Business News - DSL Wholesalers Reinventing Themselves

Posted: 04/2001

DSL Wholesalers Reinventing Themselves
By Becky Bracken

Faced with unfavorable market conditions, fierce competition from incumbents
and an ever-shrinking pool of ISP distribution channels, DSL wholesalers are
going through an inevitable period of reinvention. But in an industry where
demand is high and continues to grow, smart data LECs (DLECs) that can seize
market opportunities and remain fiscally conservative can remain viable
contenders in the long term, analysts say.

ISPs, once the bread and butter of wholesale DSL providers, have
faltered–particularly independent consumer-oriented ISPs–leaving DSL providers
NorthPoint Communications Group Inc. (www.nortpoint.net),
Covad Communications Co. (www.covad.com) and
Rhythms Net Connections Inc. (www.rhythms.com)
in search of alternate means to sell and distribute service. While strong
publicly traded ISPs such as EarthLink Network Inc. (www.earthlink.com)
and carrier-affiliated ISPs like WorldCom Inc.’s (www.wcom.com)
UUNet Technologies Inc. (www.uu.net) are likely
to remain strong partners with DSL wholesalers, they can no longer be the only
means of distribution. As a result, DLECs are pursuing direct sales, co-branding
agreements and other channels, but with wide variations in strategies.

"Covad and NorthPoint launched with pure wholesale and their logic was
to build the entire network and then rely on downstream ISPs to sell the
service," says Matthew Rubins, a principal with M/C Venture Partners (www.mcventurepartners.com).
"They made the bet that they could serve as a single point of contact with
multiple carriers and leverage a lot of downstream distribution channels, and I
think they realized, as we did, that ISPs are pretty bad at selling high-speed
services."

NorthPoint, which recently filed for Chapter 11 bankruptcy protection,
maintains that its operations are stronger than ever, aside from well-publicized
ongoing financial and legal troubles. NorthPoint’s initial plans moving forward
are on hold until a buyer can be found for the company. Shellye Archambeau,
chief marketing officer for NorthPoint, says that the company has several
potential buyers and plans to have a course of action for NorthPoint cemented by
the end of the first quarter.

"Our primary objective is to find a strategic partner to come and buy
us," Archambeau says. "It’s difficult to discuss what our ultimate
strategy will be moving forward, because that will depend on who the ultimate
buyer is."

NorthPoint, despite being in the financial doldrums, has had some success
with its partnership with Microsoft Corp.’s (www.microsoft.com)
MSN and RadioShack Corp. (www.radioshack.com).
NorthPoint’s DSL service can be ordered as one of several Internet access
options at MSN kiosks in Radio Shack stores across the country. Archambeau says
that with NorthPoint’s electronic bond with MSN, service is being delivered to
customers within two weeks of the order being placed.

Rhythms has always had diverse distribution channels, which has included an
in-house sales staff. In the past, Rhythms’ sales staff sold directly to Fortune
500 companies, which is now left to carrier partners like WorldCom, Qwest
Communications International Inc. (www.qwest.com)
and AT&T Corp. (www.att.com).

Eric Rasmussen, senior analyst with TeleChoice Inc. (www.telechoice.com),
says that early on, Rhythms faced some difficulty in acquiring ISP partnerships
because their direct sales model was often in direct competition with ISPs.

"But it turns out Rhythms had the most foresight," Rasmussen adds.

Rhythms also has partnerships with broadband integrator FIRETAP
Communications Inc. (www.firetap.com), a
division of Homestore.com Inc. (www.homestore.com).

In addition to seeking out new channel partners, Rhythms has announced that,
in an effort to conserve cash, it will suspend service in 20 smaller markets
this year, leaving room for the company to focus on the larger top 40 markets.

Covad is pursuing a slightly different route. Aside from a similarly pared
down ISP channel, the company has two other major target markets–small
businesses and large companies interested in providing branded broadband access
to customers.

Covad’s Integrated Services unit allows partners like Sony Corp. (www.sony.com)
and Avon Products Inc. (www.avon.com) to
provide partners and customers with branded broadband access. The Covad Business
Solutions unit targets small businesses.

Through the acquisition of Bluestar.net, Covad has approximately 10,000
business lines already installed. Moving forward, Abhi Ingle, vice president of
product development and marketing for Covad, says that the small to medium-sized
enterprise (SME) market offers the greatest revenue potential because of the
number of value-added services that can be bundled with broadband service, and
because prices have not yet been driven down below the point of making a profit,
unlike what has happened in the residential sector.

In fact, Ingle points to SBC Communication Inc.’s (www.sbc.com)
raising of rates in February by $10 to $49.95 as a sign that prices will have to
come up across the sector in order to provide better customer service and
experience.

"What other market do you know of that when demand outstrips supply you
lower prices?" Ingle asks. "What I think is going to happen is some
rationality is going to return to the marketplace. I think the result will be
slightly slower growth than before, but it’s going to improve customer
experience, which is something that has really lacked in the past year or
so."

The RBOCs, which have been faulted for rock-bottom pricing of DSL services in
the residential sector, haven’t presented compelling offerings to small
businesses, which opens huge opportunities to DLECs like Covad.

"The small business segment is a much different situation," Ingle
says. "The choice has been much narrower in the small business segment,
because if you look at what’s happened, the RBOCs … have focused almost
exclusively on the consumer side, because they’re in competition with
cable."

Across the board, DSL wholesalers still realize the importance of strong ISP
partnerships, but also have realized it cannot be the only means of distribution
moving forward. "The gold rush days of building a network as fast as you
can and not caring whether they make a profit–those days are gone,"
Rasmussen says.