DSL financial meltdown means fewer choices

David Nathans' righteous anger boiled forth, the wrath of a technologist wronged. "DSL (digital subscriber line) providers, the NorthPoints, the Covads, the Rhythms, they don't care about the customer, all they care about is the numbers on Wall Street," Nathans said, a week after NorthPoint Communications Group Inc. terminated its service after liquidating its assets.

Several of Nathans' customers at the Boston-based Internet service provider E-List.Net - a division of Danick Systems L.L.P -- lost their high-speed digital subscriber line service when NorthPoint cut the feed. "Some customers we were able to switch immediately, others are still out," he said.

After months of aggravating customers and enduring financial losses, the outage was anticlimactic. "We're out of the DSL business," Nathans said. "It's a very tough business. There's no margin. We make more money from a (US)$12.95 dial-up account than we do with a DSL account." It takes two to six months to install a line, he said. "And by the time we get them up, we've lost all the profit for a year."

As DSL wholesalers melt down, it contaminates the field for retail ISPs, who sell services based on the DSL infrastructure to end users . Because of this, consumers and businesses already facing what is often a burdensome DSL installation are also bound to have less of a choice in DSL service providers.

A wise man once said any problem you can write a check to solve isn't a problem; it's an expense. In that frame of thought, technology problems did not sink the raft of embattled DSL wholesalers like Rhythms NetConnections Inc., Covad Communications Group Inc., and NorthPoint.

One of the main technology problems for the DSL wholesalers -- who serve ISPs like E-List.net -- is the technology expense.

Network providers hoping to find money to keep growing and developing profitability can find none now, with the stock market trading near two year lows, the Wall Street bear preceded by rising interest rates, and predictions of reduced corporate IT spending making news every day.

"They went out and bought a lot of capital, floated a lot of bonds, bought a lot of switches and equipment from Cisco (Systems Inc.), Nortel (Networks Corp.) and Lucent (Technologies Inc.) - and then went out to sign up customers," said Peter Jacoby, AT&T Corp.'s chief lobbyist, in Washington, D.C.

Unable to gather customers quickly enough, the companies drowned in their own debt. NorthPoint - profitless and with more than $647 million in debt according to its U.S. Securities and Exchange Commission (SEC) filing -- sold its physical assets to AT&T for $135 million, pennies on the dollar for what the company likely paid.

Rhythms NetConnections (profitless and $832 million in debt) said auditors are evaluating the company as a "going concern," meaning auditors expect the company to go out of business. It has announced it is looking for a buyer. Covad -- $1.35 billion in debt -- told the SEC it would need more time to prepare its annual financial report because of "complex accounting issues," expecting those issues to reduce revenue and widen its loss.

Other broadband providers have been laid low by similar debt problems. Infrastructure and service provider PSINet Inc., for example, recently had trading of its shares suspended on the stock market and announced that it may seek to reorganize under U.S. bankruptcy laws.

"There's clearly a shakeout going on," Jacoby said. "Telecommunications has always been a cyclical industry. We're not that different from (retail store) Wal-Mart. If you have excess inventory, you're hurting until you get that inventory spoken for."

But experts say the DSL wholesalers also faced a real connectivity problem. Even though they laid their own fiber optic cable and owned much of their own equipment, the newly formed upstarts still had to use some equipment owned by the regional Bell operating companies (RBOCs). The "baby bells" own the copper wire connections to customers commonly called the "last mile" connection.

Getting the local phone companies -- each of which is a DSL competitor -- to cooperate has been time consuming, slowing down service expansion for DSL companies and ultimately preventing them from growing fast enough to justify their huge capital outlays for developing their networks.

The financial troubles of DSL providers validates a long-standing gripe AT&T Corp. and other telecommunications companies have had against the regional Bell operating companies, Jacoby said. "The basic problem, if you're a DSL provider or a voice provider, is you're relying on baby Bell facilities to deliver your product. The CLECs (competitive local exchange carriers) or the DLECs (digital local exchange carriers) have to absorb the Bell cost structure, and then lay on their own cost structure."

If a DSL provider wants to offer service to a customer, it must first collocate its switches and other equipment next to the networking gear of the local phone company at a central office service facility. Collocation is a Byzantine affair full of intrigue, the product of competitive mistrust, insiders say.

"There are literally cyclone fences, with locks on them," said Steve Haggarty, vice president for local broadband services at Qwest Communications International Inc. In facilities without cages protecting networking gear, competitors must frequently work under the supervision of personnel from the facility's owner - the local phone company, he said.

AT&T primarily bought about 1,000 of these collocation facilities in the NorthPoint deal, saving them the expense of setting up the equipment as well as the full cost of the equipment itself. AT&T plans to enter the DSL market this year -- with a head start -- but it doesn't solve the real problem "We're going to go into the same regulatory environment," Jacoby said. "If we can't make it work, then $135 million looks like a white elephant sale."

From the central office to the wires in the street to the junction box at the edge of a building, competing DSL providers depend on personnel from the regional Bell operating companies. The local phone company must find a "clean pair" of copper wires available to connect a building to the network through the central office. A clean pair means no fiber optic splices have been used to facilitate transmission, and that the wires have sufficient quality to serve.

If there's a problem, the company doesn't look for a new set of wires it tries to repair the old ones, "and it's a whole new department," E-List.Net's Nathans said, adding that he's had trouble of one sort or another with about 80 percent of installations. "It stretches the installation process from two to six months."

The provisioning process of coordinating with both a reseller and the local phone company proved too time-intensive to be profitable, he said.

Nathans' problem became NorthPoint's and other broadband wholesalers' problem. "Covad is arguing with the FCC (U.S. Federal Communications Commission) that they aren't able to get loops provisioned in a timely way," Jacoby said. To prosper, the companies needed to grow quickly, which is difficult "if they can only get 15, 20 customers a month because of provisioning."

Since each of the regional Bell operating companies - Verizon Communications Inc., SBC Communications Inc., BellSouth Corp. and Qwest through its U.S. West subsidiary - offer DSL services, there's little incentive to help others do so, beyond the retribution of regulators.

So while Covad, NorthPoint and Rhythms combined for about 442,000 subscribers last year, SBC alone served 767,000 subscribers, Verizon had 540,000, Qwest had 255,000 and BellSouth had 215,000, according to consulting company Telechoice Inc.

"In some of these cages you would have only one little bay," Haggarty said of the central offices. "You're going to be throttled by the incumbent." Qwest (itself an incumbent in 14 states) has been lowering the barriers for entry into the market, he said, noting that Qwest had curtailed litigation against other providers.

Jacoby described the DSL service market as monopolistic. "SBC in Texas drove out competition and raised prices from $40 to $50," he said. "Clearly, it shows that there's a monopoly on DSL service there, on the residential level."

An SBC spokesman denied a lack of competition in Texas, and said the company "is doing everything required to facilitate access to our network." He also said provisioning times are coming down, noting that SBC's installation intervals are between seven and 11 business days.

"We provide access to our network on a nondiscriminatory basis, and it has leveled competition," said Kevin Belgrade, an SBC spokesman. "Our competitive picture remains very strong. What we do to provide access to CLECs and DLECs is reported monthly to state and local authorities."

Belgrade said self-installation kits for customers used by Covad and now SBC have improved installation times and customer experiences. "It's taken the technician visit out of the equation."

For ISPs like E-List.Net, the struggle to provide DSL proved embittering, both to their customers and to themselves. "We had to rely on other companies, and if you don't do it yourself, it doesn't get done," Nathans said.

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