Big-Four Telcos Feeding On CLEC DSL Leftovers
The demise of competitive local-exchange carriers such as Flashcom Inc., Jato Communications Corp., NorthPoint Communications Inc, Vectris and a host of others has been a definite boon for well-heeled and deep-pocketed incumbents that provide digital-subscriber-line service.
In fact, the window of opportunity for the big four incumbent LECs — BellSouth Corp., Qwest Communications International Inc., SBC Communications Inc. and Verizon Communications — has widened considerably. Mix in a group of surviving CLECs that are on financial fumes, and the DSL sector is well on its way toward remolding itself.
Rapid growth has played a huge part in that transformation. The DSL sector now has more than 3 million lines in service, with 5.7 million lines expected by the end of this year, according to research firm TeleChoice Inc.
At the same time, DSL has carved into the market share of its main broadband competitor, cable-modem service. Cable's share of the high-speed data pie has fallen from 65 percent to 51 percent, according to a recent Harris Interactive study.
DSL's numbers are projected to skyrocket to nearly 15 million by year-end 2003, with about 80 percent of the customers in the hands of the big four incumbents, TeleChoice reported.
The largest domestic telcos stand to get the fattest from CLEC leftovers, experts said. Cable MSOs and a few surviving independent DSL providers should get their fair share of the scraps, too.
"The ILECs [incumbent LECs] are cash cows and can play the waiting game," said Ernie Bergstrom, senior analyst for Cahners In-Stat Group, a sister company to Multichannel News. "They're consuming everything in the DSL market."
Not quite everything, but close. Covad Communications Corp., which did get a six-year, $600-million boost from SBC, posted first-quarter totals of 319,000 subscriber lines on record revenue of $71.2 million.
Just last week, Covad said it would close down subsidiary BlueStar Communications Group Inc., which has 235 central offices, 144 of which overlap Covad's existing network. That move is expected to reduce Covad's operating costs by about $75 million over the next 12 months and give the company enough cash to survive into July 2002.
Covad, which also reported a first-quarter net loss of $198 million, is trying to sniff out more cost-cutting opportunities.
"Obviously, there's been drastic changes the past year, from speculative frenzy to get-big-quick to instant profitability or go home," said Covad vice president of product marketing and development Abhi Ingle. "We've suspended build-outs, laid off 800 people, shut down facilities and switched consumer service offerings to self-installed products, which is saving [on] $150 to $200 truck rolls."
Covad and other DSL providers were stung by a fearful capital market, whose reluctance to invest in high-speed start-ups prompted a chain reaction within the industry.
"When capital was choked off, many were our customers and we were left holding the bag. It hit us all very hard," Ingle admitted.
Covad may have softened the blow through its acquisition of LaserLink — whose partners include Compaq Computer Corp. and Sony Corp. — and its Safety Net program for customers who were left in the lurch by failed DSL providers. Covad has caught more than 10,000 new customers in its Safety Net.
"When the problems hit, we were better prepared than most," Ingle said.
Other CLECs haven't fared as well.
"There is no new money for CLECs; most are running on fumes," said one venture capitalist. "The distinction between betting and investing has never been more important."
For CLECs that are teetering on the edge —such as Rhythms NetConnections Inc., which lost $190 million and its CEO in the past two quarters — equity partners are high on the wish list.
Said In-Stat's Bergstrom: "The trend is towards equity positions in resellers like Covad. SBC is trying to pull back into their franchise areas, so other CLECs could be acquired in out-of-franchise markets, which could save infrastructure costs."
For instance, AT&T Corp.'s acquisition of NorthPoint's hard assets for $135 million is expected to save the company considerable infrastructure costs, as Ma Bell moves deeper into DSL territory and prepares for its split into four units.
"DSL is a very important part of the split," said AT&T spokesman Mark Seigel. The NorthPoint deal "will save us the cost of building 2,000 DSLAMs [or digital-subscriber-line access multiplexers] as part of our DSL strategy to launch multiple services, which is a good use of capital."
AT&T will fuse NorthPoint's DSLAMs into its existing networks, which currently only offer DSL service to businesses, and begin offering residential DSL service later this year, Seigel said.
Sprint Corp., meanwhile, has targeted SHDSL, or single-pair high-speed digital subscriber line technology. That next-generation version of DSL is designed to handle multiple voice lines, video conferencing, remote access and other advanced small-business applications.
"Our focus is on SHDSL, but there are lots of applications we're working on," said Sprint manager of high-speed data market analysis and forecasting Todd Lawrence. "We realize we have to offer customers something beyond just fast Internet service," Sprint is concentrating DSL service on its 25 key markets, including Las Vegas, parts of Florida, Houston and areas of New Jersey.
The cratering CLEC sector also affected equipment vendors, of course. Lucent Technologies, for example, was bitten by a shrinking DSL customer base, which included several now-defunct CLECs and DSL resellers. Even so, in May Lucent secured a large DSL-equipment deal with Qwest, which will use Lucent's remote terminal technology to expand its DSL footprint in 11 of its 14 service regions.
Even with that deal, Lucent, like many of its peers, is smarting from the soft economy.
"We have a very broad strategy with our Stinger platform in the residential and CLEC plays, but we've certainly been affected by the CLEC and DSL reseller fallout, and it's a bumpy ride," said broadband-access division senior project manager Bruce Miller. "We're seeing the market shift towards the top four and that's shifting our strategy towards the bigger guys and the international market."
Searching beyond U.S. borders could prove to be fruitful.
"The international market is really taking off," Bergstrom said. "South Korea expects 1 million DSL subscribers by year-end and Taiwan, about 500,000."
Closer to home, cable operators see the CLEC downturn as an opportunity to advance their cable-modem strategy, while picking off disgruntled and disconnected DSL residential and business customers.
"Clearly, it's a real marketing opportunity," said Paul Golden, vice president of marketing and sales support for Cox Business Services. "DSL customers are in our sweet spot, and the demise of NorthPoint is the defining moment."
Cox has launched an ad campaign to attract DSL customers, and other MSOs are also seizing the opportunity.
"As we move out into the marketplace [with cable-modem service], the fact that some DSL [providers] are struggling has been a very big focus for us," said Rick Lang, corporate vice president of product marketing at Charter Communications Inc. "The demand for high-speed data is very robust. This is our chance to get into the market and [sign-up] many of those high-speed customers," With many of those high-speed customers looking for a new provider, the DSL sector will continue to consolidate.
"Those that survive the shakeout will be the ones with the ability to get seed money from companies interested in their company's parts," Bergstrom said. "But with a 22 percent growth rate in the first quarter of 2001, DSL isn't dead and revenue projections are good."
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