National DSL wholesalers have fallen, but smaller regional carriers are gaining momentum by selling bundles of telecom services to business customers.
The carriers left standing say their competitors failed to understand that DSL is a technology, not a business.
“The DSL-only model and wholesaling is dead, but the technology is not dead at all,” said Conversent Communications CEO Robert Shanahan. “Weve sold DSL to a ton of customers who love it and will never go back. We just have to make money doing it, which is tough when youre selling DSL only. Bundling is absolutely the answer.”
When Covad Communications Group filed for Chapter 11 reorganization last week, it was the biggest independent DSL company and the last of the big-three wholesalers to hit the financial wall. Blame for the wholesalers demise has been placed at the feet of everything from the regional Bells to the Telecommunications Act of 1996.
Bert Whyte, CEO of softswitch maker Network Equipment Technologies, acknowledged that anticompetitive behavior on the part of the regional Bells hurt the wholesalers. “But even if the market were all open and free, [competitors] wouldnt have succeeded. You have to add value to what youre delivering. I dont think they thought that through very clearly.”
Deployment of DSL slowed significantly in the first half of 2001 as competitive carriers and ISPs collapsed, and incumbent carriers raised prices. Still, TeleChoice predicts DSL will continue to be a popular access technology, attracting 4.5 million U.S. subscribers by the end of this year and 13.9 million by the end of 2004.
Conversent may be part of building those numbers. The facilities-based service provider has about 25,000 customers and owns a couple of thousand miles of optical fiber connecting 25 colocations in seven states in the Northeast.
“With a cost to us of roughly $13 or $14 per line, we can get a very high margin if we are able to bundle voice and data together,” Shanahan said. About 87 percent of his voice customers add on long-distance, about 62 percent take DSL or some other broadband access product, and 10 percent contract for Web hosting.
The bundling trend is building steam among regional competitive carriers.
Focal Communications, which recently reorganized and expects to be profitable in 2003, says no single technology acts as its primary business engine. It built a DSL network only where it made sense: in a few central offices in four cities.
“We see DSL as an appropriate product as a part of an overall suite of data and voice solutions. We dont see it as a company,” said Michael Mael, president of Focals Data Services Division.
Financial analysts, having learned from the past mistakes of such companies as Covad, like what they see at Focal, and believe companies like it can indeed sustain themselves in the long run.
“The problem with Covad, Rhythms [NetConnections] and NorthPoint [Communications] is that they never had a business plan. What they were trying to do was ludicrous. Single-product companies, be it paging or DSL, never worked,” said Peter DeCaprio at Thomas Weisel Partners.
Business customers have been hardest-hit in the bankruptcy backsplash, living through the hassle of reconfiguring IP addresses for however many remote offices they have connected to high-speed pipes. If the reconfiguration problems arent annoying enough, some customers have found themselves completely out of luck: The regional Bells dont have DSL activated in the central offices that serve all of the deactivated customers.
McCormack Baron Management Services, a St. Louis real-estate manager, has changed DSL providers three times, but I-managers there say the pain is worth the savings. Business-class DSL has jumped to $130 from about $80 over the past three years, but is still substantially cheaper than leased-line connectivity.
“We are nationwide, so T1s [1.5 megabit-per-second lines] in most locations are still $1,000 a month plus setup, so that makes DSL cheap at $130 a month,” said Dennis Estes, McCormacks site systems coordinator.
Estes has looked for better DSL options. He tried to cut direct deals with NorthPoint and Covad. Then he looked at the regional Bells DSL services, which turned out to be consumer-oriented. He needed multiple IP addresses to run an office local area network via a DSL pipe, and the Bells did not have a symmetrical DSL offering needed for business-grade connectivity.
“We are playing a waiting game seeing what happens with Covad,” Estes said.
Should the wholesaler fail to emerge from bankruptcy, MegaPath Networks, Covads biggest reseller, said its attention would turn to regional carriers like Focal, New Edge Networks, XO Communications and Time Warner Telecom, which offer DSL in specific territories. MegaPaths job would be to patch these regional networks into a nationwide quilt for customers like Estes.
But even in the best-case scenario, small businesses outside the popular business districts of major cities are going to wait a long time for new phone lines. And executives like Mael say consumers waiting for DSL will have to wait until dial-up ISPs that control 80 percent of the market — AOL, EarthLink and The Microsoft Network — start pushing DSL connectivity hard.
We may be at the dawn of that day already. Qwest Communications International recently signed wholesale DSL deals with both AOL and MSN, and is pushing its retail offerings to serve more people.
“Both in and out of our region, we are very focused on building out our facilities to serve as many people as possible, as quickly as possible,” said Murray Smith, Qwests vice president of DSL. “We have not changed our strategy in light of whats happening to our competitors.”
Although observers say the regional Bells see the DSL crash as an opportunity to take a breather from rolling out advanced services, analysts say the incumbent carriers are beginning to step up with business-class offerings before market share is lost to cable-modem and fixed wireless service.
AT&T, which bought DSL gear installed in 1,900 central offices nationwide after NorthPoint closed in January, is testing gear and services, and expects to introduce a bundle of consumer services later this year.