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Free DSL hits stumbling blocks on way to market

Some of the start-ups that jumped on the free broadband bandwagon are still struggling to get their programs off the ground.

It's been six months since an ambitious California start-up sent waves through the market by promising consumers around the United States free high-speed Internet connections. Now many people are asking where this promised service has gone.

The service has been turned on in only a few markets. Many major cities scheduled to be on the first wave of the launch are a month or more behind schedule. Some of the start-ups that jumped on the free broadband bandwagon are still struggling to get their programs off the ground.

"They're not getting preferential treatment from any broadband providers," said Dylan Brooks, an analyst with Jupiter Communications. "They're getting the same headaches everyone else is."

These headaches turn out to be some of the same problems consumers face: It has been hard to get access to the connections, and once they're in place, they don't always work.

"We're having more technical problems than we thought," said Bruce Stuart, president of Staruni, a small Southern California ISP that had hoped to offer the service by mid-April. "What sounds so easy is really not."

The free DSL experiment began in earnest shortly after New Year's, when a company then called FreeDSL.com announced it would offer ad-supported broadband service in April. The announcement came as something of a surprise in a market where telephone and cable companies were having trouble keeping up with demand, even while charging $30 to $60 for comparable services.

Companies such as FreeDSL were looking at the success of the free dial-up services, which only recently had begun moving into the mainstream as Yahoo, Excite@Home and other portal and consumer brands adopted the model. These ad-supported dial-up companies had yet to prove they could turn a profit, but they were luring subscribers by the millions--and that was an attractive notion.

A few other start-ups followed FreeDSL--later renamed Winfire--with their own promises of free high-speed service. Analysts remained skeptical, saying that DSL was still too expensive to be supported wholly through advertising and noting that telephone companies couldn't even keep up with their own demand, much less an avalanche set off by lower price points.

That didn't dissuade the broadband start-ups. But they've since found that many of the hurdles are higher than they expected.

Winfire, which has successfully turned on connections for about 1,200 people in six cities in the southeast United States, says it was forced to create from scratch a back-end software system that would talk to the telephone companies' ordering and provisioning networks.

That eased the ability to order the DSL lines, says Ryan Steelberg, Winfire's chief executive. But in some regions--particularly the California markets where Pacific Bell has heavily marketed its own service--the telephone companies have said they simply don't have enough space in their offices. That means few or no lines for now, although the company still says it will have 15 markets turned on by Sept. 1.

"Some markets are faster than others. Some are slower," Steelberg said. "We're about a month behind across the board, except in BellSouth and Southwestern Bell territory."

Staruni has had even more crippling problems. The company has tried to order its lines through Covad, Stuart says. But for months now, the company has been unable to get any of five test lines to function well.

"We thought this would be up by April 15," Stuart says. "You hear these ads on the radio, and it sounds so easy. But when you get into it, it's not."

Because these companies have not yet turned on service for a large number of customers, they haven't been able to test what skeptics say are fragile business plans at best.

Steelberg says he's been pleasantly surprised at the customer response to his various offerings, however. A majority of customers who have signed up for the service are actually paying $20 or $35 in order to have faster connections without advertisements.

That's helped keep investors happy even in this climate, he says. The company recently closed a $17 million financing round and will be finishing another $50 million to $75 million round in another two to three weeks, he said.

Nevertheless, most other free ISPs that have looked at offering free DSL are demurring for now, saying it is simply too expensive.

"The economics are there, assuming you're willing to look years ahead," said Charles Katz, CEO of 1stUp.com, the free dial-up wholesaler that serves AltaVista and Excite@Home. "They're there if you're willing to sustain tremendous losses in the short and medium term."