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From: James Parmelee <[e-mail]>
Newsgroups: comp.dcom.modems
Subject: The Last Mile:  Cable Modems vs. ISDN
Date: Wed, 03 Jan 1996 11:03:55 -0800
Organization: CS First Boston
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Attached is a copy of The Last Mile:  Cable Modems vs. ISDN

This  memorandum  is  for  informative purposes  only.  Under  no
circumstances is it to be used or considered as an offer to sell,
or  a  solicitation of any offer to buy, any security. While  the
information  contained  herein has  been  obtained  from  sources
believed  to be reliable, we do not represent that it is accurate
or complete and it should not be relied upon as such. We may from
time  to  time have long or short positions in and buy  and  sell
securities referred to herein.  This firm may from time  to  time
perform  investment  banking or other services  for,  or  solicit
investment banking or other business from, any company  mentioned
in this report.
⌐ 1996, CS First Boston Corporation

CS First Boston
Equity Research
The Last Mile
Volume:  96.01

January 2, 1996
James P. Parmelee ([e-mail])
212.909.3144

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The Last Mile:  Cable Modems vs. ISDN

This  memorandum  is  for  informative purposes  only.  Under  no
circumstances is it to be used or considered as an offer to sell,
or  a  solicitation of any offer to buy, any security. While  the
information  contained  herein has  been  obtained  from  sources
believed  to be reliable, we do not represent that it is accurate
or complete and it should not be relied upon as such. We may from
time  to  time have long or short positions in and buy  and  sell
securities referred to herein.  This firm may from time  to  time
perform  investment  banking or other services  for,  or  solicit
investment banking or other business from, any company  mentioned
in this report.
⌐ 1996, CS First Boston Corporation

CS First Boston
Equity Research
The Last Mile
Volume:  96.01

January 2, 1996
James P. Parmelee ([e-mail])
212.909.3144

"Behold the turtle.  He makes progress only when he sticks his
neck out."

 - James Bryant Conant

Most industry pundits predict the competitive landscape for
Internet service providers (ISPs) will become increasingly
difficult as the Regional Bells (RBOCs) enter the fray during
1996.  We're not convinced.  It is true the Bells boast strong
customer relationships, an ability to bundle multiple services,
and massive resources.  However, the Bells are not likely to
"stick their necks out" and aggressively focus on the Internet
access market.  The RBOCs strategic priority will be to retain
their dominant position (dare we say monopoly position) in voice
services.  Internet access is of secondary importance.  This
suggests widespread deployment of the telco's high speed
technology to support Internet access, integrated services
digital network (ISDN), may be further off than most believe.
Our bet is cable service operators will be more aggressive than
the Bells in the Internet service arena.  We expect cable modem
technology to become the premier Internet access technology by
the turn of the century.

Protecting Their Voice Turf

One way or another, significant competition will emerge in the
U.S. local exchange telephone market during the next three to
five years.  Many states have already introduced competition in
the in-region toll call market, several RBOCs are beginning to
infringe on each others turf to offer value added business
services, and telecom legislation which would  accelerate
competition with long distance carriers is before the Congress.
If the specter of AT&T (T $64 3/4), MCI (MCIC $26 1/8), and
Sprint (FON $39 5/8) in the local exchange with their strong
brand names and relatively efficient telephone operations does
not strike fear into the hearts of Regional Bell executives, it
should!  The RBOCs must radically restructure their operations to
compete; costs must be slashed, more attention must be paid to
consumer marketing, and operational efficiency must dramatically
improve.  These are not trivial tasks for any company - certainly
not a monopoly.

The market at stake for the Bells dwarfs any near-term revenue
opportunity from providing Internet access.  Today's
telecommunications services market totals $175 billion.  The
RBOCs must not only protect their $96 billion local exchange
monopoly, but also develop strategies to tap the $65 billion long
distance market.  The combined revenues of the major Internet
access and service providers were under $1 billion in 1995.
These statistics indicate the Regional Bells will only
aggressively push Internet access if it assists in protecting
their dominant market share in voice.

