.... big DSL service providers are fueling up with aggressive pricing and
sturdier technology in an attempt to make real headway in
the race to grab new broadband subs

Can you hear me now?

Verizon's popular question extolling the benefits of its wireless phone service could, by sheer accident, contain a cryptic subliminal message to cable operators: DSL (digital subscriber line) technology is on the prowl for high-speed Internet market share.

DSL's re-emergence as a viable threat to cable's enduring dominance as the broadband Internet access leader is considered by many experts to be a near-desperate move on the part of top-rung telephone service providers to find a fresh revenue stream that also is aimed at reversing churn and halting the exodus of local and long distance phone service customers.

Razor-thin profit margins for local and long distance phone services, and a lingering hangover from the CLEC flameout of a few years ago, have convinced the major phone service carriers that an all-out attack on cable's nearly insurmountable lead in the lucrative high-speed Internet market is THE top priority.

Add to the mix a growing need for speed among Internet users, falling equipment and deployment costs for DSL, and appealing margins for high-speed Internet service, and it's no wonder the telco hierarchy now considers DSL service its go-to strategy.

Cable currently enjoys a two-to-one lead in the U.S. residential sector, with about 12.5 million high-speed Internet subscribers, compared to DSL's 6.5 million. DSL providers, however, are claiming small incremental victories, many adding 100,000 or more customers quarterly, reports Leichtman Research Group Inc. (LRG). Yet they have no illusions about the battles that lie ahead in capturing a fair share of the Internet access market.

"Cable modems were first to market, and there's certainly a steep hill to climb for DSL providers," says Joe Izbrand, a spokesman for SBC Communications, the nation's largest DSL provider with 2.5 million customers. "Distance issues remain, and not a day goes by when we don't look at technology that will make DSL better. But the service is moving beyond early adopters to the mass market, and we'll introduce a small- to mid-size business service this year. It's the communications tool of the future, and will be our number one focus."

Most experts agree that the telcos may have no other choice, especially after losing 8 million local voice customers last year, along with some high-margin business customers. "Cable and DSL are taking away second phone lines, and the phone companies really didn't want to do DSL in the first place because they felt it would cannibalize their long distance and local services. So, they were slow to roll out DSL. Now they have to," says Bruce Leichtman, president of LRG.

DSL is indeed rolling out. By 2007, LRG forecasts that DSL will have 16.4 million customers versus cable's 32.5 million, with DSL availability expanding to 80 percent of the homes in several DSL providers' markets, and in some cases, 100 percent.

"We're at the phase where the tide can lift all the boats. Both DSL and cable just set growth records, and tiering and lower prices will keep the train rolling," Leichtman adds.

Staying on track is crucial for DSL to gain market share, experts maintain, and bundled services, along with savvy pricing, are the engines driving the DSL rollout, evidenced by Verizon's recent 20 percent price cut to $34.95 a month for its DSL service. It's also accelerating its DSL deployment by putting DSLAMs in more than 3,000 fiber-fed remote terminals and adding approximately 1,000 central offices. Verizon now has 68 percent of its 60 million lines equipped to offer DSL service.

"We realized we are now talking to mass market customers, and we're not intending to start a price war. That's not healthy," says Allison Cerra, director of consumer marketing for Verizon On-Line. "We've become more efficient at deploying DSL, and we're taking deliberate steps to retain our customers. But we must offer value-added propositions and DSL as a stand-alone service. That's our strategy."

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Qwest Communications, a DSL provider serving 14 states, is "pulling out all the stops" in its DSL deployment, according to Tad Jones, director of consumer DSL for the Denver-based telco.

"The key to DSL is expanding the market, leveraging the packages and consistent capital spending on the fundamentals. We have to reduce the costs of deployment, and cable is a worthwhile competitor. There's no silver bullet," he admits.

Qwest will spend $75 million to deploy DSL this year. To date, Qwest has about 551,000 DSL subs, and supports about 4.3 million DSL-qualified homes and businesses.

Yet what's really powering the surge in DSL activity, some experts maintain, is a backs-against-the-wall mentality permeating the large incumbent telcos' overall business strategy.

"DSL is a lynchpin for incumbent telcos," declares Cynthia Brumfield, president of Broadband Intelligence Inc. "It's practically the only solid growth business for them. They're pushing bundled packages, and speed hikes and pricing are very compelling offers, but that's all they really have. And, cable is a serious competitor."

She admits, though, that DSL isn't likely to go away, and could mount a reasonably serious challenge to cable's high-speed Internet dominance.

Companies such as Alcatel and Celite Systems, for example, are driving new technologies into the DSL space that may correct the distance issue and help reduce deployment costs of the service. Celite, for instance, has introduced a "DSL headend" that attaches to an SIA (Serving Interface Area), bridging to every home of the cross-connect and allowing point-to-multipoint, shared bandwidth. The combination also extends DSL's effective reach by 3,500 feet.

"The traditional DSLAM model is very costly, and the cost of deployment per subscriber for DSL is about $600, including $275 for equipment, splitters and engineering," explains Tim Waters, vice president of marketing and business development for Celite. "Our model will begin to reduce costs at the 10 percent penetration level."

