A. Overview of Advanced Services

Digital Subscriber Line (DSL), cable modem, and broadband wireless are various types of high-speed advanced services, commonly known as broadband access services that exist today.⁷⁵ For this report, staff focused on the mass market segment of the advanced services market, namely residential and small business customers that use DSL and cable modem technologies and, to a much more limited extent, satellite and fixed wireless services. In order to analyze the DSL and cable modem markets, staff utilized data from the FCC and from several California companies. While this report presents an overview and limited market analysis of California's broadband services, future reports may provide more in-depth analysis of advanced services for an expanded scope, incorporating such elements as the higher end segment of the broadband market (e.g., medium and large business customers that use T1 and T3 facilities).

Advanced services enable users to send and receive large amounts of information quickly. While neither the CPUC nor the FCC has precisely defined high-speed broadband access, there is general understanding that such services offer consumers access to telecommunications services at speeds in excess of 200 Kpbs to facilitate the transmission of voice, video, graphics, and data.⁷⁶

Broadband refers to a variety of technology platforms that facilitate high-speed data transmission including copper wire, coaxial cable, fiber optic cable, and wireless channels.

The FCC reported that 56 percent of the U.S. population had the ability to obtain high speed Internet access in the year 2000. While 98 percent of Internet users in the U.S. accessed the Internet through dial-up service in 1999, the FCC anticipates that approximately 50 percent of such users will have high-speed connections by 2004.⁷⁷

B. Advanced Services Competitors

As shown in Table 4.1 at the beginning of this chapter, various incumbents, competitors, and long distance companies (ILECs, CLECs, and IXCs) have diversified their traditional telecommunications offerings and have become competitors in the advanced services marketplace. In addition to ILECs, CLECs, and IXCs, the following types of companies actively provide advanced telecommunications services (in some cases in addition to voice telecommunications services) throughout California.

DLECs (Data Local Exchange Carriers) - The TA '96 encourages the deployment of advanced telecommunications capability. DLECs are those carriers that deliver high-speed data transmission service but not voice service. Typically, DLECs deliver services such as high-speed access to the Internet. ILECs and CLECs may have DLEC functions or subsidiaries. DLECs operational in California include Covad Communications Company and Pacific Bell's data affiliate Advanced Solutions Inc., (ASI).

Cable Providers - Cable providers offer a variety of voice and data services to customers over a network that uses coaxial cable instead of copper wires. Despite the technical differences, cable can directly compete with ILECs in the provision of voice and data services. Residential customers are a particular market segment targeted by cable providers because cable video services already go to many homes across the nation. Cable providers such as AT&T, Cox Communications, Comcast and Cablevision offer residential telephone and data services in a number of U.S. markets.

Wireless Broadband Providers - Carriers may provide broadband service using fixed wireless or satellite technology. Fixed wireless technology can offer services to large geographic areas with a modest investment. Since no new infrastructure is required, fixed wireless is particularly attractive in rural areas, smaller towns, and suburbs. Sprint Broadband Direct and WorldCom are examples of fixed wireless providers serving a limited number of customers in certain select areas in California. Satellite technology is also an option for rural areas but the costs are substantial.

C. Advanced Services Technologies and Deployment

The following section discussed various types of advanced services technologies and deployment levels. In 2000, an estimated 73 percent of California's population lived in cities with broadband access, and an estimated 27 percent lived in cities without access to any form of broadband.⁷⁸

i. Cable Modem

Technology - cable modem is a device that enables a user to connect a personal computer to a local cable television line and receive data at a speed of up to 1.5 Mbps and above depending on the cable provider. This speed is roughly equivalent to the data rate available to some DSL subscribers depending on a users network characteristics. Cable modem Internet access is shared with other users in the same neighborhood, which reduces the speed as the number of users increases.⁷⁹ Cable modem service is offered on the same basic infrastructure as multi-channel video service but it requires equipment upgrades to support broadband connections. The local cable company is responsible for installing cable modems and managing service quality. In order to offer cable modem service, companies must upgrade their networks by installing fiber-optic lines and two-way data transmission capabilities. The technology now exists to allow cable operators to effectively provide multiple advanced residential broadband applications, and cable operators are beginning to upgrade their networks in order to offer multiple services, including digital video, high-speed modem data services, and cable telephony, to customers.⁸⁰ Aside from adding the value of one stop shopping for consumers, offering multiple services can lower an operator's marginal risk.

