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Ma Bell hatching new Net strategy

Just a few years after AT&T spent more than $110 billion on cable networks, the company is placing bets on a different technology to offer consumers phone and Net service: DSL.

Just a few years after AT&T spent more than $110 billion on cable networks, the company is placing bets on a different technology to offer consumers phone and Net service.

Even as the future of Ma Bell's cable network falls into uncertainty, the company's core consumer long-distance business is turning to competing DSL (digital subscriber line) technology to ensure it will still have a direct connection to consumers.

In size and scope, this new effort pales in comparison to AT&T's costly cable plans. But the communications giant's new strategy appears to once again set up Ma Bell to compete with the local phone companies--and this time its own cable division--in offering a bundle of local phone, long-distance and high-speed Net service.

The DSL push also points to the type of philosophical clashes AT&T is likely to face as the company continues its self-imposed four-part breakup, analysts say.

At the core of the DSL strategy is AT&T's $135 million purchase of the assets of bankrupt NorthPoint Communications, a network previously used largely for Internet access. But analysts say AT&T's real focus remains on using the technology to boost its ordinary phone service.

"For pennies on the dollar, AT&T bought the option to offer local voice over DSL," said Jeff Halpern, an analyst at brokerage house Bernstein & Co. "People are up in arms about the consumer business competing with the broadband unit (for Internet customers), but that's not the issue."

Nevertheless, the budding strategy is one of the clearest signs yet of the conflict for markets, resources and customers that is likely to emerge as AT&T divides its business into four units. The broadband and cable division remains committed to its own hugely expensive bet on a new way to offer phone and Net service.

The already heated competition between cable and DSL technologies will be intensified as the two sides of what were formerly the same company find themselves going head-to-head.

AT&T declined to comment for this story, citing federal "quiet period" restrictions related to upcoming securities filings.

A new voice for DSL
AT&T's decision, if it does wind up throwing its marketing weight and pocketbook behind the technology, will mark the beginning of a second age for DSL.

The company is unlikely to stake out an early lead in terms of subscribers. That role has gone to the big local phone companies, which control about 80 percent of the DSL market, according to consulting firm TeleChoice. AT&T itself is starting from scratch, after deciding to leave behind NorthPoint's roughly 100,000 subscribers.

But Ma Bell's consumer division is looking at the technology in a different way than have most previous competitors, focusing at least as heavily on finding a way to offer local phone service on a network it controls as on building a high-speed Internet business.

Voice-over-DSL, like other advanced high-speed Internet applications, has been slow to take off despite several years of hype. Equipment companies that produce voice-over-DSL hardware have seen their wares tested in a long list of carrier networks, but most alternative local phone companies likely to offer such services haven't had the financial resources to dedicate to ambitious new projects in the past year.

Sources inside AT&T say the company is using a technology called "derived voice"; it uses part of the DSL technology to create the equivalent of a regular phone line, which can be sent over a circuit-switched network such as AT&T's. Analysts say that much of the equipment already installed by NorthPoint can be used to this end.

The NorthPoint network will give AT&T an enviable national reach. Court records of NorthPoint's final days in bankruptcy proceedings detail a list of what the company actually sold to AT&T, including software, hardware and agreements to offer services in about 1,900 phone company offices around the country.

By contrast, SBC Communications, which has the most DSL customers of any company in the United States, had 1,300 central offices providing the service by the end of the first quarter of 2000, the last point for which figures are available.

But some analysts are still skeptical of AT&T's ability to deliver on a promise that has driven entrepreneurial companies like NorthPoint into the ground. The DSL business is expensive, and only the big local phone companies have made a profit on a large scale.

"I don't think it was such a good move on AT&T's part, to be honest," said Drake Johnstone, an analyst with Davenport & Co. "No one to date has done it properly, and there's little reason to believe they'll be the first to do it right."

AT&T has not said that it plans the kind of rapid expansion attempted by NorthPoint and other first-generation DSL companies, however. It has limited itself to saying that there will be trials and some commercial offerings of the DSL service this year, but it has not said it will relaunch service across NorthPoint's territory.

The consumer services division of AT&T will also be working under financial constraints that may dampen the speed at which it brings the DSL service to market. It's working hard to bring the costs of its ordinary long-distance business under control and can't afford massive expenditures on a service that will stay in the red for some time.

Some analysts noted that AT&T will have advantages that NorthPoint and other start-ups never shared, however.

"It is AT&T. There is still some strength in that brand," said Adam Guglielmo, an analyst with TeleChoice. "They've got ties to Microsoft and ties to other big companies that might help with content."

The plans haven't drawn much protest from the big local phone companies, which are sparing their barbs for AT&T's cable operations.

"AT&T is in the situation, at least for now, where it gets to enjoy the benefits of the cable monopoly," said Selim Bingol, a spokesman for SBC Communications. "If they're going to get into DSL, then more power to them...DSL is a very competitive business."