theinternetanalyst.com
Pain Is on the Rise Among DSL Providers
By Dave Sterman
The pundits were right. Industry think tanks such as Forrester Research and the Gartner Group correctly predicted that hundreds of thousands, if not millions, of us would eventually connect to the Internet through a high-speed connection.
Digital subscriber line (DSL) services offered through phone lines are now used by 1.7 million Americans, and an additional 2.4 million Americans access the Internet through high-speed cable modems, according to the Yankee Group. Those figures are up from nil just two years ago.
But judging by recent business headlines, you'd think that the broadband boom is a bust. DSL providers COVAD COMMUNICATIONS (COVD), NORTHPOINT COMMUNICATIONS (NPNT) and DSL.NET (DSLN) all have announced revenue shortfalls recently and the stocks are down more than 90% from their peaks.
In fact, the sky is not falling. Consumers continue to sign up for those services at an accelerating clip. 520,000 new customers signed up for DSL in the September quarter, compared to 450,000 in the June quarter. Jefferies & Co.'s Joseph Bellace predicts that 747,000 more customers will sign up in the current quarter.
So what's the problem? Consumers are increasingly turning back to traditional phone companies for their business.
Recent quarterly data bear out a striking trend. While COVAD, the leading dedicated DSL provider added an impressive 67,000 new customers in the third quarter, SBC COMMUNICATIONS (SBC), the second-largest local phone company in the United States, added 117,000. The DSL companies as a group added 108,000 customers in the quarter – just one-third the amount of new subscribers at the Regional Bell operating companies (RBOCs).
As the RBOCs gain momentum, investors in DSL stocks could have at least gained comfort in the knowledge that their installed base of nearly half a million subscribers would make them an attractive partner. Indeed, the decision by VERIZON COMMUNICATIONS (VZ) to take a 55% stake in NORTHPOINT this summer was seen as a ringing endorsement for the upstarts. But VERIZON was doing well on its own – adding 129,000 new subscribers in the quarter, compared to 25,000 for NORTHPOINT. Furthermore, NORTHPOINT had to restate its third-quarter results, lowering revenue and widening the EBIDTA-basis loss, to reflect delinquent payments from privately held Internet service providers.
The industry shift back to the RBOCs leads to a compelling conclusion. It's tough to build a business that depends on the kindness of other companies. DSL providers needed to work in conjunction with the RBOCs to sign up new customers, as the equipment needed to reside at the RBOCs' switching centers. The local phone company also controls the line into the home. Some suspect that phone companies were less-than-helpful, creating customer service headaches for the pure-play DSL outfits.
Furthermore, the RBOCs are now addressing their biggest weakness: manpower. The DSL firms spotted an opportunity as the phone companies simply lacked the personnel to install the equipment. But recent advances now enable consumers to hook up a system on their own. As a result, RBOCs are now guiding analysts to look for big subscriber gains in 2001. Adding to the DSL players' woes, AT&T (T) and SPRINT (FON) have each announced plans to aggressively target the DSL market in 2001. That could trigger a price war that the upstarts are ill equipped to withstand.
The shift back to traditional phone companies has analysts singing the praises of EFFICIENT NETWORKS (EFNT), which provides DSL equipment. Michael Lynch, an analyst at Morgan Stanley, sees SBC, VERIZON and BELLSOUTH (BLS) boosting their subscriber base 60% in the fourth quarter. "EFFICIENT sells to all three, so we could see upside to our projections as a result of this growth," he writes.
Morgan Stanley's Alkesh Shah, who also follows the sector, is equally bullish on the prospects for competitor COPPER MOUNTAIN NETWORKS (CMTN). That company is making an aggressive push into Europe, where DSL technology is also taking root. Though he thinks the company could post strong results in 2001, Mr. Shah rates the stock a NEUTRAL for now, citing a lack of near-term visibility on new orders.
It's hard to make a case for DSL stocks at this point. Investors may want to set their sights back on to the existing phone companies. Those firms have the financial muscle to deliver on the aggressive DSL rollout. |