Deployment - California cable modem usage increased from 1.6 million cable modems in use at the end of 1999 to over 3.6 million by the end of 2000.⁸¹ Nationally, cable providers make high-speed Internet service available to more than 60 million households.⁸² While more customers subscribe to cable modem service than to any other broadband Internet service in the U.S., cable modem service is significantly less prevalent in California.⁸³ Leading cable television companies in California include AT&T (which merged with Comcast in December 2001), Adelphia, Time Warner, and Cox Communications.

In California, the deployment of cable modem service has been limited. California was a pioneer builder of the cable television system and the State has older cable lines, which require expensive upgrades in order to deliver high speed Internet access. Given today's tight financial markets, carriers face challenges financing the needed cable upgrades, especially when considering the debt load many cable companies are carrying from past acquisitions. It has been estimated that more than $52 billion will be required to carry out needed upgrades for the delivery of cable modem broadband services throughout the United States.⁸⁴

The cable industry is the only broadband platform in which providers developed affiliated Internet Service Providers (ISPs) in concert with the cable modem service.⁸⁵ Cable companies serving 80 percent of all North American households signed exclusive agreements with @Home, the largest cable ISP, or Road Runner. @Home, however, went into bankruptcy in February 2002, leaving cable companies scrambling to find new ways of delivering services to their customers. ⁸⁶ This vulnerable link in the cable modem business model, and the general role of ISPs, warrants further study to determine how to expand broadband choices for more Californians.

ii. Digital Subscriber Line (DSL)

Technology - DSL delivers data at high speeds over ordinary copper telephone lines. DSL can carry both voice and data signals. There are many different types of DSL, (e.g. integrated services digital network DSL, high-data-rate DSL, very-high-data-rate DSL, rate-adaptive ADSL, and symmetrical DSL), but most widely deployed is asynchronous DSL (ADSL). ADSL is most widely marketed to the residential customer. DSL is distance-restricted, capable of providing services to customers up to 18,000 feet away. The customer may be able to receive data at rates up to 6.1 Mbps, enabling continuous transmission of video, audio, and 3-D effects. More typically, individual connection speeds range from 512 Kpbs to 1.5 Mbps downstream (incoming) and 128 Kpbs upstream (outgoing). DSL technologies use sophisticated modulation schemes to pack data onto copper wires and are sometimes referred to as "last mile technologies" because they are used only for connections from a telephone switching station to a home or office.

Carriers provide DSL service over both existing phone lines (shared line connections) and additional or second dedicated lines (stand alone connections). Incumbents provide ADSL service over existing copper wires and competitors need to use an incumbent's copper loops if they wish to offer their customers the option of ordering ADSL without the cost of a new line. Prior to the FCC's Line Sharing Order (FCC 99-355), competitors were required to lease second lines to each customer thus increasing their costs. But since that FCC order, the costs to the incumbents' affiliate are now closer to the costs to the competitor to provide the same DSL service. These shared line connections, referred to as "line sharing" in the industry, make it possible to talk on the phone and surf the Internet at the same time. Line sharing is made possible by a special splitter that isolates conventional phone devices from digital signals. Competitors can lease access to the customer's existing telephone line in order to offer those customers ADSL and the same efficiencies as ILECs can.

Deployment - DSL installations began in selected communities in the U.S. in 1998 and are expected to continue at an increased pace through the next decade.⁸⁷ However, since DSL is ramping up in many communities and is distance restricted, it is not an option for many customers too far from the central office or in areas with lower population density. This situation should nevertheless change over time as the industry pursues solutions to overcoming customer DSL access problems, such as the problem of customer proximity to telephone company central offices. In October 1999, for example, SBC (Pacific's parent company) announced it would be embarking on a $6 billion project - designated Project Pronto - that would extend DSL to 77 million SBC customers in the U.S.over three years.⁸⁸ In October 2001, SBC announced that it was reducing its capital spending by 20 percent and, as a result, scaling back its original Project Pronto deployment schedule. Pacific's Pronto service basically shortens the copper wire distance to the customer by including fiber facilities into the network, thus allowing a greater portion of customers that were too far away to now get DSL. Project pronto service can be provided to customers using existing telephone line or as a second line. The deployment of DSL in California, which significantly outpaces cable modem, is discussed more fully later in this chapter.⁸⁹

