Just because it's a tired old cliché doesn't mean ISPs are in any less of a bind when it comes to choosing between an incumbent or a data carrier for DSL provisioning.

by Jim Wagner of internetnews.com [April 25, 2001]

Make no mistake about it, ISPs that provide Digital Subscriber Line services are caught between a rock and a hard place, because their reselling options are limited.

On one hand, you've got Incumbent Local Exchange Carriers (ILECs) and Regional Bell Operating Centers (RBOCs) offering ISPs the opportunity to resell DSL services at razor thin profits—if any. On the other hand, ISPs could connect DSL customers through Data Local Exchange Carriers. DLECs might offer ISPs a greater profitability, but they are also a source of greater financial risk.

The evils of lessors
Remember, when DSL technology first appeared on the scene, voice carriers were slow to embrace it wholly. The Baby Bells they wanted to keep their sales efforts focused on profiting from leased line services and T-1 feeds.

Eventually, phone firms figured out that they could turn a buck or two providing DSL access for business and residential users. So they unleashed predatory pricing of their programs, hyped their high-speed services with free modems, and waived installation fees.

ISPs were forced to look elsewhere if they wanted to try and eke out a living from reselling DSL services. Enter the DLEC distributive business model based on an economy of scale.

National DLECs, represented primarily by NorthPoint, Covad and Rhythms, tried to make their distributive business model work. They ramped up their deployment schedules and quickly saturated major metropolitan markets with broadband service options. ISPs signed up in droves to resell their services and the great DSL gold rush was on!

Unfortunately, DLECs don't own the networks they interconnect with, so they had little control over technical issues and deployment problems that plagued the DSL provisioning process. Besides, line conditioning, circuit provisioning, and collocation space remained under the complete control of the Baby Bell's Central Offices (COs). As highly regulated as these nerve centers are, there was still plenty of wiggle room for ILECs and RBOCs to outmaneuver state and federal regulators and not play fair in the DSL arena.

After consumer frustrations, order delays, and ILEC excuses flowed into the marketplace, financial analysts finally realized that DLECs weren't making any money—and the DSL bubble burst.

Blame game
What ensured was a fiery public blame game that had the telephone companies pointing the finger at DLECs for their bad business model and DLECs accusing the phone firms of anti-competitive business practices.

Once again, incumbents and RBOCs outlasted rivals—ISPs and DLECs, who could not compete with the likes of SBC and Verizon, among others. The Baby Bells recognized an opportunity when they saw one, quickly introducing price hikes to users and increasing their margins—while ISPs and their customers suffered.

That's not to say there weren't ISPs out there that didn't deserve their fair share of scorn for implementing short-sited business plans—there were many. But most of these ISPs were duped by the Baby Bells and the DLECs, believing they could profit from reselling their DSL services. After all, ISPs knew that the demand for broadband services was high and that they could deliver the level of technical support that customers demanded.

Risky business
But this is all ancient history. What options do independent ISPs have in today's tangled broadband market? Is it a matter of bargaining with the Baby Bells—the devil you know? Or is it best to stick with a devil-may-care DLEC that might or might not be around next month?

Daryl Schoolar, Cahner's In-Stat ISP strategies analyst, said dealing with any type of DLEC is a risky business these days.

"If I was an ISP, I would take a long hard look at the independents before signing with any of them," Schoolar said. "Both of the last two majors in this area have the potential of going NorthPoint this year. I don't even know if an ironclad agreement would make me feel safe."

NorthPoint's recent demise at the hands of AT&T was just the latest blow to the service segment. The event created a public relations nightmare for DSL providers. It wasn't just 100,000 customers at stake, it was online businesses off-line and out of business. It gave DSL technology a black-eye. Suddenly, cable services appeared to be far more secure broadband connection—even if connectivity is based on shared neighborhood networks.

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