Ray, and All,
>> The one type of xDSL deployment that telcos might have more success with is a fiber to the neighborhood architecture, where the copper loop is only say 2000' to the home at most, with no bridge tap. That would remove many of the transmission and installation obstacles to a high volume of DSL customers, but again, we probably won't see this on a large scale for some years.<<
I've tried to keep track of the DSL to the High Rise deployment genre. Seems that these are natural fits, where tenants do not have cable, or have it but no cable modem service, or where the latter does not work as advertised.
Also, some of the data-oriented CLECs are starting to roll out DSL in selected business districts, as I'm sure you are all well aware.
A recent article in X-Change Magazine...
x-changemag.com
... suggests that the buy back period for DSL by CLECs is in the area of two years.
I'd be interested in hearing your take on this article which is printed below, as well as the opinions of others
[Hint: For a better view of the charts, go to the URL posted above.]
Regards, Frank Coluccio
=============================
DSL, Dollar$ and Deployment
CLECs Can Expect Certain Digital Subscriber Line
(DSL) Deployments to Reach Payback in Two Years
By Peter Meade
Every new month brings more announcements from competitive
local exchange carriers (CLECs) that are rolling out digital
subscriber line (DSL) technology.
DSL has become the apple of the CLECs' eye because of its
promise to deliver high-speed Internet access and corporate local
area network (LAN) connectivity at speeds exceeding ISDN
(integrated services digital network) at attractively affordable
prices.
In just the past several months, the following service providers have
announced their intentions to deliver DSL service: US WEST Inc., GTE
Corp., Covad Communications Inc., Manitoba Telecom Services,
Dakota Services Ltd. Inc., NorthPoint Communications Inc. and SBC
Communications Inc.
Unlike ISDN, which for years has endured all sorts of barbs as a
high-speed solution in search of a problem, DSL's timing--as well as that
of the CLECs' deploying it--appears impeccable. The emergence of the
Internet and its phenomenal, sustained growth has served as a rocket for
DSL's payload. DSL has made even the oldest copper look as shiny as a
new penny.
"DSL can do 'ISDN' better than ISDN can," says Mark Fisher, vice
president, corporate marketing, for Concentric Network Corp., a
Cupertino, Calif.-based provider of DSL service. "The lowest speeds of
DSL are faster than ISDN. DSL brings T1-speed service to the mass
market."
"If DSL does a better job of serving the small business market in the next
two years than ISDN has done in the last 10 years, it's a winner," Fisher
says.
That may not be saying much, however. After more than a decade in the
marketplace, ISDN did not celebrate its 100,000th line installed in
California until last year, says Fisher.
"Perhaps there are 150,000 lines now, assuming 70,000 to 80,000 are
used by small business," he adds. "There are 900,000 small businesses in
California, so after more than a decade of availability, ISDN still has not
surpassed 10 percent usage."
Meanwhile, DSL has shown a good forward motion and lots of
commotion coming out of the gate. But it's still very early in its
deployment.
CLECs expect to have DSL deployed only in about 20 markets by the
end of this year, says Beth Gage, a Northglen, Colo.-based senior
broadband consultant for TeleChoice Inc., a market research house. The
tally could be beefier, except "deploying DSL takes longer than CLECs
own up to or realize," she says.
"Announcements are not necessarily rollouts," warns Howard Flagg,
president of PairGain Technologies Inc., a Tustin, Calif.-based provider
of DSL gear. "How real are all those announcements? I'm interested to
find out how many DSL lines have been installed."
While no one has nailed down that number, there remains a potent
business case for CLECs looking to deploy DSL service, according to
John Reister, director of marketing for Copper Mountain Networks Inc.,
a Palo Alto, Calif.-based supplier of DSL equipment.
According to his calculations, with a base penetration of just 350 DSL
customers per central office, a CLEC can charge as little as $80 a month
for DSL service and still deliver a positive net present value, meaning
today's value for all resultant cash flow associated with the project. With a
base price of $140 a month, a CLEC with only 100 committed customers
can expect to break into a positive net present value, he says.
