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Technology Stocks : Orckit (ORCT) -- Ignore unavailable to you. Want to Upgrade?

To: D.J.Smyth who wrote (917)	2/13/1998 3:04:00 PM
From: Claude Edelson	Respond to of 1998

[Telephony 02/13] Lost in much of the hoopla over the five Bell companies working together on high-speed Internet access is the fact that as service is rolled out, it must compete with other technology. Specifically, telcos will find competition from cable operators deploying cable modems and competitive local exchange carriers leasing copper and collocating DSL equipment in central offices. As a result, DSL must be priced at a level that will open up more than just corporate markets. In the initial deployments of DSL, monthly service pricing and the cost of subscriber equipment has put the service out of reach of all but the most dedicated 'Net surfers. However, telcos could turn a profit with a pricing scheme that comes a lot closer to what existing Internet service providers are charging for dial-up Internet access, according to a recent study by Fujitsu Network Communications and Orckit Communications. Using a number of assumptions, the study lays out a business case scenario under which telcos could reach positive case flow inside of two years charging less than $60 a month. "For about $20 more per month than what cable operators are charging, a telco could offer DSL at 10 times the speed of current analog modems," said Tim Novak, Fujitsu's senior product manager for access planning and management. In one scenario, the companies use a model network of 21 COs serving 2600 customers set up in the following architecture: * one main office serving 1000 subscribers * five second-tier offices serving 245 subscribers each * 15 third-tier offices serving 25 subscribers each. Using that network example, telcos would generate $643 of revenue per circuit per year. Because subscriber terminal costs are added as needed, much of the business case rests on high fixed costs such as T-1/T-3 access to the Internet and support systems, said Nigel Cole, executive vice president of Orckit. "The business isn't that dependent on the DSL portion of the network," he said. "It's really all the back-end stuff. There's a lot of cost built in behind the remote terminal." In the business model developed by the two companies, each second- and third-tier office is connected to the main serving office via T-1 and costs $2000 a month. The main office then uses a T-3 Internet connection running at $16,000 a month. Transmission facilities costs are estimated at $250 a month and $2000 a month, respectively. On the subscriber side, the two companies take a slightly conservative approach, pricing each link between $700 and $1300 with costs split evenly between the premises and CO. Installation cost for each subscriber is estimated at $125, and it is assumed that customers will pay $225 for installation and the DSL modem. The model, however, does not include the network interface card, which would be provided by the subscriber. Key to the entire model is the concentration of subscribers per T-1. Obviously, the lower the concentration, the more a service provider must charge to make up those costs. In the Fujitsu/Orckit model, telcos would introduce two flavors of DSL service-symmetrical DSL running at 128 kb/s in both directions and asymmetrical DSL with about 70% of subscribers opting for the former. However because of congestion on the Internet backbone and limitations of TCP/IP, maximum Internet throughput is estimated at 300 to 400 kb/s without any limitations from access links, said Novak. With that in mind, telcos should look to the lower-speed service such as 384 kb/s as their first service option. "We built the entire scenario on 384 kb/s so it would look a lot more like a residential service," he said. Part of the reasoning for concentrating on residential service is that DSL to the home is less likely to cut into high-profit services such as fractional T-1 for business users. It's also the market in which telcos could lose significant market share to cable operators deploying cable modems. "As far as cannibalization is concerned, it's an issue until the cable operator comes into play," Novak said. "Once that happens, the issue is gone." Under the two companies' scenario, the service provider would use a concentration of 50 to 100 subscribers per T-1, which would provide for a high-performance service without destroying cost models, said Cole. "If you assume you want something close to the business environment that would typically be 100 to 200 users per T-1. We took a view that was better than that and used 50 to 100 users. We're seeing the industry recognizing that half a megabit is perfectly appropriate when you're talking about Internet service."