January 31, 1996

Internet Offers Business Frontier for Cable TV Companies

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    ELMIRA, N.Y. -- Charles Tolbert goes on line for all the usual reasons: to swap E-mail with friends, participate in chat groups or just roam around the Web.

    By signing on to the Internet through his cable television company, however, Tolbert has access to something that eludes most small-town cybernauts: articles from his tiny local newspaper the night before it hits his doorstep.

    "I can catch the editorials before they slam me the next morning," said Tolbert, who, as a member of the Elmira school board, often finds himself in The Elmira Star-Gazette over some tempest or another.

    For Tolbert, cable television has broadened the definition of cyberspace to include his own backyard. And for the cable industry, cyber-ready customers like Tolbert represent a new business frontier.

    As part of a test of its Internet-access service in this upstate New York city, Time Warner Cable has connected Elmira's newspaper, library, community college and Chamber of Commerce to its network.

    Using a cable modem and his personal computer, Tolbert can search for a book in his local library as easily as he can browse through national on-line services like America Online or Prodigy.

    And he can do it all at lightning speed -- at least compared with the treacle-like pace that information flows through computer modems connected to conventional copper telephone lines.

    For Time Warner and the rest of the cable industry, the Internet is the most tantalizing new business opportunity in years. It offers cable operators a chance to stay competitive at a time when telephone companies are swarming into their business, both because of looser federal regulations and a spate of recent investments in high-powered satellite broadcasting.

    By linking subscribers to local organizations that might not be able to afford to put themselves on line, these services play upon the "community access" tradition that has always been one of the supposed benefits of cable television, a feature that national satellite services cannot hope to match. By providing ultra-high-speed access to the global computing web, cable companies are also seizing on a technological advantage over telephone networks.

    And unlike interactive television, which was the industry's previous big futuristic hope, the technology to provide Internet access over cable wires already exists. No wonder some cable executives sound breathless.

    "While we were all waiting for interactive television, something called the Internet took over the world," said Brian L. Roberts, the president of the Comcast Corp. and the chairman of the National Cable Television Association. "It's exciting and frightening."

    Comcast, the nation's third-largest cable operator, recently ordered 250,000 modems from Motorola and Hewlett-Packard and plans to offer a commercial service to cable subscribers in Baltimore later this year.

    Tele-Communications Inc., the No. 1 cable operator, ordered 200,000 Motorola modems to begin offering on-line access in Sunnyvale, Calif., this April. And Time Warner has ordered a total of 100,000 Motorola and Toshiba modems to offer service in Elmira, San Diego and other places in its network, which is the nation's second largest.

    Time Warner currently has just 200 participants in its Elmira market test, which began in July. But Glenn A. Britt, the president of Time Warner Cable Ventures, said there was a waiting list of 250 for the service, which is called Linerunner. "We haven't even marketed it," he said, "This is all through word of mouth."

    Time Warner selected Elmira for the test because it is a small cable system, yet one with a technologically astute group of subscribers, since many residents work for the industrial glass manufacturer, Corning Inc., which has headquarters in the neigboring town of Corning, N.Y. Britt said Elmira would serve as a template for Time Warner's larger cable systems, including Rochester and, eventually, New York City.

    In interviews with half a dozen Elmirans who are using the service, everyone said that it met their almost palpable need for speed.

    With a potential top range of 25 million bits a second, Time Warner can deliver its data up to 800 times as fast as phone companies can, because coaxial cable has far more capacity, or bandwith, than the copper wire used by phone companies.

    That capacity allows cable to rapidly transmit complex multimedia images and photographs, which have become a big attraction with the growth of the World Wide Web.

    Downloading these files over regular phone lines, where the fastest modems operate at only 28,000 bits a second, is a frustrating and time-consuming -- not to mention costly -- procedure.

    Tolbert, who is a supervisor with the Postal Service, said he was spending more than $200 a month in phone bills to use his on-line service, Compuserve. He paid just $30 to install Linerunner, and is receiving the service free. Eventually, Time Warner plans to charge $39.95 a month for this all-you-can-eat on-line package.

