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Investors will have to wait for superhighway payback

Report says information superhighway will grow in in three distinct waves.

By Ron Condon

December  1995
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LONDON -- Telephone companies and cable television operators will have to wait until the end of the century before they start to see any return on their Internet investments, according to a new study.

But by the year 2005, nearly 197 million sites will be connected to the Internet in the US and Europe, and revenues from the whole superhighway will amount to $185 billion (US currency), according to "Applications for the Superhighway - Market Drivers," a study from London-based research group Ovum Ltd.

In looking at how the information superhighway will develop over the next decade, and what applications will provide the biggest stimulus for growth, report authors John Moroney and John Matthews foresee the superhighway growing in three distinct waves:

  1. The first wave will use existing switched telephony networks and run at data rates up to 28 kilobits per second. Currently in use for e-mail, the telephone network can handle still images fairly well, but it will become overloaded in the next two years as video and voice processing applications become more widespread, according to the report.

  2. The second wave, which will start in 1997, will add ISDN technology to provide low-quality moving images and faster connect times. But even at 64 kilobits per second, a high-quality still image will take three seconds to be transmitted.

  3. The third wave, which will start in 1998, will provide broadband capacity at 2 megabits per second and above, to provide broadcast-quality moving pictures and high-speed LAN interconnections.


Both network providers and content providers will shape the superhighway, according to the report. The network providers will develop from today's telephone and cable TV companies. The telecommunications companies already benefit from trends in the first two waves (e-mail and low-level video-image transmission), but there is pressure to build broadband networks to ready themselves for the third wave.

The content companies will emerge from existing publishers, entertainment companies, and educational establishments. "These organizations are entering a period of profound change as they adapt to the electronic delivery of information and entertainment to homes and commercial sites," the report said.

The content providers stand to win the most, with 65 percent of superhighway revenues flowing to them by 2002. "The remaining 35 percent must be sufficient to cover the infrastructure cost incurred by the network operators to deploy Wave 3... or they will roll out the infrastructure in a slow and patchy manner, targeting only those areas they expect to provide quick profits," according to the report.

By 2005, nearly 197 million sites -- either homes or commercial offices -- will be connected to the superhighway. Commercial users will provide most of the funds for the development of the highway, but domestic users will form the largest group on the back of wave 3a developments.

The US will see a return on investment earlier than Europe, with positive cash flow beginning in mid-1999 and reaching around $25 billion by 2005. In Europe, profits should start to flow in 2001, reaching $15 billion by 2005.

The three main obstacles to the development of the superhighway are regulation, technology, and security.

"A regulatory framework for the superhighway is urgently needed," to avoid the creation of information haves and have-nots, according to the report. Modern society is built on equal access to information and education, but "the superhighway could distort this equilibrium in favor of a wealthy, well-educated minority," the report said.

Though international government action is needed to regulate the development of the superhighway, both the US and European governments are relatively inactive, according to the report.

"This situation is advantageous to the US economy, because of its freer approach to commerce and an underlying social belief that an individual 'can do.' It will result in the European economies lagging behind that of the US," said the report.

Technology standards need to be set and agreed on soon to enable the consumer market to develop quickly.

"The faster a clear technical direction emerges for the residential market, the faster the superhighway will take off in this environment," according to Ovum.

Corporations may be slow to adopt the Internet while doubts about security remain, but the obvious commercial benefits will outweigh the costs of additional security measures needed to protect corporate data, the authors claim.

Ovum Ltd. can be reached in London at +44-171-255-2670.

--Ron Condon (a London-based reporter for the IDG News Service)

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