News

Telcos Try to Lure ISPs to Their DSL Offerings

6/13/1999 8:00 PM Eastern

Incumbent telcos are responding to competitive pressures
from all sides on the high-speed-data front with newly aggressive efforts to draw
Internet-service providers to their digital-subscriber-line platforms.

Nudged by cable-modem penetration and the phalanx of
competitive local-exchange carriers offering DSL links to ISPs, the big telcos are pulling
out all of the stops in efforts to create a consumer-friendly product that offers a wide
choice of providers.

This marks a key contrast to the one-ISP approach taken by
cable companies.

"There seems to be an appreciation that the ability to
provide consumers with a choice of ISPs could be a great competitive advantage for the
telcos," said Jim Anderson, director of product management for fast access at
MindSpring Enterprises Inc., a leading provider of Internet services to residential and
small-office markets.

"I think we're going to see many more ISPs moving to
DSL in the months ahead," Anderson added.

After months of haggling with BellSouth Corp., MindSpring
has come to terms on the use of the carrier's DSL facilities for a high-speed-service
launch in Atlanta starting this fall.

While the ISP is paying for transport under the terms of
BellSouth's long-standing tariff filing, Anderson hinted that carrier flexibility on
pricing in the future was the key to breaking the impasse.

"There's a lot of activity behind the scenes with
tariffed rates," he said. "Everybody is reconsidering pricing and terms and what
it takes to make this work for ISPs, which we're starting to see in some tariff
refilings."

In another case of improving conditions for ISPs, BellSouth
appears to be close to terms with America Online Inc., which has already announced plans
to use Bell Atlantic Corp. and SBC Communications Inc. facilities for wide-scale DSL
launches later this year.

"AOL wanted to do a press release saying they were
going ahead with DSL service in BellSouth territory, but the carrier wouldn't agree to say
anything until the deal was finalized," a source close to the negotiations said.

SBC -- which plans to have 539 central offices and 9.8
million lines equipped for DSL by year's end -- currently has DSL running commercially in
Southwestern Bell territories in Dallas-Fort Worth, Houston and Austin, Texas, as well as
in most of Pacific Bell's major metro service areas in California, SBC spokesman Michael
Coe said.

Like other telcos, the company has its own ISP to market
the service, but it believes there's a bigger business opportunity to be realized by
drawing as many ISPs to the transport platform as possible, Coe added.

"Offering end-users broad choice is absolutely
critical to our success," Coe noted. "If we didn't work cooperatively with ISPs
other than our own, we wouldn't meet our goals effectively."

Telcos were initially assessing transport rates for DSL
that put consumer-service pricing well above the typical cable cost of $39.95 per month
for high-speed access.

But the recent deals announced by AOL and Prodigy
Communications Corp. point to a much more aggressive posture, even in instances where the
tariffs haven't been formally changed.

"The announcement of the deal between AOL and SBC made
it clear that the terms were still to be worked out, which indicates that there will be
new tariffs filed," said an ISP executive at another firm, asking not to be named.

The $40 monthly price target cited by AOL for its DSL
launches in SBC territories this fall is well below the amount that the company would have
to charge under the existing tariff structure, which sets a $39 rate for DSL transport at
a guaranteed access speed of 384 kilobits per second downstream and 128 kbps upstream for
a one-year commitment.

While the current rate provides for volume discounts, AOL
is clearly anticipating a new filing, the ISP source said, although SBC declined to
discuss its plans.

The pricing trend is no longer a matter of speculation at
Bell Atlantic and U S West, both of which filed new tariffs with the Federal
Communications Commission in mid-May representing significant discounts off the original
rates.

"Our new tariff is strictly targeted to the ISP market
to give them new options in terms of the prices they pay for volume commitments,"
said Mike Volgende, director of enterprise marketing at Bell Atlantic's
enterprise-business-marketing unit.

"Both of us -- the ISPs and Bell Atlantic -- have
market-driven reasons to work with each other," Volgende added.

From the telco side, not only does the growing power of
cable, enhanced by AT&T Corp., represent an incentive to become more aggressive, but
there is also growing pressure from CLECs, which are beginning to move into the
residential markets with their DSL platforms after a fast start on the business side.

