Last Mile?
But as the money dried up under rough market conditions, a sort of chain reaction of bankruptcy was initiated down the line. For example, a local ISP cannot attract enough of a customer base, so it runs out of money and goes belly up. Then, the ISP can’t pay the bills it owes to the DSL provider, which in turn files its own bankruptcy, discontinuing its service and, thus, leaving DSL customers high and dry.
In the case of NorthPoint, that’s exactly what happened. Last January, NorthPoint, left anemic by late-paying ISP customers and a penny stock price, failed in a last-ditch effort to get bought out by Verizon and was forced into bankruptcy. Its 100,000 business and residential DSL customers were effectively cut off. AT&T then swooped in and bought up $135 million of NorthPoint’s assets and equipment — but none of its customers.
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"The value proposition wasn’t there for AT&T [in acquiring NorthPoint’s customers]," says Maricheck. According to AT&T, it would have taken more than $25 million a month to keep NorthPoint’s network running. "There is not necessarily incentive for big companies, like AT&T, to take on DSL customers. They’re most interested in the co-location facilities to provide long distance," says Maricheck.
Later in February, both Covad and Rhythms reported office shutdowns and continued layoffs. The snowballing layoffs and facility shutdowns have caused a lurch among industry analysts, speculating just which, if any, CLEC would survive.
Natural Selection
"Darwinian factors took effect," says Bob Lane, telecom analyst with The Yankee Group. "The significant network costs of building out the DSL infrastructure took its toll on the providers. Without guaranteed revenue, very few DSL providers have been able to survive." Lane speculates that Covad is in the best situation, with sufficient financial resources and a positioning that utilizes its current assets.
"We’ve changed our plan of attack to move toward profitability," says Abhi Ingle, vice president of product development with Covad. Ingle points to the $550 million the company spent last year building out its network, and the cost-cutting measures of layoffs and office shutdowns, as helping it along that path. He says the company has enough money to survive until the first quarter of 2002. "We’re being helped by the fact that most of our competition is gone," says Ingle. "At this point, anyway, we’re just filling the network, not building it out."
By filling the network, Ingle means gaining business DSL customers. Late last year, the company suspended all efforts to attract residential customers and is exclusively focused on the home/office and small business market. "We’ll let the Bells focus on ADSL and the consumer side," says Ingle.
Indeed, the RBOCs do have the consumer side. While Covad boasts 319,000 DSL subscribers (the most by any CLEC), the RBOCs have nearly 2 million, a 75 percent market share.
And despite the well-publicized struggles of the DSL industry, demand is not waning. According to telecom market research firm RHK, residential DSL service in North America will grow from 2.2 million users in 2000 to 18.6 million by 2004. In the same report, RHK predicts business DSL users will increase from 555,000 users in 2000 to 2.6 million users by 2004.
"Cable has previously dominated broadband because modems were deployed 18 months earlier than ADSL technology," says Kelly Dougherty, analyst at RHK. Dougherty sees carriers responding to strong consumer demand and points to RBOC initiatives looking to serve customers through remote terminals.
But an initiative hoping to tap remote or rural DSL customers has sparked a contentious battle – and one that now resides inside the walls of the U.S. Congress.
The Internet Freedom and Broadband Deployment Act (a curious, if not grandiose name) promises to change the landscape of telecommunications if it passes Congress later this year. Designed to unshackle the RBOCs’ requirement to give competitors access to network gear, the legislation would remove parts of the ’96 Telecom Act that requires competition in long-distance data services. Backers of the bill say it will help bridge the so-called digital divide among urban and rural users; opponents argue it will result in nothing less than a monopoly for the RBOCs.