Costly dues

After paying for equipment, leased-line charges to the incumbent carrier, office expenses and advertising costs, the typical independent ISP reselling DSL access only reaps about $6 in profit from a $40 a month DSL account.

By comparison, the cost associated with dial-up service is only a fraction of DSL access. A $20 a month dial-up account brings the service provider an average of $10 to $12 a month in profit from each subscriber.

"ISPs spend from $600 to $1,000 to acquire each DSL subscriber," said Ragnath Salgame, Edgix president and chief executive officer. "If that customer drops the service in a few months, the ISP never makes money. To make it worse, access providers are starting to see churn rates at the level of 55 percent per month."

As scary as that may sound to the uninitiated service provider, Salgame noted that the ISP could spend as much as $600 just to turn off a customer's service.

"They have to go back to the ILECs and get the provisioning systems to turn off the service," Salgame noted. "After that they have to convert it back to a basic POTS line. If you put all the challenges together, the costs for ISPs are going up more than five times per subscriber."

Given these numbers, its no wonder that DSL services are driving ISPs and CLECs are down a road toward financial ruin. It's also another reason why we can expect prices to go up, rather than down, and why termination fees may need to be incurred by provider-hopping clients.

Enduring deterioration
If you need and example of just how quickly these costs could pile-up look at Covad Communications. As of mid-February, Covad had closed 260 central offices where the company once stored DSL equipment. Covad also suspended applications for 500 planned facilities. In the past year, Covad's stock fell 95 percent. With numbers like that, Covad may become just another piece of the formula in an equation for financial ruination.

Venture capital money is also drying up for most ISPs as investors demand profits over potential or user aggregation. Zyan's Haffner said that as venture capital dries up, companies are no longer in a position to give away service at low rates.

"Instead, these companies will have to rely more on a strong business model that generates profits in the long run," Zyan.

Hmm. A strong business plan, now there's a novel ideal for the ISP industry. Raising rates of dialup and DSL access is a short-term fix for a bad business strategy. A price increase is a bandage over a deep DSL wound that would not be healed by cash flow alone.

If service providers want to play the DSL-dialup game, they're going to have to increase the value of their services, as much as they raise their fees. Only then with consumers stick with providers for the long haul.

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