Telcos bet on DSL for new high-tech image

As long as they've had a monopoly on local phone service, this hasn't been a problem for firms like Bell Atlantic, Pacific Bell, and US West, often seen as the dinosaurs of telecommunications. But now that they trail cable companies in the lucrative consumer high-speed Internet business, it's become a liability.

To address the problem, the so-called Baby Bells are readying multimillion-dollar media blitzes, scheduled to hit later this summer or early fall, advertising their high-speed Internet services and--they hope--reworking their image with consumers as high-tech gateways to the Net.

"We believe we are a technology company. We have billions of dollars invested in technology in our networks," said Steve Dimmet, vice president of marketing for Pacific Bell. "But for years we've made sure our technology is invisible to customers."

But the Bells have a long way to go before climbing to the top of the high-speed Net market. Cable companies' high-speed Internet services have been spun off in deliberately consumer-friendly, America Online-like companies like Excite@Home and Road Runner.

For the last year, the big local phone companies have continually trumpeted their achievements in rolling out digital subscriber line (DSL), a technology that allows existing telephone lines to be used simultaneously for telephone and high-speed Internet traffic. Even with low levels of marketing, the companies have had difficulty keeping up with demand for the service.

Subscribers' experiences with the services have been mixed. As more customers come on line, complaints about spotty service and recurring outages have become common. Both Bell Atlantic and Pacific Bell's Internet service providers have suffered several outages in the last few weeks that have knocked DSL customers offline.

Nevertheless, the telephone companies are quickly turning their offerings into a centerpiece of their consumer portfolio.

"Don't think about us as a phone company anymore," said Mike Rouleau, vice president of marketing for US West's high-speed Net division. "Think of us as an on-ramp to the Internet."

US West, in particular, has had early success in this game. The company's proposed merger with Qwest Communications--after a bidding war that also featured Global Crossing--had both suitors swearing that the Bell company's DSL expertise was one of the key reasons for their interest.

Trend setters or farm animals?
Many of the industry's most prominent observers, including Federal Communications Commission chairman William Kennard, say the Bells have adopted their new stance only reluctantly, after feeling the competitive pressure of the cable companies' new high-speed Net services.

"Baby Bells behave in many ways like farmyard animals," said Boyd Peterson, a telecommunications analyst with the Yankee Group. "As long as there's a big patch of grass for them to graze on, they'll stay put, even if there's another big pile of grass just the other side of the fence. It's only fear that will get them to move."

This "farm animal" mentality has put the Bells well behind the curve in high-speed Net rollouts, analysts note. Cable modem services have more than 1 million subscribers, according to a study released today by Kinetic Strategies. DSL, by contrast, had fewer than 100,000 lines in service at the end of the first quarter of 1999, according to DSL research firm TeleChoice, though DSL has had more success in the business climate.

But some Wall Street analysts say the Bells' makeover has, in fact, been in progress for some time.

"The truth is that they have pretty much had their finger on the pulse of data growth all along, because they were the ones that were handling the changing traffic patterns," said Michael Balhoff, a telecommunications analyst with Legg Mason. "I have no question that the substance [behind their claims] is there."

But the companies still aren't so sure Wall Street understands. They have watched much smaller rivals like Covad or Northpoint explode in the stock market while their own stocks remained stable but slow-moving. Some Bell executives have even complained that a conservative shareholder base has made it difficult for them to roll out advanced Net services quickly.

US West executives said early in their merger process that this was one of the reasons for seeking out a fast-moving market newcomer as a partner.

"There are those times when our achievements have been lost in the noise," Rouleau said.

Trust us, not those other guys
Meanwhile, the telcos have yet to prove they can catch the lead of cable company affiliates like Excite@Home. And some analysts say they may be starting with a handicap in the mainstream market, by continuting to market their technology as DSL, a confusing acronym for most.

Some analysts say this could be a problem, in much the same way that integrated services digital network technology, or ISDN--the telephone companies' first high-speed Internet offering--never really caught on with consumers.

Pacific Bell's Dimmit said this shouldn't be a concern.

"There is a precedent," he said. "It is possible that DSL will be like VCR or VHS. People don't necessarily know what those stand for, but they are comfortable with the technology."

Most of the big Baby Bells have already launched or are preparing to launch major advertising campaigns around their high-speed Internet service. Bell Atlantic has used direct mail, newspaper ads, and plastered subway billboards with advertisements for their Infospeed service. That company, Pacific Bell, and US West all are in the final stages of preparing television ad campaigns for the service, tentatively scheduled for a late summer or early fall release.

This alone signals a fairly substantial change in Bell policy, Peterson noted. The ad campaigns are launching well before the DSL service is universally available, a sharp break with traditional Bell company practice.

"It used to be that 90 percent of central offices had a feature before you would see the first advertisement," Peterson said. "That's certainly not the case with DSL."

But even with their reputation as slow-moving giants, the big local telephone companies do have an edge on the cable companies, their main competitors.

In a recent Yankee Group survey, the research firm asked consumers if they'd rather get their high-speed Internet access from the cable company or the local phone company. In that sample, more than 36 percent said they'd choose the telephone company's DSL, and only 8 percent said they would choose their cable company's service.

That's a big confidence gap for the cable companies to make up, even with their head start. Nevertheless, a full 48 percent said they didn't know or didn't have an opinion, leaving plenty of room for cable companies to keep their current lead in the market.