DSL

DSL Prime News Weekly: The Inside Source

The telcos have won and even the mainstream papers admit it, latest DSL subscriber numbers, equipment costs continue to fall, Nortel and FCC analysis, siginificant personnel changes in the DSL Prime News Briefs, and much more news.

by Dave Burstein DSL Prime [May 15, 2001]

"Ask not what your country can do for you, but what you can do for your country." —John Kennedy/Ted Sorenson

The telcos have won
Get used to it. Seth Slesin put the power of The New York Times behind that conclusion

"The Bells—the race's tortoises—have won...broad sections of the industry, largely the ones that consumers interact with and spend money on every day, almost as cloistered as they had ever been."

then Peter Goodman of the Washington Post chimed in:

"the promise of competition is dying...a growing chorus of economists claims that anything short of regulatory intervention amounts to tacit approval for the monopolistic grip of the Bells"

The absence of bidders willing to buy NorthPoint's network—at any price—made it clear competitors cannot find large scale financing. This is a business that needs capital, because network buildout and customer acquisition mean you lose money the first 4-6 years, even if you're doing well.

No capital means no competitors large enough to have a major impact. The bells' price rises for DSL—while costs are dropping 30-50%—makes the monopoly power clear. The response in kind by the cable guys is classic signaling—both cable and the other telcos were intending to continue dropping prices before SBC made its move.

AT&T & Sprint may become factors, but for now, we have effectively a monopoly and a government intent on de-regulating it. We urge government to do what DSL Prime will be doing—look even more intensely at what the telcos are doing, and demand the best from them. That's why we placed the Kennedy quote above—a business with extraordinary market power must serve their community as well as shareholders.

We'll only have one more issue in May, as we finish our book DSL, A Wiley Tech Brief, and we thank everyone who is helping us with information and illustrations.

BellSouth agrees to end "AOL tariff"
Prices to all ISPs at same $33
DSL Prime applauds BellSouth for backing away from a tariff designed to eliminate all ISPs other than their own and a handful of large competitors. The move was inspired by Dannie Gregoire of Kentucky ISP Iglou and his attorney, Jonathan Amlung, who persuaded the Kentucky PUC to order BellSouth to change pricing.

We call this the "AOL tariff", because when we first detected it at Bell Atlantic it was clearly aimed at providing one price to AOL and another, essentially unsustainable, price to virtually everyone else. SBC and Verizon maintain the disparity—it now protects their "independent data subsidiary" as well as two or three large ISPs. Ed Whitacre, CEO of SBC, made clear the result of this pricing: they capture more than 80% of the DSL subscribers for their own ISP, although the vast majority previously were other ISP's customers.

The disparity is extreme: the last time the big bells gave us numbers, the margin from the market price was twice as high for their own subsidiary as for the average ISP. The recent price hikes have probably narrowed the discrepancy. GTE was the only Bell working effectively with independents, with over 2/3rds of the customers remaining with outside ISPs. Since the Verizon takeover, that number has reversed.

Editorial: Justify the price!
BellSouth has indicated they want to charge the ISP $33 per DSL line, which is clearly unrelated to the cost of providing the service. Qwest, for example, charges a retail price of $20 for basic DSL service. Bell Canada offers the entire service, including the ISP, for $27 U.S.

These are not stupid companies, unable to calculate their costs. Since the primary costs involved are the shared line ($0-6 per month) and the DSLAM (whose price is under $200/ per line, or $4/month over five years), the direct cost of providing DSL service, including a significant profit, is $12-20/ month, and going down rapidly with equipment costs. (The cost overruns on DSL have been related to customer acquisition and support—costs that the ISP, not the telco, absorbs if they buy the wholesale line.)

The only way for the Bells to explain the $30+ wholesale prices is by allocating costs already included in their rate base. This means that local phone bills should be reduced if the bells wholesale DSL prices are allowed to stand. Our rough calculation is about $1.25 per month per household in 2005. We hope the bells will refute this editorial by providing hard data to the public.

BellSouth has chosen to satisfy the Kentucky ruling by filing a Federal tariff that covers seven states, giving a wide impact. We urge the FCC to process the request quickly, after carefully calculating the rate.

Who will buy whom?
Wall Street makes its money on mergers, so rumors always swirl. But disappointing financials makes some change inevitable. Anton Wahlman of UBS projects the likely results of the current brutal chip competition: "This field will likely have to see several companies exit the market, or substantial amounts of consolidation to save on fixed expenses. "

He pointed out that Virata was in a special position, because their primary product is the network processors and software that control DSL modems, a market they share with Motorola (whose division, we believe, would also be available to the right buyer). That makes for natural synergies in many possible mergers, although Virata is now producing physical layer chips as well (and the phy guys are adding intelligence). Virata's CFO, Andrew Vought, was very clear about how any deal would go "We believe our strategic strengths, including our $488m in cash, should allow us to sooner be the acquirer in the event there is a consolidation of DSL chipset competitors."

Agere's DSL division has been particularly disappointing recently, although we have no firm information about how the cutbacks will affect them. Conexant's Mindspring division was being spun off with plans for an IPO, but sales shortfalls have put that far in the future. Metalink has interesting prospects , with a particularly broad line of VDSL and G.SHDSL chips on the ways, but projects sales drops next quarter and has a market cap under $200M.

Rumors are swirling around the DSLAM market as well, as the telco domination implies their key supplier, Alcatel, will increase its 55% market share. Siemens hopes to ride DT's coattails, but literally every other vendor is considered vulnerable. Nokia, Lucent, ECI, ADC and Cisco face major corporate cutbacks, with rumors swirling about the status of their DSL units. Nortel dropped the division before this issue went to press. We have not been able to confirm any of the rumors, and specifically have confirmation from Qwest they are not dropping Cisco as a supplier. (Lucent supplied some remote Stingers, but the Cisco remains primary both in and out of district.) Copper Mountain should have some good news, as the new DSLAM discussed by CEO Rick Gilbert last fall is due.

Dave Farber: Don't underestimate Mike Powell
Powell looks to $10M fines to convince the telcos he's serious
When SBC raised DSL prices right after Powell was chosen to head the FCC, it reflected a general attitude his strong belief in free markets meant he would not block the telcos, whatever they did. I privately called the increase "Powell Pricing", and that's been confirmed as BellSouth, AT&T, Telocity, and Earthlink have joined in. But Dave Farber disagrees. He worked closely with Mike Powell the last year, as CTO of the FCC. Farber's a well-known independent, testified against Microsoft in the anti-trust case, and given to speaking his mind.

"My experience with Mike Powell left me with a very warm feeling of a person who was committed to a competitive marketplace. There are two ways of achieving that with respect to FCC actions. One is preventative—one looks into the future (a rough task) and based on that look acts in the present to "fix" things. That requires a very good crystal ball. The other way is to let the market place work it's way, monitoring and acting rapidly if it goes wrong. How fast one can act in a fast moving technology is the issue here.

Mike is, I believe, an advocate of the latter path. Both paths have problems and both are valid approaches. What is true I believe, is that Mike is far from a passive player who will stand by and watch the Bells lock up the marketplace. That will take very careful watching and very rapid action if the market fails. One hopes the Congress does not tie Powell future hands with restrictive laws.

As many of you know I have little love for monopolies and made a major effort to stop one. I am prone to believe Mike will also."

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

"The power of the printing press belongs solely to those who own the presses"
—A.J. Leibling

The Internet is the cheapest printing press ever invented.

 

1. The Telcos Have Won	3. Good News: Cheaper Equipment
>2. DSL Subscriber Numbers	4. The DSL Prime News Briefs