DSL market shakeout continues

DSL line installations are still growing steadily, but announced cutbacks of DSL services by two providers earlier this month are the latest evidence of a shakeout in the industry.

While Prism, the New York DSL business unit of services giant Comdisco, and Jato Communications of Denver, aren't household names, both had national aspirations that haven't worked out.

Comdisco is shutting down Prism, which has about 2,000 customers in 15 cities, and plans to transition Prism's customers over to other service providers by year-end, a company spokesman says. Comdisco officials cited a couple of reasons for exiting the DSL business: slow loop provisioning from incumbent local exchange carriers and market pressure to offer low DSL service pricing.

Comdisco had acquired Prism in March 1999 with the intention of using Prism to roll out DSL to Comdisco's corporate customers across the U.S., while continuing to grow Prism's existing customer base of small-business users.

Jato, which provides wholesale business-class DSL to small and midsize businesses through resellers, isn't going to be closing its doors, but the company is shelving its national rollout plans and concentrating on the 11 second-tier markets it occupies in the Rocky Mountain, Southwestern and South Central regions of the U.S.

Jato customers outside those markets are being encouraged to find a new service provider.

Smaller DSL providers aren't the only ones re-evaluating their DSL strategies. In the last two months, Verizon purchased a 55% stake in national DSL wholesaler NorthPoint and DSL provider Covad struck a deal with SBC Communications under which Covad gets a cash investment from SBC and guaranteed resale revenue.

Matthew Davis, a DSL analyst with The Yankee Group in Boston, says end users shouldn't be too concerned about the consolidations and shutdowns that the DSL market is experiencing.

"If DSL providers have turned up customers, those are assets and the company would likely sell these assets to other providers," Davis explains.

Customers might see changes to their bills and minor hiccups in service during a transition from one provider to another, but they shouldn't experience major service disruptions, Davis says.

The problem with data competitive local exchange carriers (CLEC) that entered the market after Covad, Rhythms and NorthPoint, is that they entered the market six to 12 months too late, when wholesale DSL was already dying, Davis explains.

"It's not surprising they couldn't get their footprint out quickly," he says. "Once the investment guys saw the returns on investment weren't there, they put the brakes on the wholesale DSL model."

This doesn't mean the data CLEC model is dead, Davis adds. Instead of becoming national players trying to hit as many customers as possible, data CLECs will sell multiple services to clients in particular regions. These services would include voice, VPN, hosting and security.

Adam Guglielmo, an analyst with consultancy TeleChoice, says Jato had deployed gear in about 400 central offices across the U.S. and was preparing to offer nationwide service.

"My guess is they're not getting as many customers as they want and they're trying to refocus," he says.

The smaller DSL companies that seem to be having the most success are retail-focused, rather than wholesalers, Guglielmo notes.

Ultimately, Guglielmo says, DSL providers can't succeed by offering only high-speed connectivity.

"To start to gain revenue, they need to offer additional services," he says.