DSL

Will ISPs Be Trampled in Dance of DSL Titans?

RBOCs are leveraging their de facto (if not de jure) control of the local loop to dominate the DSL market; CLECs are beginning to explore selling directly to end-users. Where does this leave ISPs?

by Jim Thompson

A recent report by Cahner's In-Stat Group declared what appeared to be a victory for the Baby Bells in the DSL arena. At least that's what the press release seemed to say. But scratching the surface reveals a more complex story.

The basic factual finding of the report is that the Baby Bells control, at least for now, 80 percent of the DSL market. They have some 600,000 subscribers compared to the estimated 150,000 that are controlled by the CLECs (Competitive Local Exchange Carriers). The report concludes that the Bells are likely to keep a majority of subscribers in the markets in which they compete.

The reasons that RBOCs (Regional Bell Operating Companies) are winning the war for control of the lucrative DSL market are both serious and complex. Not only do the RBOCs have tremendous presence in their home markets, they also own the network. As evidenced by SBC, they're using that leverage to wage aggressive marketing campaigns to secure a solid DSL customer base. The result is their current domination of the DSL market.

[See, for example, this story on SBC's delays of competitors' installations.]

Fear and loathing?
Given the obvious strengths of the regional Bells, on the face of it, the report's conclusion doesn't seem extreme. But that's not the reaction Mike Lowe, senior analyst for In-Stat's Advanced Carrier Service, received following publication of the study. "It seems like this is getting a reaction as though it's a pretty radical statement. I thought it was pretty conservative when I wrote it, but apparently not."

In this arena, the RBOCs are in competition with two related but separate constituencies. First, the CLECs were created by the Telecommunications Act of 1996 to help breakup the Ma Bell monopoly and to provide direct competition to the regional Bells. Second, ISPs compete with the Bells in providing Internet connectivity.

The Bells have spent most of their time building customer base and trying to shed their image as big monopolies that care little about the individual customer. Meanwhile, CLECs have been plowing enormous amounts of money and effort into building a national infrastructure. The technical problems faced by the CLECs are exacerbated by having to sue their way into co-location and equality when it comes to provisioning the local loops.

"Instead of helping Covad expand into new markets, which would be a lot more fun, I spend my days at the FCC trying to force the incumbents to comply with the law," said Jason Oxman, senior government affairs counsel for Covad Communications.

[Further Covad testimony is available to those with broadband connections at http://www.covad.com/1999annualreport/highband.html. Especially noteworthy is this statement that Covad's business depends upon proactively forcing the FCC to implement the law.]

Although the RBOCs strongly deny accusations of discrimination, many CLECs believe the overall strategy of the incumbents is to stall whenever possible. This includes delays in provisioning of loops and providing co-location space. Often relief comes only when the FCC enters the fray.

Second front
While the Bells are thwarting or delaying the CLECs from the top, the ISPs find themselves squeezed between the CLECs and the actual customer. Lowe notes that "part of the problem is the RBOCs' presence and part of it is the CLECs' lack of leverage."

The result is that as the RBOCs and CLECs play out their dance of the elephants, it's the ISPs who often get trampled. In the end, they are dependent on the RBOCs when providing DSL to their customers. When an ISP sells a DSL line to a retail customer, it must be provisioned either directly by an RBOC or via a CLEC who leases from, and likely litigates with, a Baby Bell. Thus the ISPs, like everyone else, are, and will remain, dependent upon the Bells.

Leveraging ISP strengths
But this not to say that ISPs are powerless in the great customer stampede of the 21st century. Their direct and personal contact with retail customers means the ISPs are not just begging for crumbs in the DSL arena, but have something to bring to the table. The SBC/Prodigy deal provides evidence of this: As Mike Lowe points out, "If SBC didn't feel they needed any help from the ISPs, they wouldn't have signed that merger."

The SBC/Prodigy deal (article here) also underscores the importance of value-added services for ISPs. According to Lowe, offering new services may be the only way for service providers to differentiate themselves in a market that becomes more crowded every day. "Selling lines is not going to be enough going forward. Providers who offer access alone face a commodity environment," he said.