ISDN:  A Niche Market At Best

Our view of the Regional Bells' strategy suggests wide spread
ISDN deployment is further off than many believe.  Yes, the ISDN
market will continue to grow rapidly from a small base, but
deployment to a double digit percentage of American homes is at
least five to ten years away - if ever.  One issue is the failure
of the Bells to create ISDN service packages.  Consumers must
fend for themselves in purchasing (for at least $300) and
installing ISDN modems.  Moreover, modem installation has proven
difficult.  One ISDN manager at a Regional Bell indicated he
would be surprised if ISDN ever achieved more than 5% penetration
within its operating region.  Another Bell is confronting
capacity bottlenecks in switching infrastructure that is slowing
deployment.  A planner at yet another RBOC indicated ISDN was an
extremely difficult technology to provision in the local exchange
network.

The Cable Industry:  Internet Access as the Killer Application

The cable service operator must be ecstatic about offering
Internet access.  Finally, a killer application to counter the
potential loss of market share to the direct broadcast satellite
(DBS) industry.  Internet access services will also assist in
mitigating any acceleration in market share loss as the Regional
Bells introduce DBS and wireless cable services (assuming the
passage of telecom legislation).  Cable subscriber growth rates,
excluding acquisitions, at TCI (TCOMA $19 7/8) and Time Warner
(TWX $37 7/8) are approximately 3.5%.  We believe the
introduction of Internet access services is one of the few
opportunities available to the cable operator to boost subscriber
growth rates as well as increase revenue per subscriber.

The ability of cable networks to offer consumer Internet access
at hundreds of times the speed of competing services represents a
substantial differential advantage.  For example, by utilizing a
cable modem that supports 10 megabits per second in capacity, a
user can download a file in 1.5 seconds which takes 3 minutes
using an ISDN line and 8 minutes on a 14.4 kilobits per second
analog modem.  Cable's speed advantage will become more important
over time as new multimedia applications requiring greater
network resources emerge on the Internet and World Wide Web.  It
will be difficult for the RBOC's to match cable's capacity
capability any time soon.  Even RBOCs with aggressive deployment
plans such as Pacific Telesis (PAC $33 1/2) have scaled back
hybrid fiber-coax (i.e. cable networks) installs in favor of
wireless cable.

Cable's Internet Access Strategy

John Malone, the President and CEO of Tele-Communications
articulated his view on Internet access and cable modems at the
Western Cable Show in early December, 1995,  "The explosion of
multimedia capable PCs in residences and businesses means the
economics of deploying a (information superhighway) system is
much more near-term because we do not have to worry about
expensive terminals (set top converters) which is the thing that
has to evolve to be cost effective."  Mr. Malone is extremely
optimistic.  Cable networks must be upgraded at a significant
cost (in the billions) and over a long time period to support
interactive services.  Given the capital constraints confronting
the industry, we suspect a more focused Internet service strategy
will be undertaken.  Only neighborhoods most likely to use the
Internet and which can afford Internet services will be upgraded.
This focus strategy will maximize revenue per subscriber,
minimize capital outlays, and potentially achieve impressive
returns on invested capital.

@Home is On Target

TCI's foray into the Internet access market will begin in early
1996 through @Home, a joint venture between TCI and Kleiner
Perkins.  @Home is deploying a national network backbone that
will offer Internet access services to all cable operators.  We
view the @Home strategy as customer focused relative to the
RBOCs' approach.  An @Home customer will be provided with a cable
modem (modem purchase is required with ISDN), unlimited access to
the Internet at a fixed price (Bells charge usage fees), and
higher speed network performance.  @Home will leverage caching
and replication techniques in its network design to further
enhance its speed and quality of service advantages.

Our view of the consumer Internet market has not changed since
the previous issue of The Last Mile.  High speed Internet access
over cable will most likely not achieve over 10%-15% consumer
market penetration until after the turn of the century.  However,
at the margin we are more bullish about cable's strategy and
cable modem technology relative to the Bells' strategy and ISDN.
A final thought; as the cable modem grows in importance, what
happens to the set top converter?

The Last Mile is a biweekly publication focusing on current
events in the telecommunications equipment/internetworking
industries.  It is distributed through First Call, fax, and
email.  To be placed on the distribution list, please contact
your CS First Boston salesperson or send Internet mail to
[e-mail].  Feedback is welcomed and encouraged.



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