DSL Upstarts Just Can't Compete

For several years, phone customers and the federal government have been pushing for the telephone companies to get on with the job of rolling out digital subscriber lines, which would allow high-speed Internet access over conventional phone wires.

But since most upstart DSL providers have nearly gone under recently, it's becoming increasingly apparent that DSL will be a game played by the big, old, slow phone companies--not the snazzy start-ups like Covad and NorthPoint.

Both those companies, along with DSL providers like Rhythms Networks, made a good run at building national DSL networks that could compete with local phone giants. Now they're looking to the phone giants to rescue them.

SBC's $150 million deal with Covad in November, under which Covad provides DSL for SBC in areas outside SBC's territory, may be the revenue source that will keep Covad alive. Number two independent DSL firm NorthPoint made a similar deal with Verizon, but it fell apart in November. NorthPoint Chief Executive Liz Fetter is said to be looking for another source of funding that will bail or buy the company out.

Why hasn't DSL paid off for these companies? Quite simply, the monthly fees DSL customers pay have dropped faster than many expected, while the cost to the DSL provider for installing the service has stayed high.

"DSL is a no-win situation unless you're an incumbent phone company," says Russ Intravartolo, chief executive office of StarNet and a former Covad partner. "With all the overhead and support costs, you just can't afford to sell it for $49 a month, or whatever the phone company is charging."

"It's a myth to say that DSL companies can't be profitable," says Chuck McMinn, chair of Covad. "No one out there realized how rapidly the markets would turn and start demanding profits. We've got to turn around and deliver now."

The only thing that has delivered so far is line sharing, a system mandated by the Federal Communications Commission that regulates how companies lease lines from incumbent local phone companies for DSL. According to Covad, the cost of installing lines has fallen from $20 for a single DSL line to between $7 and $10 per line.

Relief may not come fast enough to save the DSL guys. It's still necessary to send a technician to a subscriber's house (a "truck roll," in industry parlance) to set up DSL, and despite promises to the contrary, that's unlikely to change soon. The year 2001 is promised to be the year subscribers will be able to self-install DSL--but then so were 1999 and 2000.

Covad has slashed its spending plans by a third in an effort to reach profitability sooner, but that goal is still a year or more away. In the meantime, the DSL upstarts are so undervalued they've become tantalizing takeover prospects.