Alcatel's 7301 ASAM (Advanced Services Access Manager) delivers audio, video and data to up to 10,000 simultaneous users. "Large incumbent telcos are losing active access lines, so their basic business is declining," maintains Jay Fauch, senior director of marketing for Alcatel. "DSL is a potential way forward to provision enhanced services, but they must be concerned about processing traffic through the DSLAMs, and that means expanding them."

Expansion is the operative word. Until a certain economy of scale can be reached, experts say, DSL has little chance of seriously competing with cable's Internet service.

"Most big DSL providers can make money from DSL customers and pay off the cost of deployment well within a year," says Pat Hurley, an analyst for TeleChoice Inc., a communications research group. "Self-provisioning is at about 95 percent, and I wouldn't be surprised to see the price of DSL go even lower."

Another pressing issue, Hurley stresses, is the lack of a CableLabs equivalent to support new equipment for DSL-type services. But that picture is also starting to change (see sidebar).

The DSL Forum, a consortium of 200 companies, fosters new technologies and the advancement of DSL services worldwide. "Clearly, there are more cable modem customers than DSL, but the growth numbers for DSL are very strong," explains Tom Starr, chairperson and president of the DSL Forum. "More DSL deployments and more value per customer are the two key strategies."

The strategy for BellSouth, with 1.1 million DSL customers and 72 percent of its service area households eligible for DSL, is to deploy the service as quickly as possible in bundled packages and on one bill.

"We've been growing 40 to 50 percent annually and we're deploying more remote terminals to eliminate the distance issue," says Jeff White, senior director of broadband services for BellSouth. "But what's changing is the competition. Now, cable, CLECs and satellite providers are in the business, and billing, customer service and quality-of-service remain issues that we're addressing. DSL doesn't just happen."

Most agree that bundling would be a good idea, and not just for BellSouth. Says Leichtman: "DSL could provide glue for local services and could create more value for other venues like local lines, and when packaged with long distance and wireless services. It's also a defensive strategy. Perceptionally on Wall Street, they can't keep getting kicked by cable."

Covad Communications, a smaller DSL provider with about 420,000 customers, is actively deploying DSL and the bundled service strategy, which it believes will be a compelling business model.

"Before 2002, DSL existed to support ISPs who were exiting the business, and they needed a place to house those customers. Now, there's a pent-up demand for broadband, and when you look at the bundles from the telcos, that's a powerful package. What's emerging is a group of companies who'll be around for the long-haul. The market is there," insists Patrick Bennett, executive vice president and general manager for Covad Broadband Solutions.

For some, such as Surewest Communications, which offers DSL service to 100 percent of its customers in the Sacramento, Calif., area, the DSL business model indeed appears to be stable.

"Our model is upside down. We offer DSL service to all our customers," says Phil Germond, vice president of customer operations for Surewest Communications. "There have been some bumps along the way with affiliates and with some technology and operational issues, but now we're entering the mainstream market, and we continue to see increases in DSL offerings, and bundling the services is absolutely a top strategy of ours."

Surewest is somewhat of an aberration, however. It's lucky in the geography pool, sitting in the second fastest growing county in California, and has solved the DSL distance issue by installing controlled environmental vaults, which run fiber to industrial parks and neighborhoods, then copper wire to homes and businesses. "That's why we can reach 100 percent of our customers. And it's a sweet market area," Germond adds.

Just how sweet the DSL business will become for incumbent telcos and other providers will likely depend on how quickly they can expand their customer base and how well the providers can sell bundled packages, and to whom.

At this point, most experts are skeptical of DSL's chances of inflicting serious damage to cable's dominance in the high-speed Internet space, where they have much greater latitude to offer more services.

Concluded Brumfield: "Cable's long-term strategy is to bring the broadband pipeline everywhere into the home. When they enter that realm, they'll be more aggressive with DOCSIS. Phone companies can't do that."



Imitation is the sincerest form of flattery. That adage appears to be in play with the way three of the largest telcos in the U.S. are approaching high-speed data and other bandwidth-intensive services.

In late May, BellSouth Corp., SBC Communications and Verizon adopted a set of common standards and specifications for fiber-based systems designed to pipe basic video, voice and data to consumers and businesses, as well as more advanced applications such as gaming, photo sharing, video conferencing, home/business security and on-demand and high-definition television.

The use of common specs and standards will allow manufacturers to build FTTP equipment at more attractive price points, the telcos claimed. They're already in the process of seeking bids and proposals.

The whole process sounds eerily familiar, does it not?

Cable's DOCSIS effort has worked wonders for the industry, driving the price of stand-alone cable modems to the range of $50 per unit.

How quickly the telcos can turn those plans into pure gold will be the big question. The three involved in the announcement gave themselves plenty of wiggle room, noting that FTTP technology evaluations and deployments would happen in "2004 and beyond."

On the VDSL (very-high bit rate digital subscriber line) front, meanwhile, 11 vendors in June announced their support of discreet multi-tone (DMT) modulation as standard line code.

—Jeff Baumgartner, Editor