Sunday NYT: "A Speedy Internet Path Is Slow as an Investment
By MICHELLE LEDER
Most people who connect to the
Internet via a digital subscriber
line, or D.S.L., rave about its speed and
the fact they can use their phone while
online.
But similar enthusiasm for the handful of
publicly traded companies that provide
D.S.L. service to both residential and
small-business users has cooled
substantially of late.
The market leader, Covad
Communications, which serves 96
markets and plans to expand to 70 more
by year-end, is trading near its 52-week low, closing Friday at $15.06
for a negative year-to-date return of 59.6 percent. Also near 52-week
lows are Rhythms NetConnections and Network Access Solutions.
Even the NorthPoint Communications Group, in which Verizon
Communications, the phone giant, is acquiring a controlling interest, has
had a negative year-to-date return of 51.6 percent, closing on Friday at
$11.63 and offering further evidence that investors remain sour on these
stocks. Verizon, which was formed by the merger of Bell Atlantic and
GTE, has agreed to combine its D.S.L. unit into Northpoint and inject
$800 million in cash. The two are forming a joint venture that is to be
publicly traded, although Verizon will own 55 percent of the shares.
Indeed, analysts and money managers who follow the sector say that it
will be difficult for other D.S.L. companies to remain independent and
that premiums are unlikely for having the largest network, as Covad
does, or the most profitable customers, as DSL.net does. That is
because pricing pressure continues to mount, while the cost of building
the networks remains high. And analysts say there have been nightmare
stories about delays in installing digital subscriber lines. The lines use
extra bandwidth in copper phone lines but still require special modems
and special installation service involving a local telephone company.
"There's been a lot of focus on the dream" of high-speed Internet access,
"but when the reality hits and you start hearing about execution problems,
investors start to run," said Ann Miletti, associate portfolio manager for
the Strong Common Stock fund, which owns about 1.18 million shares
of Covad.
About 750,000 users connect to the Internet with digital subscriber lines,
the bulk of them consumers who spend about $40 to $45 a month for the
service. That is about twice as much as for dial-up service, although the
added cost of a second phone line narrows the difference considerably.
The number of users is up sharply from a year ago and is likely to keep
climbing this year, though some analysts say prospects for longer-term
growth are sketchy.
"Consumers want to pay dial-up prices for D.S.L., and no one's there
yet," said Mark Zohar, an analyst who covers the sector at Forrester
Research. "Faster is better, but is there something you can't do with
dial-up that you want to do? For most people, the answer is still no."
Also, better technology may be only three to five years away.
Still, some analysts say the stock-price declines have been unjustifiably
steep. Indeed, there have been a few signs of life. Shares of DSL.net,
which has focused on providing the high-speed service to businesses in
small and midsize markets, doubled on Wednesday, after it announced a
partnership with International Business Machines. And the
Verizon-Northpoint deal is expected to make others pay attention to the
sagging sector.
Most bets, however, are on Covad, because it is the largest. Indeed, the
company has been the subject of takeover rumors for months.
Speculation has focused on Quest Communications and WorldCom,
although most analysts say others may be interested.
"They're at the beginning of their life cycle, and they're looking at a
continued, expensive build-out," said Ken Hoexter, an analyst at Merrill
Lynch. "But for another carrier to pick up on it, it could be another
engine for growth, even if it means dilution in the short term."
Mr. Hoexter has a near-term accumulate and a long-term buy rating on
the stock and a 52-week target price of $30. Ms. Miletti of Strong
Funds figures that Covad stock is worth in the mid-to-high $20's.
Mr. Zohar, the Forrester analyst, said: "The Northpoint-Verizon deal
really was the beginning of the end for these independent companies.
Their business models are precarious, and their time to market has been
precarious, and this would marry the best of both worlds."
See you next Tuesday, JJ? |
