DSL Market Constricts

As some DSL start-ups begin to have problems, experienced carriers are stepping in.

By Paul Korzeniowski | Posted Nov 26, 2000
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The cream is starting to rise to the top in the Digital Subscriber Line (DSL) market. As start-up providers reach the point that they have to justify their business plans, a growing number are experiencing difficulties, and established carriers are moving in to help out.

Earlier this month, Comdisco Inc., of Rosemont, Ill., decided to shut down Prism, which has about 2,000 customers in 15 cities. In March 1999, Comdisco acquired Prism with the intention of offering DSL services to Comdisco's U.S. corporate customers, while continuing to grow Prism's small-business user customer base. Because of slow loop provisioning from Incumbent Local Exchange Carriers (ILECs) and market pressure to lower DSL service pricing, the firm exited the market and plans to transition customers over to other service providers by the end of the year.

Jato Communications Inc., of Denver, Colo., which provides wholesale business-class DSL to small and midsize businesses through resellers, has scaled back its plans to roll-out nationwide services. Instead, the company is concentrating on 11 U.S. markets and encouraging customers outside those areas to find other service providers.

Lucent Technologies Inc., of Basking Ridge, N.J., cited sales to Competitive Local Exchange Carriers (CLECs) as one of the reasons for lowering third quarter revenue and earnings expectations. The company anticipated difficulty collecting money owed by certain start-ups that bought equipment and services on credit.

Some Calls for Help, Some New Providers

Upon encountering financial problems, the start-up DSL providers have been running to ILECs for help. For instance, Verizon Communications Inc., of New York, recently purchased a 55% stake in national DSL wholesaler NorthPoint Communications Corp., of San Francisco, Calif., and SBC Communications Inc., of San Antonio, Texas, signed a deal with Covad Communications Corp., of Santa Clara, Calif., that involved a six percent equity investment as well as guaranteed resale revenue.

Despite the problems, new DSL providers are entering the market. A number of the start-ups are moving away from wholesale products and focusing on delivery of various end-user services, stated Matthew Davis, a senior analyst with the Yankee Group, a Boston, market research firm. Enhanced voice services and Internet access have been two areas of emphasis.

The Gartner Group, a Stamford, Conn. market research firm, expects broadband providers to offset their expenses by charging Web retailers such as Amazon.com Inc, Seattle, Wash., and eBay Inc., San Jose, Calif., for every visitor they deliver. And by following the example of credit card companies, these service providers will start charging businesses a sales commission for each online consumer purchase.

Such changes will be possible because Gartner expects the advent of high-speed broadband services to boost consumer ecommerce spending dramatically. In 2006, a quarter of all U.S. households will purchase more than $10,000 worth of products and services via the Web. At that time, the 29 million U.S. households equipped with broadband Internet will spend an average of 20 times more on electronic purchases than households that surf the Web with dial-up modems.

CrossLinks

"The broadband environment is extremely friendly for both high-end and frequent shoppers. This is similar to charging shops a higher fee for prime real estate in an elite neighborhood," said Ken McGee, an industry analyst at Gartner.

As this occurs, DSL providers will either rise to become top-tier telecommunications providers or drop into ILEC's arms. //

Paul Korzeniowski is a freelance writer in Sudbury, Mass., and specializes in networking and telecommunications issues. His electronic mail address is paulkorzen@aol.com.

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