DLCs: The Downside

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

firstmiler 12/4/2012 | 11:29:33 PM
re: DLCs: The Downside Anyone else think this over hyped FTTP RFP from the three amigos might not be what it purports.

Based on the recent history, this seems to be a neat way to throw up a smoke screen of activity to give the public and FCC the warm fuzzy that SOMETHING is happening relative to investment in a major overhaul of the current network infrastructure. Also, it provides work for the under utilized engineers at the RBOCs even if it is never destined to see the light of day - nice 18 month job security for the PM that dreamed up this "RFP".

My guess is there will be a lot of man hours spent by the dozen "viable" vendors to deliver earnest responses, but there will be no award and FTTP will not be rolled out by the RBOCs for another 5 years. The Bells will only move forward at the prodding of the sharp end of a sword - ie. competitive pressure from MSOs, Munis, or other.

Icabod39 12/4/2012 | 11:29:26 PM
re: DLCs: The Downside Couldn't agree more FM. As a long-time RBOC-watcher and equipment vendor with up-close-and-personal experience in several RFP's from those guys, the recent FTTP hype smells like a rat... Unfortunately, LR perpetuates the hype w/articles like this...

firstmile 12/4/2012 | 11:29:24 PM
re: DLCs: The Downside To my namesake,
No argument at all. Looks like greenfield only right now...so that means long and slow.
In addition, the RFP really seemed like three seperate RFPs with different requirements (both technical and financial), for each of the three RBOCs involved.
Not quite a replay of the DSL JPC.
sriharivarada 12/4/2012 | 11:29:22 PM
re: DLCs: The Downside I am trying to understand the implicit link between DLC market and FTTP initiative that was alluded to in the article.

If I can paraphrase, the article suggests that there is excess capacity between Central Office (CO) and Remote Terminal (RT) in most of the deployments in North America. This leads to my inference that there is less demand for DSL connectivity from residential/business subscribers. Is this the reason why service providers (in general sense) are taking (at least on the paper) initiative to go FTTP route so that they can offer triple play services (especially, to take advantage of the demand for video service)? Your input is greatly welcome.

wap545 12/4/2012 | 11:28:27 PM
re: DLCs: The Downside Issues for both FTTH vendors and DLC Vendors to consider.
The Service Providers are going to eventually put an actual cost per subscriber per month over 5-7 or 10 years into a cost model and realize the following:
It is very expensive to Install, maintain and support any Electronics operating between a CO/Remote and the customer premise.
Especially when you have to provide:
1. Install Labor, Pad/Grounding & Rights of way if you can get them.
2. Run and operate power (over 5-7-10years)to the electronics.
3. Maintain the equipment and upgrade (Hardware & Software)as required year after year.
4. Keep Inventory/Spares (Overhead)of Cabinet, Cards in Warehouse and in your I&R Trucks.
5. Acquire and retain Technical/Engineering design and support staff (Big $$ Overhead)sometimes in different disciplines (Voice/Data and Video)to handle these multi function DLC in the network. This includes training and keeping staff up to date on systems. (Travel & Class $)

My feeling here is that most ILEC/RBOC do not have a real number(Cost per subscriber per month to deliver a triple play level of service over 5-7-10 years)in this area. This may well be because all they looked at in the past was a similar (Electronics between CO & Sub)systems that required same support levels.
When we look at a real cost model for a FTTH deployment and project these costs out 5-7-10 years and include actual cost to maintain and support the Passive Optics and compare them to what it cost to maintain and support a DLC deployment we may all be very suprised how attractive FTTH really can be.
We need to stop looking at a "Cost to Deploy" (usually just hardware and plant costs to provide & install)figure to select a technology

What are your recuring Monthly Costs (Per Subscriber Per Month)to Maintain and Support
your existing DLC and planned DLC (or God Box deployments)??
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