A BROADBAND HIERARCHY OF CONTENT KINGS

With a heavy advertising blitz that began less than a month ago, America Online's version of broadband is already a force to be reckoned with, bringing in more than 250,000 subscribers in the first quarter. More important, though, is the company's use of exclusive content — or a revival of the “walled garden” approach — that is gaining credibility with DSL providers attempting to overtake cable operators' data efforts.

Once derided as a tool used by large media corporations to control the Internet, the new version of the walled garden has a decidedly post-Internet bubble slant. Instead of restricting users from viewing content outside the confines of specific — or preferred — content providers, the new edition of walled gardens gives users incentives to stay, such as faster access to high-end applications and premium content that others outside the wall can't see.

AOL for Broadband, which now claims a total of 2.5 million customers, also is a far cry from the company's previous efforts in which content was offered either as part of a DSL bundle or for an additional $9.95 on top of DSL or cable modem rates. Though some analysts believe many of AOL's broadband customers are sticking around to avoid the hassle of changing e-mail addresses and buddy lists, the new rollout includes full-motion video news, CD-quality audio and an array of video from the company's Time Warner division.

During AOL Time Warner's quarterly conference call, the fact that the increase in broadband subscribers almost made up for AOL's net loss of 289,000 dial-up subscribers wasn't lost on executives.

“One of the big sources of subscribers for us is our own dial-up subs leaving and going to broadband,” Don Logan, chairman of the Media and Communications Group of AOL Time Warner, said during the call. “When they do leave, we want to have a product to sell them.”

While the revenue loss from dial-up isn't always made up by broadband, telco-based DSL providers are taking a cue from AOL. Several carriers contacted for this story wouldn't be specific, but many said the concept of exclusivity — or preferential access to content — is on their radars.

Verizon Communications, which caused a stir last week with a significant DSL price cut, is banking on additional content as a drawing card for long-term growth (see story at right). What's more, Alcatel, the market share leader in DSL access multiplexers, recently indicated it is ready to support the new iteration of walled gardens. At last month's FastNet Futures, Alcatel Chief Technology Officer Neil Ransom said that AOL's success was evidence that the concept works.

Alcatel is pushing the kinder, gentler version of the walled garden by comparing it to different shopping experiences.

“It's kind of like going to a flea market,” said Jim White, vice president of marketing for Alcatel's fixed networking division. “There's some good stuff laying on the table, but it's generally not a good shopping experience. We think this is a better way to organize the marketplace and monetize the network.”

One way the company will support the walled garden approach is to tag content from specific sites as prioritized packets. While not limiting the ability of users and content providers to connect, those inside the wall will have a significantly better experience. SBC Communications is in the planning stages of such an architecture to take advantage of its content alliance with Yahoo, according to one source.

Moreover, the new version of the walled garden concept fits in well with telcos' ideas about tiered services. Initially, DSL providers created tiers based on line speeds. Except for a small minority of users, most DSL subscribers opted for the lowest-speed service. Increasing penetration rates only would have added to the bulk of users at the low end, forcing carriers into a downward spiral of price cuts with little to offer beyond speed, said Varun Nagaraj, executive vice president of marketing and services for Ellacoya Networks.

“The thought of lowering rates kills them,” he said. “An application-based set of tiers is a more reasonable idea.”

“Our customers have recognized that the market for people who buy speed has been addressed,” White added. “The next market is for people who want to buy stuff.” Pinpointing that “stuff,” however, is very much a matter of perspective.

AOL, for its part, is moving full bore into the premium content area with a decided slant toward entertainment. Among the more compelling (and profitable) applications: having users pay for delivery of new music videos from Time Warner artists before they appear on MTV.

Telecom service providers, on the other hand, traditionally have been loath to delve into entertainment. Both Verizon and Qwest Communications have signed content deals with MSN, which takes the burden of content development off the hands of the carriers.

BellSouth, however, recently started offering a package of content from ABC to its FastAccess DSL subscribers as a free add-on. Normally, ABC charges users $4.95 per month. Among the choices are 700-kilobit encoded videos of movie trailers, extreme sports, games trailers, music videos, celebrity interviews, short films and fashion videos. Also, during the Iraq War the company provided a satellite feed from ABC Live. “Other sites have some of the same content, just not encoded at the high rate we do,” said a BellSouth spokesman. “The higher rate generally provides a much better experience, including the ability to go full screen.”

SureWest, which has had among the highest DSL penetration rates of any telco, definitely is studying premium content. While not willing to specify the ideas just yet, the company has one major advantage: Its acquisition of fiber carrier WinFirst last year gave the telco access to a cable headend with all the content of a traditional cable provider.

“We have all the pieces to be successful,” said Phil Germond, vice president of customer services and marketing for SureWest's Roseville Telephone unit. “[Offering premium content] is something we want to do. It's something that we're looking at.”

However, even the new version of the wall garden is likely to run into political pressure. Though not preventing content providers from offering their services, carriers opting for the new approach are hijacking their bandwidth to the detriment of society as a whole, according to Jeff Chester, executive director of the Center for Digital Democracy, one of the more vocal opponents of the AOL Time Warner merger.

“What this is really about is monetizing bandwidth,” he said. “From a business perspective it makes sense, but we're talking about something that is at the core of democracy.”