The burden of potential

The second worst thing that you can say about an elite athlete who is hoping for a professional career—at least from the athlete's point of view—is that he or she has “great potential.” All too often, the weight of trying to live up to those expectations is such that the athlete soon is back home on the front porch trying to explain to family and friends what went wrong and mulling a future that suddenly isn't as bright as it once was.

The telecommunications industry equivalent is DSL technology, which burst onto the scene about three years ago to a great deal of fanfare. The excitement that reverberated through the industry was legitimate, as DSL was expected to do the seemingly impossible: allow carriers to transport data over copper infrastructure that wasn't designed to transport data.

But three years later, the reality of DSL is significantly different from the original vision. The technology still runs well behind cable modems in deployments and subscribers and recently has become a graveyard for a number of companies that were banking on it as the foundation of their business plans.

So what went wrong? The answer can be found in the limitations of the technology itself as well as a phalanx of blunders the carriers have made in marketing and selling the service.

The first blunder, says Jane Wasson, product marketing manager for Turnstone, which supplies DSL loop-management solutions to local exchange carriers, was that data-focused competitive local exchange carriers (CLECs) placed too much emphasis on building out their networks and not enough on building subscriber bases. This mistake was magnified when the capital markets began to dry up.

“The integrated communications providers and the voice CLECs that are going into the DSL space are the ones who are going to survive because they were focused on getting revenues in the door from day one, and they probably had a more mature installed base of services that they could fall back on,” she explains. “The issue is that the data CLECs began to run out of money before they were able to load subscribers into the network.”

Josh Wise, broadband analyst for Allied Business Intelligence, concurs. “I call it the ‘Internet Bubble,’ the whole dotcom concept of burning through money as fast as you can and building out a network without having any revenue to show for it. It would have been better for them to build out block by block, neighborhood by neighborhood, and city by city.”

However, Matt Davis, senior broadband analyst for The Yankee Group, says placing the emphasis on growing the footprint would have been fine if Wall Street hadn't shifted its focus.

“Wall Street began to reward the CLECs based on their footprint—how fast they could grow their network out—so they began to just pump it out, and they weren't worrying too much about putting a lot of money and experience into actually getting those loops turned up,” he says. “Then Wall Street turned and started looking for higher subscriber rates.”

While this was occurring, the CLECs and ILECs started down a path that led to the second significant blunder: marketing a product they couldn't always deliver due to the physical limitations of the technology, wasting a lot of money in the process.

Venture capital watch
Company	Amount	Lead investor(s)	Purpose
Multiplex Optical component maker	$105 million	Undisclosed	Product development, increasing manufacturing capacity
T-Speed Broadband Fixed wireless Internet provider	$3 million	Private investors	Buildout of networks in Arkansas and Texas
MaXXan System Storage infrastructure provider	$26 million	U.S. Venture Partners, Venrock Associates	Product development and staff expansion
Brix Networks Network monitoring system developer	$22 million	Fidelity Ventures	Product development, sales and marketing
Atoga WDM platform developer	$50 million	Institutional Venture Partners, Silicon Valley Internet Capital	Market expansion, product development
Tunable Photonics Optical component maker	$7 million	Forrest Binkley & Brown	R&D, manufacturing
MetaTV Interactive TV portal services and applications developer	$28 million	Comcast Interactive	Sales and product distribution Capital, Cox Communications
Compiled by Toby Weber

“It's hard to tell what your supply is [with DSL],” said Davis, “and that really backfired on them because they had a popular offering and couldn't deliver the service to people who wanted it. They are going to have to do a better job of living up to their promises. When someone calls in, they are going to have to have much better diagnostic tools to be able to give customers a straight answer.

“And for those who can't get it, the carriers are going to have to come up with alternative technologies to deliver the service, perhaps another form of broadband—such as fixed wireless or satellite—if they want to run national marketing campaigns.”

‘The issue is that the data CLECs began to run out of money before they were able to load subscribers into the network.’ — Jane Wasson Turnstone

That is a big problem, acknowledges Murray Smith, vice president of DSL development for Qwest Communications. “It's one thing to tell a customer, ‘I'm sorry, we don't have DSL in your area.’ That's an unhappy customer, but at least it's something they understand. I don't know if you've ever dealt with a customer you've told can get DSL, and then you find out they can't. That's an extremely unhappy customer.”

For that reason, adds Smith, Qwest has invested a “significant amount of dollars” on loop-qualification tools that he claims are accurate about 98% of the time. The company is also looking at placing DSL access multiplexers (DSLAMs) out into the network to address the distance limitations of DSL. This is causing the company to rethink its own marketing strategies because of the cost of deploying several thousand additional DSLAMs.

“We're targeting subdivisions where people have a need for DSL, specifically those made up of professionals and families with school-aged children who have a real need for high-speed Internet access,” he explains.

The third blunder that the CLECs made was targeting the same markets as their competitors—the top 100 metro markets—according to The Yankee Group's Davis.

“The CLECs figured they would get 18% to 20% penetration in the small to medium-sized businesses in these markets,” he explains, “and then they would up-sell them on added-value services, which is how they would make their margins.”

“That never really happened. It might have worked if there was only one service provider in each market, but it turned out to be a pie that was divided by five to six companies. That killed the model for the data CLECs, and we've seen what's happened to them.”

The fourth and perhaps biggest blunder—at least from the CLECs' point of view—was thinking that they could ever make any money in the space given the fact that the ILECs control the last mile, says Jim Rawitsch, managing director of carrier and enterprise communications for the Aberdeen Group. He claims that for the CLECs, working through the ILECs to provision DSL service is a little like setting up a lemonade stand inside McDonald's.

“There's not much to that process that the lemonade stand owner can control,” he explains. “McDonald's is going to control your costs and your hours, and then they're going to compete with you directly. On top of all that, they can also offer an extra-value meal that includes the drink, and all you've got to offer is lemonade.”

It's the ILECs' control over cost—specifically their uneven application of those costs—that rankles Bob Taylor, president and CEO of CLEC Focal Communications.

“Copper is copper, and switches are switches, and they're all kind of built the same way,” he says. “Yet you can have an unbundled pair cost $12 a month in Dallas and $3 a month in Chicago. It's unclear why that is, or should be, the case. There's not that much of a cost difference between the two markets, so the pricing should be similar.”

Oddly enough, even with all of the mistakes made by carriers in implementing it and the technological limitations and challenges it presents, DSL is probably going to be a viable and important technology for some time, simply because better alternatives would be too costly to deploy in far too many circumstances.

‘Copper is copper, and switches are switches, and they're all kind of built the same way. Yet you can have an unbundled pair cost $12 a month in Dallas and $3 a month in Chicago.’ — Bob Taylor  Focal Communications

“Always remember that DSL runs over an existing infrastructure,” Davis says. “That copper has already been laid, and it's already been run to homes, and it's too expensive to run fiber for the $40 a month that customers want to pay. For that reason, it's going to take a long time — probably 10 years — before we see fiber make a significant impact.”

Focal's Taylor agrees, but he suggests that carriers will have to carefully manage their expectations for the technology.

“DSL clearly has a future,” he predicts. “But we don't look at it as a business, we don't even look at it as a product. It's simply a technology that we can use to go after a customer who is in the market space between 56K dial-up and a T-1 line.”