Despite DSL Lumps, Industry Undaunted

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DENVER — Despite a recent string of casualties within the ranks of digital subscriber line wholesalers, service providers and equipment vendors who gathered for last week's DSLcon convention here said they've got enough weapons to ensure their survival for years to come.

Though it's only April, 2001 has been a tough year for the DSL industry, acknowledged Covad Communications Inc. senior government affairs counsel Jason Oxman, the keynote speaker.

He said Covad, which has enough cash to operate through early 2002, has about 320,000 subscribers today, dwarfed only by incumbent local-exchange carrier DSL service leaders SBC Communications Inc. and Verizon Communications. Covad's customer base is evenly split between the residential and business sectors, Oxman said.

Though incumbent Bell operating companies (ILECs) have sailed along with their DSL plans, service wholesalers have not been so fortunate. In addition to scores of smaller, independent DSL ISPs, larger, seemingly stronger players have had trouble raising enough money to remain viable.

For instance, bankrupt NorthPoint Communications Inc. is in the process of pulling the plug on about 100,000 high-speed subscribers, a move which became necessary when it couldn't muster enough funds to keep up its network.

AT&T Corp. has already swooped in to snatch what's left of NorthPoint, putting up a mere $135 million for "certain" assets, including its national collocation arrangements, network equipment and support software.

Rhythms Netconnections Inc. could be the next to follow in NorthPoint's footsteps. It has already said that its seeking a number of options, including an outright sale. Rhythms chairman Catherine Hapka, originally scheduled to speak at DSLcon, opened her golden parachute earlier this month and resigned from the company.

Meanwhile, Covad is casting a safety net to catch NorthPoint customers left in the lurch. Oxman said DSL subscribers have not soured on the technology in the wake of NorthPoint's problems. He said Covad has received 10,000 orders from former NorthPoint subscribers, with about 15,000 more in the queue.

Converting those customers is easier said than done, however. Oxman said it originally took between 13 and 27 days to move those customers under the Covad umbrella.

That timeframe has improved somewhat. A NorthPoint customer today can migrate to Covad in about 10 days, a company spokeswoman said.

Despite recent suffering in the DSL wholesaler sector, Oxman said he's convinced that DSL is too strong a technology and that there's too much demand for it to disappear.

Oxman also spent a good portion of his speech calling on equipment vendors and other CLECs to speak up in Washington, D.C., to counter the legions of lobbyists ILECs use to voice their opinions and concerns.

He said a new bill sponsored in part by U.S. Rep. W.J. "Billy" Tauzin (R-La.) could level the competitive DSL playing field for CLECs. That bill, expected to be introduced after the Easter recess, could drive collocation costs down and give CLECs better line-sharing arrangements, making it easier for a company like Covad to bundle voice and data services.

The current economic climate could work in Covad's favor, Oxman added, because lawmakers would be hesitant to further damage the prospects for DSL competition.

The ILECs are fine, he said. "It's their competitors who are in trouble."

Analysts agreed that DSL wholesalers face a heap of problems and must relinquish their current data-only model in favor of one that bundles in voice and even video services.

Within two years, predicted Gartner Group vice president and chief analyst Kathie Hackler, the data-only DSL providers would either change their models, sell out or go out of business. But those that can hold on and survive "will enjoy increased valuation," she said.

Data-service wholesalers won't last much longer than six months, though Covad has the best chance to make it, added Yankee Group senior analyst Mathew Davis. There is too much competitive high-speed data overlap from cable operators and ILECs for CLECs to continue on in data-only mode, he agreed.

In other words, to an ILEC DSL service is merely "gravy" and not necessarily its "bread and butter," Davis said.

Voice-over-DSL will become a niche residential offering this year, but won't take off until 2002, he forecast.

With its purchase of certain NorthPoint assets, AT&T Corp. could figure heavily into the VoDSL arena, said The Strategis Group senior analyst Jason Marcheck. His hunch is that AT&T won't use the equipment to sell DSL services at wholesale. Rather, the company will eventually market a data-and-voice combination.

Pricing will also determine CLEC longevity, Hackler said. At about $40 per month, DSL rates remain too high for service providers to move far beyond the early-adopter stage.

Consumers could more easily stomach a fee of between $20 and $25 per month, she said, noting that DSL residential signups would continue to lag behind cable through 2005, though that gap will narrow considerably.

On the competitive front, research has indicated that when given a choice, consumers will select DSL over cable 60 percent of the time, thanks in part to strong marketing campaigns, Marcheck added. But customer satisfaction falls slightly in cable's favor, he said.

Cable modems are a "strong technology, but won't run away from the market," Marcheck said.

Though those analysts agreed that DSL is in a certified funk, they were a bit more mixed when asked when the wholesaler sector will pull out of its nosedive.

Davis, who saw the end in six months or less, was the most optimistic. Hackler said she expected the downturn to continue through the end of 2002.

Marcheck split the difference and predicted the end would be in sight about one year from now.

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