Last Mile?

It seems everyone has a story complaining about digital subscriber line (DSL) service. Even Steve Ballmer. Late last year, the Microsoft CEO publicly voiced his frustration with the inability to get broadband delivered to his home. His beef: His outer Seattle area home was too far away from the central telephone switching office to get DSL service.

But Ballmer’s peeve pales in comparison to the countless horror stories that have circulated in recent months about delayed installations, poor customer service, and cancelled DSL service due to companies going out of business. These complaints have sparked several class-action lawsuits against ISPs and DSL providers. Even more, some DSL providers have filed antitrust lawsuits against the incumbent local exchange carriers, or ILECs. They charge that the RBOCs (the Regional Bell Operating Companies, a significant portion of the ILEC group) haven’t quite lived up to their end of the bargain as mandated by the Telecommunications Act of 1996. That landmark piece of legislation required ILECs to unbundle local networks to competitors, or so-called CLECs. Independent DSL providers, among them Covad Communications, have accused the RBOCs of dragging their feet, denying access to equipment in the local network, losing paperwork and slowing repairs.

All this bickering and legal action – combined with the recent high-profile flameouts of many independent DSL providers (most notably, Northpoint Communications) – clouds an already murky picture for the future of DSL. And with the perception that mass adoption of broadband services is critical to the success of streaming media, the current turmoil carries broader implications to the industry as a whole. So … what the hell is going on with DSL?

Can’t We All Just Get Along?

Part of the problem, indeed, has been the complicated and sometimes counter-intuitive relationship between the ISPs, CLECs and ILECs. In the very simplest of terms, ISPs buy DSL lines from wholesale CLECs, who must have access to the copper and equipment from the ILECs, as afforded by the Telecom Act. Any breakdown in the service chain is magnified, slowing the process and provoking a lot of finger pointing. (Other business relationships add to the confusion, such as the fact that SBC Communications, an RBOC, owns 6 percent of Covad with a commitment of $600 million over the next five years. Another RBOC, Qwest, is both a customer and a competitor of Covad.)

In May, Federal Communications Commission Chairman Michael Powell confirmed that indeed some CLECs have been "stymied" by ILECs’ actions "designed to slow the development of local competition." Such conduct is punishable by fines. Last year, among the RBOCs, Verizon was levied $3 million in fines, SBC $4.6 million and Bell South $750,000.

These impediments, say the CLECs, have contributed to the abominable customer service issues that have plagued DSL. Passing the blame has bothered some DSL customers who aren’t so much concerned about how the process or technology works, just as long as it does work.

Additionally, problems with customer service and tech support can likely be attributed to an especially crowded market that, in relative terms, exploded overnight. Though the technology has been around for years, the Telecom Act of ’96 served as a springboard for widespread proliferation of DSL. The CLEC market has garnered more than $50 billion in revenues and investments over the past five years, Covad being the first of as many as 60 DSL providers to surface since then. Few remain.

"The market rewarded companies who were getting into the business in 1998," says Jason Maricheck, analyst with The Strategis Group. "Investors and venture capital firms were most interested in DSL providers gaining as big a footprint as possible, then acquiring customers later." This frantic buildup led to a large number of small, privately funded ISPs buying circuits from the three main DSL wholesalers: Covad, Rhythms NetConnections and NorthPoint.