DSL Prime Newsletter: June 19, 2000

DSL Prime Newsletter

By Dave Burstein
DSL Prime

June 19, 2000

Covad's $200-325M Bluestar buy changes the rules
Bails out VC Crosspoint
A few months ago, we could divide DSL providers into wholesale and retail, regional and national. But Covad's $450M LaserLink deal broke down that distinction, and the Bluestar makes it past history. Covad acquires 250 COs in the South and a retail sales force, becoming BellSouth's largest competitor. Covad is gambling that ISPs will not be scared and run to NorthPoint, just as computer dealers deal with manufacturers who also sell direct. (NorthPoint has hinted they will not be pure wholesalers in the long run, either.) Keith Russell of the Nashville Tennessean predicted the deal last week, and pointed out the Crosspoint connection - major VC to both. After the IPO failed, apparently Crosspoint decided to get out, at about a quarter of the expected IPO price. At least four well-funded companies are also targeting BellSouth territory, so the competition will be tough. By ordinary standards, they (and other investors, including Intel and Lucent) did very well, tripling their money in a year. But the VCs who have been throwing money at DSL are looking for ten-fold returns. Charlie McMinn, the founder eased out of Covad last year, is on the board at Bluestar. The deal is for 8 million shares, or about $200M; incentives could add 5 million more shares.

Some numbers: Bob Knowling anouunced they are now at 1800 COs, passing 40% of American homes and 44% of businesses. They are lowering estimates for year-end 2000 from 290K to 245K, expecting the higher revenue per customer will more than make up the loss from ISPs jumping ship. They look to 620,000 in 2001, with higher revenues. Bluestar is collecting $240/customer, while Covad last quarter averaged $79. Bluestar has only 2,000 subscribers, with 5,000 in the queue. $120M of goodwill will be dealt with as purchase accounting. Covad is doing 1,000 lines a day, and may be trying to copy Microsoft's strategy of always underestimating. Covad has $1B in the bank, $1B in lease power, and would like to issue a convertible security next. Knowling said they are looking to add a second DSLAM vendor, probably either Lucent or Nortel. He also reported nearly all the regional providers had recently contacted Covad to be purchased, because of the difficulty raising capital.

"You are looking at history"
Tom Starr proudly walks us around the interoperability pavilion
The chair of the T1E1.4 committee was beaming as he walked us around the booth. The display cases held twenty DSLAMs, the exhibit area thirty vendors equipment. Everything was connected to everything, and it worked, both at G.lite and full-rate DMT. Essentially every major vendor in the industry was included. Jay Fausch of Alcatel, remembering our reporting last year on the search for full-rate interoperability, had emailed us the exhibit would be impressive, but it was even more extraordinary than we expected. We asked a dozen technical people about interconnect problems, and the answers were so few we were amazed. Barbara Tien of Netopia gave us the key demonstration. She logged on to DSLprime.com, then reached up to the patch panel above the router. She pulled the cable from slot #6 on the patch panel (the Fujitsu DSLAM), and plugged it in to #8 (an Alcatel DSLAM). After a moment, she clicked on our news, and it came right up. She could have done the same with a dozen other DSLAMs on the panel.

Tom would be the first to credit the literally thousands of people who made interoperability work, but a few must be singled out. Scott Valcourt of the University of New Hampshire has been supervising the testing (don't hire away all his graduate students before they finish the program, please!) Hans-Erhard Reiter has proved a skillful diplomat bringing the industry together, while Mark Peden and Nabil Gebrael are organizing the public outreach for the Forum.

Japan finally opening
"By fall, it is probable that operators of ISP services will be able to offer xDSL services across the whole nation." reported Nikkei Communications, based on a June 1 study by the Ministry of Posts and Telecommunications.

NTT has been prominent for many years in DSL technical forums, and just invested $5B to buy Verio; they clearly have the resources for a national presence. But their rumored 100,000 new ISDN connections each month gave them a powerful incentive to delay, even though Tokyo Metallic and KDD already provide xDSL services in certain areas of Tokyo, Osaka and Oita. Sumitomo, using Centillium chips, has an early lead in the Japanese equipment market, but NEC and the multinationals will be fighting hard for these massive contracts. Of course, government policy may change; an opening in France was recently delayed by opposition from union backed members of Parliament. The Liberal Democratic Party Secretary-General has called for the government to reduce its shareholding in NTT, and for NTT itself to sell part of its stake in DoCoMo to raise funds for the new competitive market.

Korea and the US each pass one million DSL subs
Growth accelerating worldwide
Korea Telecom and Hanaro are signing over 100,000 each week in June, according to the Chosun Ilbo, as President Kim Dae Jung leads Korea into a new era riding the high-speed information highway. He sees the internet as crucial to prosperity and education, and has inspired rapid growth, looking
to surpass two million hookups this year. Suppliers worldwide confirm the Korean growth, and are fighting for the market.

