The Analyst's Corner: DSL peace at last...or the birth of a (bigger) bully?

When I was a kid I played with my older cousin Brian, who lived just up the street and was a real bully. You might ask, “Why did you keep playing with Brian, if he was such a bully?”

Honestly, I kept going back because it was exciting. 

On the Net Related books

In the telecom world, Covad, one of the largest--and spunkiest--Independent DSL providers in the country, recently decided to go over and play with DSL giant (some would call bully) SBC Communications. Covad's move reminded me of those first days when I went over to play at Brian’s house.

Big, bad SBC has for months tried to deliver on an aggressive plan to be Baby Bell “king pin“of DSL, promising more than 1 million customer sign-ups by year end. Set aside (just for a second) that SBC is only about halfway there with only three months to go. That’s still “rough and tough” in anybody’s book. Rough and tough talk, anyway.

Just how rough and tough has it gotten? As I mentioned in a column last spring, Pac Bell, (now a unit of SBC), really bore down on Covad and all other prospective DSL competitors, storming the market with total bargain-basement, hook-up pricing for DSL (see related story).

Consumer pricing dropped below $40 per month–and that included free e-mail and Web pages, free installation, free DSL router and free 10/100 Mb/s Ethernet add-in card for PCs. By summer, SBC really turned up the heat and even threw in the PC–free, so long as prospects agreed to sign up for at least two years.

Competition was also fierce at the backend provisioning side. In fact, some of SBC’s kicks and punches on the competition might have been below the belt. Before the cozy agreement, Covad execs certainly thought so. 

The company filed suit against SBC for unfairly restricting access for resale and violating the Telecom Act. And, adjudicators that heard the complaint didn’t think Covad was just a whiny sissy. Last May, in one such Covad complaint against Pac Bell, arbitrators sided with Covad to the tune of $27 million in penalties.

Now, at least from the outside, SBC and Covad want to be friends. According to an agreement in mid-September, SBC wants to help sell Covad DSL services, guaranteeing some $600 million in sales over six years. As if that’s not enough, SBC execs say they want to “invest” $150 million in their new friend Covad. Without directly mentioning it, SBC execs seem to have the hope that at a minimum, their new Covad friends will help them make their “million man mark” for DSL customers.

In return for all these goodies from SBC, Covad execs promised to drop their antitrust suit against SBC and Pac Bell. Further, any outstanding arbitrations against SBC and Pac Bell are now considered settled. 

The public message to Wall Street traders and consumers seems to be that the DSL market demand is so huge that both companies have more to gain by working together than by competing. Snippets from the public statements from both companies present the whole history of conflict between these two companies as just a mere misunderstanding.

"[Customer] demand for broadband is so strong that two industry leaders can set aside past disputes and cooperate to deliver DSL faster and to a wider range of customers," said Robert E. Knowling Jr., chairman, CEO and president of Covad.

SBC’s chairman and CEO Edward E. Whitacre Jr. said in part something I could hear my cousin Brian saying.

“Although we will continue to be vigorous competitors,” Whitacre said, “this agreement allows us to work together to fulfill the exploding demand for broadband for both businesses and consumers nationwide."

Call me a party-pooper, but friendly handshakes like this between parties with such an ugly history, just remind me of the “let’s be friends” handshakes that Brian and I used to give each other when his parents were watching. They didn’t mean much in the long run and Brian continued his aggressive ways when he felt like it. 

The morale here is that when you want to play with the big boys, you’ve gotta be willing to take a rabbit punch to the stomach now and then. And maybe that’s just how Covad sees it. There are two other possibilities: that it could just be a good agreement between competitors, and I should just shut up; or, maybe it’s a bad deal for customers.

One final little quote may help you decide. Draw your own conclusions about this observation from Covad's Knowling: "This deal is the Telecom Act in action, proving that it works. Everyone wins here, especially customers who are waiting to experience high-speed Internet access.” 

I question whether this SBC/Covad deal actually proves that the Telecom Act works---or if it just proves something else more ominous.  Now that SBC and Covad are friends, there’s an even bigger bully in the DSL neighborhood, and customers are in for the rough-and-tough. And just when I thought I had escaped that stuff.
Vance McCarthy is Editorial Director for aspRegistry.com, a Web-based information service for the ASP industry. His e-mail address is vmccarthy@aspregistry.com.
This column originally appeared on the internetTelephony.com website.

Visit aspRegistry.com on the web.

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On the Net

The ADSL Forum
The ADSL Forum was formed in late 1994 to help telephone companies and their suppliers realize the enormous market potential of ADSL.

The DSL Sourcebook-2nd Edition
Plain Answers on Digital Subscriber Line Opportunities from Paradyne

 xDSL.com
A website from TeleChoice that offers analysis of DSL technologies

DSL Business Case Calculator
Interactive business case modeling tool for DSL service from Redback Networks

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