The proliferation of alternative technology, such as WebTV and Worldgate, has introduced families without PCs to the Internet. Forrester estimates that spending on Internet appliances will rise four-fold during the next two years—from $350,000 to $1.5 million. Several manufacturers have come out, or plan to come out, with Internet-ready appliances. These devices are all part of America Online's (AOL's) "AOL Anywhere" strategy. The devices are small and lightweight and will launch AOL and offer content and different types of features. These devices, unlike PCs, could be placed throughout the house, including the kitchen or living room. As consumers become more familiar with the Internet, they will spend more time on it. Consequently, they will begin to demand higher access speeds either through cable modems or DSL.

The world has evolved from one where all Internet access comes from PCs to one where Internet access can come from anywhere—a television, a cell phone, a personal digital assistant (PDA), or any other type of Internet appliance. There is an explosion in the number of Internet appliances. In late September, Yahoo! announced that it was fitting 10 New York City taxicabs with Internet-enabled PDAs. Continental Airlines went one better and announced it was testing fully functional Internet systems on one of its planes. Today, Internet access is available in amusement parks, ballparks, sports clubs, bars, car washes, and even waiting rooms in doctor's offices.

Moore's law is behind the technical progress that is being made in Internet appliances and is also the reason that there are so many different types of appliances. Moore's Law enables small, inexpensive processors that can be embedded into portable devices-such as Internet access through PDA and mobile phones. However, Moore's law also drives multimedia capability into digital technology as access networks, storage, and processing devices all become able to handle the large volumes of data required in transmitting audio and video content. It is this trend that is driving the industry to a plethora of entertainment-oriented appliances, such as digital photo displays (Ceiva), net-top boxes (AOL TV), and Web TV and digital VCRs (Replay TV and TiVO). Ceiva's picture frame sells for $250 plus a $50 annual subscription to its Web server, where users queue photos for downloading.

Demand for Broadband Access Services

As the Internet market continues to explode, demand for greater bandwidth and faster connection speeds have led to several technological approaches developed to provide broadband access to all consumers. The demand for high-speed bandwidth is growing at a fast pace, driven mostly by growth in data volumes as the Internet and related networks become more central to business operations. Today's telecom industry is undergoing a bandwidth shortage driven mostly by the continuing explosion of the Internet and data markets. Demand comes from three primary sources: small and mid-sized businesses and small offices/home offices (SOHOs), consumers, and multiple-tenant units (MTUs) or in-building fiber builders and universities that are installing high-speed wireless connections throughout their campuses.

The rapid growth of distributed business applications; the proliferation of private networks, e-commerce, and bandwidth-intensive applications (such as multimedia, videoconferencing, and video on demand [VOD]); as well as the continuing deregulation and privatization of the telecommunications networks throughout the world, all help fuel the demand for bandwidth. Moreover, an increasing number of teleworkers are fueling the demand for second and third lines for fax and Internet dial-up. To meet this explosive demand for bandwidth and to capitalize on this growing data opportunity, many data competitive local-exchange carriers (CLECs) are aggressively targeting small businesses, SOHOs, and teleworkers in the selected areas of the country in which they are operating.

Additionally, demand is coming from homebuyers seeking high-speed connections in their homes. According to the New York Times, high-speed access has become as important as a two-car garage, fireplace, kitchen, or a nursery in a new home. For builders, high-speed access is a way to have a continuing revenue stream even after they have sold the houses. In most of the places built, the builders retain a small ownership interest. Many builders are weighing revenue-sharing arrangements with broadband access companies that will wire all new developments as well as existing ones, similar to the deals developers have struck to wire office buildings with broadband providers. High-speed access services provided by these builders are often significantly cheaper, up to 15 percent, than services provided by other broadband providers. These providers give homeowners a bundled service that often includes phone, cable, and high-speed access at as much as $20 a month less than the typical cost of the items priced separately. Moreover, instead of a separate bill, they simply pay one fee to the homeowners association.

Consumers are tending to remain in apartments longer than average, require high-quality services to the homes, spend more money on new services such as high-speed access, and waiting longer before getting married. As a result, people in their late 20s and early 30s have more disposable income and are more inclined to purchase products that are not necessities, such as high-speed broadband access. Recent surveys show that nearly 44 percent of apartment occupants are 34 years old or younger and have a combined income approaching $125 billion annually.

Small Business/SOHO/Teleworker

Access to a corporate local-area network (LAN) at reasonable prices is one of the main reasons why small businesses and teleworkers purchase DSL; access to a corporate LAN often requires a 1 megabit per second (Mbps) connection in both directions. DSL eliminates the poor performance and busy signals of analog modems and the complexity of the integrated services digital network (ISDN) with a high-speed dedicated service that costs a fraction of the price of T1 leased lines.

According to the U.S. Small Business Administration (SBA), some 85 percent of businesses with fewer than 100 employees had PCs in 1999, and more than 61 percent of these had access to the Internet. Home-based businesses invest about $1,100 on Internet technology with very small businesses; those with fewer than five employees spend about $1,150 annually.

