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Commentary: DSL market missed first, crucial step

Why will competition in the DSL market diminish--causing prices to rise--and what other effects will the lack of competition have?

    By John Girard, Gartner Analyst

    The retrenchment of leading providers means the DSL market has entered a new, less exuberant phase.

    See news story:
    High-speed rate hikes may be on the horizon
    Covad Communications and Rhythms NetConnections both announced recently that they were discontinuing DSL (digital subscriber line) service in some areas in the United States. The abruptness with which these decisions were made--in some cases, consumers and small- to midsize businesses had just weeks to find new providers--indicate the severity of the financial pressures that pioneering DSL providers face. Gartner believes that more providers are likely to follow. Competition in the DSL market will likely diminish, and as coverage decreases, prices will likely increase.

    Why did this happen, and what will be the consequences? To begin with, DSL is a bit harder to make a profit on than cable modems, the most feasible alternative broadband technology. DSL providers had to install more equipment and juggle more immature products and standards for each subscriber. If incumbent local-exchange carriers (ILECs) and competitive local-exchange carriers (CLECs) had cooperated more, they could have helped each other accelerate DSL subscriptions. As users hooked into DSL and liked it, they would have become fair game for future competition between all LECs.

    Gartner analysts and clients have observed, however, that ILECs and CLECs have conducted a quiet war of noncooperation. Although federal law mandates that ILECs must lease lines to CLECs, it does not mandate that they must be helpful. As a result, users can experience delays of months to get basic DSL service established. Underlying these delays are costly schedule delays within the LECs, and labor-intensive multivendor meetings to connect and configure equipment at company service boundaries or "demarcation points."

    DSL service requires complex infrastructure and systems to ensure smooth operations (for service start-ups, repairs and billing, for example). Without fully tackling the underlying issues, providers had their attention diverted and lost some of their momentum. As difficulties mounted in the CLECs, turnover of support and installation staffs increased, thereby creating skill shortages.

    Thus, as the retrenchments show, the DSL market missed the crucial first step. What will happen now?

    The obvious candidates to give DSL back its momentum are the ILECs, which retain ownership of the local loop and which will not be punished for their part in stalling the CLECs. However, Gartner believes that the ILECs will not easily return the DSL market back to the boom growth of its early years. ILECs enjoy strong revenue growth from traditional voice services, and low-cost DSL--particularly as competition to revenue-rich legacy data services such as T1--is not their top priority. Lacking competition and facing many of the same cost hurdles as CLECs, ILECs will likely be content to raise DSL prices to maximize profit.

    Enterprises that purchased DSL for use in small and home offices will still get value for their investment because these users are predisposed to pay for a better class of service, which still costs less than T1 or leased lines. But in general, the consumer market will have less reason to adopt DSL quickly. Most consumers will find it easier to deal with their cable company or just to keep using their dial-up modems a little longer.

    One last thought: ILECs and CLECs should consider well that, while they squabble over details, users who sign up for cable modem service are lost to them as customers.

    (For related commentary on using DSL to help make virtual employees a reality, see TechRepublic.com--free registration required.)

    Entire contents, Copyright ? 2001 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.