DSL Resale Ready to Hit One Out of the Park

By Tara Seals

Posted: 3/2003

DSL Resale Ready to Hit One Out
of the Park

By Tara Seals

2002
was like spring training for DSL after a long, cold off-season. The teams got
warmed up and likely contenders began to emerge. This year, the access
technology could hit a homer with end users, especially because the Big League
brand names have stepped into the on-deck circle. AT&T Corp., America Online
Inc. (AOL) and Earthlink Inc. are getting into the DSL resale game in a big way
this year — and smaller resellers will have to fight for a spot in the pennant
races.

The outlook of the preseason lineup
improves as demand continues to grow. The technology is improving and the
applications are becoming more compelling, especially in the business market.

The DSL Forum reports the North
American growth rate for DSL was around 11 percent as of fall 2002 — a healthy
uptake rate for rocky economic times. One player, DLEC New Edge Networks Inc.,
says it is on a rapidly increasing run rate that’s almost $80 million a year,
from customers in the 360 cities and towns where it provides service.

CONSUMERS: THE WORLD SERIES OF
BROADBAND

One match-up to keep an eye on plays
out in the consumer segment. The hefty market share of the Bells plus
competition from cable operators has made the consumer market extremely
competitive, while pricing pressure drives down already-slim margins for
resellers.

TeleChoice Inc. found the incumbents
account for 89 percent of the DSL market, while the competitive providers make
up the remaining 11 percent, led by Covad Communications Co.

"The margins have been getting
slimmer, and the reasons are that the RBOCs charge a given amount to us, and the
prices have come down in the last year or two, and that makes for slimmer
margins for resellers," says New Edge Networks’ CEO Dan Moffat. "When
you’re talking about consumer broadband from the RBOC for $35, up against a $40
cable modem retail offering, that’s not much of a business."

Fred Pieplow, COO for regional ISP
Quantum Connections, says the only way to make that model work is volume.

"Volume. That’s how we do
it," he says. "We’re also always looking to offer new items our
customers will appreciate."

He adds that Quantum Connections,
which offers service in Indiana and Michigan, reduces churn and attracts a
steady stream of customers by focusing on customer service and offering
value-added Web services, such as security and content filtering. The company
also provides business accounts.

"Cable operators are really
going to focus on the neighborhoods, and they’re really going to offer Internet,
and then VoIP so you can get your local phone service, and that scares the heck
out of the RBOCs, because they regard that consumer business as their bread and
butter, and they’re out pushing their DSL on the neighborhoods," says
Moffat.

All that attention on the consumer
market leaves the business accounts ripe for the plucking. One of the biggest
mistakes that DSL resellers and ISPs make, says Moffat, is to focus on
converting their installed base of dial-up consumers. "Up against the cable
guys and the RBOCs is not a good place to be, so it really does require
[regional ISPs] to reinvent their business a bit," says Moffat. "They
need to get more savvy about business customers. People that are able to
reinvent their business are going to be around, and those that aren’t won’t be
around."

Covad, for one, is not concerned
with the threat from the cablecos. "[Cable has] still got many challenges
— the shared service aspect where as more of your neighbors get it your speed
goes down, and when you really want to surf the Web," says Charlie Hoffman,
Covad’s CEO. "And the potential security concerns. And of course the cable
companies all have huge amounts of debt as well. It’s going to be tough for them
to make the investments necessary. So sure, it adds competition in the consumer
space, but that’s OK."

Cable and DSL are neck-and-neck for VSBs
Source: The Yankee Group 2003

ENTER THE RINGERS

One
of the reasons Covad’s not too worried about the cable guys is it’s lineup of
reseller ringers, such as No. 3 ISP Earthlink. And when AOL announced last
September it had signed with Covad to offer high-speed Internet access, a nation
turned its lonely eyes to the giant ISP to bring them low-cost DSL. Sprint
Corp., AT&T (which extended its Covad deal in January) and others also
signed resale deals with various providers, including the RBOCs, to provide
nationwide DSL to businesses and consumers. Many hope the heavy hitters will
reinvigorate a market segment wracked by a flurry of bankruptcies.

The DSL market’s past instability
claimed the lives of NorthPoint Communications, Rhythms and DirecTV’s DSL
business, among others. The problem was uptake, says Matt Davis, director of
broadband access technologies at the Yankee Group. "[DLECS] were going into
a market and putting a DSLAM in a central office, which can serve 50,000
potential subscribers, and they think they’ll be able to reach about 75 percent
of those because of DSL limitations — that’s the addressable market," he
says. "And of that 75 percent I might get say 30 percent take rate — and
you’re splitting it with another national provider or a regional provider and
then the ILEC itself. [So,] the 30 percent, 8,000 or 10,000 people, is suddenly
whittled down to 1,500 or so, and that was even a dream. These guys were
lighting up six or seven customers out of a DSLAM, and when you’re paying for a
DS3 for the backhaul, there’s just no way they could make that business model
work."

Consolidation has turned the market
around, helped by the big reseller operators getting into the game and driving
more sales. "It’s a more beneficial market this year to try and drive
penetration into your DSLAM and to actually get enough customers to support the
enterprise," says Davis.

