DSL

DSL Prime News Weekly: The Inside Source

Small ISPs in trouble while the giant ISPs are fine, Verizon releases service metrics for its voice offering, Nokia romps, Centena raises money, and the DSL Prime news briefs.

by Dave Burstein
DSL Prime
[December 14, 2000]

"The investment future in technology is brighter than at any time in history."
—Tony Perkins, The Red Eye. We hope he's right!

"No significant residential competition" is the future, according to two-thirds of the audience at the DSL Summit last week. Covad's slowdown in consumer confirms it.

If they're right, the blunt conclusion is that US telecom policy has failed, because it requires effective competition. DSL Prime thinks giving up is premature, because at least five giants are unveiling major national plans.

Flashcom, Zyan, Relaypoint, Fastpoint broke
Covad reports Chapter 11 filings with more to come
No surprises, the ISP problems are well known. Chapter 11 of the US Bankruptcy Code gives a debtor great flexibility in reorganizing, and we hope they will successfully do so. The common wisdom in the legal profession is that companies make a terrible mistake waiting too long to file Chapter 11, because it suspends debts and requires approval of the bankruptcy judge for many actions, possibly including the transfer of customers to another ISP.

Flashcom and Zyan have both told us they intend to emerge by concentrating on business customers, and we wish them luck doing so. Richard Rasmus told CNET he was forced to "monetize" the residential customers, selling those served by NorthPoint to Telocity and those at Rhythms to Earthlink. Covad, meanwhile, has introduced the "Covad Safety Net" to make it easy for customers to switch, apparently without any payment to Flashcom. We applaud Covad for taking care of consumers, but hope all legal rights are respected.

Covad's McMinn: "Blessed company, first profound test"
40% cut in next years' subs conserves cash, EBITDA + in 2002
"We have gone far beyond my wildest dreams when I founded the company. We been blessed from the beginning, are facing a profound test now, and will emerge stronger."

Now, McMinn has must administer strong medicine. After adding 65K customers this quarter, and reaching 270K, they project less than 190K additional in 2001, predominantly business. McMinn told us they were going from 40% to 60% business customers.

They've stopped their buildout, lowered capex $100M, intend more cutbacks beyond the 13% layoff, and ended market development funds and co-op advertising that have been the lifeblood of the ISPs. Equipment and installs will lose most subsidy, while they're actively pressing equipment suppliers for lowered prices.

Despite that, new customer costs mean a first year loss, and hence encreased cash needs. They're going back to re-negotiate ISP contracts, and have placed on intense credit watch even ISPs current in their payments. 26% of accounts are in clearly troubled ISPs, 32% on watch. But McMinn projects 15 key (and timely paid) accounts are enough to meet his projection, with volumes expected from AT&T, Worldcom, Sony, Avon, XO, and other "gold" resellers. Covad is actively looking to move customers from weak to strong ISPs.

Consumers will be turned away unless Covad can lineshare, a policy they vehemently denied earlier, and most will self-install. DSL Prime believes Covad's long term business includes aggressive residential deployment and McMinn confirmed that. However, we believe the numbers imply Covad will take on very few individuals in 2001, primarily in support of a few key partners. McMinn projects a cash "burn rate" down to $60M/month, EBITDA plus by Q4 2002, no need for additional cash in 2001.

Vectris falters, Harvardnet flunks
Flood of failure not yet turned
Vectris layed off most of their staff home the moneymen pulled the plug. They had wired 155 cities in ten states from Texas to Michigan, delivering the business plan. But the DSL climate turned, and the money pulled. Vectris, an Austin-based regional provider, that had $90M in financing, Cisco had promised $60M in financing, and VCs including Austin Ventures, Stolberg Equity Partners, Trinity Ventures, Lightspeed Venture Partners, and Weiss, Peck & Greer had pumped in $30M. Cisco can handle the write-off, if necessary, while other vendors (Efficient among them) have presumably smaller exposures.

Harvardnet, with hundreds of COs wired on the East Coast, laid off most of their staff and got out of the DSL business. After their failed IPO, news has been hard to come by from these guys; in particular, they refused to release subscriber numbers. They started with bright technical folks and ambitious plans; the more "business-oriented" fixits brought in this year obviously couldn't solve the problems.

At least 4 other providers face layoffs or worse.

Giants are coming
AOL, MSN, AT&T, Sprint, Worldcom, Earthlink on the move
Existing customers will purchase hundreds of thousands of lines as soon as the tap is turned on, and we believe it's being turned as we speak. Each company has a similar strategy - establish a national broadband footprint and sell broadband in volume as quickly as possible. All are technology agnostic, planning to use DSL, cable, fiwed wireless & satellite to reach homes, depending on what's available. A 10% take rate for DSL from the ISPs below would be two million lines, and could be induced in less than a year; the long distance telcos, each with an internet backbone that keeps costs down, are five times as large.