There are about 24 million teleworkers today, and this figure is expected to grow significantly in future years as many more companies are offering workers the ability to telecommute. Furthermore, according to the Gartner group, about 80 percent of the 1.5 million enterprise locations in the United States are small or branch offices with six to 75 employees. Like telecommuters, these branch offices typically need connectivity to the corporate network.

Many teleworkers work from home on a full-time, part-time, or after-hours basis and require high-speed, remote LAN access to best perform their jobs. Also, many people work and operate a business at home. In 1997, The U.S. Department of Transportation reported that as many as 11 million people telecommuted. This figure has now climbed to 23.6 million. Servicing this demand should lead to rapid innovation and rapid deployment of services designed to meet the needs of corporations and their teleworkers as well as Internet service providers (ISPs) and their small-business customers. Many firms have already created special products targeted at these people.

IDC states that small businesses and teleworkers spend a combined total of $73.9 billion on voice and data services. Moreover, because these small businesses lack economy of scale, they typically pay higher rates for voice and data services than large businesses. However, despite their smaller size, small businesses and SOHOs have many of the same communications requirements as large companies. Many small and branch offices require multiple phone lines but cannot justify the cost and expense of a dedicated T1 line. DSL solutions that include voice are perfectly suited for this market.

According to the trade periodical The Industry Standard, the number of small businesses with Internet access is expected to more than double by 2001, resulting in a compound average growth rate of 11 percent from 1997 to 2001. By the end of 2000, 61 percent of all small businesses had Internet access, but only 20 percent of these had a broadband connection.

Morgan Stanley Dean Witter estimates that the value-added services market represents a $40 billion opportunity. These analysts forecast the value-added service market will increase from $34 billion in 2000 to $45 billion by 2005. Today, voice services for small-to-medium enterprises (SMEs) account for 96 percent of all value-added services revenue, but in the coming years the deployment of voice-over–DSL (VoDSL) or voice-over–IP (VoIP) technology will enable SMEs to reduce their spending on voice services. As a result, the addressable voice market will decrease to 71 percent by 2005.

Consumer Market

According to various analyst forecasts, at the end of 1999, there were about 34 million consumer households on-line, or about a 33 percent market penetration. Additionally, this 33 percent penetration equaled about 82 percent of all PC households. By the end of 2000, Internet access penetration in the consumer market increased to almost 41 million and is expected to rise to 81 million by 2005, or 73 percent of households and 97 percent of PC households. Analysts expect the consumer market to continue to account for more than 80 percent of total Internet subscription through 2009. Although dial-up access is the most prevalent, broadband access is growing strongly as was discussed at length in the earlier sections.

Morgan Stanley Dean Witter estimates that the consumer market for broadband services will reach $108 billion by 2005, up from $95 billion in 2000 for a compound annual growth rate (CAGR) of less than three percent. Today there are more than 104 million households in the United States, with a penetration rate of almost 40 percent for Internet access. However, only a small percentage of these consumers—less than one percent—are served by a broadband connection. There is a race between the cable operators and the DSL providers concerning which can gain the largest market-share. The fight over the consumer market has led to massive industry consolidation and has also led SBC to spend $6 billion to perform a massive upgrade to its network infrastructure to ensure that it captures the lion's share of this market. Furthermore, the inability to gain access to the consumer market is what led NorthPoint to merge with Bell Atlantic.

All growth in the consumer market is for Internet access services. The voice services market is expected to remain relatively flat because consumer versions of VoDSL using asymmetric DSL (ADSL) are a couple of years away. Morgan Stanley Dean Witter analysts estimate that consumer Internet access revenues will increase at a 17 percent CAGR from $9.4 billion in 2000 to $20.8 billion in 2005.

MTUs or In-Building Service Providers

The MTU broadband and equipment market is rapidly expanding and is expected to increase from $370 million in 2000 to $2 billion in 2004. Shared-tenant facilities also offer excellent opportunities for rapid payback from broadband applications. These facilities began owning their own copper loops in the early 1980s, as customer premises equipment (CPE) was deregulated. These private copper loops are an extremely valuable hidden resource. The resource is hidden because most building owners are not cognizant of the opportunities available to them. There are about 750,000 commercial office buildings in the United States, with only two percent or 17,000 having more than 100,000 square feet.

However, these commercial office buildings with more than 100,000 square feet account for 40 percent of the total commercial office space. Some 42 percent of all tenants rank built-in wiring for high-speed Internet access as one of their most desired business features.

In-building service providers offer building owners significant benefits. Building owners receive state-of-the-art fiber networks, warrants to purchase equity with the service provider, and approximately a four to six percent share of all revenues derived from the building tenants, with little or no capital contributed. These in-building broadband providers provide tenants with significant amounts of bandwidth at very competitive prices. Allied Riser, one provider, is offering tenants 10 Mbps of bandwidth at prices comparable to 1 Mbps. This allocation of large amounts of bandwidth to the desktop will enable providers to supply a whole host of value-added services such as Webcasts, video, application hosting, and real-time videoconferencing.

Because these large commercial office buildings are predominantly located in large cities—more specifically in downtown areas—they are likely to be connected via fiber. The average customer in a fiber-fed building pays $750 per months for 8.5 Mbps of bandwidth. In contrast, the average business DSL subscriber pays about $200 a month for 1 Mbps or less of bandwidth.