Acquisitions Squeeze DSL

Prospects dim for greater choice, lower subscription cost.

Justin beech is finally fed up. In an effort to get DSL access, Beech has endured a half-dozen visits from telephone technicians and repeat visits from employees of now-defunct NorthPoint Communications Inc. Add to that the burden of subscribing to three Internet providers and hooking up modems and other gear from several vendors.

For all his efforts, last week Beech—ironically the head of, a provider of advice on broadband connections for small business—ended up with nothing. His digital subscriber line connection, like most secured through NorthPoint, was cut off when the bankrupt company sold its equipment to AT&T Corp.

"I cant stand it anymore," Beech said, in New York.

Getting into the Internet via DSL—never a walk in the park—is poised to become an even greater struggle. Independent providers are losing ground to incumbent carriers, whose plans for—and commitment to—DSL remain unclear. Whats worse, the poorer service is likely to be accompanied by higher prices as a result of decreased competition, industry insiders said.

AT&T, which purchased almost all of NorthPoints infrastructure for just $135 million late last month, said that it will not assist the bankrupt companys stranded users. The telco wont soon be using the newfound gear—co-location cages with switches and DSL Access Multiplexers, for the most part—for business data services.

AT&T spokesman Mark Siegel said the company, for now, plans to use the equipment for local and long-distance voice services in addition to data.

Even if the incumbents do ultimately use their triumph over the independent DSL vendors to promote broadband access, prices are likely to rise.

"The rates charged were unsustainable for most everybody," said Roland Van der Meer, a partner with ComVentures, in Palo Alto, Calif., a venture capital company that invests in communications companies. "On the consumer side, from an ILEC [incumbent local exchange carrier] you will see rates go in the $50 to $60 [per month] range. The cost of marketing has slowed down because they dont have to compete as much. People are going to call the phone company first more often. Business DSL is going to change dramatically."

For Beech, relying on a carrier for DSL does not inspire confidence. "I have Verizon [Communications Inc.] due to visit between 8 a.m. and 8 p.m. Monday to check wires [and so on]," he said. "When I consider their visit, I am reduced to a quivering mess."

While AT&T contemplates the best approach to absorbing its new gear, former NorthPoint customers are scrambling to find alternatives. California customers won the support of the states public utility commission, which ruled last week that NorthPoint must continue offering service, but the company said that there is little it can do.

"Our response is that we are not actively taking down those services," said Manuella McCall, one of the few NorthPoint vice presidents remaining after the company let go of 700 employees following the deal with AT&T. "Our transport vendors are withdrawing their services. We have no funds to pay for them. Were not in any way thumbing our nose at the order."

In theory, NorthPoints loss should be its rivals gain, but other independent DSL providers such as Rhythms NetConnections Inc. and Covad Communications Inc. are struggling with their own teetering stock prices and financial constraints as they try to recruit stranded NorthPoint users. Many industry observers see little reason to believe the rivals can escape NorthPoints fate.

The struggling independents said much of the blame for their difficulties falls to federal regulators, who have not provided sufficient incentives for ILECs to cooperate with their rivals.

Federal Communications Commission Chairman Michael Powell rejects the argument that regulators are to blame for the DSL providers woes.

"The government does what it can to provide entry, but it cannot guarantee a business model," Powell said. "As harsh as it sounds, markets dont just reward, but they also correct and punish inefficient activity. Some of the companies that did the right things are being punished anyway."