By substantially lowering the transport cost to ISPs,
telcos make it hard for CLECs, which have to lease lines from the incumbents, as well as
installing DSL facilities, to match these transport rates.

There's an added edge to the telcos' new aggressiveness in
this regard, insofar as the FCC is considering CLEC calls for it to unbundle telco-line
spectrum so that DSL spectrum -- which rides above the small segment required for POTS
(plain old telephone service) -- would be available to CLECs, obviating the need for
leasing separate lines from the telcos.

By getting ISPs to sign long-term commitments now, telcos
can diminish the potential impact of such rule changes.

"ISPs know that they have to get into the
high-speed-access business on the consumer side, as well as the business side, but they've
been reluctant to make long-term commitments under existing tariffs because they think
there's going to be an opportunity to go with the CLECs at much lower rates," a telco
executive said on background.

"Right now, with lower-priced tariffs, we have an
incentive to make the long-term commitment so attractive that the ISPs can't afford to
wait," the source added.

U S West -- which dropped its starting price for DSL
transport to $29.95 per month from $39.95 last month for its 256-kbps symmetrical-service
tier -- now has more than 200 ISPs signed up, vice president of marketing Mike Rouleau
said.

"We saw a significant uptick in volume when we went to
the lower prices," he added.

A big factor in the industry's ability to lower transport
costs is the FCC's ruling that telcos can file tariffs for DSL at the federal level,
rather than the state levels, thereby aggregating their total transport-line volume in the
cost equation, Rouleau noted. "We get some scale advantages we didn't have," he
said.

Along with more aggressive pricing, telcos are moving to
expand coverage at a faster pace than most anticipated when DSL-rollout plans were
announced last year.

This includes not only the number of wire centers or
central offices to be equipped with DSL-access multiplexers (DSLAMs), but also the means
by which the number of DSL-qualified lines within a wire center can be increased from
current levels, which average 50 percent to 60 percent of total available lines and, in
some cases, even less.

For its part, U S West has been experimenting with
fixed-wireless-access technology supplied by Qualcomm Inc. as a possible fill-in for
high-speed-data coverage, and with unspecified wireline techniques, as well.

In addition, the company has begun deploying
digital-loop-carrier systems from NextLevel Systems Inc. that support delivery of DSL
services to areas beyond the 18,000-foot reach of first-generation DSL.

"Starting in the fourth quarter, we'll be using
[DSL-enabled] DLC systems from other suppliers, as well," Rouleau said.

Industrywide, DLC solutions will be available in two
general categories -- one involving new fiber-based DLC deployments, where the DSL
capability is built right into the line cards that terminate the DLC in the CO; and the
other consisting of environmentally hardened, miniaturized DSLAMs that can be fit into
existing DLC remote terminals in the field.

Alcatel Alsthom, for example, is preparing to ship both
versions in the fall, officials said.

SBC, which is using Alcatel gear, is also moving to a
technique not related to the DLC issue to provide for much broader coverage from any given
wire center, Coe said.

The technique, which he declined to describe, will allow
virtually all of the lines to be qualified, regardless of distance from the CO or the
presence of noise-inducing line coils and bridge taps.

"We're now at 65 percent to 70 percent coverage, but
that's just a start," Coe said. "We'll be announcing our new approach very
quickly."

BellSouth, with a large base of DLC-served households, has
only been able to reach one-third to one-half of the customers from the CO with DSL
deployments, but that will change radically this fall, spokesman John Goldman said.

"By the end of the year, when we've deployed our DLC
solution, we'll be getting 70 percent to 75 percent line qualification from the CO,"
he added.

BellSouth is just entering a period of accelerated DSL
deployments with the intention of moving from its current qualified-line base of about 2.5
million in 18 markets to some 6 million in 33 markets by year's end, Goldman noted.

Moreover, he added, the carrier is well-positioned to move
to the new G.Lite "splitterless" DSL platform this fall, because it, like SBC,
is using Alcatel DSLAMs that are upgradable to G.Lite via software downloads once the
standard is finalized by the International Telecommunications Union.

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