Cable Won't Shake Troubled DSL

While new corpses of DSL resellers litter the landscape weekly, cable shouldn’t gloat.

Broadband analysts and industry executives say the traditional Bell phone companies are gearing up to become potent competitors in providing high-speed digital services.

The number of telephone and cable high-speed connections will be increasing, despite the all-too-common horror stories of installation and service nightmares, which have contributed to the spate of DSL cutbacks and closures.

Last week, Digital Broadband Communications laid off 85% of its staff and reported it would file for bankruptcy, while Planet Systems Network and Jato Communications planned to shut down.

According to The Yankee Group, the advantage MSOs have in the high-speed race will hold at least through the end of 2005, although cable’s share will shrink.

Cable broadband connections will grow from an estimated 3.5 million at the end of 2000 to 14.7 million at the end of 2005, says Yankee senior analyst Michael Goodman. During that same period, DSL connections will increase from 1.5 million to 10.5 million, he adds.

"The market’s going to be split fairly evenly between the two of them," Goodman says. "They’re growing at about equal rates — the advantage for cable is that they were first to market."

Cable operators aren’t looking for a decisive victory over DSL in the near or mid-term future, says Michael Luftman, spokesman for Time Warner Cable.

"Regardless of any momentary issues related to DSL, we think we’re in a long-term dogfight," he says.

In the short term, DSL — digital subscriber lines that provide high-speed data over copper phone lines — is suffering growing pains, and some of them will be fatal for resellers and equipment suppliers. Companies are falling by the wayside on an almost daily basis.

DSL equipment supplier Efficient Networks’ shares tanked last week after the company issued an earnings warning based on order shortfalls.

High-profile Covad Communications — the only non-Bell among the top five DSL providers — took a hit in late December after the company announced it would slash an additional 400 jobs and close 200 offices as it restructures its Business Solutions division in an effort to cut operating costs by as much as 30%.

In November, NorthPoint Communications’ deal with regional Bell Verizon fell apart, leaving that CLEC reseller searching for an investment or a buyer.

Late last year Flashcom raised its lowest prices for residential service to $59.95 per month, while laying off much of its work force. Zyan Communications dropped residential service altogether and laid off employees.

How can major companies with plenty of initial funding find themselves at risk of imploding in an environment where the players can’t keep up with consumer demand?

For one thing, the business has extremely high upfront costs, says Scott Cleland, CEO of The Precursor Group.

"This isn’t an easy business to get into or operate in," he says. "Telephone networks are not designed to do DSL, and they must be redesigned to deliver the service. That can’t happen overnight."

Another problem is that DSL providers have made promises they couldn’t fulfill in order to grab as many customers as they could.

"It was a land grab," says a former DSL executive. "The idea was to get as many customers as you could as fast as you could. There was plenty of money, and investors were willing to put in more money because capital was readily available."

Last spring, the money suddenly dried up.

"Wall Street has been very hard on the DSL stocks and rightfully so," says another DSL veteran. "They spent too much too quickly. They felt they had to, but in many cases it wasn’t the right move."

One of the biggest problems plaguing DSL providers has been provisioning. Installing is often difficult, time-consuming and expensive, as it is for cable.

"It cost us $1,000 to roll a truck; companies were almost giving away the installations to get customers," one DSL executive says.

No one expects the entire DSL business to implode. Some investors will likely buy up or merge struggling companies, recasting them as more financially viable operations.

The ultimate winners in the DSL wars are likely to be the old Bells, most agree.

"The bottom line is that the SBCs, the Verizons and the BellSouths can undercut the resellers on price, or they can charge the same price and have a better margin," says Yankee Group’s Goodman.

The breakdown of which companies dominate the DSL market bears that out. Bells account for more than 1.1 million of DSL’s estimated 1.5 million subscribers.

With all of DSL’s problems, it’s easy to wonder why cable isn’t doing even better.

"I think the phone companies are simply outmarketing the cable companies," says Jerilyn Kessel, co-founder of the Centris research firm.

In addition, most people find it more logical to graduate from a dial-up modem to a DSL line than to a cable modem.

That said, cable has an advantage it needs to push, says Cleland of the Precursor Group.

"Long-term, cable’s 750 MHz plant is far superior to the telephone plant — plain and simple," he says.