What the DSL future holds

The downturn of the economy and the telecommunications industry seem to have damaged faith in DSL. But with demand for high-speed access bubbling over, DSL's future isn't necessarily dismal, although it may involve far fewer players than the early days.

At last week's DSLcon, the buzz was a perpetual optimism that DSL will survive in some way. However, most of the industry seems to accept that the data competitive local exchange carrier (CLEC) model was flawed and, therefore, doomed from its inception.

With so many CLECs closing their doors, many are pointing fingers at weaknesses in the Telecommunications Act of 1996.

“The RBOCs want to return to the market before 1996,” said Jason Oxman, senior government affairs counsel for Covad Communications. Oxman placed most of the blame for the failure of the competitive model on the lack of federal regulation of the incumbents (see story below). Yet he neglected to address the notion that the model wasn't sustainable and depended on too many parties to complete orders.

Another competitive provider, New Edge Networks, has suffered through downsizing its work force, yet CEO and co-founder Dan Moffat believes the DSL company will persevere. New Edge is targeting Tier 2 and Tier 3 cities, which he believes will set the company apart.

“When folks talk about the demise of the current crop of players, they forget that people want this service,” Moffat said. “It's a failure of nerve and a failure of imagination on behalf of the capital markets.”

Moffat also expressed disdain for the RBOCs and the lack of success of the Telecom Act.

“They've done a great job of blunting the impact of the Telecom Act,” Moffat said, referring to RBOCs.

Indicative of this positioning — fueled by weakening competition — is SBC Communications' rate increase for DSL service and some RBOCs' decisions to slow deployments. With this in mind, vendors such as Lucent Technologies may count on deals with RBOCs. Sprint and Verizon deploy Lucent Stinger DSL access multiplexers in their networks, and Lucent expects to announce another deal with Verizon soon.

“A lot of the RBOCs are looking at their whole infrastructure,” said Paul Carew, chief technology officer for General Bandwidth. “Most of them like to spend their way out of a recession.”

Meanwhile, the remaining competitive providers are trying to figure out how to survive.

For a variety of reasons — cost and a misjudgment of future needs among them — many CLECs chose not to offer voice services. But providers with voice services at the crux of their business plans appear to be the only ones with a chance of survival.

Providers such as McLeodUSA, XO Communications, and CenturyTel are more stable because they based business plans on voice and then migrated to data once the technologies and market had matured, according to Matt Davis, senior analyst for The Yankee Group.

“Service providers should look as DSL as gravy, not their bread and butter,” Davis said.

Despite the apparent victory for the RBOCs, they can't be complacent, said Jay Fausch, senior director of marketing and business for Alcatel.

“The ILECs have to fear the cable guys taking their customers,” Fausch said. “The fundamental demand for broadband access hasn't changed.”

One analyst believes the incumbents are aware of cable firms' actions and are responsive in areas of encroachment.

“The ILECs are basically cheap and only put equipment where cable companies are a threat,” said Kathie Hackler, vice president and chief telecommunications analyst for Gartner/Dataquest.

Competition aside, the RBOCs really need to enhance their DSL margins without stifling customer interest.

Hackler believes the monthly price needs to drop to $20 to $25 to achieve mass penetration of the market. But if the cost drops that low, the margins would surely vanish.

For this reason, layering revenue-producing services on top of the basic high-speed access is critical.

“They have to find the intrinsic business benefits to deploying DSL,” said Ron Westfall, senior analyst of broadband infrastructure at Current Analysis.

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Michael Hanley contributed to this report.

Where did the money go?

Overheard at DSLcon:
The growing list of excuses why the DSL sector is in trouble

• Technology has fallen victim to the hype machine
• ILECs overbuilt their central offices
• Regulatory environment favors the ILECs
• Wholesale model is inherently flawed
• Price point is too high
• Costs too much to deploy
• Competition from other broadband technology is fierce
• Provisioning problems persist
• Data CLECs and ISPs are failing