DSL Gets the Gift of Gab
By Kevin Petrie
Staff Reporter
7/8/99 7:00 AM ET
SAN FRANCISCO -- The phone jangled as Cynthia Ringo was
preparing lamb chops for a dinner party at her Morgan Hill, Calif., home
one April evening. Another telemarketer, she thought. "I almost took
his head off," laughs Ringo, CEO of CopperCom, a private maker of
Internet phone systems.
In retrospect, Ringo's restraint was wise. On the other end was Alex
Nassar, an engineer at her company who was demonstrating that
weeks of fine-tuning CopperCom's products succeeded in producing
clean, echo-free telephone calls over Internet pipes called "digital
subscriber lines," or DSL.
The phone call may not go down in the history books alongside
"Watson, I need you," but it was a key moment nonetheless. Clean
voice calls over Internet lines is a rich vein that telecom companies are
starting to mine after years of effort. This month the 50 employees in
CopperCom's Santa Clara, Calif., headquarters will start making
routine phone calls through DSL. Later this quarter, the company will
ship the products commercially.
More importantly, the success of companies such as CopperCom is
crucial to the new generation of phone companies called competitive
local exchange carriers, or CLECs, that help other service providers
such as MCI WorldCom (WCOM:Nasdaq) cater to corporations using
DSL lines. Rhythms NetConnections (RTHM:Nasdaq), NorthPoint
(NPNT:Nasdaq) and Covad (COVD:Nasdaq) must branch into phone
calls to win and retain corporate customers -- and perhaps hasten
profits.
The catch: These young carriers will find themselves competing
directly with the Baby Bells when they launch DSL phone services.
The Baby Bells lag behind the CLECs in delivering high-speed Internet
access, but they offer a suite of services that include voice and data
calls. To be ready, the CLECs need to convince small- to
medium-sized businesses they can be reliable.
In early tests with WorldCom in June, Rhythms ran voice calls through
copper wires via digital packets. Later this year Rhythms will start
selling these new phone services, followed shortly by Covad and
NorthPoint.
Lines of Service Growth
Company
Lines as of
12/31/98
Lines as of
3/31/99
Increase
Rhythms
NetConnections
500
1,235
147%
NorthPoint
Communications
1,400
2,900
107%
Covad Communications
3,900
8,600
121%
Source: Company data.
The importance of the voice calls is ironic. In the Internet age, voice
decidedly lacks sex appeal on Wall Street. Shares of Rhythms,
NorthPoint and Covad have tripled, doubled and quadrupled,
respectively, from their IPO prices earlier this year, largely because
investors are excited about their plans to feed a voracious demand for
Internet data. These three young carriers are building networks that
connect customers, mostly businesses, to the Internet via copper
wiring. They also carry traffic for Internet service providers. Rhythms
and NorthPoint use ISPs as an intermediary to reach corporate
networks.
Rhythms and its peers are appealing because they aren't asking
corporations to change their internal phone networks to computerized
systems, says analyst John Freeman with the technology research
firm Current Analysis. Rather, these carriers simply place outgoing
phone calls onto the Internet for part of the journey.
DSL Carriers Spark Early Enthusiasm
Source: Baseline.
Now the CLECs must branch into the spoken word.
"You can't say: I just want to be your communications provider as long
as it's just data," says David Williams, a marketing vice president with
GST Telecommunications (GSTX:Nasdaq), a carrier that intends to
offer DSL phone services with its partner Covad by early 2000.
Corporations large and small, he says, want to write one monthly
check for communications, not two.
"It's going to be a great sales tool," says Matt Davis, analyst with the
Yankee Group, a market research firm. Davis says the three carriers
might be able to halve the prices of phone and data services in the
next 18 months, because voice calls travel more cheaply as Internet
packets.
Once a reliable data network is in place, adding voice signals carries
almost no incremental cost. Voice is almost a "100% [profit] margin,"
says Jim Linnehan, vice president of research with the investment
bank Thomas Weisel Partners.
And voice calls will be no small part of DSL carriers' business,
accounting for as much as 10% of their revenue by the end of 1999
and crossing the 20% line sometime the following year, according to
Freeman. Linnehan estimates voice services making up 15% of DSL
traffic a year from now.
Of course, voice calls over Internet lines alone aren't the biggest draw.
More important is the ability to pair voice and data services. At least
one investor says they may give away voice calls to bring in more
Internet-data business. "Maybe that's going to be a necessity" to keep
customers, says David Brady, portfolio manager with Stein Roe &
Farnham, who says he's thinking about buying shares of Covad.
Covad already has won the trust of Beginning to End, a Web
advertising firm in San Francisco, for the complex task of hosting
videoconferences with clients. Would they be receptive to running voice
calls over the same DSL lines? "We would be thrilled to deploy them,
provided it's fail-safe," says Beginning to End CEO Keith Lindbeck.
These carriers better keep the customer happy if they are ever to
improve their yawning losses. Revenue at Rhythms, for example, will
grow 350% to $48.8 million in 2000 from this year as its subscribers
triple, Linnehan forecasts. But the company's net loss will also grow to
$4.89 a share in 2000 from $2.87 a share in 1999, he says. Weisel
underwrote Rhythms' initial public offering in April, but has no
underwriting relationship with NorthPoint and Covad.
At least in the lab, the CLECs have moved beyond the
tin-can-and-string phase of DSL voice calls, which will help satisfy
customers. When Ringo of CopperCom talked with TheStreet.com,
she called by DSL and then by cell phone. DSL was less choppy.
"It has happened more quickly than we expected," Ringo says.
Echoes Catherine Hapka, CEO of Rhythms and alumna of US West
(USW:NYSE): "It's happened, it's here and we're doing it." |
