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Report: DSL Is Profitable

A research report out this month claims DSL services are both profitable and essential for carriers

October 31, 2002

4 Min Read
Report: DSL Is Profitable

As incumbent carriers continue to insist that regulatory relief for DSL is the only way to soothe the smoldering telecom industry, a report out this month calls DSL the “profitable way out of a dead-end future.”

i2 Partners LLC’s October report -- “Consumer DSL: Are US Carriers Crying Poor All the Way to the Bank?” -- states that, contrary to many carriers’ claims, DSL is a good business. The Internet access service continues to enjoy double-digit growth rates while the cost of providing the service continues to drop, the report says.

"[A]n omnipresent theme of regulatory 'relief,' obscures the fact that incumbent DSL is about cash flow break-even and will contribute to net income next year," the report states.

This strongly contradicts the murmurings -- or, rather, shouts -- coming from the regional Bell operating companies (RBOCs), which claim that the regulation of DSL puts them at a disadvantage on several fronts, making it a losing business. The main complaint, of course, is that competitive carriers taking advantage of UNE-P resale are basically freeloading on their networks, paying set, low wholesale prices for the use of network elements the RBOCs used to get high retail prices for.

According to the report, however, service providers are at the profit-making threshold for DSL now -- and stand to make a lot of money off the service in the years to come.

“Obviously, it would be nicer for them to have the market all to themselves and only charge retail prices,” says analyst and author of the report, Andrei Jezierski. “But even on wholesale, they’re going to make money.”

DSL is not only a good and profitable business, according to the report, it is also essential to securing the incumbent players’ long-term future. Moving forward, more and more services, including a significant portion of voice, will be delivered through broadband access networks. The report predicts that broadband penetration will ultimately reach 70 percent.

With cable companies holding a 2-to-1 penetration advantage in the broadband market today, the telecom carriers are going to have to give customers a reason to keep their telephone wires, use them more often (and for more services). “DSL is the conduit not to just broadband, but everything else,” the report states, including: “retention of local voice, adding on ILEC-provided long-distance, and provisioning enhanced voice or hybrid PSTN/Internet applications in the future.”

While the cable companies are faring better at deploying broadband than the telecom companies today, the report insists that closing the gap is eminently possible. It will, however, require that service providers focus on their fundamentals, instead of spreading themselves too thin trying to offer all services to everybody.

“Getting more connections should be priority number one,” Jezierski says. “Should they offer services? Sure. Create them themselves? Probably not. Resell them? Yes… Only when they’ve made significant progress [in gaining more connections], should they start looking at other services.”

When DSL was first introduced, most providers took the one-size-fits-all approach. The report, however, suggests that tiered pricing is one of the best ways of enticing people from dialup to DSL. Once consumers have discovered the benefits of broadband at a lower price-point, the report says, they'll be more easily encouraged to gradually upgrade their usage.

Several carriers have already started offering tiered pricing. Back in August, SBC Communications Inc. (NYSE: SBC), the largest DSL provider in the U.S., announced that it would split its DSL pricing into four separate tiers. Covad Communications Inc. (OTC: COVD) and Qwest Communications International Inc. (NYSE: Q) also offer tiered-pricing; and Verizon Communications Inc. (NYSE: VZ) says it has certain tiering in its service offering.

This is a step in the right direction, the report says, but insists that these options have been far from fully explored.

Closing in on the cable companies' lead in the bandwidth market will require "not being distracted by unrelated services or complementary but separate bundling initiatives, nor being confused by one's own political posturing," the report concludes. "Meanwhile, there's a lot of money to be made."

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com

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