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FCC ruling could reshape DSL landscape

A federal decision scheduled this week could determine the future direction of the high-speed Net market, and could lower prices for broadband Net access.

A federal decision scheduled this week could determine the future direction of the high-speed Net market and could ultimately lower prices for consumer broadband Internet access.

The long-awaited ruling will likely make it easier for firms to compete in the consumer high-speed Internet market, a business now dominated by the big telephone and cable companies. That's good news for companies like NorthPoint Communications, Covad Communications and Rhythms Communications, which are itching to stake a larger claim in the market for Internet services.

See related newsmaker: William Kennard The decision also could be a boon for high-speed Net subscribers, who are clamoring for better, less expensive services. About 275,000 homes now subscribe to high-speed digital subscriber line (DSL) service, but analysts expect this number to grow to more than 5 million by the end of 2001.

At stake is whether competing phone firms can share a single phone line with local providers to offer DSL service. Currently, companies like Covad and NorthPoint must lease a separate phone line from local firms to offer their own high-speed service. The firms argue that this policy raises their costs, preventing them from offering competitive prices for DSL.

In March, the Federal Communications Commission tentatively agreed that competitors should be able to share a single line with the local firms to offer broadband service. This Thursday, commissioners are expected to set that opinion in regulatory stone.

The decision comes at a time when the market for high-speed Net services is truly heating up. Recently, local phone firms like SBC Communications and GTE have boosted investment in the technology while at the same time cut costs to entice new subscribers.

Picking lines
The battle over high-speed phone lines--which has pitted upstart phone firms against giants like SBC Communications and US West--is focused on the main phone line that connects most homes to phone networks at large.

The fight is similar to the ongoing struggle over high-speed cable networks. Internet service providers (ISPs) and telephone companies want to offer their Internet services to cable Internet customers, but can't yet get access to the cable lines.

Like the cable companies, the telephone companies have argued that allowing outsiders onto their wires may be technically impossible--or at least difficult and expensive.

"We're still not quite sure it's possible," said Matt Miller, a spokesman for SBC Communications. "Even if it is, we will have to develop new systems, and that will raise the costs."

Baby Bell companies use DSL technology to offer high-speed Net and voice services over a single telephone line. Under current rules, companies like Covad and NorthPoint have to lease another phone line to reach their customers.

"We've competed with one arm behind our back since we started. Now this [decision] will remove that handicap," NorthPoint's deputy general counsel Michael Olson said.

Companies like Covad and Rhythms haven't let current limitations in the consumer market hamper their overall business strategy, however. They, like other firms that offer high-speed DSL services, have focused on the lucrative business market. Firms have also offered some limited DSL services in conjunction with ISPs like MindSpring Enterprises.

Yet companies say they will be stuck in the business market until they can bring costs down to compete directly with the local phone firms, which currently offer DSL services for as low as $30 per month.

"We've built the airplane," said Dhruv Khanna, Covad's general counsel. "Now don't tell us we can only fill it with business-class passengers. We want the economies of the mass market."

Analysts point out that some of the DSL firms have deliberately focused on the business market because of the higher profit margins involved. Yet if the cost of serving the home market was lowered, analysts agree that it would open a whole new era of competition.

"There's some posturing here, but some [of the complaints] are undoubtedly real as well," said Jonathan Atkin, a telecommunications analyst with Ferris, Baker Watts. "This is pretty significant in terms of offering more competition."

Savings in fine print
Just how low prices for consumer DSL service could go depends on the terms of the federal decision.

Competitive phone firms say they should get access to local phone lines as close to free as possible--since the lines are already installed, allowing simple access won't cost the local phone firms a single penny.

The local companies disagree, however. They claim they would have to add an additional layer of operational systems to support the new sharing agreement, and want the competing firms to pay for this.

"That is going to cost a whole lot of money that I don't need to spend to use [the lines] myself," said Joe Zell, president of US West's data division. "If there's not some way to recover those costs, you will see us go to court."

But as long as the phone companies and competing firms face the same costs, it ultimately doesn't matter what the final price is, NorthPoint's Olsen said.

"The key here for us is that we have to have parity," he said. "If it's $5, $4, $7, we can compete if they're charged the same."

The ruling, if favorable for the competing firms, could also carry a silver lining for the big local companies. Once firms like US West and SBC expand outside their home territories, they'll be in a similar position as competing firms in new markets--and will be able to use a favorable ruling to their advantage.

"We're not happy about the whole deal," Zell said. "But if we have to make the best of it, we'll go do it out of region ourselves."