NGN -- Demand: Where Will It Come From?

The first wave of broadband deployment has not been in sync with consumer interest, said Jeffrey Blumenfeld, an attorney with Gray Cary. Blumenfeld, who was part of the original Rhythms NetConnections team (an early DSL network provider in the U.S.) said the basic problem is that the perceived value of broadband is not sufficient for a mass audience to pay for it. He noted that broadband service is already available for most U.S. households, but for most users dial-up is good enough. The market dynamics for business WLANs is similar, said Blumenfeld, because of the same perceived lack of value, as well as ongoing security concerns. However, for WLANs, Blumenfeld believes the killer apps are likely to be audio/video instant messaging. Regarding the telco triple play, Blumenfeld said the ILECs continue to be poor innovators and only reluctantly moved into DSL when the cable modem threat became real.


There is no problem with broadband demand in the U.S., said Roland Van de Meer of COM Ventures. He sees broadband access to be on "a phenomenal growth curve" -- approximately a 30% CAGR over the next few years. About 62% of online U.S. households will be broadband users by 2007. Van de Meer agreed that lower prices will probably not compel users to sign-up for broadband but that new applications will. He noted that the price of delivering a packet on the backbone has been dropping 45-50% per year, but is approaching a stabilization point -- in other words, the price per packet on the backbone will not get much cheaper. The fact is notable, he said, because costs now need to be driven out of other parts of the network. Van de Meer argued that the cable networks have much better economics that the ILECs because DSL costs are still extraordinarily high. As for applications that will drive growth, Van de Meer predicts that DRM technology will catch on and consumers will prefer to buy all their audio & video content online. He also believes consumers and business will pay extra for value-added services like VPNs and security services such as virus protection and spam guards. Regarding the triple play, Van de Meer said the cable companies have the upper hand, although the cable VoIP threat is probably overstated due to wireless substitution.


Network operators need to adopt a distribution model for their business, said Herman Rodler, Senior VP for Solution Management Access for Siemens. Rodler agreed that applications are driving the broadband business, especially peer-to-peer applications and digital cameras. These two applications are also leading to increased bandwidth usage in the upstream direction. Deutsche Telekom has seen rapid DSL growth following the introduction of flat-rate pricing and lower tariffs, proving that there is a very clear price threshold at which broadband demand really takes off. There are now more than 4 million DSL users in Germany. Even after an initial marketing blitz ended, the rapid growth in subscriber numbers has continued because of the viral effect of a successful service. Rodler pointed to Yahoo! BB in Japan, where VoIP has really taken off, and FastWeb in Italy, which is now showing football matches over its DSL network, as other successful cases. Wireless router promotions have also been successful in driving consumer demand. The focus will turn to content distribution services -- bundling video services, e-learning and gaming for targeted consumer markets. Regarding telco triple play, Rodler believes that video services will significantly increase ARPU for the DSL operators. He noted that when Germany had only 200,000 DSL users the Hollywood content providers would not return the phone calls of the network operators. Now that the network has scaled to 4 million, the content companies are knocking on the door.


Predicting market demand has been full of errors and lies, said Howard Anderson, Senior Managing Director of YankeeTek Ventures. Over the past 5 years there has been too much supply for too-little demand. He blames the venture community for excessive investments in telecom. Corporations are now paying as little as $0.01 per minute for long distance. Why bother with new schemes aimed at optimizing voice? Anderson agreed that the growth of residential broadband in the U.S. is real, but said that demand for bandwidth is growing slowly. There is still an over-saturation of supply. New applications are appearing but they are not enough to soak up the excess capacity and as a result capital is not flowing to communications companies. The bottom line, predicts Anderson, is that "the communications industry will suck until at least 2005-06." Regarding telco triple play, Anderson noted that the telcos are notoriously bad at selling content.
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