DSL Prime: Remarkable Margins in Telco DSL

As the buildout comes to a close, most of DSL revenue is pure profit.

by Dave Burstein of DSL Prime and Future of TV [November 6, 2006]

"Contribution from DSL has increased over 50 percent as we reached economies of scale."
—Pat Shannon, BellSouth CFO

Pat Shannon explains, "all or a vast majority of the revenue from these services flows through to the margin." BellSouth's average charge is over $40. I calculate the marginal cost of DSL is between $6 to $8 per month in most of the developed world. BellSouth's DSL customers produce a billion dollars per year of operating margin. Broadband is a very good business once you reach volume. That's the good news.

The bad news is that in Korea we have the first large scale breach of network neutrality. Cable companies and new broadband provider Powercomm have decided that their three million customers may not watch video from HanaTV, a competitor. This is the first of many battles between those who believe in "access to content of your choice" and carriers who want to cash in on control of your choice to watch. Videotron in Canada just asked for a cut of all the video on the web. That's the IPTV system in China, but those in Korea, the U.S., and Canada do not claim to be Communist.

These costs suggest a "normal price" of $20 to $25, with a standard profit margin. Competitive markets including Japan and France are seeing effective prices of $15 to $20, typically bundled with voice and now TV in a $25 to $40 flat rate package. The AT&T and Verizon $15 to $18 (+ phone) low end rates are perfectly plausible. U.S. $30 to $45 averages suggest competition is weak.

Low marginal costs suggest connecting additional customers makes sense, as BT (97 to 99 percent), FT (95 percent+), Vermont Tel (98 percent+) and others have discovered. Fairpoint CEO Gene Johnson has 200,000 customers in some of the smallest towns in the U.S. He already serves 80 percent of them with DSL, and at Columbia's Business Models for Rural Broadband conference discussed how he can get closer to 90 percent. 90 percent was the original Bell goal for 2004 to 2005 before they cut capex 30 to 50 percent, in much easier territories than Fairpoint's.

Basic DSL gear costs about $100, takes about an hour's labor, and pays for itself in less than a year. The cost goes up as you cover more than 80 percent to 90 percent, depending on the territory. You need to connect smaller offices, small remotes, and customers beyond 15,000 feet from fiber. Smaller DSLAMs cost more per line to install and backhaul and somewhat more to maintain. Distant users need repeaters or fiber runs to new remotes. This adds $50 to $300 to the cost, increasing the payback period to two or three years.

DSL Everywhere copper reaches? Almost—a last 1 to 5 percent is definitely expensive to serve, and probably best covered by satellite or occasionally wireless. Qwest was so close to bankruptcy they couldn't think more than nine months ahead until now. AT&T and Verizon's amazingly low coverage is due especially to a refusal to spend anything on the 10 to 15 million lines they intend to spin off, the single biggest reason the U.S. doesn't have "broadband for all." The payoff, as Shannon notes, is now so fast that they are filling in most other gaps.

Music for this issue of DSL Prime is Lush Life, Billy Strayhorn singing, a sad song as I prepare my obituary for BellSouth. Say hello to the round fellow with a beard at UBS and Future of TV here in New York in two weeks. Wish I could make it to TelcoTV in Dallas. leweb3 will bring the most interesting net folks to Paris on December 11th and I'd love to be there. Maybe one of the companies reading this might help sponsor a party that brings together the telecom, video, and blogging crowd. It would be incredible to fly to Hong Kong for ITU December 4th and then to France, the most vibrant internet country in Europe.

Wherever you meet me, give me a hint of a story and I'll promise you a gift better than a T-shirt.

Copyright 2006 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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