DSL Prime News: The Inside Source  
January 17, 2002

Dave Burstein
DSL Prime

"The phone companies discovered you couldn't train 10,000 installers or build a network to serve millions as quickly as they thought"
—Dave Burstein in The New York Times, explaining the past problems of the telcos.

Now, those problems are mostly solved, while Germany, Japan, and Korea are moving three times faster than the U.S. It's time to remind Ed Whitacre that he promised in his last annual report, "SBC will make broadband transport service and applications available to nearly 100 percent of our wireline metro-area customers by 2003." Some else please whisper to Ivan Seidenberg he projected "90 percent coverage" in 2002. Remind them also they promised to bring the price back down.

Meanwhile, others are investing despite the capex shortage. Worldcom offered nearly $20M to buy into the wholesale DSL business of three ISPs. Betsy Bernard of AT&T confirmed the NorthPoint COs will be re-lit, and AOL and MSN are playing a role in BellSouth's growth. Everest got funded. Things are looking up.

Four companies responded to our free job posting offer. TI wants engineers, Garnet a US rep, AFC a project manager, and a respected ISP a COO. Details at end. Happy to help, especially as Verizon displaces 7,000 people.

Worldcom/MCI bidding for wholesale DSL
Millions on the table looking for deals
Internet Connect's auction in bankruptcy went over $7M because investors were available who were counting on funding from Worldcom to rebuild the business. Two other major ISPs have offers from Worldcom with financial incentives well into the $millions. Worldcom is supporting nearly a thousand COs acquired from Rhythms, with high fixed costs and low variable costs per customer. It therefore makes good business sense to load on the volume, and they are bidding aggressively to get business customers in wholesale deals. I'm disappointed that Worldcom did not provide us with information for this story, which always makes us wonder what they are hiding.

MCI announced in 1999 and Bernie Ebbers confirmed the next year they would be major players in DSL, but didn't follow through. They worked closely with Rhythms from the beginning, including designing the Rhythms network to fit with theirs, and promising to deliver 100,000 customers to Rhythms. They almost bought Rhythms when the price was in the $B's, holding back only because their balance sheet could no longer support the debt.

Covad bids around $1,000/customer for Internet Connect
Internet Connect has 9,000 business customers and expected positive cash flow in months. Internet Connect had run through as much as $70M building that customer base, but now was running much leaner. They were ready to emerge from bankruptcy, and were entertaining offers from MCI to switch customers over backed with substantial cash. Most ISPs (or their creditors) received little or nothing for their expensively developed customer base, as Covad shut down some and moved aggressively in bankruptcy against others.

If Covad only retains 75 percent of the customers (not implausible, since many have been sold VPN features not supported by Covad directly), they will have spent $1,000 for each customer. Covad bought only the assets and is not keeping employees, so IC salesmen are already trying to pull accounts away. McMinn and Knowling both have told us that Covad had learned not to overbid to drive up customer counts, a poor strategy now that the market wants earnings. But if MCI persists (or Sprint/AT&T jumps in), Covad may have some hard decisions. One of their largest ISPs commented last week Covad has been an excellent partner, but "perhaps plays too much hardball."

Martha Sessums looks at the price differently. "Covad considers the purchase to be a much broader deal than just purchasing subs. Covad bought the assets of InternetConnect, which include customer data, customer leads, the VPN customers, the OSS and source code, intellectual property, trademark and all rights to use the trademark, cash on hand, accounts receivable, prepaid deposits, credits with vendors, unencumbered network equipment along with the subs. Also, Covad considers this an integration deal—we bought the DSL operation including service, billing and support and will use the resources to build up the business. With all these assets included in the purchase price, Covad actually paid in the ballpark of what it has paid for lines in the past. " If other than financial assets had that substantial a value, I believe Covad would have kept many of the employees responsible for them, however. The deal may prove unique, however, and I wouldn't extrapolate the price to other contexts. We're not in dot.com boom time, anymore.

Come to New York!
Government funds could build the best network in the world
Verizon should build the network of everyone's dreams downtown, to follow on their remarkable work after 9/11. For a decade, everyone (including the telco) has proclaimed that fiber is the future of networks—since the rebuilding is so extensive, let's do it right. Manhattan can and should be the showcase of the Verizon network—after all, it's the most lucrative telecom market in the world.

A priority for the $700M in federal money is infrastructure rebuilding, and I believe many companies can help build state-of-the-art services. MFN, Telseon, Cogent, and Yipes can deliver gig-e architecture, and I hope other creative companies jump right in. John Cioffi has been proclaiming that VDSL has significant advantages over fiber, and the short distances in Manhattan would be a great place to prove that idea.

Loan terms are unusually generous, and specifically makes loans available to companies "that currently lack access to suitable credit." The greatest concentration of Internet traffic in the world is downtown, so it has always been a natural location for communications interchange and operations. National companies— even those not currently active in Manhattan—are encouraged to apply for government funds to invest downtown. 

Next Page: AOL's missing 2,000,000

Copyright 2002 Dave Burstein. 
The DSL Prime Newsletter is reprinted with permission.