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November 23, 1999
Web posted at: 8:27 a.m. EST (1327 GMT)

by Eric Brown

(IDG) -- The Baby Bells have been begging the Federal Communications Commission to break open AT&T's monopoly control over cable modem networks, while keeping a tight rein on their own broadband networks. An FCC ruling could change that.

The FCC called Thursday for incumbent local exchange carriers to make their digital subscriber line access freely available to other broadband providers. For you, it should mean lower DSL prices and more choices. But only a handful of Internet service providers can afford to play the consumer broadband game.

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Under the FCC ruling, an incumbent like Bell Atlantic and SBC must unbundle the high-frequency "advanced services" portion of their local phone lines within 30 days. Competing carriers such as Covad, Northpoint Communications, and Rhythms NetConnections currently must lease separate phone lines for DSL service. But the incumbent carriers can offer both voice and DSL over a single line.

Competitive carriers typically resell their services through other service providers. They've focused primarily on the business market with symmetrical DSL service, which offers equivalent bandwidth in both directions. Consumers who want fast Web access typically choose cheaper asymmetrical DSL, which accepts lower upstream bandwidth in exchange for being able to share the line with a voice channel. With line sharing, ADSL becomes a more attractive offering for the competitive local exchange carriers.

Competition lowers prices

As more competitors enter the consumer market, lower prices won't be far behind.

"I was thinking consumer DSL pricing was only going to drop to about $40 a month by 2002, but thanks to this ruling, we'll probably get it down to around $32 by then," says Michael Erbschloe, vice president of research at Computer Economics. "For every million new lines, there's going to be about a 3 percent reduction in monthly subscriber fees."

Competitive local exchange carriers will first discount installation and modems, Erbschloe says. Then they'll undercut the local telcos' prices, now around $50 to $60 a month, by 10 to 15 percent.

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This might bring a few more consumer DSL competitors into a typical metropolitan area, but don't expect the wide-open competition of the dial-up world. Lease of these unbundled DSL lines is limited to registered competitive local exchange carriers, a legal and financial hurdle beyond the reach of most Internet service providers. Dial-up ISPs that want to go broadband must either deal with a handful of DSL-savvy competitors or a single, often uncooperative incumbent local exchange carriers.

"The ruling will open up the competition somewhat among [competitive local exchange carriers]" Erbschloe says. "But it won't lower the cost for the typical service provider."

Challengers still face a fight

The ruling doesn't go far enough to open the door for most service providers, says Barbara Dooley, director of the United States Internet Service Providers Alliance. To really open up the market, the FCC should force incumbent local exchange carriers to provide access to their DSL equipment as well as to phone lines, Dooley says.

Because competitive local exchange carriers control only about 6 percent of DSL lines, most service providers have no choice but to buy DSL access from incumbent carriers. They're buying wholesale, but at higher prices.

"The [incumbents] do not offer a product at a reasonable tariff," Dooley says.

What's more, these carriers often engage in anticompetitive behavior to make sure their own ISP subsidiaries have an upper hand, the USISPA charges. The House Commerce Committee, headed by Tom Bliley (R-Virginia), is investigating such claims. One claim alleges that an internal SBC e-mail message told employees to destroy records about its DSL rollouts so they wouldn't have to share them with competitors.

The USISPA also charges that incumbent local exchange carriers often fail to notify service providers when they upgrade new central offices with DSL equipment.

"By the time the ISPs find out DSL equipment has been installed, they're told that all the ports are taken, usually by the [incumbent's] DSL affiliate," Dooley says. Also, these carriers are deliberately slow to fill orders for new DSL customers, and sometimes even "slam" customers over to their own providers, Dooley adds. Some such carriers illegally bundle their regulated phone service with unregulated DSL service.

More options, at least

The good news for ISPs is that competitive local exchange carriers will soon control more DSL lines, thanks to the ruling. More competition should give better prices to both ISPs and their customers.

Still, even competitive carriers may limit their consumer DSL partnerships to a few major ISPs and content providers. For example, Yahoo just signed a DSL cobranding agreement with Northpoint and Covad.

US West threatened to appeal the FCC's decision even before the ruling. But industry watchers say the independent telcos are likely to win only the right to charge participating competitive local exchange carriers for a share of the cost to implement the line-sharing technology. It won't be a hurdle for the top carriers, but smaller outfits won't be able to afford the ante.

More important, competitive local exchange carriers still must compete with the incumbents on billing and marketing, where the incumbents can offer the convenience of a single bill. But if the newcomers can provide better customer service, that edge may not matter as much.