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Bridge News, 8/31/01
Slowdown in DSL might continue even if broadband bill passes By Elizabeth Festa Washington, Aug. 31 (BridgeNews) - The slowdown in digital subscriber line deployment has been blamed on the sluggish economy, an unpalatable hike in prices and the lack of a killer application in the wake of Napster's demise as a blockbuster site for free music downloads, even as Bell companies and other providers say demand continues to be strong. However, one of the largest providers of DSL service now acknowledges that DSL broadband is a risky investment whose deployment is not certain, even if Congress passes a bill freeing current Bell obligations and restrictions. * * * "Right now, there is so much uncertainty," said David Young, director of Internet and technology policy at Verizon Communications, the second-largest U.S. DSL provider with 840,000 lines at the end of the first half of 2001. Only SBC Communications is larger, counting 1.37 million lines at the end of June. "We would have to look at the bottom line," added Bobbi Hennessey, a Verizon spokeswoman.
Even though cable doesn't face the same requirements and regulations, Excite At Home Corp., the cable Internet access service, is still struggling, Young noted. After raising $185 million in financing two months ago, Excite At Home warned it might not survive as a going concern. Its shares plunged 46% on the news and face possible delisting from the Nasdaq, as The Wall Street Journal first reported on Aug. 21.
The Bell company-backed legislation, termed the Internet Freedom and Broadband Deployment Act of 2001 or Tauzin-Dingell after its sponsors, is designed, its backers say, to encourage broadband deployment, as the name of the proposed act would suggest.
However, even if legislation takes away "all the sharing and unbundling" requirements, "it's still a risky investment" and Verizon needs the certainty of making a return on its investment, Young noted.
The Bell companies' sharing and unbundling requirements refer to rules now in place for both voice and data services that require incumbent telephone companies to allow new entrants to buy or lease the necessary copper links to reach customers' homes or businesses. The legislation seeks to splice off data from voice on the grounds that data is different and represents new, not legacy, government-subsidized investment by the Bells.
Although Young said passage of the bill would change the criteria and there would be "some and more" DSL deployment without regulatory burdens, Hennessey said guessing about future investment commitments is speculative,and "we can't get into it" because of the uncertainty. Tauzin-Dingell is "not a magic bullet," Hennessey said. "Even with the passage of Tauzin-Dingell, which would be fabulous, deployment is still an investment and we would have to look at the bottom line," she said.
This emphasis on cautioning on post-deregulation deployment contrasts with comments made by senior Verizon officials.
In calling for deregulation, Tom Tauke, Verizon's top public policy executive, told an industry group in Aspen, Colo., on Aug. 21 that to jump-start growth in broadband and the communications and computer industries' contribution to the economy "the status quo won't cut it" --- that "stimulating the flow of capital to fund the build-out of the 'last-mile' broadband connections to the home requires a new approach."
Tauke testified April 25 before the House Commerce Committee that "deployment of broadband services is key to economic growth." He also attempted to deduce Federal Reserve Chairman Alan Greenspan's support by linking Greenspan's suggestions tying productivity growth with networking to support a vision of economic explosion should the networks be improved. And the bill calls for the old Bell networks to be improved to a certain limit -- but not more than 15,000 feet or less than 3 miles -- from the home, in exchange for deregulation.
Washington-based Verizon spokeswoman Susan Butta said that would "allow us to invest with more certainty" by establishing a national policy. But regarding the broadband over DSL deployment issue currently, she said, "the demand the question is, if we have $1 billion to spend now, do we spend it to deploy broadband or pay down debt? That is the policy issue," Butta said.
Verizon has targeted 40% of its wireline network investment, or $4.7 billion, for high-speed data services alone and expects to end the year with more than 1.2 million DSL customers.
"But it's clear that the full market potential can only be achieved if companies like Verizon are as free to compete as our competitors in the cable industry are," Verizon spokesman Eric Rabe said in a reference to Tauzin-Dingell deregulatory legislation on Aug. 17 after an FCC report on high-speed data services was released.
Days later, Verizon was wondering if broadband investment would be too risky even then. "The Bells now have got the low-hanging fruit (in the DSL market). Now, they are raising rates because they are quasi-monopolists and under pressure from Wall Street to show increased earnings, and it's expensive to build this stuff," said one Washington-based analyst.
The Tauzin-Dingell bill will mandate 100% central office plan upgrade to offer high-speed service within five years and be made available to all in the company's footprint, SBC and Bell company trade groups assert.
