DDR Status Report 2460

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See AT&T. See Baby Bells. A few years back, they have this wonderful (for them) thing called ISDN. They get to charge by
the minute, and makes lots and lots of money from a few business people. Much money, little hassle. The phone companies like this way of doing business.

Here comes DSL. Phone companies have to do something to provide a broadband solution, or they lose out on what is effectively the new telephone. Compared to ISDN, DSL means more change, more hassle, more installation and maintenance costs, less revenue per person.

Even worse, phone companies get told by the government that they have to allow competition in this DSL market. Competition to the phone company is a very, very, very, VERY bad word. Imagine being forced to perform an unnatural act at gunpoint, and you have an inkling of how well phone companies like competition in areas they think belong to them.

So you had what were referred to as CLECs (Competitive Local Exchange Carriers) entering the business. Essentially, the phone company had to do most of the heavy real-world lifting (i.e., hook up and take care of the phone lines), and the CLECs made money handling some of the electronic networking and market the product. It seems that most phone companies apparently viewed these CLECs as being fleas living off them, and have done everything at least arguably within the limits of the law to make them go away.

Periodically, I take a look at the DSL newsgroup on Usenet, which is called comp.dcom.xdsl . What I’ve read about DSL there in my neck of the woods (New York City, OK, the trees are made from steel and concrete) has kept me to a 56K modem waiting for cable modem. To say that the phone companies on the whole have dragged their feet and made life difficult for many of those using the CLECs is an understatement. I can’t definitively say it’s been deliberate or just inertia-laden bumbling (which may well be the case given the level of service given their own customers), but deliberate or not, the phone companies haven’t been doing the CLECs any favors.

On the other end of the line, the ISPs that use CLECs (and Northpoint dealt primarily with ISPs, not CELCs) had the very bad habit of driving incredibly hard bargains, then taking their time paying the bills, or not paying them at all. So you end up
revenue statements that don’t even come close to even covering the costs of running the network, never mind other expenses.

The CLECs themselves didn’t do themselves any favors by acting like telecommunications dot.coms. Their stock price flourished; they spent all kinds of money getting big first and worrying about profits later. In the case of Northpoint, they were actually in merger negotiations with Verizon (what used to be a couple of the Baby Bells). When the tech crunch came, Verizon backed off, and Northpoint could no longer get their hands on easy money. It filed for bankruptcy late January and sought someone to take it over. Negotiations were going on with a number of parties. AT&T finally agreed to buy Northpoint’s assets a couple days ago, but not take over the customer base. The customer base offered a little bit of money to keep Northpoint going during the transition. Northpoint wanted a lot more. Northpoint was closer to reality than the ISPs. The ISPs thumbed their noses, and Northpoint called their bluff and suddenly began pulling the plug late Thursday, and throughout Friday.

Everybody’s screaming and pointing fingers at each other, but after looking at some financial statements, I’d have to put more blame on the ISPs than the others for this outage. The amount of money the ISPs offered to give them time to find other connections, but the amount offered looks like a joke compared Northpoint’s operating expenses. Buying the customer base usually means buying the terms under which customers contracted for services, and I can see why AT&T wouldn’t want to take that on. Remember, to AT&T, you, the DSL user, aren’t the customer. The ISPs are, and it doesn’t matter to AT&T if you pay your bill on time, they only get paid when the ISP pays, and Northport’s ISP customers aren’t too good at that.

Either I’m being fair to the ISPs, or not, but if I’m not, the reason is pretty ominous for end users. It could well be at least in some cases that the ISPs are losing money, too, and it’s been a matter of pay the ISP bill or stay in business. If that’s the case, then you’ll have to expect either prices to go up, or a bunch of ISPs going down the tubes in the near future. There’s been a few DSL providers out there who have told their customers, “We don’t make enough money from you. Either pay more, or you get whatever’s left over after we take care of our profitable customers. We want you to leave.”

Don’t be too surprised if you see a similiar message one of these days.

And laying in the background are the phone companies, waiting to pick up the pieces and impose their own terms.

What Does This Mean In the Future?

If this were just a matter of a stupid/foolish company going bankrupt, that’s one thing.

However, if you look at the alternative CLECs, none of them are in very good shape; they all suffer from essentially the same problems as Northpoint. The question is not “Will any others go down?” it’s “Will any of them stay up?”

I think it’s fair to say that from a financial level, DSL at current price points is probably not a particulaly profitable deal for the phone companies. There are significant installation and infrastructure costs. The installation costs can be reduced using technologies like G-Lite, the infrastructure costs look solid. It ties up a ton of bandwidth at a low price. Perhaps most importantly, it doesn’t get economy of scale, because outside of a few areas, not many people in most areas use it compared to the number of people using phones.

Sure, you can talk about the inefficiencies of the phone company, and they have every incentive to make DSL look as
expensive as possible when they go to rate boards, but I would bet the situation on your block is closer to you being the only person on your block with DSL as opposed to every single house on your block having it. I suspect the phone companies would do fine at $40 a month if everybody had it and they didn’t need to make installation trips. I’m sure they do fine in business areas where everyone is at least a potential customer, and will pay more for reliable service.

I don’t think most do so fine financially when 2% of phone users in residential areas have it, and they have to make a couple trips to get it working.

If they raised their prices, though, cable modem folks grab the business. Due to the peculiarities of the two industries, the cable modem folks do financiallly better when there’s relatively little use, and worse when there is. Get five kids running Quake servers on your block, and you find this out very quickly. If you run a business and need a fast connection, you can’t be held hostage by kids coming home from school or being on vacation, which is effectively what you get with cable-modem with a home business. What are you going to do, start a “Little Johnny DOESN’T need a home computer” campaign in your neighborhood?

That leaves you stuck with DSL, and the road’s going to be rocky for the next year or two. Expect more Northports, expect higher prices.

Email Ed


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