DSL firms look to ride services wave

Rhythms NetConnections, a digital subscriber line (DSL) provider, yesterday joined the ASP Industry Consortium, marking the first step in the company's plan to offer network services to a new batch of so-called application service provider (ASP) companies that host and manage software for business customers.

The move, coupled with similar overtures by Covad Communications and NorthPoint Communications, is the latest indication that the DSL providers, which still are scrambling to deploy their high-speed lines in cities across the nation, already are looking for new sources of revenue.

"There's only so much money these companies can make from selling the pipes. The real opportunity comes from what you can do with that pipeline," said Laurie Falconer, a DSL analyst at consulting firm TeleChoice. "Ultimately, if they can provide additional services it really increases their revenue."

The growing ASP market, which generally aims to provide information technology (IT) department functions for small and mid-sized companies that can't afford their own IT staff, will prove to be fertile ground, DSL company executives said.

Although the ASP market is still shaking out with players such as Corio, FutureLink and USinternetworking, it is understood that the space will be extremely lucrative. Market research firm Dataquest recently predicted the worldwide ASP service industry will be worth $22.7 billion in 2003.

"At some point these [DSL] guys have to start making money. They can only float along so long on good IPOs. They have to turn a profit if they're going to have long-term sustainability," Falconer said. "They're new companies…so they have to be forward-thinking. They can't afford to sit on their laurels because they don't have a lot of customers to fall back on."

Other industry analysts agree that DSL companies will need to offer new services to survive, and that entering the ASP market is only one such example.

"They're going to need to look for new services," said Amy Harris, a broadband industry analyst at International Data Corp. "The one thing the [local phone companies] do have is a large subscriber base and a wide variety of services, whereas Covad, NorthPoint, Rhythms don't have that big subscriber base. So, they're going to need to expand."

Although Rhythms has only joined the ASP Industry Consortium as an associate member, the company is in talks with several other firms about possible partnerships to serve ASPs, according to Rob Harris, director for business development at Rhythms.

The company hopes the onslaught of ASP start-ups will turn to Rhythms to outsource their network management needs, he said. ASPs typically host software on servers in data centers and deliver those applications to customers over high-speed networks.

"We're working on partnerships on the network infrastructure side and ASP business relationships because we want to provide enabling technologies for ASPs," Harris said. "We have some relationships that are imminent that will build on that."

Some industry executives privately expressed criticisms of the ASP market aspirations of the high-speed access providers, saying they should focus on deploying service as widely as possible before branching out into new services. Although DSL and other broadband technologies have gained in popularity in 1999, its nationwide availability remains limited.

"You need to focus on your core competency in this space or someone will eat you for lunch," said one ASP industry executive. "Rhythms needs to focus on DSL local connectivity and master it. They need more density in their footprint."

But analysts and DSL executives say they will continue to look for new revenue opportunities, and what better way than to ride the cresting ASP wave?

"It is something the company is committed to doing. The business case will determine to what extent," Rhythms' Harris said.

Covad is negotiating with Aristasoft and Certive, an ASP started by Covad founder Chuck McMinn, to get a foothold in the application service provider market, executives said.

"Do we have designs and interests in the ASP space? Absolutely," said Rich Wong, vice president of marketing at Covad. "The market is still incredibly immature so, frankly, we're still at the stage of figuring out how these relationships should work."

Covad believes that via alliances it can sell more DSL to ASPs, those ASPs can market their services to existing Covad customers, and, like Rhythms plans to do, the company potentially could offer network management services to ASPs.

"We view this [emerging ASP market] as an opportunity to expand the channels in which to sell DSL," Wong said. "We're just trying to figure out what is the right strategy."

NorthPoint joined the ASP Industry Consortium earlier this year but primarily is monitoring the market for now, according to a spokeswoman.