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US West works on national DSL strategy

With its Global Crossing deal, the Baby Bell says it can change from a stodgy telco into a technology firm on the cutting edge of DSL and other technology.

US West has start-up envy.

The sprawling local phone firm says it can use its pending merger with Global Crossing to transform itself from a stodgy Baby Bell into a technology company on the cutting edge of communications. Its first move, the company said, will be to head a national rollout of high-speed digital subscriber line (DSL) Internet access.

"We believe we could be in the market in 6 months or less with a superior offering to those companies who are already in place," said Joe Zell, president of the company's Enterprise network division and advanced service offerings, in a News.com interview.

Company executives have been frustrated at seeing industry newcomers like Northpoint Communications and Rhythms NetConnections soar on Wall Street, albeit with risky investment strategies and negative returns, while their own stock and investment campaigns have remained relatively flat.

US West claims it has the ability to act as quickly as its smaller competitors--if only its stockholders would allow it. But like with other Baby Bells, US West's shareholders have demanded stable, consistent growth, and have frowned on riskier investment strategies, executives say.

With 35,000 DSL subscribers, the company has been ahead of the curve in rolling out high-speed Internet services, Zell noted, although SBC Communications and Bell Atlantic are now beginning to catch up.

The company also has been investing in trials of other experimental services such as VDSL, which can bring cable TV-like service over phone lines, as well as high-speed wireless data and mobile Internet services.

But with the exception of the DSL rollouts, the company's advanced service projects have been stuck in trial markets. By merging with Global Crossing and creating a new tracking stock dedicated to these riskier investments, the company will finally be able to realize its ambitions with data and video, Zell said.

"One of the reasons we need to do a tracking stock is because investors want us to stick to our knitting instead of going into this new $4 billion [video] market," Zell said. "What we're really doing is unlocking the ability for us to go and do this as if we were a start-up."

The first sign of this new US West could be a joint venture with Frontier to roll out DSL Internet access to big markets around the country. Zell said that this could be structured so that it wouldn't violate any regulatory barriers, and could take advantage of Frontier's backbone and Web hosting centers.

The executive stopped short of saying the company definitely planned this tack, but said it would be "illogical" not to do this as soon as US West and Frontier sat down to work out the details. "For us this would be nothing other than a geographic expansion," he said.

A deal questioned
Many analysts and investors have been skeptical of the US West-Global Crossing deal, saying that their prospects aren't as compelling as mergers between AT&T and cable companies, or the other corporate marriages between big local phone companies.

But the expansion of US West's data business along more entrepreneurial lines, despite the reticence of the company's traditional stockholders, makes good sense, some say.

"It's not only feasible, but smart," said Jeffery Kagen, an independent telecommunications analyst based in Atlanta.

"There is a first-mover advantage in the escalating battle between DSL and cable modems," Kagen added. "If a joint venture would allow them to capture more market share more quickly, then it's a smart move."

The tracking stock would also give US West the "air cover" needed to roll out VDSL video services across its 14-state area more quickly, and even into Frontier's service areas after the completion of the merger, he added.

The company is as committed to retaining control of its high-speed Net brand as it is to expanding its services, Zell added.

Bell Atlantic and SBC Communications have signed agreements with America Online to let the online service offer its content directly over their DSL lines, essentially giving up the front doors of their service to AOL.

US West is reticent to give up that control, however.

"We're not actively in discussions with AOL," Zell said. At this point, the company prefers the cable TV model, in which customers access the Web through its US West.net service, and then get AOL service on top of that, he said.

"Our business model is not to be just the dumb pipes for other providers," he said.

US West was trading at 53 at midday Friday, down nearly ten points since the word of its pending merger broke a week ago.