Last call for residential DSL?

Last week's America Online/Time Warner merger announcement may spark a trend in joining new and old media. But for DSL providers, the marriage means facing a new, significantly larger competitor squarely focused on the untapped residential broadband market.

Although initial reaction from DSL companies was minimal, analysts anticipate some shift in the DSL market, perhaps involving a marketing redirection. They agree time will tell.

Because the AOL/Time Warner news has put a spotlight on the residential market, which has not experienced as much DSL penetration as the business market, DSL providers face a challenge. Or do they?

"We deal with mergers on a day-to-day basis so we cannot [begin to] stray from our strategy," said Micki Jacoby, director of U S West.net, the dial-up Internet service U S West offers in its 14-state territory. The RBOC, which has been among the more aggressive in rolling out DSL, is banking on its U S West WebVision to keep it afloat as it treads the mass-market high-speed Internet waters. With the service, customers with a dial-up connection or high-speed MegaBit Services DSL connections can send and receive e-mail while surfing TV channels or the Internet via their TV.

But carriers might be content playing the bundling trump card to gain a competitive edge. "RBOCs have the ability to offer value-added services. This is another way phone companies will be competitive with the cable companies," Jacoby said. U S West offers bundled telephony and broadband packages, with services such as online call waiting. "The main reason customers will stay with us is because we are focused on the customer, who wants the best value," she said.

As for the potential AOL/Time Warner marriage, U S West believes the growth of broadband awareness will be good for everyone, Jacoby said.

General consumer awareness will help DSL providers as they pursue the residential market. However, effective marketing will be essential, said Claudia Bacco, an analyst with TeleChoice. Although average consumers are better educated about the benefits of a high-speed connection, DSL remains somewhat unknown, especially when compared with recognizable brands such as AOL. Once cable adds more service offerings and AOL/Time Warner gains more coverage, residential consumers, many of whom equate the Internet with AOL, might pick AOL/Time Warner for their high-speed connection based on brand awareness alone.

The DSL market needs someone who understands marketing, Bacco said. "It's good for Joe Web surfer to have someone who can market to him," she said. "I hope [telcos] take notice that this is a big threat to the residential marketplace."

The merger also put an imperative on DSL providers to argue for open access to cable plants, said Hilary Mine, senior vice president of Probe Research. "It's rough having to play catch-up with cable providers. And as long as companies like Microsoft are throwing money at the content guys, the RBOCs have a lot on their hands."

Although Mine believes AOL Chairman and CEO Steve Case could have made any deal he wanted, the Time Warner move represents the importance of content when tapping the consumer market. However, gaining cable infrastructure will help when large content files over the Internet become the norm, Mine said.

In fact, as that scenario develops, "there is nothing to say the combined company will not buy an RBOC at some point to fill in the spots in its market," she said.

Despite all of the ifs and buts, DSL providers will devise ways to remain competitive, Mine said.

Several RBOCs have contracts with AOL to provide DSL-based access, including Bell Atlantic, SBC Communications and GTE. Bell Atlantic's contract would remain unaffected as a result of the proposed merger, said a Bell Atlantic spokeswoman. However, current Bell Atlantic customers benefiting from the contract now would expect even more gains as a result, she said.

SBC, which early in the DSL game had been consumed by its own mergers with Ameritech, Pacific Telesis and Southern New England Telecommunications, recently has sharpened its focus on the residential market. In November, it joined Prodigy Communications' consumer and small business Internet operations. SBC CEO Edward E. Whitacre said the alliance was meant to build on his company's Project Pronto, a $6 billion broadband deployment plan. In addition, Prodigy would allow SBC to position itself in the high-speed consumer Internet access market.

The DSL world was "surprisingly quiet" after the merger news, said Bacco, who believes it would be detrimental for providers to ignore the residential scene. "When cable adds more services [for consumers], then this will be a direct risk."

1993 U S West purchases 25.5% of Time Warner Entertainment, Time Warner's entertainment arm

1995

U S West acquires MediaOne, creating Media Group, which controls U S West's share in Time Warner Entertainment

March 1996

Time Warner agrees to a $7.5 billion merger with Turner Broadcasting Systems. Within minutes U S West files a lawsuit against Time Warner, claiming the proposed merger violates the noncompete clause in the companies' partnership

June 1996

A Delaware judge tosses out the lawsuit. U S West does not appeal

June 1998

U S West Media Group spins off from U S West. The new entity, MediaOne Group, takes with it U S West's 25.5% share in Time Warner Entertainment

April 1999

AT&T, which owns 9% of Time Warner, proposes a $58 billion purchase of MediaOne. If the merger is approved, AT&T will gain MediaOne's interest in Time Warner Entertainment