Can the Baby Bells do broadband?
By John Borland
Staff Writer, CNET News.com
August 9, 2000, 12:10 p.m. PT
Competition in the high-speed Internet market has become intense enough to turn around an old saw: Even if
you can beat them, the rule now runs, join them anyway.
The two largest telephone companies in the United States, SBC Communications and Verizon Communications,
each have hitched their high-speed Internet businesses to a smaller national competitor. SBC has put its consumer
DSL business in the hands of Prodigy Communications, and Verizon yesterday said it would merge its high-speed Net
business with relative newcomer NorthPoint Communications.
The deals, each of which will give considerable brand power and control to the
new partners, are radical steps for megacorporations in the midst of reinventing
themselves as Internet businesses.
But does this mean the local phone companies themselves--which have faced
considerable consumer criticism for customer service and DSL reliability issues--are
beginning to admit that smaller companies are simply better at the business?
Yes and no, analysts say. The big local phone companies are desperately trying to
become national players. Partnering with the smaller companies will give them
this presence faster, at a point when the race to the market is crucial, they say.
"Time is of the essence," said Zia Daniell Wigder, a Jupiter Communications
analyst. "If they were to lose a year or two building out their own infrastructure,
they'd be two or three years behind in the market."
But the smaller companies also bring a more aggressive culture and a stronger
focus on customer service to the table, two things that haven't been the Bells'
strongest points, analysts note. And it's exactly these features that the Bells need to
move to increase their prowess as high-speed Net companies, they say.
"Fundamentally, the (big
local phone companies), or
at least their DSL portion,
understand that they need
a boost in terms of
customer service and a
more aggressive response
in the DSL market outside
their regions," said Fritz
McCormick, an analyst with The Yankee Group.
The deals come as all of the big telecommunications
companies are scrambling to establish as large a footprint as
possible in the United States, across a wide spectrum of
telecommunications services. Most of the big local phone
companies have merged with each other or with newcomers
to expand their profiles, while AT&T has snapped up cable
companies for its broadband and local telephone services.
Only Sprint and WorldCom's attempt to bulk up by joining
forces has been nixed by regulators.
Although the vast majority of revenues for these companies still come from traditional phone calls, the merger frenzy
is being driven by huge growth in both the high-speed Net and wireless phone markets.
Each of the companies hopes to carve as large a geographical territory for itself as possible with these technologies
while constructing as large a loyal customer base as they can before the market settles.
According to The Yankee Group, the DSL market will grow from 1.45 million subscribers this year to 8.4 million
subscribers in 2001. The cable modem service providers, the Bells' biggest rivals, will grow from 2.4 million
subscribers this year to 9.6 million subscribers in 2004, the analyst firm says.
But getting to those figures will require the Baby Bells to expand their regional markets to compete nationally. That's
where the deals come in.
You scratch my back...
The two most recent major deals hint at slightly different expansion plans.
SBC's deal with Prodigy gives control of the consumer ISP business to the venerable online company, allowing the
telephone company to retain control of its own high-speed network assets.
NorthPoint and Verizon, by contrast, are merging their network assets, which will be sold wholesale nationwide under
the NorthPoint brand. Some of the consumer services will remain under the Verizon brand, although the companies
say they are still working out branding issues.
Verizon executives say the two companies have "complementary assets," and the merger is not an indication of
NorthPoint filling in for the telephone company's service shortfalls.
"Over the course of the last six months, the DSL technology has been completely changed," Verizon vice president
Larry Babbio said in a conference call yesterday. "In my mind, those service issues are behind us."
Verizon's share price has dropped sharply since the news was released, falling from above $47.50 on Monday to
$39.50 at midday today. Much of the drop stemmed from disappointing earnings results released yesterday, analysts
said.
The two deals share the ability to bring the telephone companies' services to a nationwide audience quickly, while
giving the smaller companies access to a huge amount of capital and a near-captive
customer base.
Other Bells are proceeding differently, however. US West, now part of Qwest Communications
International, is building a national presence on its own. It's already entered a few California
markets, with others planned throughout the next year.
BellSouth has been content to keep its high-speed service in its southeastern U.S. home territory, at least for now.
These other companies, too, are likely to partner with smaller national companies, simply in the interest of speed,
analysts say.
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