Nov 6, 2000 12:00 PM,

The Analyst's Corner: Rain on the DSL parade?

Vance McCarthy

After all the years I’ve lived in California, I still have a hard time getting used to the roller coaster we call fall. One day, it's 80-plus degrees and sunny, and the birds are swooping lazily around the sky. The next day, it’s 50 degrees (maybe) and windy, with a gray slate sky and what few birds are around are huddled under benches or rocks, or sitting on the dock crunched up in a ball, their heads tucked under or wing or scotched down into their necks.

More on this Topic

Industry News

Blogs

Briefing Room

Just about the time stormy weather kicked in this year out here, the same seemed to be happening to the DSL market.

I’m sure many of you are still scratching your heads (or even suffering from the pain) from the news that many of the nation’s best-known names in DSL lost 25% to 50% of their value in one day. Covad, NorthPoint, Rhythms all got hammered. It could be months before these companies will recover. For others, it may be never.

There is word that more than one DSL provider was counting on its lofty stock prices to get terms for high-quality employees–even low-interest loans for equipment purchases. With stock prices below $10 per share--and in some cases as low as $3 per share--I’m afraid some of these companies may go the way of Boston Market–which also had a fatal combination of many customers (good), but too much debt to finance too rapid an expansion.

What has happened in DSL is just the front edge
of the storm that will hit the Internet infrastructure party.
More and more, the analysts...are openly concerned about
the aftershocks of companies involved in
the zany infrastructure buildout going on right now.

Looking more closely at why there has been a DSL tumble, it’s really a classic “watch the dominos fall” story. One DSL company came out with an earnings warning, and then there was concern about over-capacity and price wars. Less than six months ago, DSL companies were enjoying a honeymoon with investors. Everybody wanted faster Internet connections, and DSL companies and DSL equipment makers–even a few RBOCs–were riding a wave of popularity.

What has happened in DSL is just the front edge of the storm that will hit the Internet infrastructure party. More and more, the analysts I talk to are openly concerned about the aftershocks of companies involved in the zany infrastructure buildout going on right now. If you think the DSL market took a tumble, they say, just wait until companies like Qwest, AT&T Broadband, Exodus Communications, USinternetworking and those big names at the backend start to feel the storm that is approaching.

“If things keep going at this rate, we see a 20% to 40% overcapacity for data centers and infrastructure by 2003,” said Pascal Aguirre, vice president of the Global Application Service Provider consulting practice at Adventis (formerly Renaissance Strategies). “Without taking steps to bring more than infrastructure into their business, this will lead to pure price-based competition. And nobody wants that.”

To avoid the storm, Aguirre said, he is advising his infrastructure and telecom clients to take more aggressive steps to form partnerships with value-added players in Internet applications and content. Items such as online applications (or ASPs), voice over IP and even supply chain/collaboration services that integrate at the backend are some of his suggestions. Not all backend providers, however, are willing or able to take his advise, Aguirre acknowledged.

“Some of them just don’t see the need right now, or don’t see how they can incorporate those things into their business and delivery models,” he said.

The trouble here is that as new business models for the Internet continue to emerge, the infrastructure companies (and the venture capitalist firms that fund them) continue to think they don’t have to change.

On the surface, who could blame them? The infrastructure plays are the darlings of Wall Street and the venture capitalists (VCs), even in this troubled time for Internet investments. The interest in infrastructure among VCs is so white-hot that some companies in that space just the last year have been able to raise between $200 million and $300 million in their pre-IPO funding. Typical infrastructure investments are now in the $100 million range.

In turn, buoyed by VC and investor devotion, these infrastructure firms continue to see their value as the highest in the Internet services value chain. Their rate for services is high, and their interest in content or services partnerships is low–on the whole. So, they don’t see the need to change.

As a group, don’t these infrastructure execs see that they could be repeating the ugly DSL history of just a month ago? Weren’t they darlings in the spring? Weren’t they not very interested in partnering with content players?

Aguirre puts the situation this way: “Individually, they are reacting rationally. Collectively they are being irrational.”

Translation: One exec at a time, the signals are too strong that infrastructure is still a great business. And, even if there are too many players, it’s the other guy that will have to change–have to run in from the rain–not me.

The one problem with that logic, of course, is that rain usually hits the whole neighborhood, not just one house. And, if it’s a California rain, it can be a hard, cold storm–that lasts and lasts and lasts.
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.

RETURN TO TOP

On the Net

The DSL Forum

xDSL.com
Analysis of DSL Technologies from TeleChoice

RETURN TO TOP