This pricing model falls in line with those of several recent DSL
announcements from CLECs. Santa Clara, Calif.-based Covad, for
example, announced an initial pricing structure ranging from $90 to $195
a month for service between 144 kilobits per second (kbps) and 1.5
megabits per second (mbps). San Francisco-based NorthPoint, offering
service in the same basic area--the San Francisco Bay--has priced its
service at between $99 (for 160kbps) and $199 (for 1.04mbps).
Focus on a Metro Market
A well-defined, concentrated strategy is necessary. Basing his pricing
model on a CLEC deploying DSL in a single metropolitan area, Reister
says CLECs must consider all the revenues and costs associated with
establishing a metropolitan area network to connect users to service
providers such as Internet service providers (ISPs).
Even though Copper Mountain's Reister suggests CLECs start with a
regional rollout, his model expects the costs of billing systems and
customer service to be prorated over a national rollout.
According to PairGain's Flagg, CLECs are best served by targeting
upscale metro markets with a customer base with the demand and the
pocketbook for services such as DSL. Such markets include San
Francisco and Boston, even though most of the potential customers in
these markets should be offered another high-speed data service
option--namely, the cable modem--within a year.
DSL as it appears today seems to compete quite cost-effectively with
other high-speed data networking options in the market, including
33.6kbps modems, ISDN service as well as both one- and two-way
forms of cable modems (see Figure 2).
DSL also gives service providers two advantages, says Bob Laurent,
technical marketing manager for Fujitsu Network Communications Inc., a
Richardson, Texas-based provider of DSL equipment. Aside from
higher-speed access, DSL offers dedicated connectivity--a major plus
that many at-home workers may have missed since leaving a more
traditional office environment. This ability should let DSL get away with
higher prices than cable modems, where the bandwidth is shared among
all the cable modems on a local system at a given time, Laurent says.
The need for increased speed could be "a heroin-like hook," says Dave
Gellerman, vice president, carrier marketing for Newbridge Networks
Inc., a Herndon, Va.-based supplier of DSL gear. Knowing that
customers can upgrade with just a phone call to the CLEC's customer
service department could become addictive. "Let's face it, if you could
upgrade your PC modem with just a phone call, wouldn't you have done
that a couple of times already?" he asks.
But there is a huge potential for customer churn due to matters of speed,
Gellerman says. If rules are not in place, customers may call for a
temporary upgrade to get through a project and then call the following
week to drop down again. As far as technical support goes, expect 20
percent of customers to call each month with an average call length of 20
minutes, Reister says.
The true cost associated with providing telephone support is one of the
most difficult factors to determine, says Fujitsu's Laurent. In most cases,
as much as 90 percent of these calls are not associated with a network
problem but instead helping customers with their PC's operating system
problems. If this type of call could be billed to the caller, then call counts
would drop to two or three calls per year per customer, according to
Fujitsu. One possibility for reaching this level: Put a $10 monthly charge
on the ability to make service calls, says Laurent. A credit later could be
applied to customers who do not abuse the process.
Market Model
Copper Mountain's market model assumes a maximum penetration of
350 DSL customers per central office (CO), according to Reister. With a
CO typically serving 70,000 to 80,000 people, this figure should be
achieved in three years, he says.
If a CLEC targets a metropolitan area with a population of 1.75 million
people, it probably would be served by 25 COs with some 40,000
access lines in each office. Of the CO's lines, 11,000 would be for
business with the majority serving residences, he says. There are
approximately 2,400 businesses and 27,000 households served by each
CO.
A CLEC could target 20 of these central offices, with each CO being
interconnected to the CLEC's regional data center using a DS-3 circuit.
Figure 1
High-Speed Possibilities
Alternative
CPE
Installation
Monthly Fee
Leased Line
$600-$1,000
$1,000-$1,300
$350-$650
Frame Relay
$800-$1,200
$900-$1,100
$575
ISDN
$300-$750
$100-$350
$100-$330
Source: Copper Mountain Networks Inc.
Within the targeted COs, the CLEC would go after customers with a
demonstrated willingness to pay for high-speed data services, according
to Reister. The majority of these customers will be small- to medium-sized
businesses and residential customers who are early adopters (i.e., those
with ISDN lines), he says.
