By Matthew Fordahl
Associated Press
May 14, 2001
SAN JOSE, Calif. -- Not long ago, the prophets of our digital future were touting digital subscriber lines as one of the hottest tickets to a broadband revolution that would utterly transform telecommunications.
Homes and businesses would have hassle-free, always-on, affordable and speedy Internet access. And DSL was not just for Web surfing: Interactive television, telephones and appliances--all connected--were supposedly just around the corner.
Digital subscriber line technology, which runs over regular copper phone wire, also was supposed to be a powerful vehicle for ending regional telephone companies' domination over local service.
But for independent DSL providers, the reality has fallen far short of the promise. Wall Street lost confidence. Plans to create nationwide networks were scaled back. Many independents are going broke.
Emerging dominant in the DSL market are the century-old phone companies against whom complaints had piled up for shoddy service and long installation waits.
The independents accuse the regional Bells of anti-competitive behavior, of locking them out of the neighborhood switching offices that link phone lines, the telephone network and the Internet--of violating the spirit of the 1996 Telecommunications Act, which promised more choice and better service.
"We're on the precipice of disaster, and it's not clear our industry is going to survive," says John Windhausen, president of the Association for Local Telecommunications Services, a trade group for competitive carriers that offer voice and data lines including DSL.
Victims in the DSL drama include bankrupt NorthPoint Communications, which sold most of its assets--but not its customers--to AT&T for $135 million; Rhythms NetConnections, whose chief executive quit and whose auditors question its viability; and Covad Communications, which laid off 800 people and scaled back.
High demand
The crisis of the upstart DSL providers would seem paradoxical. Demand has never been stronger, and the major phone companies are reporting fewer installation troubles.
Last year, U.S. subscribers of DSL shot up by 500,000, to 2.4 million, according to TeleChoice, a research firm. That number is expected to swell to 5.7 million this year but still fall behind the numbers posted by the cable companies' competing services.
Most new DSL business is expected to fall to regional Bell companies, including Verizon, SBC Communications, Qwest Communications and BellSouth, which claim 76 percent of all subscribers.
For residential customers, cable or DSL service costs as little as $39.95 a month. That price is difficult for independents to match after they pay the phone company to use its lines.
Monthly leases for single lines that share voice and data can cost independent providers as much as $15. New lines cost them as much as $30 each. Plus, the phone companies charge for leasing space, line testing, security and air conditioning.
"It turns out it was a faulty business model," said Michael Goodman, a Yankee Group analyst.
Some DSL companies claim the Baby Bells did their best to hinder competitors--denying access to equipment, losing paperwork and slowing repairs. Such complaints were the basis of antitrust lawsuits Covad filed against Verizon, BellSouth and SBC.
Matter of money
The DSL imbroglio might be best understood in light of the billions of dollars in profits to be made in a transformed communications market. DSL lines can carry digitally rendered voice and television service.
That threatens the Bells' decades-old cash cow.
"We're introducing a new technology that threatens the rich revenue stream that they've enjoyed as a monopoly for the last 100 years," said Sal Cinquegrani of New Edge Networks, a competitive carrier.
The regional Bells insist they are being true to the 1996 telecom act, which specified that they cede monopoly control over phone lines as a condition of being allowed to enter the long-distance market.
Regulators have occasionally fined regional phone companies. The issue is most hotly debated when the Bells' applications to enter long-distance are considered.
Not all independent DSL providers blame the phone companies for their financial woes.
Those who stay in business will learn to anticipate slow service and other glitches, said Keith Markley, president of DSL.net, a combined competitive carrier and Internet service provider that focuses solely on small and medium-size businesses. The structure makes for higher profit margins and easier problem-solving, he said.
Because it is nearly impossible to compete on price, survival may depend on offering products and service that the established phone companies do not. New Edge Networks, for instance, focuses on businesses in cities with fewer than 250,000 people.
Covad settled its suit against SBC and now sells directly to small businesses and maintains partnerships with solvent ISPs.
Excel - Greg
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