DSL Prime: The Challenges Facing the Bells

If VoIP actually happens, all sorts of Bell business practices and subsidies will have to change.

by Dave Burstein DSL Prime [December 19, 2003]

VoIP as dynamite
"Voice over IP is like planting dynamite on a bridge," Powell says "Put the right piece in the right place, and the whole thing is coming down." The Bells are not going to tie it up in regulation for years.

Suddenly the problem is overhype—remember, only about 15 percent of U.S. homes have cable modems, the prime market. Qwest just demonstrated why the VoIP market is a small niche in DSL homes, with pricing to shut out competitors.

VoIP and other stories are breaking faster than I can analyze them. A few worth noting:

• Danger, Danger for the e-rate, universal service fund, and the big one, overpriced local access charges. Even Mike Powell is raising the issue, and everyone in the business knows much of the $15 billion a year involved is wasted and/or corporate welfare. Saving universal service will require cutting the cost in half or more, a tough political move likely to be delayed until after the 2004 elections and a new FCC Chair.
  
  
• Possible disaster for the Century, Citizens, Alltel and other regionals, which depend on 55 percent margins to service their debt. Their market price doesn't reflect the risk D.C. might cut their ridiculous access overcharges. One top analyst agrees, but doesn't think the stock prices will suffer until the politics become clear in 2005.
  
  
• "Which stocks should go up because of VoIP?" Nearly none, and especially not the ones the market is touting. VoIP triumphs only if it's very cheap, so large profits are unlikely. If you're a true believer in VoIP, the market move you'd expect is that telco stocks are headed even down. (Don't use DSL Prime for market recommendations, please.)

Overheard on the street
Everyone comes to Wall Street, a great opportunity to meet top people. The Lehman T3 conference was remarkable. In just four hours I caught the Verizon and BellSouth CTOs, Adtran's CEO, and Lucent's CFO Frank D'Amelio. All were proud of what they are doing in DSL, and we focused on the coming changes in technology. Never underestimate people like Mark Wegleitner or Bill Smith, pros who usually know the issues in far more depth than the analysts or reporters writing about them.

CSFB at the Plaza was more glitzy, although the downturn meant the limousines were only two deep out front, not three. Lara Warner brings in cable, the networks and newspapers, and telecom—far too much for me to catch it all.

Bill Smith: DSL costs are down 60 percent, DSL is profitable
"Our costs went down 50 percent in 2002, and another 16 percent in 2003. They will continue to fall." Smith is very proud of BellSouth's reliability and service, which consistently rates better than most of the industry. One of the enigmas of the industry is why Verizon is so far behind SBC, which has a comparable footprint. Listening to Smith, I remembered "DSL Hell" was profound in Verizon territory, and I think that reputation for disaster is costing them heavily despite having fixed many of the problems.

Smith is watching ADSL2+ and probably DSM
"We can reach 85 percent of BellSouth customers at 3 Mbps, and 50 percent at 5 Mbps, and that's before shifting to ADSL2." Like his peers at SBC, whose current mantra is how many people they can serve at higher speeds, he perceives a pressure for faster offerings. Although the extra cost for the higher speed service is minimal, BellSouth has decided to charge a premium price, which I assume will be $5 or $10 additional. Roland Kittel of Deutsche Telecom found that failed, with nearly no customers paying that much for higher speeds. The Japanese on the other have found much more interest in speed, presumably because the price difference is smaller.

ADSL2 delivers 10-12 Mbps to most customers under 8,000 feet, and related improvements, like the solution to bridge taps, mean the current generation delivers much better results. I believe, based on John Cioffi's results evaluated by independent engineers like Ken Kerpez of Telecordia, that DSM adds much more, especially for customers with performance limits.

The result: 5 -20 Mbps can soon be delivered to the average American, with 10-30 Mbps common in countries with shorter loops, from Italy to Cairo to China. The industry is so anxious to get the new stuff to the field, although also aware of problems early adapters in Japan are discovering.

Mark Smith of Adtran: Bells promising to buy
"We hear from our customers Q1 2004 will be busy," which corresponds to SBC's comment they will go to 80 percent DSL coverage that quarter. That's five quarters behind the Pronto plan, but two years ahead of what they were telling D.C. a few months ago. Adtran has the right product mix for the next wave, going from 80 percent to 90 percent. They have a line-powered small unit for remote terminals, and smaller DSLAMs perfect for the less populated central offices.

Dave Dorman: Bells starting small business price war
AT&T's stock dropped, despite an optimistic VoIP announcement, when Shawn Young in the Journal and others noted the declining margins for business phone services. Dorman pointed to aggressive pricing by the Bells, who are "offering small companies prices only big ones previously could get." I've seen that personally, as Verizon tailored a voice over T-1 voice offering at a good price to a non-profit I work with.

BellSouth has lost an amazing 29 percent of medium businesses, some to regional CLECs like Network Telephone. So the Bells are striking back, hiring thousands of dedicated salespeople and now coming with new pricing plans. Randall Stephenson likes that market, even if the margins are lower than SBC's goals. "We don't need to invest capital, so it's a good opportunity" and Roy Wilkins emphasized how aggressive their plans are.

Copyright 2003 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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