The Dot-Com Bust Hits Broadband: What Happens Now?

Six months ago, the internet could do no wrong. Broadband subscriber counts were doubling annually. Venture capital was flowing like water into anything with a ".com" in the name. The NASDAQ hit 5,048 in March.

Today, the NASDAQ is down over 50% from that peak. Dozens of internet companies have shut down or announced layoffs. And the broadband industry — which was supposed to be the foundation of the next economic boom — is starting to feel the chill.

The Carnage So Far

The damage isn't theoretical. Real broadband companies are bleeding:

NorthPoint Communications, one of the largest competitive DSL providers, filed for Chapter 11 bankruptcy protection in September. NorthPoint had been reselling DSL service from the Baby Bells' copper lines, serving hundreds of thousands of customers in major markets. Its collapse leaves those customers scrambling for alternatives and sends a warning shot across the bow of every independent DSL provider.

Rhythms NetConnections, another competitive DSL player that focused on business customers, is in severe financial distress and burning through cash at an alarming rate. The company's stock has fallen from over $70 to under $2.

Excite@Home, the cable internet provider that serves roughly 3 million subscribers through partnerships with Comcast, Cox, and AT&T Broadband, is hemorrhaging money. The company lost $1 billion in the first three quarters of 2000. Its stock has fallen from $35 to under $5. CEO Tom Jermoluk resigned in April. The merger of @Home Network with Excite (the search portal) has been a disaster, creating a bloated company that can't figure out whether it's an ISP, a media company, or a technology platform.

Covad Communications, another competitive DSL provider, has cut its workforce by 15% and is struggling to find a path to profitability.

The pattern is clear: companies that depend on outside funding to subsidize broadband buildouts are getting crushed as the capital markets dry up.

Why Broadband Companies Are Hurting

The dot-com bust didn't cause broadband's problems — it exposed them. The fundamental issue is simple: building broadband infrastructure is enormously expensive, subscriber acquisition is slow, and most broadband providers aren't generating enough revenue to cover their costs.

A competitive DSL provider like NorthPoint has to lease copper lines from the incumbent phone company, install equipment in central offices, hire technicians for installations, and support customers — all while charging $40-50/month in a brutally competitive market. The math never worked without a long runway of investor capital to bridge the gap to profitability. When the capital markets slammed shut, so did the runway.

Cable internet providers have a different cost structure — they own their networks — but Excite@Home's portal strategy burned through cash faster than the broadband business could generate it. The @Home side of the business was solid; the Excite side was a money pit.

What This Means for Consumers

If you're currently a broadband subscriber, don't panic. Your DSL or cable connection isn't going to disappear overnight. But here's what to watch:

If your DSL is through a competitive provider (NorthPoint, Covad, Rhythms, or a reseller that uses their network), you should have a backup plan. If your provider goes under, service may be disrupted. The incumbent phone company — your local Bell — will likely absorb the customers eventually, but there could be a gap. Make sure you know who your upstream provider is.

If your cable internet is through @Home, the service itself is probably safe for now. Comcast, Cox, and AT&T Broadband need cable internet to compete with DSL — they're not going to let the service die even if Excite@Home implodes. But the ownership structure could get messy, and customer service (already not great) might deteriorate.

If you're on the fence about signing up for broadband, the dot-com bust might actually work in your favor. Providers desperate for subscribers are offering installation deals and promotional pricing. SBC is running a $49.95 DSL modem plus free installation special. BellSouth is offering its FastAccess DSL at $39.95/month with no long-term contract required.

The Silver Lining

Here's the counterintuitive reality: the dot-com bust is bad for broadband companies but potentially good for broadband consumers in the medium term.

The competitive DSL providers were middlemen — they leased copper from the Bells and resold it at thin margins. Their demise simplifies the market. Going forward, most DSL customers will get service directly from their local phone company (SBC, Verizon, BellSouth, Qwest), which actually owns the infrastructure and has the financial resources to sustain the business through a downturn.

Similarly, if Excite@Home fails, the cable operators will build their own internet platforms. Comcast, Cox, and AT&T Broadband are enormous companies with deep pockets. They're not going to abandon cable internet because a dot-com-era middleman went bust.

The big incumbents — the Bells on the DSL side, the major cable operators on the cable side — have survived recessions before. They have billions in revenue from their core businesses (phone service, cable TV) to subsidize broadband expansion. The buildout might slow down, but it won't stop.

The Numbers Still Point Up

Despite the gloom, broadband adoption continues to grow. The FCC's latest data shows approximately 6.5 million broadband connections in the U.S. as of mid-2000, up from about 2.8 million a year ago. That's still only a fraction of the roughly 100 million U.S. households with phone or cable service, but the trajectory hasn't reversed.

The reason is simple: people who get broadband love broadband. The churn rate for DSL and cable internet is remarkably low compared to dial-up. Once you've experienced the internet at megabit speeds, you're not going back. The dot-com bust hasn't made broadband any less useful to consumers — it's just made it harder for middleman companies to turn a profit delivering it.

Looking Ahead

The broadband industry is in for a rough year. More competitive providers will fail. Investment in new infrastructure will slow. The dream of universal broadband by 2005 — which some analysts were projecting just a year ago — now looks wildly optimistic.

But broadband itself isn't going anywhere. The technology works, consumers want it, and the companies with the deepest pockets and the most infrastructure — the Bells and the big cable operators — are committed to the long game. The question isn't whether America goes broadband. It's how fast and how competitively.

Right now, the answer to both is: slower than we hoped.