Change the rules

In this new, supposedly enlightened age of 2001, CLECs are as trendy as peanut allergies, a roster of RBOC customers is in and profit is the hottest party guest.

The old economic saying that there is no free lunch was turned on its head by the explosion of the World Wide Web. You want it free? Sure. Just give us your demographic information and it's yours. Privacy advocates shrieked, but dotcoms found out what any trade show coordinator worth his or her expense account knows: give it away for free, and people will line up.

The implosion of the Nasdaq changed everything. Sure, there's still plenty of free stuff to be had on the Web — like news, weather and sports information. But try to get some software utility or recent market research and you'll have to reach for your credit card.

Analysts euphemistically call it “adapting to a new model,” but most of the rest of us call it changing the rules in the middle of the game. Not considering the fairness of it, everyone in the telecom industry is dealing with a mid-stream rules change.

Ask virtually any out-of-work CLEC executive and he or she will tell you that the rules changed just as they were starting to get a good head of steam. From the signing of the Telecom Act until the beginning of 2000, venture capitalists, investment banks and other money sources couldn't give away their cash fast enough to companies building competitive networks. Vendors felt the wrath as well and were told repeatedly by analysts that unless they had a customer roster filled with CLECs swimming in debt, they were yesterday's news.

In this new, supposedly enlightened age of 2001, CLECs are as trendy as peanut allergies, a roster of RBOC customers is in and profit is the hottest party guest.

Internet access is the latest market where the rules have changed, and that may be the best news yet. Despite the evidence of virtually every PowerPoint presentation, the cost of the Internet access commodity is not declining. AOL's decision last week to raise the price of its basic unlimited access plan by $1.95 per month garnered the most attention, but it was just a single event in a succession of price hikes. SBC recently acknowledged it would raise rates for DSL service, while @Home has hinted that it will jack up rates for its cable modem service after advertising revenues have all but disappeared.

The question the industry now must ask itself is whether changing the rules in a market that has yet to fulfill its promise is going to damage future potential. In raising the bar to entry for high-speed access, do service providers damage their long-term prospects in exchange for a few cents per share on next quarter's earnings report?

Efficient Networks co-founder and Chairman Mark Floyd recently said he believed the industry would benefit from having some pent-up demand for DSL disappear because it would allow service providers to solidify the work processes behind the deployment of high-speed service. At the same time, raising prices might eliminate the marginal customers who require the most hand-holding and are the least profitable.

At the risk of being characterized as an elitist, a price spike might be the best thing to hit the high-speed access market. At the initial price levels — including a couple of failed attempts to offer it for free — high-speed access was within reach of virtually every consumer who wanted it. Yet the process of making DSL and cable modems mass-market products isn't there yet. To be sure, progress is being made on self-installation methods, and the process is light years ahead of where it was just one year ago. But service nightmare stories are still common enough to make a respite in demand desirable.

Doubters may fear that raising the price of a commodity that is supposed to fall in price also raises the risk of alienating a major segment of users who will be customers in the long term. Given the lack of profitability for DSL providers, though, it's a risk the market needs to take.

Contact Vince Vittore at vvittore@intertec.com