AOL is already distributing DSL self-install kits to computer stores around the country, and only the merger in Washington is holding back the big announcement, currently scheduled for next week. AOL signed up last year for a million lines from both SBC and Verizon. Their 28M subscribers include one-third of the US Internet—three-quarters cannot be served by Time Warner cable, and they will use DSL elsewhere.

Sprint has bet the company on ION, which includes 800 COs of DSL with a big sales push coming in January. Key offering is data and two or four voice lines, with added value tiers at a higher price. DSL will be the main technology, although they are building out fixed wireless in some areas. Verizon has taken 1.5M long distance customers in New York State—Sprint has no choice but to deliver on advanced servers to make up for the erosion of their base.

Microsoft is running TV commercials for the MSN/Radio Shack/NorthPoint deal, and tell us they'll move as fast as the industry can reliably deliver. Bob Visse's strategy to to expand beyond the MSN direct subscribers to the 210M around the world who access Microsoft on the Iinternet. "Home networking is critical to our plans", which requires broadband, and they expect profits to come from added services: music, games, and telephony/integrated messaging. Last week, he strongly reaffirmed Microsoft's support of NorthPoint.

AT&T, primarily a Covad reseller, briefed us early this year they intended to offer ubiquitous broadband in 2001, covering over 95% of the US. Covad is already seeing volume orders, and AT&T's strong presence at DSL events make their interest clear.

Worldcom has extensively trained their sales force to sell business DSL, and has contracted with Rhythms alone for 100,000 lines. CEO Bernie Ebbers in June said 2001 would be the year, and back in 1999 said they would be competitive for consumers as well.

Earthlink has 100,000 DSL customers, making them the largest independent ISP, and are heavily advertising their quality support to win new clients. They also picked up Flashcom residential clients, and several other ISPs are looking to cut a deal. They inked a TimeWarner cable deal, and have added satellite, but expect 70-80% going forward to be DSL—if the industry can deliver (Pac Bell burned them bad this summer).

Sure, field problems continue, but the telcos have improved installs (unofficially, Verizon is at 3,500 per business day and SBC has hit ten thousand) as truck rolls become a feature of the past, with 90% customer self-install rates. Covad planned 90% line-shared self-installs by the end of December, and Rhythms & NorthPoint similar. We urge the telcos to release customer service metrics, which we believe would confirm things are getting better.

Catena raises $60M
Ex-Nortellians putting voice/data together from chips to systems
$60M from Goldman Sachs, with Berkeley International/London Pacific and Attractor Investors, proves that funding remains available for DSL companies. The money will support 175 engineers in Kanata, Ontario, including much of the 1 meg modem team. Steve Bauer reports "We are integrating POTS and DSL into the same data path—thus eliminating POTS splitters—and have more than 20 patents in this area." He believes Catena will require lower power and deliver higher density than others, like Infineon, developing "digital POTS Splitters." Key targets in the "post-DSLAM" era are the line cards in DLCs and the switches themselves. Reference designs from Infineon and Legerity already offer DSL + POTS in the same form-factor as voice-only cards; Catena is keeping most product details quiet for now, but is presumably heading for the same market.

Fire the manager! Andy May out at Paradyne
Building international, reorganizing
Losing sports teams fire the manager, whether or not he's the problem, and the trend seems to be moving to industry as well. Paradyne bet heavily on the success of Dreamline in Korea, who backed away from some of the world's toughest competition. US sales will be reduced by the failure of key customer Harvardnet and the end of the network build at NAS and Rhythms. Ultimately, that meant heads rolling in Florida. Paradyne's plans going forward include expansion internationally, where Paradyne already has a strong base, and focus on products for frame relay/SLA verification as well as DSL. Ever-popular Frank Weiner shifts to VP, Corporate Marketing and Advanced Technology, with Paul Floyd taking more responsibility for DSL and Scott Eudy international. Paradyne has a rich history (including being an early home for many of the industry's managers) and a key product advantage - greater reach from their DSLAMs, as reported by customers in the field. COO Sean Belanger moves to CEO, while May remains as a "senior advisor" and board member.

Nokia Ramps
Secure routers and wide VAR relations purchased for $120M
In the US, Nokia has Covad (who just froze their deployment) and little else, but they are expanding rapidly around the world; in Europe their execs are pledging to rise near the top in market share. Nokia last year purchased George Hawley's Diamond Lane , and now has bought Ramp for a CPE product. Ramp brings a respected product, a wide VAR channel, They have a gorgeous wireless home gateway just hitting the market, and their Rooftop distributed wireless system is a natural complement to fill in the gaps in a DSL service map.

Verizon shows what quality means
DSL service should match
Verizon/GTE proudly reports their services results for Florida telephony customers; we only hope that Verizon and others match these numbers for DSL:

Orders installed in three days—97.1 percent

Out of service repaired in 24 hours—97.1 percent

Customer Sales and Service Center answer time—97.2 percent of calls answered within 55 seconds

[Go to page 2: Briefs]