DSL

Baby Bells Bouncing Back

The RBOCs seemed poised to take a dominant position in providing DSL services—while ISPs and data CLECs drown in red ink. But Baby Bells must change their ways to win new customers.

by Jim Thompson [January 19, 2001]

As DSL service providers and data CLECs fall to financial ruin; the Baby Bells appear to be in the right place at the right time to capitalize on the mistakes, misfortunes, misadventures and mismanagement of their diminutive rivals.

The financial problems plaguing many ISPs and CLECs amounts to a second chance for the larger local phone firms. Less than two years ago, RBOCs were chastised for delaying DSL service roll-outs.

When DSL technology finally hit the mainstream, it was CLECs and ISPs who first understood the opportunities for long-term growth. These broadband upstarts moved quickly to expand national facilities and increase their customer-bases—while RBOCs sat on the sidelines.

CLEC edge
Data CLECs possessed several competitive advantages that helped catapult them to the forefront of the DSL market segment. Primarily, CLECs aren't constrained by geography, which means the companies could quickly move into lucrative metropolitan markets—while avoiding the pitfalls of extending services to expensive, less profitable sub-market.

Unlike RBOCs, CLECs weren't concerned about cannibalizing higher-priced dedicated line services with DSL access. CLECs also had a size advantage over RBOCs—as a smaller business entity, CLECs could move quickly into new markets—a major boon over RBOCs when it comes to taking over new territories.

The times, they are a changin'
But the honeymoon for CLECs and ISPs appears to be diminishing as quickly as it intensified. Nearly every day service providers and competitive carriers are reporting lower than expected earnings to investors. Some firms have filed for protection under the bankruptcy laws—while others have closed their doors for good.

After posting lower than expected quarterly financial results, Covad Communications was forced to cut its staff by 13 percent late in November last year. At the same time, Verizon Communications terminated its acquisition of NorthPoint Communications citing deterioration in the data CLECs business operations as the reason behind nixing the deal.

This month, Digital Broadband Communications, Inc. in Waltham, Mass. announced plans to file for bankruptcy after laying-off 85 percent of its staff. The announcement came on the heels of decisions by Planet Systems Network and Jato Communications to shut down their operations.

And this week, NorthPoint filed for Chapter 11 bankruptcy protections, while Rhythms Netconnections cut its workforce by 450 employees.

The entire industry—not just DSL providers—took another hit on the stock market when a Wall Street analyst downgraded data CLECs even further, following fourth-quarter profit warnings by equipment suppliers.

Robertson Stephens analyst Paul Johnson downgraded Efficient Networks, Turnstone Systems, Paradyne, Elastic Networks, Copper Mountain, Aware, Tut System and Advanced Switching Communications from buy status to long term attractive rating.

Window of opportunity
What may spell disaster for one company—often creates an opportunity for another. Suddenly, regional phone firms can cast-off their also ran attribution and take command of the DSL marketplace.

It won't be easy—RBOCs must watch the market closely and carefully listen to their customers. If they play their cards right, RBOCs could inherit the top-spot for broadband services in the DSL marketplace simply by picking up existing customers where other providers failed to subsist.

However, it will take a three-pronged assault on the market if RBOCs want to reign as the dominant player in DSL space. It will take money, effort, and a willingness to learn from past blunders—like when RBOCs neglected to behold the opportunities of DSL services at the dawn of the industry.

Belly up to the bar
Once the Baby Bells decided to make a play for for customers in the DSL market, the RBOCs moved into broadband space with a vengeance. The firms cut prices and offered special discounts on customer premise equipment and installation fees. The promotions quickly pushed RBOCs into a strong market position for DSL services.

"Almost everybody has relinquished the consumer DSL market to the Baby Bells, entirely," said Crosby Haffner, president of Zyan Communications, a DSL provider headquartered in Los Angeles. "It's very difficult to make a profit at the consumer price points set by the Baby Bells."

Because RBOCs offer diversified communications solutions, the Baby Bells can afford to feast—even during the leanest times of a famine.

"For the local Bells, their whole business model doesn't rely just on being successful with DSL," said Daryl Schoolar, Industry analyst for ISP strategy at Cahners In-Stat Group. "They can survive through the growing pains much easier than a company whose only business is DSL."

Pressure points
While RBOCs are in a better pecuniary position than CLECs and ISPs to navigate safe passage through the financial storms—Baby Bells aren't the only broadband game in town.

Cable access providers have exerted serious competitive pressures on the DSL side of the market. Companies like Excite@Home and Road Runner established a strong foothold in the consumer segment because they were the first to market residential broadband services.

Jupiter Research recently reported that at the end of the Q3-2000 the number of users connecting to the Internet via cable was nearly double that of DSL services. According to the report, there are nearly three million cable modem users, compared to about 1.5 million DSL customers, only about 900,000 of which are installed in residences.

But DSL is still in a remarkable growth phase. The Yankee Group estimates that by the end of 2005, broadband cable connections will grow to 14.7 million. At the same time, analysts also predict that DSL connections will increase to 10.5 million.

There's no question that RBOCs have a tough fight for residential customers on their hands. With the recent approval of the AOL-Time Warner merger, it will be even more difficult for the RBOCs to compete with cable providers.

The Baby Bells have fueled the demand for DSL through advertising campaigns and attractive pricing plans. They will likely continue these aggressive marketing tactics when they engage cable operators in a full-scale war.

Customer service concerns
If the dogfight with the cable operators is not enough to occupy their time, the Bells also have some fence-mending to do with their present and future customers.

DSL access has a less than sterling reputation for service—scores of customers have recounted horror stories about billing problems, installation issues, and poorly trained technicians. Most customers experience setup delays—ranging from several weeks to several months—after placing an order for DSL service.

"It was three weeks without a phone or Internet access, filled with broken promises and broken appointments," said Mickey Sagusay about her experience with Pacific Bell. "We couldn't even dial 911."

Haffner said customer or going to demand that telephone companies to get their act together and start providing a high-quality services.

"But, that's going to take a long time, Haffner said. "It's very difficult to get large companies to change the way their culture and their operations have been developed over many decades."

There's no question that the Bells have been handed a unique and, potentially, lucrative opportunity. But it is only that—an opportunity, not a guarantee of success.

ISPs down, but not out
Despite the financial problems for many of the ISPs and CLECs, the current situation also presents a window of opportunity for many of the smaller firms.

"We can certainly provide higher levels of service than the Baby Bells," emphasized Haffner. "We can also provide products that the Baby Bells don't provide. Over the last five years, telephone companies haven't been able to provide quality Internet access—just basic Internet access—much less the additional services that businesses need."

It's much too early to count ISPs out of the DSL industry—with high quality customer service in one hand and value-added services in another, ISPs can hit the Baby Bells with a powerful one-two punch.

— End