The DSL business requires significant investment and a stable expanding customer base. Because of the need to raise capital to build network infrastructure, some independent DSL providers, such as NorthPoint Communications Inc. and Rhythms NetConnections Inc., were hit by the economic downturn and are now out of business. Other companies are pulling back from major geographic expansion projects and focusing instead on growth through existing infrastructure.

iii. Wireless Broadband

Technology - Wireless carriers may provide broadband service based on "fixed wireless" or satellite technology. Fixed wireless service requires a device called a "transceiver" to be mounted on a customer's home. The transceiver is pointed towards a radio transmission tower that sends and receives signals, and in turn sends a signal to the customer's modem and computer. The radio transmission tower can send and receive high-speed Internet data, voice, and video to customers that are almost 35 miles away. Fixed wireless service requires a clear line-of-sight so that signals can travel directly between the transmitter and the customer location.

Wireless broadband can also be provided by satellites. With satellite broadband, a small dish, generally between 24 and 36 inches, is placed on or near the home to receive signals from an Earth-orbiting satellite. Standard coaxial cable link the dish to a satellite modem, which is connected to the PC. Both fixed wireless and satellite can offer services to rural areas where DSL and cable modem is not available. While it is not yet viable in dense urban areas with tall buildings, satellite broadband can be beamed simultaneously to thousands of locations and received by any home with a clear view of the sky.⁹⁰ On the down side, the time it takes for satellite to beam and relay data make it less than ideal for interactive Internet content such as gaming.

Deployment - Wireless broadband deployment in California, which is significantly less prevalent than DSL and cable modem, was not an advanced service focus of this report. However, the level of deployment and competition relative to DSL and cable modem is a topic for further study. While satellite broadband service is offered by several providers around the world, led by major players like DirectPC and until recently StarBand, it is not yet widely available in California.⁹¹ Because fixed wireless technology can offer services to large geographic areas without the cost of new infrastructure (the primary investment is the tower and transceiver), it is particularly attractive in rural areas, smaller towns, and suburbs. The line-of-sight requirement, which can only be achieved in specific building types and locations, is one of the most substantial constraints to broader deployment of fixed wireless. Similarly, satellite-based wireless broadband customers will be in rural and other locations where cable and DSL don't reach. Unlike fixed wireless, the costs of establishing a satellite modem system may be the greatest constraint to broader deployment and will be likely to limit market entrance by new service providers in near term. In addition, the rates charged to consumers (about $70 per month) are generally higher than prices for DSL and cable modem services and the installation charges (between $200 and $400) are higher than those for DSL and cable modem.⁹²

iv. Technical Summary

Table 4.7 illustrates the relative speeds and level of broadband deployment in California for existing DSL, cable modem, and wireless technologies.

Table 4.7 Advanced Services Overview
Type	Typical Speeds	Deployment in California
Digital Subscriber Line (DSL) *	Download speeds of 384Kpbs-6.1 Mbps Upload speeds of up to 1.5 Mbps	Greatest deployment in terms of access and current subscribers, limited rural availability.
Cable Modem **	Download speeds of 1-2 mbps Upload speed of up to 128-384 kbps	More limited deployment, limited rural and business customer availability.
Wireless Broadband: Fixed Wireless	Download speeds of 512-1.5 Mpbs Upload speeds of up to 256 Kpbs	Limited deployment and data.
Wireless Broadband: Satellite	Downloand speeds of 400-500 Kpbs Upload speeds of up to 128 Kpbs	Limited deployment and data.

* Speeds vary based on a customer's distance from the service provider's central office. Tiered service plans are offered, making it possible for customers to pay for faster service.

