Special Report:
The Case for Cable Modems

Although almost two out of every three online homes in America want faster Internet access, only about one in seven will pay a premium for speed, according to a recent survey by the Yankee Group.

The Yankee Group survey of over 1,900 US households found that about one-sixth, or almost 17 percent, of US households currently have access to the Internet through a proprietary on-line service or dedicated Internet service provider (ISP).

Of those online homes, about 66 percent expressed an interest in receiving some type of faster Internet service, Bruce Leichtman, director of the Yankee Group’s Media and Entertainment Strategies Group, said, but barely seven percent of current online subscribers said they were "very interested" in a service providing unlimited access for $40 per month.

And when asked specifically about cable modems, slightly more than half, or about 51.7 percent, expressed a "general interest," but only four percent were "very interested" at the $40-per- month price point, Leichtman said.

"Clearly we see a strong overall interest in high speed data services, and cable modems perform well with early adopters," Leichtman said. "But the real challenge for the cable industry will be to make the product available to more homes, and to convince more consumers that it’s worth the cost."

Leichtman added that "it is also important to remember that the individuals who will subscribe to high speed data services from cable companies and other providers over the next few years are largely those people who are already subscribing to a service today."

The survey also found that those "very interested" in an overall faster Internet access speed was about double the number of those specifically interested in cable modems. While 25.2 percent of the respondents said they were very interested in an overall faster speed, that number dropped to 13.3 percent when asked about cable modems.

Another point of view

According to a recent study by Ryan-hankin-kent Inc., the number of cable modem subscribers in North America will soar from an end of 1997 penetration of 165,000 subscribers to 7.4 million subscribers by the year 2002, with shipments of cable modems totaling some $317 million and associated cable router sales hitting $122 million by 2002.

While the Rhk report, "Cable Modems: Business Case and North American Forecast," predicts that the market for cable modem equipment will grow by 700 percent in the next five years, other studies take a more conservative tack, with projections less than half that by rhk.

A study earlier this year, "Cable Modems & High Speed Data Services: Technology, Content and Business Strategies," by Kinetic Strategies, notes that cable modem service was available to two million homes in North America, and that cable operators had captured 19,000 paying subscribers by March 1, 1997. The study projects that cable systems will have 197,000 modem customers by early 1998 and 1.6 million in 2000, accelerating to 3.2 million in 2002.

Michael Harris, president of Kinetic Strategies Inc., in Phoenix, Arizona, agreed with The Yankee Group’s findings noting that while "the cable modem business can be financially lucrative for cable operators," cable-delivered Internet services will only be available to a minority of North American households for some time.

"The lack of ubiquitous cable system upgrades is a major limitation in the widespread deployment of two-way cable modems," Harris said. "For at least the next five years, local cable systems and their subscribers will be divided into a world of return-path haves and have nots."

"Currently, only 10 percent of US households have access to two-way cable systems," he said, and "cable operators generally are preparing only a small portion of their cable systems for modem service."

Harris said, however, that cable modems will prove successful in those markets where they are deployed "due to a compelling combination of fast throughput speeds, reasonable pricing and integrated content."

"Cable operators are packaging high-speed data services much as they do basic cable television service," he said. "Multiple service operators (MSOs) are typically charging $35 to $60 per month for an Internet service package that includes software, unlimited Internet access, specialized content and rental of a cable modem. At the low end of this pricing scale, a very robust Internet service is available to consumers for about the cost of a dial-up account with an Internet service provider and a second telephone line.

According to the rhk report, while subscriber penetration will grow enormously from 1998 through 2000 and beyond, equipment revenues for competing cable modem vendors will flatten due to severe product price competition.

"Standard modems, which will be available from multiple vendors in 1998, will allow cable modems to be sold at retail as telephony modems are today," Joel Jakubson, vice president at rhk, added . Previously, he said, proprietary modems forced MSOs to lease modems to consumers, much the same way as set-top boxes are leased today.

In order to generate the forecast, Jakubson said rhk analysts developed a detailed business case model of a typical MSO cable modem deployment. Even with conservative penetration assumptions, he said, moving the cost of the consumer modem from the MSO capital expense budget to the consumer reduces the MSO’s pay-back period for a typical deployment by a full year.

"This reduction in the time to achieve break-even operation will lead MSOs to offer the service in many more locations, which leads us to our forecast," Harvey Morrison, Rhk’s senior analyst and program manager for cable modems, said. "This in turn will lead to many more two-way systems being deployed, as opposed to telephony return cable modem networks."

( Contact: Bruce Leichtman, The Yankee Group, 617-956-5000, ext. 322, Jim Kent, Ryan-hankin-kent, Inc., 650-737-9600)