The million mark was reached in the US last month as well, and demand is clearly there to pass three million at the end of the year, as the companies have forecast. Smart people throughout the industry are working very hard to solve the field problems that have held back US growth.

Universal Broadband Initiative
AFC leading on key issue
SBC has promised Universal Broadband to one-third of the United States, and DSL Prime is strongly on record urging other telcos to do the same, so we were delighted to see Advanced Fibre take magazine ads and bring together Centillium and other suppliers to support Universal Broadband at SUPERCOMM. It's smart business for them, because their remote terminals are one of the key technologies that can solve the problem.

DSL Prime urges the industry to gather support for universal delivery, which is strongly backed by both FCC Commissioner Bill Kennard and Republican Congressional leader Billy Tauzin, otherwise in profound disagreement. That requires educating the providers on the favorable economics and effectively directing the political pressure. The first agenda should be to understand the facts. The telcos have already promised DSL to 80-85% of the US; universal broadband is about serving the other 15-20%. We would guess about one-third of those not scheduled for service have bad lines that could be corrected, one-third have a distance problem (some of which could be solved by DLCs), and the other third live in areas where the telcos do not have the will to solve the problem, and political pressure is required to bring them service. Fixed wireless is a good alternative in some situations, and satellites may be the only choice in a few. Very few of the folks behind DLCs get service now, although BellSouth
has equipped 2400 with minirams. The equipment problems have been colved, but with the competition rarely allowed to access DLCs, they been on the bottom of the install schedule.

Near universal deployments going worldwide
DSL Prime missed a big announcement a while back: Bell Canada is spending $1.5B to make DSL available to 85% by 2002 (and 70% this year.) About 90% of Australians households and businesses will have access through Telstra by mid-2002. Sweden, Korea, Hong Kong, and Singapore are all aiming for
100%. SBC in the US promises 85% in 2002, and 100% shortly thereafter - a condition of the Ameritech deal, Bill Kennard told us. The question in the US is how to persuade the other Bells to match SBC.
Bell Atlantic is mostly there. Fred D'Alessio told us they will install DSL in "essentially all the COs and DLCs", and Ivan Seidenberg told the Credit Suisse conference they will soon serve "90% of qualified homes". BellSouth, with 40% of its subscribers behind 35,000 DLCs, has not matched that promise, nor has US West. None of them have a consistent policy of correcting customer line problems (load coils, bridge taps) for those unlucky enough to require a little field work to solve, unlike SBC. Current test equipment and some well-trained technicians could serve those customers.

Technology is reducing the distance problem
GoDigital offers a repeater-based solution that can extend 130,000 feet, and Alcatel & Adtran are supporting 50,000 feet with G.shdsl repeaters. GoDigital is delivering 500K split into three DSL circuits, but could easily modify the equipment to offer a single circuit at a higher speed. The current price is high, but a look at the design makes it clear prices could be dramatically reduced ordered in large telco quantities

What's hot from SUPERCOMM
Who needs the "wired home" - wireless is ready
Cayman may have been first, Nokia has the slickest design, and 2Wire has the commerce-enabling windows. But all agree that wireless is ready for a mass market, with price points well under $100/node. 802.11 is hitting the market hard, and most expect it to be the standard.

Voice works great
On the show floor, at least - and at pioneers like mPower, which has just ordered millions more in equipment. CopperCom and Jetstream demonstrated with dozens of partners. Looks like operations problems (billing, OSS, customer support) are the hold-up, not the technology.

Ethernet is back - over VDSL
Infineon's ethernet/VDSL chip, targeted at a remarkably low price point ($25), offers an ideal way to connect a basement DSLAM over existing building wiring and existing network switches. Orckit recently purchased EDSL for similar ethernet building networks, which they promoted at SUPERCOMM. Wiring a building with Cat 5 cable (or fiber) can cost more than the DSLAM/DLC itself, and takes time customers are not always ready to wait.

Coppercom leads with a roadmap
"Where are we going?" is everyone's necessary question, and the electronics industry has a tradition of providing roadmaps of the future to aid everyone's planning. The Semiconductor Industry Association provides detailed plans five and ten years out, and Intel, Microsoft, and others also share their vision. But DSL firms have held back, reluctant to talk until product is ready. That's why we particularly appreciated TI's briefing a while back, predicting the capabilities of future chips (16 times as many ports per line card during the likely life of today's DSLAMs - can yours handle that many), and thank Cynthia Ringo and Martin Taylor for the Coppercom presentation. Frank Wiener made a point of calling Ms. Ringo "the belle of SUPERCOMM 2000", a necessary correction to our report last week that she was the belle of SUPERCOMM 1999 - not quite the compliment we intended.

