DSL upstarts bank on content to boost business

The triumvirate of Covad Communications, Rhythms NetConnections and NorthPoint Communications--which offer high-speed digital subscriber line (DSL) connections--are in the early stages of signing and negotiating partnerships with content providers, technology companies and caching firms, allowing them to combine Internet content with their high-speed networks.

Rhythms signed a deal today to provide high-speed lines to Microsoft so the software giant can offer its own branded DSL service. At the same time, Rhythms will work with Microsoft to distribute streaming media and other entertainment content to broadband users.

Although executives admit their strategies for content are far from complete, they recognize the need to provide additional services for business and consumer users; if they don't, they will face dwindling profits as the cost of broadband services falls.

For the typical Internet user, the deals can only mean a better online experience for those with a high-speed Net connection.

"Content is pivotal to our strategy both in the consumer and business markets," said Dan Foster, vice president of consumer marketing at Rhythms. "We recognize that there is going to be some downward pricing pressure over time."

A recent federal ruling has the potential to help drive down DSL costs, beginning what many believe will be a trend toward cheaper broadband services. The resulting falling profits have led DSL companies to look for new sources of revenue.

For one, most of the DSL providers are testing voice-over-DSL offerings that will allow businesses and consumers to get multiple phone lines over a single DSL connection. The DSL companies also have considered branching out into the application service provider (ASP) market as a way to tap into new revenue sources by hosting software for companies. Their recent content push is only another example of the DSL companies departing from their core businesses, analysts said.

"If you sit around as Johnny-One-Note for long in this industry, the amount of time that you're going to be able to play a song is not long," Aberdeen Group industry analyst George Peabody said.

Said Telechoice industry analyst Laurie Falconer: "[These companies] have shifted, and it makes a lot of sense. The real exciting revenue opportunities are in what you do with the access--it's not just the access."

But some analysts are skeptical of the DSL companies' Web content push, saying traditional Internet service providers' attempts to combine content with Net access have left much to be desired.

"The history of effectively bundling content and access has not been a very successful one. The lone exception to someone who has succeeded has been AOL," Forrester Research analyst Chris Charron said. "The content and access businesses are very different…To do these things well you need to have focus."

Charron said AOL has been hugely successful, but only with the help of major marketing efforts. Covad and Rhythms recently announced $50 million advertising campaigns, but those efforts might not be enough to truly establish brand recognition for the communications upstarts.

Aberdeen's Peabody said depending on the branding agreements between Covad, NorthPoint, Rhythms and their respective content partners, pushing Net content could be one way to gain national recognition for the relatively obscure companies.

Still, others suggest content will only be a passing fad. "Narrowband ISPs like AT&T WorldNet, Netcom, EarthLink and MindSpring have provided content, but it's not an important part of their business model," Charron said. "Content may be an intermediary stage."

Rhythms' MSN alliance comes on the heels of the company's first foray into the consumer DSL market. Rhythms also sealed a deal with content caching firm Sandpiper Networks. Rhythms will install Sandpiper's caching technology in its central offices, allowing the company to store Net content closer to end users to speed the distribution of information on the Net.

Covad also is getting into the content game. "We're looking for ways to combine content providers with those of us that own the pipes," Covad marketing vice president Rich Wong said.

The company signed a deal with RealNetworks earlier this month to offer streaming audio and video for DSL connections. Meanwhile, executives say the company has held talks with companies such as Sandpiper and rival Akamai Technologies, and that Covad expects to make a string of content-related announcements in the coming months.

NorthPoint also has a handful of content-minded alliances. The company has partnerships with iBeam Broadcasting, a satellite-based content distribution company; Equinix, a data hosting center; and Broadcast.com, Yahoo's streaming media subsidiary. NorthPoint also is in negotiations with several content caching companies, according to executives.

"Over the next six weeks or so we'll be announcing a lot in the content realm," said Brian David, director of business development for NorthPoint.

For now they're scrambling to sign infrastructure deals that will attract content providers and content aggregators, who they hope will be attracted to networks optimized for so-called rich media content.

"We're not going to be the content provider, but we'll build a content-enabled network," Rhythms' Foster said.