But the bill is more limited than broadband for all: as currently drafted, Tauzin-Dingell only considers mandatory upgrades on copper loops less than 15,000 feet in length from the central office to the customer's premises along the line, according to the section on broadband deployment. "I think the Bells have made promises in the past ... but didn't want to cannibalize their DSL lines. On video, they were going to be a competitor to cable over the phones. Bell Atlantic (the former Verizon before the merger with GTE) was most aggressive in the early to mid-1990s leading up to the 1996 Telecom Act -- as soon as the act passed, guess what?" the analyst said.
"The difference now with DSL is that the Bells can't be as complacent because they do have cable competition and cable is ahead and has a first user's advantage," he said. Indeed, statistics for the second half of 2001 put cable broadband subscribers at 5.5 million compared with 3.33 million DSL subscribers, according to TeleChoice Inc. and the National Cable & Telecommunications Association. Cable modem subscribers came in at the rate of 70,000 per week during the second quarter, according to NCTA. DSL subscribers signed up about 32,000 per week, less than half the rate of cable subscribers.
Overall second-quarter figures from NCTA tally net cable modem additions at about 920,000, while TeleChoice counts net DSL adds at 420,488. At the residential level, 75% of today's broadband households use cable for Internet access compared with 25% using DSL, noted Forrester Research. "What has become clear is that it is unlikely that the Bells will ever be able to capture more than 50% market share of the residential broadband market," Goldman Sachs wrote the week of Aug. 20 in a global telecom report.
The overhang of cable telephony is eating up the Bells' residential voice customer base and swooping in with broadband, as well, analysts note. Incumbents "must move quickly with voice over DSL to combat cable companies that are on the warpath with comparable voice/data bundles," Seema Williams wrote in an August Forrester Research report.
"No one has ever made good on a promise saying, deregulate me and all of a sudden I will spend billions of dollars to market that hasn't demonstrated they want the service," Robert Quinn of AT&T said.
"Verizon and SBC have convinced everyone you need this to deploy broadband into rural areas. How many Bell guys are operating in truly rural areas? Why are they doing it?" he said. "Cable modem service ... SBC had cable systems. He sold them. Ameritech had cable systems. He sold them. All of a sudden he is going to put fiber to the curb so he can do video? Please."
The Bells still do not offer symmetrical DSL (SDSL), which offers similar speeds both upstream and downstream while competitors such as Covad Communications offer SDSL to rival T-1 service provided by the Bells. A BellSouth spokesman said T-1s and DSL were two different products.
"People are using them for different things. Business might use T-1s to transport voice -- and although some small businesses are using DSL, a T-1 is a different type of service," the spokesman said. He and a SBC Communications spokesperson didn't answer what the price and other differences were.
Many rivals, Internet Service Providers and industry commenters have noted the Bells won't upgrade to offer SDLS because they don't want to cannibalize their pricier T-1 lines to business customers, since both can move data at about the same speed and copper can also carry voice traffic through line splitting.
Some say the Bells could deploy to more people now if they wanted. "I think it is a bunch of phooey about the phone companies wanting to bridge the digital divide because if they had wanted to, they would have deployed IDSL and not left it up to CLECs to do it," said LA Bridge's
Tony Cappelli, who helps run the Los Angeles-based ISP. Covad has type of service that is DSL over ISDN, an older technology, that makes its services go farther out to a customer's premises than standardphone companies allows. ISDN allows the installation of repeaters to go farther -- 30,000 feet along the copper loop compared with the 15,000 feet offered by Bell companies, he said.
"The phone companies in their unfortunate relationship with the CLECs really widened the digital divide because people cannot get IDSL (DSL over ISDN) service anymore. In Los Angeles it is a serious issue -- L.A. is a sprawling city, " said Cappelli.
"Essentially what they are trying to do is work against the 1996 Telecom Act and at end of the day, it is not in the interest of customer to limit rollout so telecom companies can limit their stance," said John Ellis, Pasadena, Calif.-based director of broadband products for EarthLink.
"If anyone limiting deployment of remote terminals, only hurting themselves. People are choosing alternatives; if something is not available, people will go elsewhere." As such, Tauzin-Dingell is not in the best interests of customers or industries, he said.
Earthlink is launching Time Warner Cable broadband deployment in a number of markets by year-end as part of the open-access agreement for ISPs in the wake of the AOL Time Warner merger.