** Speeds vary based on the number of people using the network at the same time.

D. Analysis of Broadband Competition: DSL vs. Cable

This section addresses competition between broadband technologies, namely cable versus DSL. Only about half (49%) of Californian's living in cities with broadband access have a choice between DSL and cable modem. Moreover, following the demise of many DSL providers, these California consumers are basically confronted with an ILEC affiliated company as their only option. And when seeking cable modem service, the same is typically true - there is one large cable company from which to obtain service. As a result of this lack of competition, consumers that live in areas where both DSL and cable modem service is available (which is almost half of the cities in California with broadband access) end up choosing between DSL or cable modem access rather than among DSL or cable competitors.

i. California Distinct From National Trend

DSL Is More Prevalent Than Cable in California - The FCC reports that California was the only state to report higher DSL (57 percent) than cable modem (43 percent) subscribership as of December 2000.⁹³ Nationally, the FCC reported significantly more cable modem than DSL subscribership, with a total of 2 million DSL lines as compared to 3.6 million cable modem connections as of June 2000.⁹⁴

The CPUC looked at how California communities compare in their broadband choices. Not surprisingly, the regions in and around major metropolitan areas have much greater access to broadband services. In 2000, approximately 11 million Californians lived in cities where DSL was the sole broadband option in a total of 210 communities. In comparison, only about 1.5 million people in 68 communities lived in cities where the sole access to broadband services was via cable modems. 12.2 million Californians live in 83 communities where they could choose between DSL and cable modem broadband service. An estimated 73 percent of the State's population lived in cities with broadband access, and an estimated 27 percent lived in cities without access to any form of broadband in the year 2000.⁹⁵



As illustrated in Figure 4.8, less than half (49 percent) of Californians residing in cities with broadband service can choose between DSL and cable modem forms of access. For most Californians seeking broadband, the choice is limited to either DSL (45 percent) or cable modem (6 percent).

For those communities that offer broadband services, 55 percent of Californians live in cities that provide cable modem access, whereas 94 percent of Californians live in cities that offer DSL. The limited availability of cable modem broadband service is attributed to several major California cities (population greater than 200,000) that do not offer cable modem access to most of their residents, including the following:

San Jose 894,943 population

San Francisco 776,773 population

Long Beach 461,522 population

Oakland 399,484 population

Stockton 243,771 population

Moreover, there are 16 communities with populations between 100,000 and 200,000 that do not have cable modem access. With limited cable modem deployment in California, broadband competition between DSL and cable is restricted to select areas. Appendix I includes a detailed breakdown of DSL and cable modem broadband availability by community.

ii. Growth Expected for Cable and DSL

Overall, U.S. residential broadband subscribership has seen slowing growth, with an exodus of activity in the DSL market. Nationally, there was a decline in DSL growth, from as high as 50 percent growth in 2000 declining to 20 percent growth in the first quarter of 2001 and further dropping to 14 percent in the second quarter of 2001.⁹⁶ Companies, including SBC Communications, AT&T Wireless, and Excite@Home, decided to halt or curtail major broadband initiatives.⁹⁷

Nevertheless, growth in residential DSL and cable modem subscribership is forecasted to continue in 2002. The Wall Street Journal has reported a 52 percent projected growth in market share for DSL as compared to 37 percent for cable modem service.

Table 4.9 U.S. Residential Broadband Subscribership Projections (In Millions)
Broadband Type	Subscribership
	Year End 2001	Year End 2002	Projected Growth
DSL	3.3	5.0	1.7 (52% increase)
Cable Modem	7.0	9.6	2.6 (37% increase)

Source: Wall Street Journal, Bells Make a High-Speed Retreat from Broadband, Berman

and Young, October 24, 2001.

E. DSL Competition Analysis

This section examines competition within the DSL market, including: market share held by large ILECs; competitor access to the shared line DSL market segment; and differences in DSL line sharing activities among medium and large ILECs.

i. ILECs Dominate DSL Markets

As previously noted, DSL may be provided to two core market segments: stand alone and shared line customers. The equal ability to provide shared line service (DSL line sharing) is key to establishing and maintaining competition in the DSL market. Analogous to UNEs (unbundled network elements) for wireline telephone service, which enable competitors to lease parts of the network from ILECs, line sharing allows competitors to provide high-speed data service without the substantial cost of building their own infrastructure. Staff's analysis indicates that ILECs continue to have a substantial competitive advantage in the shared line DSL market and consumers are limited to a few dominant service providers. Overall, ILECs control approximately 90 percent of the DSL market in California.⁹⁸

ii. ILECs Continue to Dominate DSL Line Sharing Market, Despite Access

Requirements

DSL line sharing, as previously noted, allows a customer to use his or her existing phone line for both normal phone service provided by the local telephone company and for high-speed DSL internet access through the same or another provider. The idea behind DSL line sharing in respect to local competition is that the playing field will be leveled by giving competitive DSL providers access to shared-line interconnections.

