DSL gets down and dirty

Although demand for broadband is at an all-time high, last week saw further evidence that the DSL marketplace is in crisis when Covad Communications Co. shut off service to two ISPs late in paying their bills.

The move immediately sparked a potentially nasty lawsuit, which was dismissed the next day. However, the incident was declared yet another black eye for the ailing industry. Just last month, DSL provider NorthPoint Communications Group Inc. fell into Chapter 11, and Rhythms NetConnections Inc. announced layoffsThe most recent flare-up involved Covad's decision to sever broadband connections running out to customers of DSLnetworks Inc. and Internet Express Inc., leaving unsuspecting users in the lurch. The two ISPs had fallen behind in payments to Covad and apparently could not come to a resolution on how to get current.

Covad sells high-speed Internet connections to more than 250 ISPs. In October, Covad announced that a number of the ISPs were having trouble paying their bills, which was straining Covad's revenues.

"We are in a position right now where we need to make smart business decisions that will get us to profitability. Unfortunately, we can't fund other people's businesses," said Covad representative Suluh Lukoskie.

DSLnetworks quickly retaliated last week by hauling Covad into court. The ISP filed an injunction to stop Covad from contacting DSLnetworks' customers.

"Some of our larger enterprise customers even said that top executives at Covad began contacting them directly, immediately after the shutdown," a DSLnetworks representative said.

But the court ruled in favor of Covad, saying Covad's efforts to contact customers did not amount to a breach of contract.

Officials at both DSLnetworks and Internet Express hold that Covad is seeking, in some cases, to begin providing service directly to DSLnetworks' customers.

Other ISPs might consider following the footsteps of DSLnetworks with legal action, said Barry Diamond, CEO of San Diego-based Internet Express.

Despite Covad's short-lived legal troubles and the publicity surrounding its bold accounting moves, the Santa Clara, Calif.-based service provider is still viewed as the healthiest of the trio of companies seeking nationwide DSL business.

"Covad has the best chance for survival," said David Willis, an analyst at Meta Group in Stamford, Conn. "But they are going to have to leverage partnerships with large ISPs or Interexchange Carriers who pay their bills."

That's because Covad has also had its share of fiscal adversity. Last fall the company's Chairman and CEO Robert Knowling resigned in the wake of corporate cash flow problems.

But Covad has strong ties to local phone giant SBC Communications and has lately redoubled its efforts to woo small-business customers.

It will take all those moves and more to stay viable in the DSL game, which now appears to be favoring the Baby Bells, noted Norm Bogen, an analyst at Cahners In-Stat in Scottsdale, Ariz.

"It doesn't take a lot of money to hang out a shingle, but it takes a lot of money to stay in business," Bogen said.

Bogen offers this to the enterprise contemplating DSL: "Watch out who you're buying service from, and make sure you think they'll stay in business."

Ironically, the bleak financial outlook facing DSL providers occurs as the appetite for the high-speed access increases. Cahners estimates that the DSL subscription level will skyrocket from the 2.35 million users registered for the service at the end of 2000.

Struggling DSL vendors see voice as killer appAs DSL vendors struggle to stay alive financially, many are also eager to add VoDSL (voice over DSL) capabilities, now considered by some industry watchers to be the "killer" broadband application.

Especially attractive is the notion of paying a single vendor for voice service and broadband connections. Sixty percent of those polled recently by market research company Cahners In-Stat said they prefer to buy bundled communications packages from a single provider.

However, VoDSL is not yet a reality because hardware makers such as Alcatel SA and Cisco Systems Inc., which make DSLAM (Digital Subscriber Line Access Multiplexer) devices, still have technical hurdles to clear, according to Cahners.

Specifically, DSLAMs, integrated access devices, and voice gateways will have to work seamlessly, and quality of service will have to improve, Cahners analyst Ernie Bergstrom said.

To match traditional voice services, VoDSL equipment must be able to do a better job of prioritizing traffic as it passes through the line, as voice is extremely sensitive to latency and delay, Bergstrom added.

Once these technical barriers have been surmounted, VoDSL is expected to take off -- perhaps as early as the third quarter -- and hit 10 million active lines by 2004, according to Cahners.

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