Today, cable is in $40 to $45 monthly price range and DSL is $50 price points. "$49.95 (per month for DSL) is not arbitrary number -- need it to make money ... People pay $21.95 today for dial-up and typically people who use broadband don't need another phone line," said Ahbi Ingle, vice president of product marketing of Covad. Covad is the DSL upstart that expects to be cash flow positive in late 2003 but is now wading through a bankruptcy to eliminate debt.
Although Covad plans to provide voice services at some point, it is trying to be conservative with cash and is not now buying the equipment needed to run voice switches.
"I do think that over time, cable and DSL will reach parity in price points ... Bells are trying to manage growth now that the high-flying days areover," according to an Earthlink executive. "It is very expensive to deploybroadband services."
"I don't think they are slowing intentionally ... there is probably a lot of debate about where to (invest) the money," TeleChoice's Andrew Guglielmo said of the Bell and other DSL providers. "I think the bigger cause with the regional Bells is that they don't really have services yet: gaming, virtual private networking, video on demand, video," Guglielmo said.
Also, DSL service is not profitable yet, even though the prices for the equipment -- the DSLAMs and modems -- have come down.
The providers should be able to start making a profit within a year on customers paying $50 per month, Guglielmo said. BellSouth told Deutsche Bank Wednesday it now estimates break-even at two to 12 months from now with wholesale and business customers at the low end and residential customers at the upper end.
Qwest Communications, the only U.S. RBOC to improve its subscriber additions in the second quarter over the first quarter, said it has been experimenting with video DSL.
BellSouth, with $225 million in anticipated DSL revenue this year, is one of the only companies that says it has no plans to offer video over DSL -- it is concentrating on getting fiber to the curb and directly to the home in some new communities.
Covad's Ingle thinks DSL will be the dominant technology in a few years and predicts a cable slowdown. Hundreds of cable companies find it hard to integrate, most are not upgraded, and quality problems exist. Other alternatives are only niche services such as satellite or are still "buggy," Ingle said.
VDSL or very high-bit VDSL is a matter of bandwidth over DSL at a reasonable price. But it is still not fast enough, at 300 to 500 kilobits, to get good video for $50; something in the 2-plus megabit range is needed for high-quality video. DSL can deliver now, but it is too expensive, although prices are coming down, Guzman & Co. telecom analyst Patrick Comack said.
"I think DSL adds in the quarter were somewhat disappointing across the board, but a lot of these companies increased prices," Comack said. "I think the Internet is the future -- movies, cable modems, DSL -- but right now, in terms of impulse pay-per-view, cable has the advantage ... cable will be making money over this soon."
He and other analysts agree movie entertainment over DSL is several years away.
"Entertainment companies are going direct to consumers, but the DSL networks don't have capacity for video on demand and are only offering DSL or high-speed at 300 kilobits to a megabyte, which is generally slower than cable.
One would have to compress it," said Drake Johnstone, a telecom and cable analyst with Davenport & Co.
"In maybe three to five years out maybe more of an option, but now cable companies are in the catbird seat," Johnstone said. "At some point in time, more competition will waken up the Bells and they will bring prices to more reasonable levels."
But whether they will invest or not is now an open question, with or without Tauzin-Dingell. "What they (the Bells) did was a sharp ramp-up of early adapters," said Joe Plotkin, who does marketing at New York-based ISP Bway.net, adding the Bells slowed the rollout of DSL because the copper is too old, among other things.
"In Brooklyn, in my building my phone service went out two months ago, the wiring system is too old, it is crumbling, it is 75 years old and the copper has never been replaced, never been upgraded and Verizon said it is just replacing what breaks," he said. Verizon technicians "showed me a handful of gunk, and that was the wiring," he said.
"It dissolved ... it is a 100-year-old network and the copper is going to be the best we can get -- the story is the copper network and ADSL is going to be our big moment in the sun for broadband," Plotkin said.
Plotkin also complains current DSL offerings don't often even meet criteria of high-speed broadband by the Federal Communications Commission, which is supposed to be 200 kilobits in both directions. Instead, much broadband service is offered at 144 kilobits, which Covad and others say is still four times faster and exponentially better in experience than dial-up.
Still, only 4.3 million of the 7.1 million high-speed lines counted at the end of 2000 provide services of speed of over 200 kilobits per second in both directions, according to the FCC's recent report on high -speed services. The FCC counts lower speeds as high speed in noting that lines connecting homes and businesses increased by 63% during the second half of 2000.
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