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DSL Prime Editorial: Time to Deal in D.C.

It's time to gather up the pain and with the wizard's wand, transform the wounds in our economy into a sea change in the broadband industry that will generate the next wave of broadband demand.

by Dave Burstein DSL Prime [October 17, 2001]

"I have three term sheets for the money we need."
—Covad's Charles Hoffman, to BusinessWeek's Jane Black.

It's time to deal in D.C.
Every competitor's bankruptcy made the telcos' push for "de-regulation" a harder sell, for the market can't work without serious competition. Tauzin-Dingell is unlikely to pass the Senate, and the telcos' proposals now are much more limited. DSL Prime has confirmed in separate conversations that nearly every company is ready to cut a deal.

Tom Tauke of Verizon proposes "New wires, new rules" —which can work fine for everyone if the "new rules" are fair and consistent. The key issue is how competitors should serve their customers behind a DLC remote terminal. We've found agreement, off the record, from D.C. reps from AT&T, several CLECs, and key Washington players.

Nobody's accepted all the details or gone back to their management for approval, so this the deal is not yet done. It also would probably require a 4-8 month process, probably through an FCC NPRM. But after 9/11, the telcos want to move ahead in rebuilding the economy—they are looking for a solution.

The terms that make sense

• The service must be reliable, so value can be added with voice and video. This is the breakthrough for the CLECs, who need to offer quality service to the 25 percent of the market behind DLCs. BellSouth's Eric Fogle was clear about the problem "lack of reliability means you will always have a low margin service." Non-blocking DLCs add less than 5 percent to the installed cost, so it's a smart move for the telco's own customers as well. Unfortunately, SBC was putting oversubscribed equipment into the field for Project Pronto, which meant "webhog" unreliability. CLECs could not honor service level agreements, while multiline voice might suffer dropouts. Forget streaming video on demand—the pronto promises could not be delivered in volume on the equipment being planned. Now that G.shdsl symmetric cards are announced for the DLCs, CLECs will be able to offer the high-end business services to replace T-1s.
  
  
• The price calculation includes a risk factor. TELRIC assumes a cost of money of 9-13 percent, and the bells argue that's inappropriate because uncertainty means they may never cover their costs. Adding percent to the return on investment satisfies Babbio's key request, a fair return, without unduly burdening the competition. 25 percent maximum of the customers the next few years will be served through new DLCs, so a small adjustment on return does not break a competitor's economics. Frankly, other calculations that have passed virtually unnoticed are far more burdensome and hence more important to fight. The most outrageous is the telcos wholesale cost for DSL service, for which they ask $30-35. That's twice as high as Germany, and more than the retail price, including ISP connections, in Canada.
  
  
• The return on fixed investment should be stable for an investment period. Prices of equipment go down in this field, and in theory could result in a drop of the so fast the telcos face a loss. In practice, this is unlikely, so freezing the fixed cost for an appropriate period is not a hard change in the regulations. Telcos today are expecting an investment return in 2-3 years, and holding the value of the equipment fixed for that long doesn't make a big change, either in theory or in practice.
  
  
• The scope should be clear and limited. The rules should apply, as Verizon suggests, to newly installed DLCs that they believe require new rules. Demand is "unpredictable", they claim, creating a "risky" investment. This does not apply to most other telco Unbundled Network Elements (UNEs), so the "new rules" can be made very specific. Other proceedings, including a Supreme Court case can address the general price questions—but let's get this one off the table meanwhile.

Is this possible? Forty D.C. pros, many senior, think so. Everyone agreed that Mike Powell's FCC will give the telcos any reasonable change required, when I asked at the Pulver conference.

SBC's Whitacre makes the same request Verizon's Babbio did, not wanting to "assume all the risk for investing in new technologies, while competitors can assume the reward, at little cost to themselves."

DSL Prime is skeptical about whether there really is much risk (telco breakeven is 30-50 users, easily achieved), but allowing a risk incentive is a small but easy concession. Randy May of The Progress & Freedom Foundation is one of Washington's strongest voices for unbundling the telcos; he told us the risk premium and stable fixed costs would achieve most of what he believes needed.

Matt Flanigan writes to Bush with urgency
Matt Flanigan, president of the Telecommunications Industry Association, calls broadband "a fundamental economic policy, essential to competitiveness," This echoes our call on September 18 to make increased broadband coverage telecom's contribution to the economic recovery. TIA represents nearly all the manufacturers in the industry, and Corning, Motorola, Lucent, and Intel have indicated strong support, in an effort that began before 9/11 and has brought many CEOs to D.C.

Editorial: Seidenberg, Whitacre should be leaders
Neither Verizon nor the CLECs will give on-the-record details of what they need, and probably won't until the FCC moves on the NPRM and solicits comments. But waiting is costing the telcos money, and the economy even more.

DSL Prime urges SBC's Whitacre and Verizon's Seidenberg to move forward as soon as they know D.C. will work on their key concerns. Drop the price to the world level of $30, where competition would take it, and double your volume to increase profits.

How much have they cut back and could restore? SBC planned 350,000 new lines in Q4 of last year, then cut that in half this year. Verizon's capabilities are similar. Whitacre personally told D.C. recently Pronto should get to 80 percent in 2002, although everything we see finds them a year behind and essentially on hold. Verizon in 2000 planned 90 percent coverage in 2002, but virtually stopped expanding almost a year ago. Both are mired at 50-60 percent availability the last few quarters.

Covad's coming back, BellSouth is driving hard, the U.S. could easily double the install rate, to about a million per quarter. Once the base grows, services will spring up to feed it, and generate the next wave of demand.

We are journalists, not investment advisers; invest at your own risk and do further research.

Copyright 2001 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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