DSL

Contest Heats Up for DSL Providers

As if current market conditions aren't enough to bring DSL down—new threats from rival broadband platforms and deregulatory fribble from federal regulators might mean the kiss of death for independent service providers and resellers alike.

by Jim Thompson [February 20, 2001]

Once again, Internet service providers and competitive local exchange carriers that offer digital subscriber line access find that they are in a good news—bad news situation.

The bad news? Competitive threats from rival platforms provided by cable services, the Baby Bells, and satellite broadband firms are luring would-be DSL customers away from ISPs and CLECs—while driving the price and profit downward.

The good news? Even with increasing competition and dwindling revenues—DSL access continues to expand its market share.

The latest bump in the DSL roller-coaster comes in the form of a report from the Federal Communications Commission, which concluded that DSL service is not only a major part of the broadband explosion but presents the biggest challenge to broadband over cable.

"DSL technologies remain the most significant competitors to Internet over cable," noted the 134-page FCC study, which added that cable continues to hold the broadband lead in last-mile delivery of high-speed services to residential users. Cable's dominance is being eroded, however, by both DSL technologies and direct broadcast satellite (DBS) high-speed services.

According to the study, as of June 2000, there were about 820,000 DSL subscribers.

This compares to more than 2.3 million cable broadband subscribers. However, the FCC noted that this lead is beginning to dwindle as "the rollout of DSL and other broadband technologies is accelerating."

They also cited a Morgan Stanley Dean Witter report which predicted that there will be 10.1 million DSL subscribers by the end of 2002 compared to only of 9.1 million cable-modem subscribers.

Menace in the sky
Cable's broadband lead is also being threatened by the promise of new services available via DBS. Currently, satellite services require a dedicated telephone line used as a return path for Internet connections. However, this is a temporary obstacle. According to the FCC study, both DirecTV and EchoStar plan to offer high-speed, two-way broadband connections as early as this year.

DirecTV announced plans to shift from its DirecPC telephone-return system to a Ka-band satellite system. Under a partnership agreement with Hughes, DirecTV hopes to have its system, aptly named Spaceway, operational by 2003.

In another partnership, this one with AOL Timer Warner, DirecTV plans to offer two-way connections to U.S. Consumers as early as this year, using Ku-band satellites.

EchoStar is making substantial moves to enter the two-way satellite connection market by leveraging its stake in Starband, formerly Gilat-2-Home. Starband launched its first satellite in November, 2000 and has plans to put more birds into low orbit over the earth soon. Added to this is a partnership with industry giant, Microsoft and a significant investment in WildBlue, formerly iSky. WildBlue and EchoStar plan to use Ka-band and spot-beam technology to deliver two-way, broadband services later this year.

Here again, is a little good news and bad news for ISPs and CLECs. Satellite technology is helping DSL providers by cutting into the markets traditionally dominated by cable—at the same time, it means more competition for DSL providers too.

ISPs and CLECs are already subsisting on the thinnest of margins. The last thing they need is more competition. ISPs have their hands full trying to make ends meet as pressure from the Baby Bells continues to drive down the price of DSL services. The addition of one more major competitor will only add to the downward spiral and result in the demise of even more DSL-based service providers.

Systematic strikes
In additional to consumer satellite service deployment, there is a growing deregulatory sentiment within the FCC, which may hand over the DSL market to the Regional Bells. Just such a move toward relaxing regulations governing Baby Bells is gaining momentum in Congress.

Billy Tauzin (R-LA), chairman of the House Committee on Commerce and John Dingell (D-MI) also of the House Committee on Commerce are working on updating the Telecommunications Act of 1996. Although no details of the plan has been released, insiders say the telecom-friendly twosome are leaning toward limiting or removing all levels of regulation over broadband services.

There is a chance that a revised Telecom Act could eliminate all regulation of the entire broadband market segment, including DSL, satellite, wireless and cable access.

Even AT&T, which has never been an ally of CLECs and ISPs, warned against deregulating the broadband market because it equates to building a DSL monopoly for the Bells.

In a speech to reporters and lobbyists at the Washington Press Club in early February, AT&T's chief executive, C. Michael Armstrong noted that RBOCs control some 75 percent of the DSL market. He further noted that companies like Covad Communications and NorthPoint Communications have fallen on hard financial times because of the Baby Bell consortium that controls DSL services in local markets.

"This all would be ludicrous if it weren't so scary," Armstrong said. "The Bells' monopoly power throws a dark shadow over the entire telecom industry."

In his first public appearance after assuming the helm of the FCC, Chairman Michael Powell added fuel to the deregulation fire by noting that his time in office will be marked by a "greater reliance on deregulation." He added that this emphasis was designed to push competition into telecom and Internet markets.

Third-degree burn
Powell shot another flaming arrow at the heart of high-speed service providers by indicating that he will "do everything possible" to help propel 3G wireless services into reality. Powell considers wireless broadband access as one of the "critical three components" to broadband service deployment in the nation—along with DSL and cable.

"Wireless is a killer app that is leading the way in growth and competition," Powell said. There is growing belief that such strong language may indicate that the FCC would move to lift the cap on the amount of spectrum a wireless provider can own in any given market.

The new FCC Chairman also voiced some foreboding comments about shared access to cable systems when he stated that "openness is not always good." Since some industries, like cable, which have survived as closed systems, might not thrive if forced to carry rival services on their systems.

"All you have to do is look at NASDAQ 2000," Powell said. "There is still blood on the floor" left by companies unable to make a profit while operating in an open environment. "The Internet will be just an interesting experiment if the producers can't find a way to provide services to consumers while still making a profit."

He also left little hope for struggling CLECs and ISPs when he commented, "a lot of people show up at a gold rush, but not everyone leaves with the gold."

Thwarting calamity
The bottom line is this—if DSL providers think things are tough now, just wait until satellite services, deregulation and discriminatory access to cable systems come into play—things will be a whole lot tougher.

In order to compete with rival platforms and survive what's coming down the deregulatory pipe, DSL providers should batten down the hatches and prepare for rough seas as competition from three new fronts are unleashed.

—End