An interesting article from Business Week Online
DSL's Broadband Advantage
Cable has the lead among U.S. high-speed subscribers, but the telecoms and their technology are catching up fast
It comes as no surprise that increased use of the Internet has fueled strong demand for broadband technologies such as digital subscriber lines (DSL) and cable modems. And Americans increasingly feel the need for speed. According to a recent study by Internet measurement company Nielsen/NetRatings, broadband Internet use in U.S. homes increased 59% in 2002, driven by consumer defections from slower dial-up connections.
And the future continues to look bright for broadband globally, as worldwide high-speed Internet access remains limited. At the end of 2002, only 20% of total worldwide online households were estimated to subscribe to broadband services. The Telecommunications Industry Association (TIA), a leading publisher of information on telecommunication technology, expects the global high-speed Internet access market to grow at a compound annual rate of 26.5%, rising from $15.6 billion in 2003 to $28 billion in 2006. And of the two competing technologies, DSL appears to be in the catbird seat. Globally, it's the broadband technology of choice, though it lags badly in the U.S., where cable holds roughly a two-to-one lead on a subscriber basis. However, DSL equipment companies and service providers are taking steps to close that gap.
The question for investors: Is it time to jump on the DSL bandwagon by placing money in stocks of companies that make the necessary gear? We'll get to that a bit later. But first, let's take a closer look at the DSL boom.
DSL 101. DSL allows ordinary copper telephone lines to carry high-bandwidth content at a high speed over the telecom network. Typically, individual connections will provide downstream speeds between 1.544 Mbps (million bytes per second) and 512 Kbps (thousand bytes per second). A DSL line can carry both data and voice signals, with the data part of the line being continuously connected.
As for the equipment that makes it all possible, DSL gear can be segmented by the two sides of the line connection, from the network side to the customer-premises side.
On the network side, DSL is generally configured with a digital subscriber access multiplexer (DSLAM) at the local phone exchange to connect multiple users to a high-speed backbone network. Through the use of a splitter or filter, voice traffic is diverted to the voice switch, while data is transferred to the DSLAM. As opposed to dial-up Internet, the DSL network bypasses the voice switches and alleviates network congestion.
CABLE'S REACH. On the customer side, on-site equipment includes a DSL modem, either external or built in to a personal computer, and a DSL filter to split incoming voice and data traffic.
DSL's growth has been hamstrung by the limits of existing technology. The principle limitation is reach, with a maximum loop length -- the extension length of the DSL line from the customer premises to the central office -- of roughly 15,000 feet, restricting coverage to about 80% of total grounded lines. However, the industry is close to launching extended-reach DSL, which would expand the distance limitation for the service to over 20,000 feet.
And while the lack of a widespread global cable-TV infrastructure has hurt cable modem's global subscriber base, its pervasiveness in the U.S. has given it a leg up over DSL. Roughly 70% of the U.S. population already has cable-TV service, supplying a ready-made potential customer base. DSL operators, meanwhile, have had to install DSLAMS to all the central phone company offices.
SUBSCRIBER SURGE. According to the DSL Forum, a consortium of nearly 250 leading industry telecommunication companies, during the first quarter of 2003, global DSL subscribers increased by 5 million. Overall, total global DSL subscribers surpassed 40 million, with an average of 1.8 million people per month choosing DSL broadband.
The DSL Forum forecasts a long-term target of 200 million DSL broadband subscribers by the end of 2005. Strong growth in Europe and Asia, regions that have just begun to build their DSL networks, will likely account for the majority of new DSL subscribers.
High-tech market researcher In-Stat/MDR estimates that about 22 million DSLAM ports were shipped in 2002. While the end-user demand for DSL remains robust, vendors are struggling to make money in this commodity-driven sector. In fact, due to rapidly falling equipment prices, several communications vendors recently exited the DSL arena to focus on higher-margin businesses.
In an effort to spur increased broadband subscriber growth, Verizon (VZ ), one of the largest U.S. DSL service providers, slashed its DSL fees from $49.95 a month to $34.95, and to $29.95 when ordered with a bundle of other services. Verizon's price cuts come on the heels of similar reductions at major telecom company SBC Communications (SBC ), which charges a subscription rate of $35 a month for customers who sign a one year contract.
STILL NEUTRAL. With the new DSL fee roughly 30% to 40% lower than current cable-modem access offers of $40 to $45 month, consumers are more likely to choose DSL over cable as their broadband technology of choice.
Which gearmakers are the leading players in DSL? In terms of market share, France's Alcatel (ALA ) is the clear front-runner in the access market, with almost four times as many ports shipped as the nearest competitor. However, we at Standard & Poor's rate the company 3 STARS, or hold, as it struggles to become profitable in other weakening end-markets, particularly optical and wireless handsets.
Other noteworthy DSL equipment vendors include Advanced Fibre Communications (AFCI ) and Adtran (ADTN ), which are also ranked 3 STARS, as we believe both are adequately valued.
While the time isn't ripe yet, we believe that these stocks are all well positioned to benefit when access spending recovers and telecom providers need to invest heavily in DSL to stave off competition from the cable operators. Until that time arrives, though, investors should keep their powder dry. |