The large communications companies
have good content at the ready and economics of scale, making the consumer
market a good target for them, despite existing RBOC penetration.

"The nice thing about the AOLs
of the world getting into this is that they see their job as creating compelling
content," says Hoffman. "Meanwhile we worry about the back-end stuff,
getting the line provisioned and so on. And they can effectively go after the
dial-up base. We’re still at 50 million people on dial-up."

But Davis cautions that providers
like AT&T and Sprint should be wary in abandoning a facilities-based
strategy. "There’s a danger if you’re an AT&T or a Sprint that is
building a lot of services off of a network you don’t own," Davis explains.
"Even if it doesn’t go bankrupt, they may, with a retail strategy, start
competing against you, and you leave yourself in a position where you don’t have
a lot of control over your cost. If you want to raise wholesale prices, either
you lose your customer or you accept it…you’re in a position where you have
other people making your network decisions."

U.S. Broadband Penetration
Source: Point Topic, November 2002

PEANUTS AND CRACKERJACKS

In
the business market, resellers can find better opportunities and higher margins.
New trends in applications also provide value-added opportunities for business
partners.

"We do think the prices for
business broadband are as low as they’re going to go, and they’re going to go
up," says Moffat. "If you’re getting it from New Edge, for $40 or $45,
and you sell it for $80 or more, the average revenue per user for a business
user is more along the lines of $130. That’s where you can make some
money."

The smaller resellers will have a
hard time up against competition from Sprint and AT&T, however. "Except
the ones that have their niche, a particular thing they’re good at and can build
a name for," says Hoffman.

One example is Speakeasy Inc., which
targets small businesses and consumers, but has a particular additional focus on
the gaming industry. Another is, MegaPath Networks Inc., an aggregator known for
its nationwide footprint, a rarity in the DSL space.

"One of the redeeming qualities
that we have is that we don’t just resell, but rather we interconnect with all
the major ILECs, Covad and New Edge," says Dan Foster, the company’s chief
marketing officer. "Our footprint on DSL today is right around 4,300 unique
central offices, compared with Covad’s 1,750."

That nationwide service offering has
attracted distributed enterprises to MegaPath, like Radio Shack, Farmers
Insurance, Northwestern Mutual and Honda.

So while the RBOCs and cable
operators and the big brand operators battle it out, smaller DSL resellers and
aggregators can still grab a piece of the pie. ISPs and aggregators buy
wholesale transport, then layer their own differentiating facilities and offers
on top.

"They target SMBs, government
and sometimes regional and enterprise accounts," says Moffat.

DSL is finding more and more
traction in the small and medium business (SMB) market, which includes print
shops, graphics shops, insurance companies, dentists, doctors’ offices, schools
and companies like New Edge Networks’ smallest customer, Stan’s Astronomy Shop,
which uses the high-speed access to transmit star maps.

Application trends and opportunities
continue to grow. Local and long-distance phone service using VoDSL technology
could be an important trend to watch in the coming months as most providers are
taking a look at the opportunity.

"We
have an Alcatel [Ltd.] network, carrier class and heavy iron, and we’ve tested
extensively for VoIP and VoDSL," says Moffat. "Some of our 350 ISP
partners are already doing voice over our network. We’re set up for latency so
we can handle voice, so we think longer-term that the opportunity to layer voice
over our network is going to be important to us, and later on we’ll look at
whether we want to bundle that."

The top market for BellSouth Corp.
ISPs is home or small office service, says Eric Fogle, director of broadband
access marketing at BellSouth, but the call for wide area networking on the
rise.

"One of the emerging
opportunities for DSL is that now this technology is starting to evolve, one of
the things is that reliability and service quality is improving," says
Fogle. "We’ve got a lot of smaller network service providers that are
building out wide area networks for corporations and enterprise customers that
have branch locations, and they’re using DSL as their underlying transport to
make that happen. It’s a great play, and it’s really the emerging opportunity in
the transport business to play into that higher margin space."

From a reseller’s perspective, it’s
also an opportunity to provide professional services associated with building
out an IP network. "They could also come in and configure the routers, the
PCs, do the physical wiring of the Ethernet, all the other ancillary support
services that business needs," says Fogle. "The lead to that is, ‘I
can provide you the DSL service, as well as a complete service offering that
includes the DSL.’ That’s great for the smaller players."

New productivity applications, such
as a claims adjuster application, require always-on, higher-level data
transmission, says Foster, making DSL a must-have for many small businesses.

"Similarly,
some of the pharmaceutical companies are deploying portals out to doctors’
offices to augment or enhance the drug representative selling model, so we’re
helping their distribution model," he adds.

In all, applications, technology and
economic health are making for an exciting season for DSL resale. "DSL
resale will absolutely continue to grow," says Fogle. "These past two
years have been tough from a telecom market perspective, yet in that same time
frame I grew three-fold the number of people that are buying the transport
services for the purpose of selling to their end users. So in an area where many
companies are going out of business, it’s also an area where people are going to
enter the business."