It would be very difficult for any CLEC to use DSL in any strategy to
capture the consumer market, says TeleChoice's Gage. To do so requires
a large amount of CO space and technicians--two areas in which ILECs
hold an overwhelming upper hand.
"Stick with the business market," she says, unless a CLEC has a method
for becoming profitable while offering service for $50 or less a month.
"Half-a-hundred" is mentioned repeatedly by market followers as the
acceptable threshold for entrance into the residential market.
Figure 2
Typical Costs for Residential or Home-Office Service
Access Technology
Modem
Cost
Monthly
Rate
Second Line
33.6 kbps modem
$125
$20
$20
ISDN
$225
$80
included
Cable Internet
one-way
$225
$35
$20
Cable Internet
two-way
$250
$45
not available
Source: Fujitsu Network Communications Inc.
Reister estimates the tab for CO collocation, including rent and power, to
average $1,400 per CO per month, with the amount varying by territory.
Expect backbone transport costs of $950 per CO per month under a
DS-3 interconnection tariff, he says. Operations and maintenance should
average 3 percent of the gross capital per year, he adds. Monthly costs
for leasing unbundled copper loops from the ILEC should cost about $22
each.
Reister says most DSL services should generate a positive cash flow in
the sixth quarter of operation. But payback on the initial investment
typically is not reached until after eight quarters. If the cash flow is
discounted at an annual rate of 15 percent, the net present value after 16
quarters, or four years, of cash flow would be $8.7 million, he says. After
eight years, net present value could reach $21.4 million.
This an is aggressive plan, according to TeleChoice's Gage, as most
CLECs cannot expect their DSL deployments to reach payback in less
than three years, even if the CLEC has its own points of presence (POPs)
and business processes already in place.
Their differences not withstanding, she says the window of opportunity is
wide open for CLECs to offer DSL as a service differentiator. There are,
however, four "must" factors:
Must be able to compete with the incumbent LEC (ILEC);
Must be a lot more flexible than the ILEC;
Must be able to do things quickly; and
Must deliver a higher level of service.
Perhaps it's too much to ask or expect to excel in all these categories, so
Gage suggests "putting a stake in the ground in one of those areas while
trying to achieve parity [with competitors] in the others."
There is an opportunity to excel because the ILECs' DSL announcements
so far have lacked clear-cut consistency, Gage says. For instance, Pacific
Bell's DSL prices are as high as CLECs'. US WEST is attacking both the
consumer and small business at once, she says.
"It is difficult to compete here as [US WEST] has a history of setting low
prices that may make competition tough," Gage says. Its menu of speeds
includes monthly prices down to the $50 range, she says.
Bell Atlantic Corp.'s third quarter announcement is expected to address
both consumers and small business. Ameritech Corp. is looking at the
consumer market with a range of speeds and monthly prices down to
$50, while SBC's offerings start at a minimum of $80 per month, she
says.
Even with the eventual ILEC inroads, CLECs have a major opportunity
to cash in today. "There will be tens of thousands of DSL lines in place
before [ILECs drive prices down to where] DSL is available at $39.95 [a
month]," says Concentric Networks' Fisher. "CLECs will be able to turn
up $100 million in business without getting the attention of the ILECs."
Creative pricing, such as practices that are prevalent in the wireless world,
will help, says Newbridge Networks' Gellerman. For example, GTE's
offer includes five separate price packages, ranging from symmetric DSL
service of 256kbps for casual Internet access or work-at-home users to a
1.5mbps service for multiple users on the same LAN.
According to a GTE spokesman, users will be offered month-to-month,
multiyear and volume discount plans ranging from $30 per month to $250
per month.
The GTE announcement looks "pretty good shooting out of the gate,"
says Newbridge Networks' Gellerman.
Keep the Customers
As with most any CLEC venture, the most important chapter in the
playbook is speed-to-market, says PairGain's Flagg.
"Get the service out there, sign those customers to one-year contracts," he
says. "Then they're not likely to change [due to the price penalty for early
service termination]. It's a strategy that has worked well in cellular."
Whoever captures the customers will keep them, says William Cobb,
director of business development for the DSL products division of
Paradyne Corp., Largo, Fla.
"The technology is here, the unknown is which strategy will get the
customers," he says.
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