Behind broadband's <br>big spending spree

By way of example, AT&T (NYSE:T) spent $55 billion to buy Tele-Communications Inc., Microsoft Corp. (Nasdaq:MSFT) took a $5 billion piece of the deal, and Yahoo! (Nasdaq:YHOO) forked over $5.7 billion to buy Broadcast.com (Nasdaq:BCST), the streaming-media portal site.

Answer: Even if fast access is headed for a slow build, the companies behind broadband infrastructure, content and services say now is the right time to get on the bandwagon.

The idea is to be first in line for the big returns that will come as broadband grows, while positioning themselves in the public eye as prime-time players.

Very rich Microsoft, which has the luxury of forgoing an instant return on its investments, has been one of broadband's biggest-spenders.

Recently, its $5 billion share of the AT&T-TCI deal brought with it a stepped-up agreement to use Microsoft's operating system on broadband set-top boxes. (WebTV is Microsoft's current set-top product.)

The Redmond, Wash., giant was a bit of a laggard to the Internet movement, but it doesn't intend to let that mistake happen again. Microsoft's view is that broadband isn't just more Internet, but that it will create a whole new category of consumer-oriented services.

"There are a lot of chicken-and-egg problems to be solved," said Alan Yates, director of platform marketing for Microsoft's WebTV. "We don't mind being a leader in solving those problems. We are ... committed to making it a three-year process instead of a 10-year process."

For a company that provides applications and online services as well as operating systems, that means a huge market opportunity.

But it could mean big bucks for others, too. Research shows that the most compelling application for broadband right now is audio and video, in the form of either downloads or "streaming media." What will drive demand for broadband?

But even if everybody had broadband connections, they might still have a hard time getting at the media they want, since much of the congestion users face is not between users and their ISPs, but out on the public Internet.

That could mean a big opportunity for building media-specific networks within the Internet, to get broadband users the stuff they want, when they want it.

Such media-specific networks are the bailiwick of RealNetworks Inc.(Nasdaq:RNWK), which makes the industry-leading streaming media platform, and also provides infrastructure for much Internet media content via its Real Broadcast Network.

"The Internet has grown up by its bootlaces," said Martin Dunsmuir, general manager of broadband systems for RealNetworks. "But to move it to the next level, in terms of bit rate, quality, and those things, we have to reinvent parts of the Internet's architecture."

Dunsmuir isn't fazed by projections that show broadband users remaining a small minority of the overall Internet public. The reason: Even a few million Internet users will create a disproportionately large market for all kinds of Internet companies.

"With broadband, you can increase the amount of traffic per user significantly," he said.

New services are possible, such as, for example, an Internet radio news update that launches when you turn on your computer. Also, the increased quality of the connection will make users willing to pay for services like video or audio programming on demand.

"Even an audience of a few million is going to generate a significant amount of traffic, compared to Internet users at large," Dunsmuir said. "So even within a couple of years, we're going to be in a position to make money."

But if better Internet access will bring reasonably short-term rewards to some companies, AT&T expects much greater returns several years from now, as convergence becomes a reality.

To AT&T, convergence means that consumers will have the option to purchase all their services -- cable TV, Internet access, local and long distance telephone -- under one roof. But the company also foresees new features that will make Caller ID look as advanced as the telegraph.

For example, there could be what the company calls universal messaging. By calling one number, you could access your voicemail, e-mail and faxes. To AT&T, the technological kinks in all these services have already basically been worked out.

The main challenge remaining -- and this will take several years -- is introducing the back-office systems and training the customer service personnel that will be necessary to offer such services to millions of people.

Sure, it will take a while, but the telecom giant is betting that the technology will be worth the wait. After all, says AT&T spokesman Mark Siegel, "You don't spend this kind of money on something that's short-term."

America Online Inc., the world's largest ISP, meanwhile, sees broadband mainly as an opportunity to get bigger.

That's because, no matter how advanced the technology behind the screen and outside the house gets, AOL believes consumers will always want a friendly-looking, all-in-one package -- and will pay to get it.

"We don't view broadband as a separate platform, it's just a continuance of the evolution of the current service," said Barry Schuler, president of AOL's Interactive Services Group. "To get people to use it, it's got to be invisible to them. They want to turn it on and have it work. Broadband has to work the same way."

That's been the basis of AOL's success with its modem-based service, and it is moving into DSL with several partnerships, including Bell Atlantic and SBC, that will begin beta testing in large cities this year.

The next version of the AOL software, 5.0, will sense broadband connections and offer those users a more media-rich experience.

Things look rockier in the cable-modem market, however. So far, the cable companies that control those wires force users to sign up for the network's ISP. An AOL subscription, if users want it, costs extra.

Content-oriented companies are understandably taking a more restrained approach.

Yahoo! Inc., for example, paid big money for Broadcast.com, whose expertise with audio and video could prove a valuable asset once there's a significant demand for high-bandwidth media. But Broadcast.com has a thriving business purveying its properties over modem lines.

The company is also using its base of office users -- who usually connect at high speeds -- as a test bed to see what kinds of applications people want over fat pipes.

"We're working in broadband content from Broadcast.com, threading that into the normal usage of Yahoo!," said Jeff Mallett, Yahoo!'s president and chief operating officer. "The expectation is that the people hooked on Yahoo! at work will want to carry the experience home with them, once the pipes are there."

Of course, not everyone is ready for a spending spree.

GO Network -- the umbrella online venture of Walt Disney Co. (NYSE:DIS) -- stands to gain from the rise of broadband, if only as one of the world's most prominent content providers.

But GO and Disney are content to investigate how broadband will affect the world of content -- and, for now at least, to keep their pennies to themselves. "At the point that we're ready for it, we have the assets to take advantage of broadband," said Patrick Naughton, GO's executive vice president of products. "But we're not going to go out and spend hundreds of millions on the infrastructure, or on doing deals to accelerate it.

"It's on the pace it's on," he continued. "It's several years away."