DSL upstarts fight Bells ambitions

The future has never looked brighter for dsl —or dimmer for the local exchange upstarts that have championed the broadband service for the past year. Last week, the stock prices of digital subscriber lines primary service providers—Covad Communications Inc., NorthPoint Communications Group Inc. and Rhythms NetConnections Inc.—hovered around $1 amid news of layoffs, failed deals and scuttled expansion plans. And as insiders pointed to the slack Internet economy and the powerful ILECs (incumbent local exchange carriers) as keys to the providers demise, those same ILECs such as Verizon Communications and BellSouth Corp. are poised to push DSL further.

“What have the ILECs done to slow down or impede our growth? In short, everything they could do,” said Brian Farley, Rhythms associate general counsel, in Englewood, Colo. From taking too long to provide lines to demanding unacceptable terms and rates for co-location, the incumbents have hurt the fledgling DSL providers.

“I dont think [the Regional Bell Operating Companies] have played fair,” said Marc Liggio, an analyst at Allied Business Intelligence Inc., in Oyster Bay, N.Y. “When it takes three, four or five months to get a line rolled out, that delays growth.” Those delays made growth difficult and profit impossible. Analysts now question whether the DSL companies will survive at all, particularly NorthPoint, which is reportedly down to its last $150 million in cash.

Covad officials said they have sufficient capital to fund the operation through next year. “Were much farther along today than I would have thought when we started,” said Chairman Charles McMinn, in Santa Clara, Calif. “Would we have been farther along had the ILECs been better suppliers? Yes.”

To be sure, DSL has had its share of public relations problems, with limited availability and troubled installations. But few blame the technology for the providers problems. Even as Covad last week cut its work force by 400, McMinn—who took over last month after then-Chairman Robert Knowling resigned—said the demand for DSL is “still tremendous.”

Analysts remain equally bullish on DSL. Gartner Group Inc., in Stamford, Conn., estimates that the market for DSL will more than double during the next year. “DSL is going to be the primary means by which small and branch offices get broadband access,” said Jay Pultz, a Gartner analyst.

The Law Enforcement Alliance of America Inc., in Falls Church, Va., illustrates the type of midsize organization giving DSL a chance. “I had heard all the horror stories, but when we called for service, the installation dates were on time,” said Kevin Watson, legislative projects coordinator. “We havent had any noticeable outages.” The LEAA signed up for DSL service from UUNet, a division of WorldCom Inc., in March.

It may be that kind of success story that is now piquing the ILECs interest. The same incumbents that were slow to help the DSL providers solve early technical issues are stepping in with improved DSL offerings of their own.

During a briefing regarding last weeks cancellation of a deal to merge DSL assets with San Francisco-based NorthPoint, Verizon officials spelled out an aggressive new DSL strategy emphasizing existing assets such as Verizons sales force and operating support systems.

NorthPoint officials said last week theyll file suit against Verizon for reneging on the deal.

BellSouth, meanwhile, touted a new Shasta 5000 Broadband service node from Nortel Networks Corp. to offer DSL access and value-added IP services to service providers and enterprise customers. Indeed, the RBOCs enjoy several advantages, given their legacy work force, their familiarity with consumers and local infrastructure.

To spur local competition, the Federal Communications Commission issued a line-sharing order one year ago, but CLECs (competitive local exchange carriers) charged that not all ILECs were set to comply and that the feds did little to uphold their directives.

The only salvation for the DSL CLECs may lie in expanding their businesses to include value-added services.

Rhythms CEO Catherine Hapka said her company is “fundamentally a telecom infrastructure business. Whats changed is the market—the meltdown of the NASDAQ, meltdown of telecom, meltdown of DSL.”