Tallahassee Democrat
Wednesday, April 25, 2001 |
Matthew
Fordahl
THE ASSOCIATED PRESS
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Despite big demand,
DSL industry
struggles
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SAN JOSE, Calif. - Not long
ago, the prophets of our digital future were
touting DSL 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 kitchen appliances - all connected - were
supposedly just around the corner.
Digital
Subscriber Line technology, which runs over
regular copper phone wire, was also 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 now 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 anticompetitive 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.
Frank Wood, city director for KMC Telecom in
Tallahassee, said his business isn't offering DSL
but might offer it in the future. Wood said
companies that got into business just to offer DSL
have been particularly hurt. KMC Telecom provides
business telecommunications services, including
voice, data and local and long-distance telephone.
"Companies that are most robust in their service
offerings have not faltered," Wood said. "It's
very difficult in the telecommunications industry
to serve a very, very small niche."
Digital scramble
Victims in
the DSL drama include bankrupt NorthPoint
Communications, which last month 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.
Now, tens of
thousands of customers are scrambling for
alternative providers or returning to slow dial-up
modems.
"It's really tough for me to be
giving this up," says John Margarone, a Buffalo,
N.Y., computer consultant about to lose his DSL at
his home where he invested $10,000 in equipment.
"This aspect of my business is dead right
now."
The crisis of the upstart DSL
providers would seem paradoxical. Demand has never
been stronger - and the major phone companies are
now 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.
Sprint
spokesman Jason Duff said this week that the
company's DSL sales were up 57 percent in the
first quarter over the fourth quarter of 2000.
That includes new subscribers in cities where DSL
already had existed, including Tallahassee, plus
subscriptions in five cities in which DSL was
newly introduced. Duff would not say how many DSL
subscriptions Sprint has in
Tallahassee.
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.
Under the
Telecommunications Act, leased-line charges are
negotiated under a formula set by the Federal
Communications Commission. If no deal can be
reached, state regulators step
in.
'Faulty business model'
In the end, charges vary widely - but the
independents say the regional Bells game the
system to their advantage. The phone companies say
fees should be higher.
Monthly leases for
single lines that share both 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. "Was it
someone else's fault that they built their
business model at a competitive
disadvantage?"
The DSL buildup began in
earnest in 1999, as the stock markets boomed and
plentiful venture capital emboldened DSL companies
to embark on nationwide rollouts. Internet Service
Providers, which worked with pure DSL providers as
retail partners, also spent furiously in a quest
to grow.
"They were giving away close to a
thousand dollars to acquire that customer," said
Joe Plotkin of the U.S. ISP Alliance.
Last
year, the cash spigot closed as Wall Street
stopped prizing growth over profits. ISPs stopped
paying their bills just as their DSL partners were
deep in the capital-intensive network
deployments.
The Bells leveraged what Epoch
Partners analyst Mark Langner called their "huge
natural advantage," heavily advertising their own
DSL service.
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.
Problems with
providers
In some cases, would-be DSL
customers were told by regional Bells that service
provided by an independent was impossible at their
address, only to learn later that they could
obtain the phone company's retail DSL at the very
same location.
When computer programmer Terje
Oseberg tried to order service from a competitive
DSL carrier, he was told by Pacific Bell that his
line would not qualify. A few days later, his
roommate called and was told PacBell's retail DSL
would work.
The DSL imbroglio might be best
understood in light of the billions 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.
"We have
every incentive to provide nondiscriminatory
access and indeed do so," said Saralee Boteler, an
SBC spokeswoman.
The confusing relationship
between the upstart competitors, their partner
ISPs and the regional phone company also created
headaches, said Claire Beth Nogay, a vice
president at Verizon.
"It's very difficult
for the end user to get a clean picture of what's
going on," she said. "That's just the nature of
the industry as it stands today. Nobody really
wants it this way, but that's the way it
evolved."
Baby Bell angle
Critics say there's more to the story - that
the Baby Bells have deliberately encumbered
competition.
"I believe the Bells didn't do the
training. They didn't hire enough staff to handle
the problem," said Bruce Kushnick of the New
Networks Institute, a telecom public advocacy
group.
"Basically, the rollout has been
atrocious," said Kushnick, a telecommunications
consultant.
Regulators have occasionally
fined regional phone companies. The issue is most
hotly debated when the Bells' applications to
enter long distance are considered.
In
December, during SBC's push to sell long-distance
in Kansas and Oklahoma, the Justice Department
urged closer scrutiny of competition and access
prices. In January, the FCC approved the
application.
In Pennsylvania last month,
regulators ordered Verizon to split its retail and
network operations but stopped short of ordering
new separate companies. Florida, Illinois, New
Jersey and other states are considering some form
of separation.
Both sides have been blaming
each other for DSL problems for years, said Ken
Johnson, a spokesman for Louisiana Republican Rep.
Billy Tauzin, who chairs the House Commerce
Committee.
Less, not more, regulation is
the answer, he said.
Because it is nearly
impossible to compete on price, survival may
depend on whether they offer products and service
that established phone companies do not. New Edge
Networks, for instance, focuses on businesses in
cities with fewer than 250,000
people.
Covad, which settled its suit
against SBC, now sells directly to small
businesses and maintains partnerships with solvent
ISPs.
Chuck McMinn, Covad's chairman and
co-founder, says demand for faster connections
will overcome all the odds.
"The customers
love it when they get up and operational," he
said. "If you went to them and said we're going to
take your broadband connection, you'd better duck
because you're going to get hit with
something."
Business editor Pete
Reinwald contributed to this
report.
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