Phone companies face critical months for DSL

Weakness in the broadband Internet market has given big local phone companies an opportunity to jump-start their high-speed Net businesses over the next few months--but only if they can fix enduring service complaints.

With rivals collapsing around them or distracted by mergers and other pressing corporate issues, the big local phone companies have been handed a window of time when they can focus on their high-speed Net subscriber businesses with less competitive pressure from rivals.

This easing of the competitive landscape comes at a critical time for the phone companies. Looming over the consumer broadband market is the shadow of powerful America Online, which plans to use its pending merger with Time Warner to push heavily into the high-speed cable modem arena, probably later this year.

But if the local phone companies want to avoid a repeat of their also-ran status in the dial-up Net access world, they need to use the breathing room afforded by the market downturns to improve their own services, analysts say. Their DSL offers still suffer from persistent complaints about long waits for installation and poor customer service once service is installed.

"Customers will not be choosing cable vs. DSL," said Mike Guertin, a research analyst with broadband consulting house TeleChoice. "It will be the best installation experience that wins out."

Unearned opportunity?
The local phone companies' temporarily strong market position is attributable at least as much to accident as to the completion of successful corporate strategies.

For the past several years, the big local phone companies have trailed cable modem service providers such as Excite@Home and Road Runner that approached the consumer market earlier and have consistently maintained a tighter consumer focus. Nipping at their heels have been independent digital subscriber line (DSL) providers like Covad Communications, NorthPoint Communications and Rhythms NetConnections that offered their own high-speed services to businesses and some consumers.

But each of those rivals is now struggling for different reasons.

The independent high-speed companies are foundering in Wall Street's hostile waters, struggling to find enough capital to fund skeleton operations. Many smaller ISPs are going out of business, finding themselves unable to pay for the DSL connections they resold for Covad or NorthPoint. That's forced layoffs and reductions of marketing and customer acquisitions expenditures for many of those companies still in business.

On the cable side, corporate distractions threaten to pull the leaders' attention away from aggressive subscriber fights over the next few months. Excite@Home has been crippled by anemic share prices over the past few months, and is now heading into a custody battle between its three major cable company shareholders. Road Runner, the other major cable modem service, is largely being subsumed under Time Warner's cable service.

DSL dignitaries Baby Bell local phone companies led the way among providers of high-speed DSL at the end of the 2000 third quarter. Regional Bell operating companies appear in red. Provider Subscribers SBC Communications 516,000 Verizon Communications 350,000 Qwest Communications 213,000 Covad Communications 205,000 BellSouth 134,000 NorthPoint Communications 87,300 Rhythms NetConnections 47,000 Broadwing 35,000 Source: Jupiter Research

This doesn't mean cable modem service is being put on hold. For the most part, it is the cable companies themselves, such as AT&T or Cox Communications, that market the Net service. They are on track with their estimates, and analysts say they're likely to continue that way through the next year.

"I don't think that (the phone companies) will overtake cable in the residential space in the next five years," said Michael Harris, president of Kinetic Strategies, a broadband market research firm. The addition of AOL's marketing clout is likely to boost cable beginning in 2002, he added.

According to Jupiter Research, cable subscribers still considerably outnumbered DSL by the end of the third quarter of 2000, the last quarter for which figures are available. About 2.9 million subscribers had cable modem service, compared with about 1.5 million DSL lines in service, only 936,000 of which were residential lines.

Nevertheless, the relative lack of financial and corporate distractions has the potential to serve the Bells well over the next few months, many analysts say.

"It's clear that it's the Bells that will be dominating this space," said Jupiter Research analyst Zia Daniell Wigder.

Clouded reputations
The window is one only of opportunity, not of guaranteed success, however.

The Bell companies' history in the Internet market has been punctuated by horror stories from consumers reporting waits of two, four, or even more months for installation, along with labyrinthine customer service, intermittent connections and billing nightmares.

Many of these are the byproducts of a technology that simply isn't mature. The companies are learning about problems as they arise and are still training staff to install and support the evolving services. They say they've fixed many of their problems in the past half-year, and many analysts say their record has improved.

Nevertheless, complaints continue to pour in from consumers. San Jose, Calif., technology worker Mark Hull tells of being on hold for almost a full six months before giving up on the service, a story he says has turned him off Pacific Bell forever.

After ordering DSL service in July as part of the company's Compaq Computer promotion, he went through several months of restarted and lost orders before being approved. Technicians told him that his telephone line would support the service, but after getting the computer, he found it didn't work. He spent several additional months dealing with successive customer service and technical representatives before the company canceled his order again in December.

"This was deplorable," said Hull, who has started an Internet mailing list dedicated to Pacific Bell's problems. "I now have zero faith in their ability to maintain the service."

The Bells have also struggled to reach their own subscriber goals in recent quarters. SBC Communications fell short of its midyear DSL goals and was far from year-end 2000 goals of 1 million subscribers by the end of the third quarter.

Newer services like Sprint and WorldCom's fixed wireless broadband have already begun to eat into the DSL subscriber base. Although no final date has been set for AOL's move into the cable modem marketplace, it will radically change the broadband market dynamics when it appears, analysts say.

"I wouldn't call this the last opportunity for the Bells to stake out their mark," Guertin said. "But this is the time that the Bells really need to get all of their technical and all of their installation issues together."