    "The choice is between driving on a superhighway or driving on a 5-mph bumpy access road," said Tom Wolzien, a media analyst at Sanford Bernstein & Co. Wolzien predicted that high-speed data delivery would become an $8.4 billion business for the cable industry by the year 2004.

    Cable operators believe they bring two other strengths to this business: plenty of programming and a strong local presence. In Elmira, besides connecting subscribers to the locally owned Star-Gazette, Time Warner is also avidly promoting its magazines, books, and other products on Linerunner, which has a menu that prominently features a link to Pathfinder, Time Inc.'s elaborate Web site.

    Paul Sagan, the editor of new media at Time Inc., said the goal was to offer a full spectrum of local, national and worldwide information. "We want to help people make communities, both across the fence and around the world," he said.

    Such lofty pronouncements raise the hackles of telephone companies, which are still the sole local gateway to the Internet for the overwhelming majority of Americans, since most home PC owners use a computer modem and a telephone line to gain access.

    Ray Albers, the vice president of technology planning at Bell Atlantic Corp., contended that the technology for cable modems still had kinks in it and that some cable operators had already scaled back their plans for deploying them.

    Even while acknowledging that coaxial cable has more capacity than phone lines, Albers said cable's speed dropped quickly if too many users signed on at the same time.

    Unlike the phone model, in which each call is allocated to an individual circuit, the cable network is a shared system, where all the cable customers are vying for use of a single pipeline. And the cable network's highest speeds can be superfluous if the subscriber is interacting with a remote Internet computer that allows connections of only 56,000 bits a second -- a fairly common limitation.

    Bell Atlantic and other phone companies are trying to maintain their dominance in data delivery by developing a new generation of high-capacity lines, called integrated services digital networks, or ISDN, which can transmit data at much faster rates than regular phone wires.

    At the moment, phone companies are merely the local conduit to an Internet access provider -- whether it be a commercial on-line service like America Online or a direct-access company like Netcom or Psinet. But phone companies hope to expand into the more lucrative Internet-access business.

    The biggest threat to cable's on-line future may not be phone companies, however, but squabbles among the cable companies themselves. The two largest, Tele-Communications and Time Warner, have been unable to agree to join forces on a national network that would link cable systems to each other, and in turn, to the Internet.

    Such a network would bring efficiency and economies of scale to the cable industry by enabling operators to store vast amounts of data in one location, and ship it around the network as required by individual subscribers.

    Tele-Communications has been developing such a system in a joint venture with Kleiner Perkins Caufield & Byers, a venture capital firm. But executives familiar with the project, which is called Home, said that Time Warner had rebuffed several offers to make an equity investment in it.

    These executives said that Time Warner did not want to turn Home into a national brand name. But Britt said the disagreement was based on technology issues, rather than any concerns at Time Warner about brand identity

    Executives at Home said they had doubts about Time Warner's technical approach. As it has done in Elmira, Time Warner plans to connect its cable systems to the Internet one at a time, while Home is building a network that would connect a group of systems to the Internet.

    "If you don't integrate the system, you'll end up with something unmanageable," said Will Hearst, the chief executive of Home and the former publisher of The San Francisco Examiner.

    None of these issues mean much to the early adapters of Elmira, who are quickly finding ways to turn Time Warner's new service to their advantage. Elisabeth Carvelyn, a marketing executive at the Arnot Ogden Medical Center, is using Line-runner to publicize the hospital's fitness and health programs.

    "In health care, you have to be able to download very large files, so speed is very important," Ms. Carvelyn said.

    The service can be turned to unexpected uses. Gary Packard, who runs a small industrial brake and clutch manufacturer in Elmira, has used the service to save on legal fees. After a customer tried to renege on a contract recently, Packard logged on to Linerunner and found his way to the law library at nearby Cornell University.

    Packard, who is not a lawyer but once took a course in business law, said he downloaded a few pages from the Uniform Commercial Code and mailed them to the customer. Payment was quick in coming.

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