Earlier this month, Light Reading reported that the markets outside North America were looking pretty hot for digital loop carrier (DLC) makers (see DLCs Gain Foreign Currency). But what about inside North America, especially now that the FCC has dropped its Triennial Review on us?

Unfortunately, the North American market is fraught with problems. The Triennial Review was, as expected, very much in favor of the RBOCs (though they don't seem to be too happy about it -- see Bells Challenge FCC Ruling), but that doesn't mean DLC vendors will breathe any easier. Indeed, FCC's rules don't require the RBOCs to deploy any new facilities. The rules do, however, encourage fiber-to-the-premise (FTTP) deployments, and several vendors are now trying to win a big chunk of that business (see Merrill Boosts AFC).

Overall, though, the FCC's efforts were a missed opportunity, and the North American DLC market has been on the decline since at least 2001. RHK Inc. reports that the North American DLC market shrank to $1.04 billion in 2002 from $1.43 billion in 2001 – a drop of about 27 percent.

Why the slide? There are the usual reasons – capital spending has slowed, and the market seems overcrowded (see DLC Shakeout Looms). But a deeper investigation shows that the DLC market as a whole – and its potential – may be smaller than was once thought. A few months ago, independent telecom analysts John Celentano, principal of Skyline Marketing, and Kermit Ross, founder of Millennium Marketing, slapped together a report that outlined some key areas that might keep the North American DLC market tethered.

The duo's most interesting findings came from combing through about five years worth of data that the RBOCs had been providing to the FCC for its Armis database – the database that lots of market research companies use in figuring market size, growth, etc. The data needed work, they say, because each RBOC had their own interpretation on how to report voice-grade equivalent lines, digital carrier services, and other items. "For years, the vendors have been using bum dope," says Ross.

Celentano's and Ross' report, dubbed "The Millennium-Skyline Project," made a handful of assertions about the DLC space that, if true, could dampen the spirits of DLC equipment vendors looking to score big on sales. The main marketing pitch of such gear is that it can help carriers moving from POTS [plain old telephone service] and data service to a full suite of broadcast TV, video, high-speed data, and other services.

The Millennium-Skyline report's findings include two important points for the DLC market. First: Fewer lines are served by DLCs than was once thought. Second: There is an excess of unused baseband copper lines in the big RBOC networks today.

Market researchers in the past have said that more than a third of all access lines are served by DLCs, but the Millennium-Skyline report contends that DLC systems served only about 24 percent of the total access lines, far shy of the 41 percent that the Armis data had previously reported for the years 1997 through 2001. Worse yet, this share isn't really growing.

In all but two major telcos, less than 20 percent of the lines are DLC-served, and in one carrier, less than 10 percent of the lines are DLC-served. This shows that there may be fewer opportunities for upgrading or replacing DLCs than folks have been led to believe. "It has taken 25 years for DLCs to achieve an almost 25 percent penetration level, and it likely will never go higher," the report states.

Thanks to aggressive bubble-time buildouts such as SBC Communications Inc.'s (NYSE: SBC) Project Pronto and Sprint Corp.'s (NYSE: FON) Integrated On-Demand Network (ION), the major carriers in the U.S. have an abundance of unused DLC capacity and copper in their access networks, the report also states. By comparing the number of working lines to the number of equipped lines, Celentano and Ross found that about 43 percent of the equipped DLC capacity in the RBOCs' networks is unused. That's significant, the authors say, in that it makes it easier for carriers to delay replacing their existing base of DLCs with newer broadband-enabled systems. Instead, they might opt to use upgrade cards from vendors such as Catena Networks Inc. or add mini-DSLAMs to remote terminals in order to provide customers with DSL service.

With all that as a backdrop, it's easy to see why so much emphasis has been given to the FTTP activity of late. It's also worth noting that those cut out of the FTTP RFP race may be looking forward to a very long winter.

— Phil Harvey, Senior Editor, Light Reading