DSL market forecast: Mostly cloudy skies

DENVER (Telephony)—Representatives from three leading industry analyst firms painted a rather gloomy picture for the DSL market--especially data CLECs--in an opening-day session of Spring DSLcon. According to analysts from Gartner Dataquest, The Yankee Group and the Strategis Group, the industry has a long way to go in addressing provisioning problems and flawed business models.

Within two years, all data-focused competitive local exchange carriers will either revamp their business plans, get acquired or go out of business, predicted Kathie Hackler, vice president and chief telecommunications analyst with Gartner Dataquest. However, “those that survive 2001 will see substantial valuations,” she added.

With NorthPoint Communications bankrupt and Rhythms NetConnections searching for a bailout, all eyes are now on Covad, which remains the only major data CLEC operating within relatively safe margins. And, if it weren’t for funding deals with SBC Communications and Compaq, Covad would soon follow, according to Hackler.

“We’ll see if Covad can readjust its strategy, but it will be very difficult,” said Matt Davis, senior analyst with The Yankee Group.

Indeed, given prominent data CLEC failures, recent price hikes and chronic provisioning issues, some in the industry are beginning to question the viability of the technology, said Davis. He cited several contributing factors in DSL’s bumpy ride, including the fact that incumbent LECs have overbuilt their central offices.

“Alcatel wouldn’t like to hear that, but it’s true,” he said.

Part of the problem is in how service providers market DSL, he said. Carriers should look at DSL as the “gravy, not their bread-and-butter business,” Davis said.

“The one thing that we seem to be forgetting is that voice is an essential element of the telecom bundle,” he said.

Data CLECs aren’t the only ones suffering in the current market. Equipment makers also will start feeling the effects of a soft economy, Hackler said.

“ILECs…have some catching up to do with getting subscribers before they buy more equipment and put it in place,” she said. “The broadband market leaders are the vendors that can invest in long-term product solutions.”

DSL’s price point is another sticky issue, according to analysts.

“I don’t think anybody is making money at it—not even the ILECs,” said Hackler.

She added that the price point for DSL would have to come down to $20 to $25 before true mass-market penetration occurs--an irony given that SBC Communications just raised its monthly DSL rates by $10 and most carriers aren’t making money on service priced at $39.95 per month.

Not all the analysts’ predictions were doom and gloom. Though cable modems have proved to come out ahead of DSL, 60% of customers would still pick DSL over cable modem service if given the choice, according to Jason Marcheck, senior analyst for broadband research at The Strategis Group. Furthermore, advances in self-installation technology will improve provisioning times, he said.

However, an on-the-spot survey of the audience revealed that 49% of present attendees thought that provisioning is the No. 1 problem facing service providers, while 36% said that it was their flawed business models.

And in perhaps the most telling indication of how attendees view the DSL sector, almost two-thirds of those polled said they thought it would take at least a year for the market to recover from the current downturn.