Providing additional services may be the only way to solve the problem of moving dial-up users to high-speed access without increasing the price of the service, per se. "Voice services, like VoDSL, will be among the first of the value-added services that will add to the revenues of ISPs," said Crosby Haffner of Zyan Communications.

Voice proves to be a lucrative market for both ISPs and CLECs. More than $46 billion is spent on telecommunications by small businesses in the U.S. alone each year. More surprising is that only about ten percent of that amount is spent on data services. The remaining ninety percent, or nearly $41.5 billion, is spent on voice services.

Still, this is only the beginning of the value-added bonanza. Business customers want unified messaging services and hosted IT applications. Residential consumers are looking for video-on-demand, streaming media, and multi-player gaming.

Scratching the surface
Yet, despite the promise and the revenue potential, few are doing much with value-added services at this time. Qwest recently invested in Entertainer as a move in that direction, but one cow doesn't make a stampede.

"Everybody's doing a little bit, but the whole promise of broadband, in my opinion, is content in terms of entertainment, of being able to video-conference your kid in with Grandma, on a birthday," Lowe said. "The speed itself is not the promise of broadband. The promise is what the speed can bring you. We've only scratched the surface."

For ISPs it's not too late to start grabbing market share in the quest for value-added services. The first companies to offer voice, streaming audio, and video, as well as business applications, will be able to establish market share before the local Bell arrives. Once they're entrenched, it will be difficult to pry them loose.

Carpe diem
ISPs have to wake up to the fact that the wolves are at the door and licking their chops. Both the RBOCs and the CLECs see a fat market that's ripe for the taking. To protect themselves, ISPs should first face the reality that their alliance with the CLECs is not a permanent one. Covad, for one, has already made a move to deal directly with retail customers by partnering with Big Net, which gives them a retail presence. it's a disturbing trend that could spell the end of many ISPs. RBOCs already operate their own ISP services, should all CLECs do the same, ISPs could be squeezed out.

"That's not out of the realm of possibility," said Lowe. "Covad is now in direct selling." Lowe added that in talking with Covad, Northpoint, and Rhythms, "all three have said that ISPs are going to be an important part, but the CLECs could step away and end their relationship with ISPs at any time." He mitigated that statement by saying that "there remains a place for ISPs in the RBOC world and certainly within the advanced carrier world."

It also doesn't hurt that the ISPs can walk away from a carrier as easily as they can be left (for example, many ISPs use more than one carrier). Realizing that the sword cuts both ways is an advantage as well as a caution to the ISPs and their providers. The truth is that no one is going to be squeezed out of the market as long as the market remains competitive.

Political dimensions
The competitive nature of the market is also a function of the regulatory climate. CLECs owe their very existence to the Telecommunications Act of 1996. ISPs have become familiar with its provisions as they lease (and litigate) loops from the regional Bells. All of this is cause for concern in an election year.

"That's the thing that would scare me if I were a CLEC," said Mike Lowe. "A new Congress, a new President, a new something. What if the regulatory climate shifts back to the RBOCs, then you're at their mercy again. You hate to hire a lawyer every time you want to do something on the network." Of course, if CLECs are pressured, ISPs will also feel the squeeze.

It's no minor caveat that a change in FCC policy could result in a change in the entire telecommunications landscape. The reality is that unless you're a major political contributor, it's unlikely you'll get a straight answer on regulatory climate during a coming administration. All you can hope for is some recognition by a new administration that competition works.

If we're lucky, whichever candidate enters the White House will have at least some understanding of the importance of competition in the telecommunications industry. But don't hold your breath. With one candidate claiming to have 'invented the Internet' and another who seems to think high speed access means being first in line at Howgly Wogley's All You Can Eat Barbecue Shack, the prospects are slim.

So, despite Cahner's own headline,"Baby Bells Predicted Winners in DSL Battle," the Baby Bells will not ultimately dominate the market as thoroughly as they do now. Sure, they're always going to be the big gorilla at the table, but if you're fast and nimble, you too can get some bananas.

 —End