Optimism remains despite DSL flame-outs

It's hard to ignore the flood of bad DSL news in recent months -- including last week's revelations that NorthPoint Communications has filed for Chapter 11 bankruptcy protection and Rhythms NetConnections is laying off about one- quarter of its staff. But industry watchers say DSL remains a solid option for companies looking to connect remote workers or branch offices to the Internet or a private network.

Sure, customers will need to select service providers carefully given that more of them are bound to implode in the weeks and months ahead as cash runs low and network build-outs stall. But customers who choose wisely should benefit from DSL's current strong points, such as its relatively low cost and high speeds vs. T-1 lines and other services, as well as better offerings from the Bells and improvements in service provisioning.

The downfall of DSL providers in recent months has been well-documented. The capital markets stopped funding the massive network build-outs of companies such as Covad, NorthPoint and Rhythms, which have installed equipment in a combined 5,400 central offices, but have either laid off or announced plans to cut some 1,500 employees between them to save their businesses.

"A lot of the service providers when they were building out their central offices focused on a land grab, putting equipment into as many places as they could, and the market was willing to support that," says Frank Weiner, a vice president for DSL equipment supplier Paradyne. "But the markets changed and became more interested in profits."

Nevertheless, last year was actually a banner year for DSL growth. The number of DSL lines installed in the U.S. more than tripled from the year before to 2.3 million, according to market watcher TeleChoice.

A recent FCC study showed there are nearly three times as many cable customers as DSL customers as of last June, but indicated DSL is gaining quickly. The study cited a Wall Street report forecasting that DSL customers will outnumber cable modem subscribers 10.1 million to 9.1 million by the end of next year.

Bell companies are among those showing solid growth in their DSL businesses. BellSouth and Verizon beat expectations for DSL installed lines last year. BellSouth topped its goal of 200,000 lines by 15,000. Verizon was above its 500,000-subscriber goal by 40,000.

Even some competitive DSL providers showed gains. New Edge Networks of Vancouver, Wash., says its DSL orders increased more than 60% from November to December, in part because business DSL customers were fleeing failed or struggling providers.

Intermedia Communications, a competitive local exchange carrier (CLEC) that sells business-class DSL services as a partner of DSL wholesaler Rhythms and is being bought by WorldCom, announced in December that it would expand from 12 metropolitan areas to more than 1,300 U.S. cities. Frank Pulaski, Intermedia's senior product manager for IP products, says DSL companies that survive the turmoil will have an easier time turning a profit.

"Many of the companies that have left the business were loss leaders," he says. "They had very aggressive pricing plans that didn't cover the cost of rolling out the technology. Now that they've left, the pricing in the market is more realistic. There aren't many companies offering installation rebates any more."

One competitor had offered business-class symmetrical DSL lines (SDSL) -- providing upstream and downstream rates of up to 3M bit/sec -- for as little as $75 per month, Pulaski says. The normal price range for SDSL is $115 to $140.

Another reason Pulaski is optimistic about Intermedia's DSL business is the company's ability to implement service faster. "When DSL first came out there were some installation difficulties," he says. "That's changed. We get a line up and running within 30 business days 98% of the time."

Within the next six months, Pulaski says self-installation, which is common in the consumer market, will be the norm even for business users, allowing DSL providers to drastically cut back expensive technician visits to customers.

While the incumbent local exchange carriers (ILEC) continue to dominate in pure DSL line numbers, Pulaski says competitive providers will dominate the business-class DSL market. According to TeleChoice, as of September ILECs had roughly 1.3 million lines deployed, 80% of which were residential-class asymmetric DSL (ADSL) -- providing up to 9M bit/sec downstream and up to 640K bit/sec upstream. CLECs had about 405,000 lines in place, with more than two-thirds being business-class SDSL lines.

Pulaski notes SDSL competes to some extent with higher margin T-1 services. ILECs are big T-1 sellers and may be hesitant to deploy a lot of business-class DSL because it could cannibalize their more profitable T-1 businesses.

But Matthew Davis, an analyst with The Yankee Group, says ILECs will make a stronger push into the business market this year. The main factor is the maturation of a new DSL technology -- G.shdsl, single-pair high-bit-rate DSL. G.shdsl is an IEEE standard, unlike SDSL, the business-class technology most widely used now, and can provide higher symmetrical speeds. G.shdsl can also coexist with ADSL in carrier networks, Davis notes, while SDSL and ADSL have compatibility problems.

Verizon recently purchased Alcatel equipment that supports G.shdsl, and TeleChoice's Adam Guglielmo expects the ILEC to deploy the technology shortly.

The ILECs still have plenty of doubters though. Richard Lippincott, a market consultant in San Jose, ordered a DSL line last spring from his ILEC to replace a 56K bit/sec dial-up line. While the installation went fine, the line later started failing for hours at a time until Lippincott eventually cancelled the service.

He considered going with a CLEC, but says he got "scared about all the trouble these other guys seemed to be having."

Other customers, such as Betsy Horn of law firm Harris, Finley & Bogle, P.C. in Fort Worth, Texas, have questions about DSL service provider stability. Horn, a systems administrator, also wonders how secure DSL is and whether running VPN traffic over DSL will meet performance requirements.

Another key issue for ILECs and CLECs will be their ability to offer better service-level agreements to DSL business customers.

"You haven't seen business SLAs at all, at least not ones that will cover the last-mile loop," Guglielmo says. "Business customers are reluctant to leave frame [relay] and ATM where they at least know what they're getting."

This story, "Optimism remains despite DSL flame-outs" was originally published by Network World.

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