Last Monday's column on broadband Internet generated such a large response on the discussion boards and in email that I need a broadband connection just to read it all. Yet, last week I argued that broadband is not yet a necessity in the eyes of most Americans, judging from adoption rates. My argument met with disagreement from broadband users, and our Rule Breaker poll showed that 58% of readers who answered have broadband.
Fewer than 4% of homes in the United States have broadband Internet, so Rule Breaker readers are ahead of the curve. A participant bias aside, the poll is most important for the discussion that it generated. Almost everyone who has broadband loves it.
Broadband users love the always-on connection and the speed with which they can accomplish things on the Internet. The Internet becomes a much more convenient and versatile tool with broadband, and broadband connections for businesses are essential to survival.
This brings me to make clarifying points. After last week's column, many people believed that I was writing that broadband wasn't a need for most people, and by inference, that it wouldn't be a need for them later. The response was so strong on this point that I need to restate what I meant, or say what I meant to say for the first time.
I believe that broadband use will continue to grow by several-fold, until broadband is a mass-market service used by the majority, and far overshadowing dial-up users. I believe that broadband will prove essential in bringing the Internet to a new level of utility, and with that, it will bring the Internet to millions of additional users who wouldn't otherwise be online at all. Therefore, broadband is the important next wave in the Internet's advancement.
So, I do not question broadband's long-term potential for customers. Eventually, almost all of us will have broadband Internet access at home. My argument last week that a majority of Americans don't yet feel a need for broadband (based on the fact that 96% of Americans do not have it) was a statement on the present situation. The fact is that broadband's adoption rate has been much slower than anticipated.
However, this is largely a reflection of the poor marketing done by many broadband providers, of less than great availability, and of the fact that a killer application that will make everyone rush to broadband isn't yet apparent. Other reasons given by readers for not moving to broadband include considerably higher costs, complex setup procedures, and, 12% said that they just don't feel the need. But even given these shortcomings, broadband adoption is growing at a rate comparable to the adoption of the Internet itself in the mid-1990s, and that's impressive.
Investing in broadband
Most investors recognize the importance of broadband Internet. They also realize that broadband providers should be able to develop strong recurring revenues.
AOL Time Warner (NYSE: AOL) hasn't cranked up its broadband hype machine yet, but it will. It wants to be present on more cable systems before it goes full bore, and that's partly why it's opening its cable to competitors like Earthlink (Nasdaq: ELNK). If AOL Time Warner's cable is open to others, it can argue that AT&T's (NYSE: T) widespread, larger cable system should be open to others, too.
Investors should also recognize the difficulty of the business, and the high cost. AOL does not own the phone lines over which it offers dial-up access. It pays telecom companies a commission, but even on this "light" operating model, it achieves very low margins in this division. And to date, access companies owning the infrastructure have struggled. Telecom companies (those that survive) are years away from earning a positive return on their digital subscriber line (DSL) investments, and the largest cable owners are even farther from positive returns -- especially AT&T, which paid tens of billions (in debt) for its cable network. Excite@Home (Nasdaq: ATHM) is the broadband leader, with more than three million cable subscribers, but it hasn't been profitable yet, either. (For a good summary of Excite@Home's situation, and broadband in general, view this post by Fool "duwhee.")
Who needs broadband? In the long run, most of us will want it. Which companies will make great money providing it? Almost any investment that you could have made in broadband so far hasn't seen a positive return yet. That could change when tens of millions of people are using broadband, but there isn't a guarantee. We haven't seen how broadband is priced when there are many competing suppliers running at full speed, and we don't know how high the ongoing costs of maintaining a network and its services will prove to be. There is promise, but also risk. Sometimes even the most useful industries don't turn out to be good investments.
To close, this morning Amazon.com (Nasdaq: AMZN) shared strong preliminary first-quarter numbers. Sales are expected to top $695 million, up 21% from last year, and gross profits should rise more than 35% to over $175 million. As someone who wants to see Amazon survive and thrive, this is good news. Amazon reports full results on April 24.
Jeff Fischer sold short the idea of the Easter Bunny by age five or six. It took him another year or two to start shorting Santa Claus. Didn't wanna give that up. He owns shares in AOL Time Warner, and AOL is also an investor in The Motley Fool. The Fool has a full disclosure policy.