DSL Prime: As AOL Dies

As AOL exits dialup, and U.S. RBOCs continue to fail to invest in broadband, the DSL market in China grows because that's where the investment is, not because of China's cheap labor.

by Dave Burstein DSL Prime [March 1, 2004]

"You have to choose your battles"
—FCC Chairman Bill Kennard in 2000, discussing choices critical to AOL

AOL probably died on February 1, 2004 when they stopped offering DSL or cable service. Not long ago in control of 1/3rd of the Internet, it will take a miraculous recovery to allow more than a small fraction of the company to survive. I hope I prove wrong—several at AOL are friends—but in two years or five, only a shell is likely to remain. I knew this was coming, but it still hurt to see this story.

Michael Powell is no Franklin Roosevelt, but he's eloquent in support of Net Freedom below. He's right to begin with fundamental freedom of speech and "access to content." I've heard a cable CTO saying "we must control what goes over our wires" and a U.S. Bell explain how QoS will allow them to charge anyone sending video to their users. Quality video now streams over the net at practical and affordable speeds, and we need to fight plans to erect tollbooths.

Expect excellent chocolate when your delegates come back from the DSL Forum meetings in Brussels next week. Wish I could come, but I will be in D.C. Monday. I can use advice from readers on a technical point I'm discussing. How should the FCC measure the quality of broadband service? What metrics do the operators already collect, so that they can be reported without adding unreasonable costs? Help appreciated.

The Death of AOL
AOL dropping broadband in the U.S. isn t a surprise, but my jaw still dropped when the story appeared on DSL Reports. It will take years for 20M dial-up customers to disappear, the European operation may get some solace from regulation, and they have dreams of creating a new business of software and service under the name AOL for Broadband. But 70-80 percent of revenues will fade away, and they have little comparative advantage in the remaining markets. The recent layoffs are just a small part of the inevitable, with real estate obligations and other committed costs likely to add to the necessary write-offs.

Mike Powell has some eloquent statements on net freedom below, and I believe they are sincere. Nonetheless, his actions make him the executioner of AOL. In hindsight AOL was doomed when Powell as Chairman backed off from major competition requirements. Bill Kennard, the previous Chairman, discussed with me the problem of ISP death back in 2000. If the telcos were allowed to continue pricing with no margin allowed, and cable wasn't effectively opened, prospects were dismal. He and a senior staffer (still close to Powell, and doing work I respect) could see that meant fewer consumer choices as broadband took over.

"You have to choose your battles," Kennard explained as we went over the details of telco wholesale pricing that were squeezing ISPs. He chose not to directly challenge wholesale tariffs on the then new DSL service. Instead, he required Verizon and SBC to offer DSL through a separate subsidiaries that had to pay the wholesale rates. Massive losses in the subsidiary would expose the cross-subsidy and force them to change the pricing structure. Beyond that, as part of the Ameritech merger SBC was required to actively compete in 30 metros across the country as a CLEC under risk of billions in fines for non-compliance. Verizon, to take over GTE, agreed to invest hundreds of millions in out-of-district services. The two giants would be CLECs in most of the country, giving political power that would force reasonable wholesale terms. Powell also believes in solving problems through competition, but once Chairman he killed these and other regulations.

ISPs all dying isn't inevitable. In the UK, half the BT Wholesale DSL is served by independent ISPs, and Australia has just promised to clamp down on Telstra's similar pricing. Microsoft Network is also gone (bye, bye butterfly), but EarthLink is pressing on. Dick Notebaert of Qwest just visited them in Atlanta, and he's optimistic of a joint future. They're working with Verizon as well. ISP choice requires either enlightened carrier pricing or smart regulation; I hope Powell's successor will share his eloquent values expressed below, with the wisdom required to achieve them.

Billion dollar warchest for Huawei and ZTE
Export bank financing for bids around the world
"We know Huawei, we know ZTE," Paul Reynolds of BT mentioned when we discussed DSLAM choices, although he chose Marconi and ICL/Fujitsu. Westerners who cling to the myth that Chinese strength is due to cheap labor are missing the importance of a domestic market that is nearly a third of world telecom, representing absolute demand more than twice that of the U.S. That gives Chinese manufacturers profitable scale in every product line, and sales large enough to increase research and development.

Chip vendors are now finding the Asians the early adopters of technology, while U.S. telcos, among others, fall back because "we can't afford to take any chances."

Copyright 2004 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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