Getting to the numbers

At least twice a week TeleChoice is asked for the digital subscriber line market forecasts. The financial community in particular is especially interested in how fast DSL will grow. While we have our own projections, the root of the question is, "When will DSL be a mass market service?"

If you've analyzed recent DSL service announcements from the U.S. telcos, their desire to serve wide markets is questionable given some of the packaging, pricing and support decisions that they've made. The general reply to questions about this is basically, "Demand is so great, we can charge whatever we want and still have people beating down the doors." Considering that DSL is in the early phase of the technology adoption curve, this is likely to be true for some time.

However, the early market is not where the real volume is. As of April 1997, only 17 million U.S. households out of roughly 270 million people were connected to the Internet, according to a Strategis study. Creating a mass market depends on a lot of things, and unfortunately, some are just not controllable. Uncontrollable elements include a market base with sufficient discretionary income and computer expertise. Also, a certain amount of attraction depends on the glitz of the applications in use and how important they are to the average user.

Even so, vendors and service providers can do a great deal to spark the market or create the demand. The most difficult item is packaging the service: Advertising and getting the word out is simple by comparison. The biggest opportunity will be in the residential market-and in packages that can address residential users' needs.

One type of package is for the power PC user who requires only a single application: the Internet. This is the preliminary approach that most of the large service providers are taking today. Today's versions of residential DSL-based services are nothing more than bandwidth beyond basic rate ISDN at a higher price. This is fine for the computer aficionado or MIS director who plays at home. But the market that is willing to pay more than $100 a month for Internet access is definitely limited.

The real opportunity in offering DSL for Internet access will be to package that service to appeal to wider markets that are less computer-savvy. The beauty of this is that all it takes is some organization of content or providing directions to find the desired content. "Connecting Johnny for a better education" and "giving Grandma e-mail" are both potential packaging strategies that rely on a single application: Internet connectivity.

None of these services requires a separate billing system or separate customer support group once the initial service is launched. Instead, it may be as simple as packaging software applications, including a set of bookmarks to educational sites, or putting together a specialized home page for each new market segment with the service provider's brand on it.

This type of market strategy will enable the service provider to get an early lock on the broadest possible market while DSL customer premises equipment matures and evolves into a new beast: the Trojan Horse. With this approach, the DSL CPE is like a residential gateway, enabling intelligent home local area network applications to be connected to the wide area. This positions the carrier to gain incremental revenues over time and confers other benefits such as better customer control and account retention.

Pricing these new services attractively will also be key. The installation fee should be either nominal or amortized over a minimum contract period. And until DSL is "consumerized," the CPE must be included with the service and therefore amortized over some period of time as well.

Certainly, service providers will not want to leave money on the table, but on the other hand, setting initial rates too high leaves room for a competitor to get a lock on more frugal customers. Cable companies, for example, have shown less propensity to take the high-speed customer for granted.