The FCC, in fact, designated the high frequency portion of the local loop that delivers DSL information to be a UNE, and began requiring ILECs to line share this portion of the loop with CLECs in December 1999.⁹⁹ The FCC further asked the states to set rates, terms and conditions for access to this new UNE, and the CPUC has since been working toward performing these tasks for California. A final CPUC decision on the price for this UNE should be issued by mid to late summer 2002. The CPUC will then focus on non-cost related issues surrounding line sharing (e.g. - what specific unbundling obligations for line sharing ILECs are to provide CLECs in California) once this final price is decided.

The CPUC evaluated line-sharing orders received by Pacific Bell from nine competitors that comprised the California DSL market between June 2000 and April 2001. These firms include Pacific's advanced services affiliate ASI (SBC Advanced Solutions) which was spun off from Pacific in 2000, as well as the following companies: Covad Communications Company, DSL.net, MGC Communications, New Edge Networks, Pointe Local, Rhythms NetConnections, and TCI Telephony.¹⁰⁰ As indicated in Table 4.10, below, ASI controlled approximately 96 percent of the DSL shared line market between June 2000 and April 2001.¹⁰¹

Table 4.10 DSL Shared Line Market in California102 June 2000-April 2001103
	Competitors	ILEC Affiliate *
Market Share	4.2%	95.8%

* Pacific Bell's affiliated DSL provider, ASI.

As of May 2002, only one wholesale competitor, Covad, remains in business and no new wholesale competitors have entered the California DSL market. Hence, ASI's market share today is likely higher.

Staff also evaluated California's DSL line sharing market based on customer segments served by ILECs.¹⁰⁴ As indicated in Table 4.11, the State's four largest ILECs filled DSL line sharing orders for three audiences: (1) affiliated DSL service providers; (2) non-affiliated competitors; and (3) directly for other customers. In this case, staff evaluated the proportion of DSL line sharing orders filled by each ILEC through affiliates versus other channels.

Table 4.11 DSL Line Sharing Market Activity in California
DSL Line Sharing Order Market Segments	Percent Filled by ILEC Per Market Segment
	Pacific	Verizon	Citizens105	Roseville
Jan 2000-Dec 2000
Filled for ILEC Affiliates106	99%	-	-	-
Filled for Non-Affiliated Competitors	1%	2%	-	-
Filled Directly for Customers	-	98%	-	100%
	100%	100%	-	100%
Jan 2001-June 2001
Filled for ILEC Affiliates	96%	45%107	-	-
Filled for Non-Affiliated Competitors	4%	2%	-	-
Filled Directly for Customers	-	55%	-	100%
	100%	100%	-	100%

Source: CPUC Data Request responses.

As indicated in Table 4.11, Pacific filled 99 percent of its DSL line sharing orders for its DSL affiliate, ASI, in 2000. This proportion decreased to 96 percent in the first six months of 2001 as Pacific started filling more orders for competitors.

In 2000, Verizon filled 98 percent of its DSL line sharing orders directly for customers but in 2001 filled 45 percent of its orders for an affiliate. Verizon consistently filled 2 percent of line sharing orders for competitors in 2000 and in 2001.

Citizens and Roseville do not have DSL affiliates and did not fill DSL line sharing orders for competitors during the reporting period. There was no DSL line sharing activity occurring in Citizen's service area through June 2001, which is largely rural, but modest activity is taking place in Roseville's service area.¹⁰⁸

⁸⁹ DSL access as compared to cable modem is discussed later in this chapter in section B(i).

¹⁰⁷ Verizon's shift from filling DSL orders directly (98 percent in 2000) to filling orders through an affiliate (in 2001, 45 percent through affiliate while 55 percent were still filled directly) is due to the launch of Verizon's separate data affiliate, VADI, in May 2001. Orders from January through May 6, 2001 were filled directly, whereas, after May 6 orders were filled through VADI. DSL orders are currently filled through VADI.