IP can be controlled - Is the future here?
Integral Access demonstrated MPLS quality of service to every node, allow pure IP traffic to the customer. Skeptics doubt today's effectiveness of IP QOS, but that's the dream going forward. Cisco and Copper Mountain have an early lead in supporting IP, while Accesslan's iSLAM advanced IP abilities puts that company in the forefront. Everyone else is promising IP soon as well, including a major effort from Alcatel.G.shdsl is winning

It hasn't come out of the lab yet, but universally it's agreed to be the next big step - coming fast. Less interference, higher data rates, standard chips available from many sources are driving the move. We've previously reported big boys (including Cisco, Alcatel, and Conexant) are moving quickly. Adtran spent hundreds of thousands make sure they are in the race, with a big booth proclaiming G.shdsl, loads of t-shirts, and four page magazine ads with Infineon.

PacBell shut off at Stanford
Service problems continues
The Stanford Linear Accelerator Center has "put a hold on processing new installation requests for PacBell DSL service because of the numerous problems we've seen in the past months including faulty installations, billing errors, long wait times for installations, inadequate resources (ports) to fulfill the demand for DSL service, and poor customer service. " according to their web site. www2.slac.stanford.edu/comp/net/dsl/ They added "PacBell, as the backbone DSL carrier, is doing a good job. Most of the problems originate from PacBell Internet Services, an ISP. ... PacBell does not have their billing working correctly." DSL Prime's impression is that PacBell's service is better than most - but that clearly is not good enough, as customers no longer seem willing to forgive "growing problems" - nor should they have to.

Another comment from the site is "(The installation technician) should stay with you until you have a successful connection to the PacBell DSL network." That seems good advice to all; the technician who leaves after connecting the modem but before the PC is online is an invitation to customer problems, and a false economy, whatever fine print is in the service agreement.

Briefs:
* JATO opened Jacksonville, Des Moines, and Sacramento, making clear they have shifted their focus beyond US West territory. That was always their plan, they've told us, and was not influenced by the Qwest deal.

International:
* Bell Canada, Telmex, and SBC are joining together in a multi-billion dollar expansion into the Internet and telecommunications in Latin America.
* Subscriptions came in this week from India, Estonia, Slovenia and Zimbabwe. DSL is everywhere.
* SDSL has essentially been forbidden by UK's OFTEL, citing interference problems. As noted above, G.shdsl is coming soon, so the issue may be irrelevant soon. But it's just one more way that OFTEL is creating roadblocks to competition.
* Singtel is working with Alcatel and TdSoft on a voice over DSL trial.

Deals:
* Fujitsu Europe went to VPSwitch for a technology building on voice over DSL
* German CLEC riodata went with Pairgain for as much as $100M of equipment. We've spoken with several Pairgain engineers lately who are much happier now that ADC has reached out to them.

Stock Market:
* Accelerated Networks is on the calendar to IPO next week. Kevin Walsh and Kathy Tebben have done a great job positioning them in the VoDSL market, but the key to their success is MCI's implicit endorsement several public discussions of their trials of Accelerated's SVC-focused systems.
* ConnectSouth raised another $125M through Morgan Stanley to build out their network in the South, giving them a $225M warchest.
* OnSite Access raised $70M through the other Morgan, J.P., as they wire buildings in major cities.
* CNBC reported Broadwing is considering purchasing Intermedia and Digix, buying facilities around the country. Broadwing's Cincinnati Bell is pioneering added services, including VOD, through DSL.
* Prism/Redconnect's parent, Comdisco, had to pull a $300M offering due to "market conditions". We're waiting for some dramatic news about Prism's national rollout, scheduled to have reached 33 cities by now.
* Efficient's purchase of Netscreen fell through with the stock price decline, but they will be working together on security appliances.

People:
* Best wishes for good health to Mark Smith of Adtran and EET's Loring Wirbel's dad.
* Terrence Schmid, previously of ONI and before that gamemaker 3DO, took over as CFO of Turnstone, as company co-founder Denise Savoie concentrates on business development.
* Ex-Lehman Brothers CFO Richard Stewart took a similar role at Plan B, a CLEC just getting into DSL.
* Cathy Gadecki signed on as VP of Strategy for Ellacoya, a startup in Merrimack, NH looking to provide advanced services to internet providers. Their $34M funding should support some interesting ideas. Yet another Telechoice alum moving to the client side, replicating the experience of the old-line consulting firms.

In-progress: If we tried to write all the product news from SUPERCOMM, we never would have finished writing this issue. More next time. We are working hard to finish the first VoDSL News and DSL Chip News.