QWST), Global Crossing (Nasdaq: GBLX), and Metromedia Fiber Network (Nasdaq: MFNX), are spending and acquiring in a race to complete and offer new high-speed networks to consumers, while wireless services are spreading over the continent rather invisibly. Brian Graney (TMF Panic) offers a closer look at the wireless landscape in his review of the industry in 1999.

Looking Ahead to 2000
It is impossible to provide a brief overview of the immense, emerging broadband industry, let alone to summarily say where it is going in the future without being superficial. The most Foolish way to say where broadband is going is to say that it is growing -- fast and large. As such, there are a number of promising companies in broadband and related fields, so Foolish investors should keep a wide eye out for possible investments. I believe that well-researched broadband investments will be among the best-performing of any stocks in 2000 and beyond as broadband needs expand.

Leading companies to put into a Fool tracking portfolio (maybe name the portfolio "Broadband Watch") and to begin to research are the ones mentioned above, including Excite@Home, AT&T, America Online, Echostar, Qwest, Global Crossing, and Metromedia Fiber Network. Track these and the other companies mentioned above alongside other promising, industry-related companies (many of them young, so risks are higher), such as Ortel (Nasdaq: ORTL), Aware (Nasdaq: AWRE), Broadcom (Nasdaq: BRCM), JDS Uniphase (Nasdaq: JDSU), Harmonic (Nasdaq: HLIT), Qualcomm (Nasdaq: QCOM), and in satellite, Teligent (Nasdaq: TGNT), and moving to enable interactive TV, Gemstar (Nasdaq: GMST).

In networking hardware, Efficient Networks (Nasdaq: EFNT), Paradyne Networks (Nasdaq: PDYN), Redback Networks (Nasdaq: RBAK), and F5 Networks (Nasdaq: FFIV), among others, deserve tracking. Also, add to your watchlist DSL leader Rythyms NetConnections (Nasdaq: RTHM), Internet providers Concentric Network (Nasdaq: CNCX), FlashNet Communications (Nasdaq: FLAS), OneMain (Nasdaq: ONME), MindSpring (Nasdaq: MSPG), High Speed Access (Nasdaq: HSAC), and PSINet (Nasdaq: PSIX).

In relation to MindSpring, which will be the number-two ISP in the country with over 5 million users following its merger with Earthlink, an interesting small-cap company is Ravisent (Nasdaq: RVST). Ravisent sells software enabling digital video and audio stream management in PCs and electronic devices, including television. Ravisent has partnered with MindSpring to provide technology to its millions of subscribers. Ravisent has also partnered with many major PC makers and with Intel (Nasdaq: INTC). The company provides an important technology that currently faces little direct competition. As of this writing, Ravisent (at $36 per share) is valued at about $500 million.

Finally, in the oldies but goodies, Cisco Systems (Nasdaq: CSCO) continues to dominate networking, and Lucent Technologies (NYSE: LU) is no slouch in anything it does. SBC Communications (NYSE: SBC) is an early mover in providing DSL, and Time Warner (NYSE: TWX) is the cable giant behind only AT&T. Other rocking giants include Nokia (NYSE: NOK) and Nortel (NYSE: NT). Wireless data is key to these two companies, while optical networking is a business driver at Nortel that you should keep an eye on.

We'll return next year to see, in general, how all of these companies fare and others, too. By researching these companies, you'll learn about others in their fields and maybe find the right investments for your portfolio. Right now, almost all broadband-related businesses are ramping up operations in preparation for tomorrow's broadband world. This building is great for both hardware and software providers in related industries. The gates have just opened and the broadband horses are beginning to run. There are going to be some mighty strong horses.

Have a great 2000.

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 Related links:

  • The Motley Fool's Internet Report on Broadband Available for $20 in FoolMart