Some CLECs Ready DSL Challenge

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A small but growing guerilla army of next-generation CLECs
has built a beachhead in DSL transport that could quickly translate into a challenge to
telcos and cable in the consumer market.

So far, companies like NorthPoint Communications, Covad
Communications Group Inc., Rhythms NetConnections Inc. and JATO Communications Corp. have
focused placement of their digital-subscriber-line access multiplexers (DSLAMs) in central
offices that serve areas of high business concentration.

Over the past four months, these competitive local-exchange
carriers have moved beyond initial test beds in California to fan out across the country
with launches in major cities.

They are providing dozens of Internet-service providers
with the means of delivering high-speed-data services to small businesses at a fraction of
traditional costs for incumbents' transport services. Among the cities that the CLECs
have invaded are New York; Washington, D.C.; Chicago; Philadelphia; Boston; Detroit;
Houston; Dallas; and Atlanta.

"Customer response has been incredibly strong,"
said John Stormer, vice president of marketing at NorthPoint, which is now operating in
more than one-dozen major urban markets. "We're at the point of inflection that
should allow us to expand our market base very rapidly."

Along with lining up ISP affiliates on a market-by-market
basis, NorthPoint has also signed major multimarket deals with Verio Inc. and the @Work
unit of At Home Corp., and it is negotiating others, as well, Stormer said.

Small companies with 50 or fewer employees comprise 82
percent of NorthPoint's customer base -- 45 percent of which can be categorized as
early adopters that have upgraded from ISDN (integrated services digital network) to DSL,
with most of the remainder moving to DSL from dial-up, he noted.

"We anticipate that 95 percent of the customers will
be former dial-up users as we move into the mainstream," Stormer added.

By the third quarter, he said, NorthPoint's facilities
will be expanded to reach 80 percent to 90 percent of the small-business market in the 13
cities that it now serves, enabling it to reach 20 percent of the residential market, as
well.

"We're currently using SDSL [symmetrical DSL]
technology, because it's well-suited to business applications, but we will probably
move to ADSL [asymmetrical DSL] to accommodate the consumer market," he said. The
likely choice will be the new G.Lite consumer platform, which is expected to be ready for
commercial deployment this summer, he added.

While many ISPs using NorthPoint's and other
CLECs' DSL facilities are not interested in pursuing the casual residential online
user, they are looking at the work-at-home market as an important expansion opportunity
for their small-business services.

Verio, for example, will use DSL to go after the
residential market "insofar as it blends in as part of the SoHo
[small-office/home-office] profile," said Sean Brophy, vice president of corporate
development at the ISP.

Verio recently announced an eight-city DSL-launch deal with
NorthPoint, building on already-launched markets with other CLECs in Chicago, Boston and
major California cities.

"We've invested in NorthPoint to create a tighter
relationship and to allow us to be more aggressive with the service offering," Brophy
noted.

The signing on to DSL by companies like Verio and @Work
marks a turning point for the technology. After several months of testing,
business-oriented ISPs are discovering that they can make the platform work as a reliable
conduit for value-added services that were once out of the budget reach of smaller
companies.

In Verio's case, services range from a "starter
kit" of Internet access, Web hosting, e-mail and other basics over a
144-kilobit-per-second symmetric link at $125 per month; to 1.5-megabit-per-second
symmetric service with a rich suite of services offered at $1,068 per month.

The new CLECs have made such services possible in an
environment where, despite the public statements of the incumbent LECs (ILECs), telcos
continue to make it difficult for ISPs to exploit the DSL platform, Brophy asserted.

"The LECs have two problems with DSL: It cannibalizes
higher-priced traditional services, and when they do offer the service, they try to
protect their own ISP affiliates, which makes it hard for other ISPs to use the
facilities," he explained.

While telcos said they have ISP customers using their DSL
platforms, in most instances, the number of such entities is low, with most of the
marketing and penetration of the telco's DSL transport being driven by the
telco's ISP affiliate.

For example, since launching DSL services last summer,
BellSouth Corp. -- which is now operating in seven cities and expanding to 23 more this
year -- has about one-dozen ISP customers besides its own BellSouth.Net, BellSouth
spokesman John Goldman said.

"Some of these ISPs are the types that serve only one
location, others are using our service in a number of locations and some are in all of our
locations," Goldman added.

ISPs seeking to reach the residential market with DSL are
currently in no-man's land, confronted with the costs and other barriers imposed by
LEC strategies and the general lack of reach offered by CLECs and LECs alike.

This is one reason why companies like MindSpring
Enterprises Inc. -- an Atlanta-based ISP with a consumer base of about 1 million -- are
trying to win regulatory support for gaining access to homes over cable high-speed-data
networks, MindSpring president Mike McQuary noted.

"We've done some testing of DSL, but we
don't have a product to roll out because it's been a disappointment as to where
and how broadly it's available," McQuary said, adding that BellSouth typically
only supplies connections to one-third of the households in a covered region.

"The technology is great, but as a company with 85
percent of its subscriber base in the residential market, we're content to
wait," McQuary added.

MindSpring might not have too long to wait before it has
many more options than the local telco. Even CLECs encountering resistance from ILECs are
finding that once the interconnection and colocation agreements are in place, they're
generally able to get the unbundled loop that they need to fulfill ISP orders, said Rand
Kennedy, vice president of network architecture at Rhythms.

"Provisioning lines is something that the telcos
understand," Kennedy said. "Getting copper loop isn't a big issue."

The biggest issue where expansion into the residential
market is concerned is the way that the LECs price the use of their lines, Stormer said.

While in the business market, the economics support
provisioning over "unbundled lines" that are leased from the LECs by the CLECs,
the consumer market will only be cost-effective for the competitors if the unbundling
applies to the spectrum used over existing lines, he added.

"Voice service operates at baseband using 4 kilohertz
of frequency, leaving all of the frequency above that level available for DSL, which is
what the telcos use when they offer the transport service to ISPs," Stormer said.

He noted that his company and many others are pressing the
Federal Communications Commission to unbundle the telco-line spectrum in its current
review of telecommunications rules.

"We want access to that upper band," Stormer
said.

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