DSL providers face wipeout in US market

Regional digital subscriber line (DSL) service providers in the United States are shutting down their operations, after a series of layoff announcements across the industry.

Jato Communications Corp. and Digital Broadband Communications Inc. are just two companies winding down and referring thousands of subscribers to seek alternative DSL providers.

The companies are blaming tighter capital markets. They say they cannot find new investors prepared to fund their buildout.

But some analysts blame the companies' own "flip-flop" marketing strategies; changing targets from small to medium sized enterprises one month, to residential the next.

"They have been really inconsistent in what is their value," said Adam Guglielmo, DSL analyst at TeleChoice Inc., of Tulsa, Oklahoma. "[With markets increasingly looking for company profitability] a strategy changing month to month does not help."

The disastrous DSL situation in the U.S. does not bode well for competitive operators in Europe, where a new unbundling regulation, which came into effect this month, is supposed to boost the nascent DSL market. But startups in Europe have to contend with more regulatory issues than in the U.S. in addition to the challenge of securing funding.

National operator Northpoint Communications Group Inc., based in San Francisco, California, announced 248 job cuts, 19% of its staff Northpoint has also divested its 50% stakes in VersaPoint, a joint venture with Versatel Telecom International N.V. in Europe, and NorthPoint Canada Communications, its joint venture with Call-Net Enterprises, Inc.

Industry leader Covad Communications Co., of Santa Clara, California, laid off 400 employees, 13% of its workforce, and is slowing its network expansion.

Now Denver, Colorado-based Jato Communications has terminated services after withdrawing an initial public offering in May. Jato had equity investments from 3Com, Global Crossing, Lucent, Microsoft and Qwest Communications. Waltham, Massachusetts-based Digital Broadband Communications filed for bankruptcy protection after failing to find new investors and turned down its network on January 12. Medford, Massachusetts-based HarvardNet exited the DSL business last month and refocused on web content hosting and managed services. DSL.net Inc., of New Haven, Connecticut cut 141 jobs, or 28% of its workforce.

A tight financial market, where funding is increasingly hard to find, is a primary reason for the DSL difficulties.

But New Edge Networks Inc., a national wholesale DSL provider based in Vancouver, Washington, cut 135 jobs even after receiving a third round of equity and debt funding in October.

Industry analysts cite difficulties with operational support systems and inconsistent business plans as additional sources of DSL service providers' problems. Covad asserts that its cutbacks, which are anticipated to lower operating costs by 20% to 30%, are purely due to the current financial situation.

"The financial markets changed their minds on the goal of profitability. Initially, they wanted us to sign up as many subscribers as we could; they would fund us and postpone our date for profitability," says Chuck McMinn, chairman of Covad. "Now, they are concerned about any Internet company's ability to make money."

Covad has taken several cost saving measures, including slowing the rate of subscriber growth.

"The more new subscribers we have, the more it adds to our costs," says McMinn.

The issue of user volumes

DSL wholesale provider Northpoint claims its financial problems stem from leading local telephone company Verizon Communications' termination of their binding merger agreement in November, according to Marvin Wamble, a Northpoint spokesman.

Northpoint has filed a $1 billion lawsuit against Verizon for pulling out of the merger "That was the beginning of our financial problems," says Wamble. "We're trying to reduce expenses in any way we can. We're looking to restructure and we're looking at other financially strong partners."

Four of Northpoint's major ISP customers have filed for bankruptcy, forcing the operator to migrate lines from troubled ISPs to financially sound ones.

"The real issue is [user] volumes," says Robert Sesko, executive director of the broadband solutions market for Telcordia Technologies Inc., of Morristown, New Jersey. Newer DSL operators are suffering due to incumbents gaining greater share of new users, he said. "I don't know if it is psychological but customers' take of incumbents' offerings is higher than the new entrants."

The new players are also more reluctant than incumbents to embrace operations support systems (OSS) automation software, claims Telcordia, which provides service provisioning and activation OSS support. "The cost of doing DSL has been higher than anticipated," says Sesko.

"Money is still there for enterprises that look like succeeding," said Keith Willetts, chairman of the Telemanagement Forum, the New Jersey-based body representing over 360 service providers, equipment vendors and integrators. But, said Willetts, new entrant DSL service providers need to get closer to incumbents' OSS.

"[Our OSS system] was a very important aspect of our business," said Covad's McMinn. "We fundamentally built [it] ourselves."

But despite the defense case, analysts say DSL faces further competition from alternative broadband technology such as cable modems.

"The cable modem industry is attacking DSL real hard," said Telcordia's Sesko. "You never heard that two years ago.

COPYRIGHT 2001 EMAP Media Ltd.
COPYRIGHT 2001 Gale Group