the (DSL) statistics and forecasts are glowing. The problem for ISPs is that making money from DSL isn't nearly as clear. Wasn't that combination -glowing statistics and forecasts but noe money- that killed Dotcoms?
ISPs In DSL Squeeze
David Simons, Forbes.com, 12.07.00, 12:01 AM ET
It would seem that broadband is just what Internet service providers (ISPs) need to counter slowing growth of dial-up subscriptions. And with ISP access to cable still a political football, telephone-based digital subscriber line, or DSL, is the main option.
Certainly the statistics and forecasts are glowing. DSL lines tripled to 2 million in 2000 and are projected to grow 50% annually to 10 million by 2004. The problem for ISPs is that making money from DSL isn't nearly as clear.
EarthLink's (nasdaq: ELNK) Chief Financial Officer Lee Adrian said in the company's third-quarter earnings report conference call that EarthLink's "margins will be muddied by the increasing proportion of broadband business." Translation: Though today's $39.95 price for DSL is double the $19.95 standard for dial-up, there's no net gain for the ISP. The bulk rate cost of DSL lines for the largest ISPs is 50% greater than for dial-up lines. Smaller ISPs pay much more. And the DSL bite is increased by greater demand on operations and tech support.
The silver lining is that today's demand for DSL is from early adopters and requires little marketing expense. In addition, everyone in the ISP business agrees that DSL prices will follow the downward cost curve of dial-up. But two other problems are much tougher.
The Telco Threat
The local telcos, which wholesale DSL to ISPs, also sell it directly to consumers. But unlike long-distance, which can be chosen independently of local service, retail telco DSL service is bundled with Internet access and e-mail. Only USWest customers can buy DSL alone (for $19.95 per month) and hook up to any ISP that supports it. Internet subscribers who live everywhere but Colorado and the Northwest must choose between buying access and e-mail from the telco or from their ISP.
The telcos' dismal track record at marketing dial-up access--they have less than 5% market share--would seem to make competition from them unimportant. The telcos never got excited about selling dial-up access, especially because the opportunity was dwarfed by the far more profitable demand for second phone lines at online households.
But the telcos got religion about DSL. Cable modem service and telephone-based competitive local access providers posed the first serious threat to their dominance. So the local telcos have been stepping up DSL marketing, and though ISPs aren't the competitive target, they are squarely in the line of fire.
In September, Verizon Communications (nyse: VZ) and SBC (nyse: SBC), which account for two-thirds of U.S. phone lines, cut their residential DSL price from $49.95 to $39.95, with no installation and equipment fees. Last month EarthLink began a promotion that matches the telco's monthly price but charges a non-refundable $99 setup.
My last two local phone bills from Verizon included a promotion offering a perpetual $5 per month credit on $39.95 DSL to customers who have one of four premium local calling packages that start at $17.99 per month. I'd guess that a high percentage of the households willing to pay $39.95 for DSL already subscribe to those telephone plans. Verizon also offers a 30-day money back guarantee, or the first month free if signup is done online. Those deals, backed by TV advertising, target a new volley of cable modem deals, such as Time Warner (nyse: TWX) systems offering Road Runner service with the first month and the sixth month free.
Mike Lunsford, EarthLink's senior vice president of broadband, emphasizes that price is just a part of the equation. He points to EarthLink's award-winning customer support and features such as access to EarthLink's national dial-up network while travelling. Fair enough. But Lunsford also agrees with widespread estimates that the local telcos are grabbing up to 70% of residential DSL access account subscriptions. Telcos won't break out their DSL sales reports by wholesale and retail. Prior to the advent of DSL, the telcos captured only a sliver of Internet accounts. So it seems that most of the DSL subscribers gained by telcos are coming from ISPs.
The Somewhat Good News
Lunsford and other ISP executives say the real leverage in DSL is that users greatly increase time spent online, enhancing the opportunity for advertising and commerce. Sounds great. Yet ISP executives are squishy about the types of services, revenue, and business models. All agree that file downloads such as Napster are the clear application leaders today, and that development of broadband content such as streaming video remains foggy. Even less clear is how ISPs will claim a piece of the action.
The good news is that the timeline for figuring out how to make money from DSL isn't as tight as the broadband hype suggests. EarthLink's Lunsford said that early results of his company's $39.95 promotion show a sign-up rate about the same as at $49.95. That reflects the relative price insensitivity of early adopters. But it also says that $39.95 isn't low enough to attract the mainstream market.
That explains why Juno (nasdaq: JWEB), which offers DSL at $49.95, doesn't feel compelled to match the telcos' new $39.95 price point. President Charles Ardai says that Juno customers, whom he describes as solidly mainstream, "aren't clamoring for DSL." Juno is focused on converting its 7.5 million ad-supported free e-mail and Web access dial-up accounts to a $9.95 per month service that offers less advertising, more access numbers, and live customer support. Ardai thinks that the inflection point for mass market pricing and adoption of DSL is at least two years away.
America Online (nyse: AOL) seems to agree. There's been little follow-through on DSL resale pacts inked with Verizon and SBC in early 1999, even though Time Warner cable passes just 20% of U.S. households. Instead, AOL has focused on narrowband enhancements to its online service delivered via cellular, paging and television. Actions do speak louder than words. |
