The companies have agreed to conditions on their proposed merger that could help companies like Covad Communications, Rhythms NetConnections, and Northpoint Communications break into the residential DSL market, now dominated by the big local phone companies. The financial implications could be significant for these new-age DSL-based communications carriers.
DSL, or digital subscriber line, is a technology that can upgrade existing phone lines to provide simultaneous voice and Internet service. It is the main competitor to cable modems, but only has about 92,000 users, according to research firm TeleChoice.
Because the big phone companies already own their networks and can charge competitors to use their lines, they have been able to undercut their broadband rivals. Aspiring DSL newcomers have been unable to match their prices for monthly service--ranging between $40 to $50--leaving the consumer market largely to the phone companies.
But SBC Communications now has agreed to set up a separate company for its high-speed Internet business, and said it will treat this affiliated company the same way it treats competitors like Covad or Rhythms. This means that once its merger is approved, the small companies will--in theory--have for the first time about the same basic costs as their telephone company rivals.
"I think this will get us closer [to the consumer market] than anything we've got so far," said Jeff Blumenfeld, Rhythms' general counsel.
Ready and willing
Rhythms, Northpoint, and Covad all have built their business--and their high Wall Street valuations--on the basis of providing DSL service to small and medium-size firms.
But they all say they would enter the consumer market, either directly or by wholesaling their service to consumer-focused partners, if the costs for lines were level with what the telephone companies pay. Complicating matters is the fact that DSL competitors are required to buy an additional line for DSL service, while Pacific Bell offers its DSL service over the same wire as it carries its telephone service.
Northpoint, for example, says it pays about $21 per month per DSL line in California, making it impossible to compete effectively with Pacific Bell's cheap consumer DSL service.
As part of its merger agreement released today, however, SBC said it would charge its new DSL subsidiary and its competitors about the same price for lines. Ultimately, it will also allow competitors to share the first line into homes, according to the agreement.
If this agreement goes through and the merger is approved, analysts say, the leveling of costs could provide a stepping stone for DSL providers in SBC's territory to enter the consumer market.
"They're interested in going where their partners have customers," said Mark Langner, a financial analyst with J.P Morgan. All three of the biggest independent DSL providers have recently been striking new partnerships with consumer-focused companies such as MindSpring, Microsoft, and MCI WorldCom, he noted.
But there's still a catch, which could delay the real competition for many more months. According to SBC and the other Bell companies, line sharing--using one piece of the wire for SBC voice traffic, and the rest for Covad's data traffic, for example--isn't yet practical.
"Our position is that it is not technically feasible at this date," said Selim Bingol, an SBC spokesman. "The reality is that it's not simply a matter of hooking up a few different pieces of equipment."
The FCC is already looking at this issue, yet has tentatively agreed with the small DSL providers that line sharing is possible. But that proceeding does shed some light on why SBC may have been willing to agree to let competitors onto its lines.
The merger agreement to share lines kicks in only after DSL line sharing is deemed technically feasible. The FCC is the agency that would make this ruling, but doesn't plan on making a definitive ruling until the end of this year.
Once it makes this ruling, however, there is a good chance that all of the big local phone companies will have to open their lines to competitors anyway--making SBC's merger concessions worth considerably less.
This delay has angered some of the small DSL companies, which say they will push to open the lines immediately--while the FCC asks for comments on the merger agreement. That comment period will last until mid-July, with the FCC expecting to rule on the deal by the end of the month.
"These guys will go ahead and continue to perpetuate their monopoly, while we're struggling with these so-called technical issues," said Dhruv Khanna, Covad's general counsel. "That's nonsense. We should get line sharing yesterday."