The Key To DSL Survival: Avoid Consumers

As the field of DSL ISP survivors shrinks, residential users are left with ever fewer choices. We provide a snapshot of two survivors: Covad Communications and DSL.Net.

by Jim Wagner Managing Editor, ISP-Lists [August 9, 2002]

Providing high-speed Internet access in the U.S. is a risky proposition if you are not one of the four Baby Bells. In fact, the playing field of nationwide independent DSL providers has essentially shrunk down to a few survivors.

Two of those survivors—Covad Communications (OTCBB:COVD) and DSL.Net (NASDAQ: DSLN)—announced their second quarter 2002 results Thursday and the one item both have in common is their renewed strategy to pursue lucrative business-class contracts.

Both companies found out the hard way that residential service doesn't pay. Last year, asymmetric DSL (ADSL) was the subject of an all-out pricing war between the telephone companies who owned the DSL network and the competitors who leased from the incumbents.

When an ADSL line from the Bell costs $35 a month to lease and you have to price your service competitively at $39 to $40 a month to subscribers, the only way to make money is on volume—something companies like Covad and DSL.Net were unable to do.

Most of those national, independent, residential DSL providers became a footnote in Internet history. The rest, the remaining Internet service providers (ISPs) and competitive local exchange carriers (CLECs), quickly scrapped residential service and hurried to sign on business-class customers.

Although ADSL prices have been on the rise this year ($51.67, on average, according to research firm ARS, Inc.), providers get the most bang for the buck with business-grade symmetric DSL (SDSL) and ISDN DSL (IDSL).

Charging anywhere from $200-$500 a month, companies like DSL.net can bundle voice service and T-1 contracts with the businesses' basic Internet package, making even more revenue.

Then there's the technical savvy of business customers, who in many cases have their own IT staff: customer support is a revenue-burning operation. Ask any ISP support rep, and you won't find one who hasn't fielded at least a dozen 'you mean my telephone cord has to connect to the PC?' queries or complaints by online gamers for ping rates above 100 milliseconds.

Ray Allieri, DSL.Net spokesperson, said their company actively pursues DSL customers from other providers who are giving up on DSL. Earlier this week, the company bought up the rights to acquire the DSL customers of Aplus.net.

It's all about acquiring business customers, Allieri said.

"We've been actively acquiring DSL lines, which is less than the cost to organically grow DSL numbers," he said, "(but) any residential customers we get are purely incidental. The margins just aren't there."

DSL.Net's financial results today are proof of the continuing efforts the provider is making to switch to a business DSL outfit. The company had revenues of $11.6 million for the second quarter of 2002, a slight gain of two percent from the previous quarter. Earnings before interest, taxes, depreciation and amortization (EBITDA), however, are still a negative, at $3.8 million.

Robert DeSantis, DSL.Net chief financial officer, said the number is an improvement over previous quarters and reflects "the company's restructuring actions taken last year."

Even the Baby Bells have had a hard time with residential service. Earlier this year, Qwest surrendered management of its DSL service to MSN to cut down on costs. DSL clearly isn't in the incumbent phone company's game plan anymore, as Richard Notebaert, Qwest's new chairman and chief executive officer, tries to rein in the carrier's massive debt load.

"We are aggressively taking the steps necessary to maximize the profitability of our core operations, deliver our balance sheet and improve the delivery of services to our customers," he said shortly after Qwest posted a net loss of $1.14 billion in its second quarter results. The company's report shows data and Internet revenues dropped 2.5 percent over the second quarter.

Like DSL.Net, Covad's bottom line signals the carrier's attempts to turn its business around after last year's bankruptcy. The company posted a net loss of $40.8 million in the second quarter, down from $56.8 million the previous quarter.

Covad predicts its revenue growth in the third quarter to be flat, at best.

Mark Kersey, broadband industry analyst at ARS, Inc., said Covad has a pretty even split between consumer and business subscribers, though they certainly would prefer more business accounts. Getting them, however, is another question.

"That's something all the DSL carriers are wrestling with right now. I think they realize they need to target the business customer—it's just a question of actually getting it done," he said. "More than 80 percent of DSL is residential subscribers, so, that being the case, the question is how to get to the small to medium sized businesses"

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