LAS VEGAS – One of the great mysteries of telecom right now might be this: Where'd all the sales of that DSL equipment go?

Industry boosters say the DSL market is booming, and on a global scale it is gaining in broadband market share.

"DSL is on a roll," says DSL Forum president Tom Starr. "China is red hot. In the United States, we're still in the early stages of the game."

That, in a nutshell, is the problem. While globally DSL continues to grow, with impressive gains in Asia especially, it's still a fairly unpredictable business here in North America, as clearly demonstrated by Adtran Inc.'s (Nasdaq: ADTN) tangle with the dreaded "lumpiness," as discussed this morning (see Adtran Cites Lumps and Bumps in Q3)

Starr cites research from Point Topic Ltd. which says that DSL's global market share of broadband is picking up, and it hit 64 percent in the second quarter of 2004.

But DSL penetration in the U.S. remains low, at only 6 percent, which would seem to indicate that there is plenty of room for growth. Only one problem: Reports from some DSL and access vendors indicate softness. Recent examples include Adtran's earnings, Ciena Corp. (Nasdaq: CIEN) citing a "DSL slowdown" when it experienced a shortfall in its Catena broadband business, and the recent weakness at Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI).

So is it just specific companies that are suffering? Or are bigger trends at work? Basically, three broad theories are circulating about the current slump in North American DSL growth:

Generation Gap
Some analysts and company executives say that the large service providers are now stuck between two generations of DSL – the older flavors including ADSL, and the next-generation products including ADSL2+ and VDSL, which significantly increase speeds.

In addition, the major new DSL initiatives, especially those from BellSouth Corp. (NYSE: BLS) and SBC Communications Inc. (NYSE: SBC), involve new architectures, specifically fiber to the node (FTTN). This requires a new type of gear that is only now in trials, and new growth in the DSL market will spring from this equipment (see Analyst: Copper Is BellSouth's Gold, Bottleneck Blowout, Carriers Prep DSL Wave Part II , and SBC RFP Refreshes Remotes).

With many of the next-generation products now in carrier trials, deployment will begin in earnest in 2005, giving the DSL equipment market a boost. "Almost all the service providers I talk to are in the process of field-trialing ADSL2+," says the DSL Forum's Starr.

Regulatory Gridlock
Here at Telecom '04, which is run by the powerful telecom trade association United States Telecom Association (USTA), there is plenty of chatter about regulations. And many service providers will lead you to believe that they're stuck trying to decide where the regulatory environment is going, and whether to invest in DSL or fiber to the home (FTTH).

A steady stream of service provider executives banged the drum of regulatory reform here at Telecom '04, and although everybody agreed that less regulation is better, there were few details of how to achieve that.

Some equipment vendors say the service providers are having trouble moving on big equipment purchases until they get a clearer direction from the government (see Comcast & Verizon, Sitting in a Tree...).

"Investment has been retarded because of uncertainties over regulation of the access network," says Kevin Walsh, vice president of marketing with Calix Networks Inc. "But why does it have to be either copper or fiber? It can be both."

The DSL Forum's Starr said that regulatory environment is important, but it's not the only factor. He notes that countries where DSL penetration is the greatest – such as South Korea and Taiwan – are fortunate to have both stable regulatory policies and dense population centers, both of which favor DSL deployment.

The Inventory Glut
In this theory, there is a vast oversupply of aging DSL gear, some of which was reported shipped but never deployed. This hurts equipment vendors all around, who must compete with cut-rate prices of glutted gear and have trouble generating new sales in a market awash with excess capacity.

"Extra inventory of ADSL equipment is definitely an issue out there," says Jefferies & Co. analyst George Notter. "It's been reported that there's a mismatch of ports shipped versus sub additions of carriers – you can draw your own conclusions.

All of the Above
Kermit Ross, principal of consultancy Millennium Marketing (no Website), says the DSL market is likely grappling with all three of the above issues. "All three of these forces are at work."

Ross says that sales are shifting as carriers move more aggressively to IP-based platforms that can handle video. "If you think about it, BellSouth has said they want to replace 80 percent of their network with fiber to the node," says Ross. "The telephone companies are focused like they've never been on IP. Conventional ATM-based DSLAMs have plateaued," says Ross.

So what are folks saying about 2005? Not surprisingly, nobody wanted to hazard a guess. Looks like the dreaded lumpiness could continue in the foreseeable future.

— R. Scott Raynovich, US Editor, Light Reading