Itï¿½s been a little over a year since I wrote about digital subscriber
line (DSL) ï¿½ and what a year itï¿½s been! Winston Churchill might have
been thinking of 2000 when he said, ï¿½Now this is not the end. It is not
even the beginning of the end. But it is, perhaps, the end of the beginning.ï¿½
In the beginning, DSL inspired wild optimism, which was fueled by
proactive telecom deregulation, market demand, and abundant capital. Today
DSL vendors, service providers, and investors are shaken and staggered --
having been pummeled by the rapid and unexpected boom-to-bust cycle in
global capital markets. When I last checked, former high-fliers like Copper
Mountain and Covad were trading in single digits, while other DSL value
chain members were suffering similar, if less dramatic, declines.
Does this spell the demise of DSL and by extension, the death of pure IP
dialtone delivered over broadband pipes?
It all began last October when Copper Mountain and Covad announced their
2000 third-quarter financial results. Copper Mountain, a market-leading
DSLAM supplier to the data CLECs, announced lowered guidance for the fourth
quarter and for 2001. The vendor cited lowered capital expenditures by its
customers. That was strike one. Covad followed this bombshell by announcing
a deeper-than-expected third-quarter loss due to late payments from its ISP
customers. Strike two. The strikeout pitch was delivered by Verizon in
November when it unceremoniously announced its intention to withdraw its
acquisition of DSL wholesaler Northpoint. Verizon cited
"deterioration" in Northpoint's financial condition and called off
the deal. Strike three -- and the DSL sector, already under severe pressure,
was now on a bona fide losing streak.
What It Means
It is clear we are seeing a significant slowdown in network build-out among
CLECs, data CLECs, and other next-generation service providers. Capital has
suddenly tightened up. Where once all that was needed was subscriber growth,
now investors are demanding profitable subscriber growth. Reorienting around
this new business objective will not be quick or easy for many vendors.
The implications are many. First, we may see significant consolidation in
the service provider space. Second, equipment suppliers to the telecom
segment will be increasingly squeezed as their customer base contracts and
capital spending slows. Third, the long-predicted consolidation in the ISP
space will likely begin. (There are roughly 7,000 ISPs in the U.S.)
Market Demand Is A Given
Despite these circumstances, the market remains good. Why? There is no doubt
the fundamental demand drivers for high-speed Internet access remain in
place. No technology has emerged to threaten DSL. The battle is still
between cable modem and DSL -- and as long as this is a two-horse race, DSL
will certainly claim a significant share of the overall market, if not the
The pace of DSL subscriber growth is picking up in North America, though it
is somewhat hampered by installation hassles. According to Telechoice, U.S.
DSL lines in service have increased from 500,000 at year-end 1999 to 1.7
million at the end of the third quarter of 2000 -- a three-fold increase.
Add in another 287,000 lines from Canada and you have a North American
installed base of 2 million DSL lines. This is just the beginning. IDC's
2000 year-end forecast shows global DSL lines increasing from 4.4 million in
2000 to 66 million in 2004, a CAGR of 96 percent. Meanwhile, Asia is seeing
pockets of high growth in places like Singapore, Taiwan, Korea, and Hong
Technology Trends for 2001
This year will see the emergence of g.shdsl (ITU g.991.2) as a strong
contender, particularly in the small business space. This new standard has a
lot going for it including excellent spectral compatibility, abundant
symmetrical bandwidth, multi-rate capability, and the promise of a single
standard for both the U.S. and Europe.
What about Voice over DSL? Still in the promise phase, this market is
potentially huge. As of the third quarter of 2000, there were probably fewer
than 20,000 paying customers for VoDSL -- at least according to some remarks
made by a CLEC executive at last fall's DSLcon tradeshow. While his company
was rolling out VoDSL, he was careful to keep expectations within line and
to make sure the service was working and ready for his customer base.
However, there is still a feeling that this market is poised to take off.
The service provider margins, estimated by CLEC NetPlus at 70 percent, are
simply too compelling to ignore. Of course, those margins require some
rather substantial investments in CO equipment like VoDSL gateways. And
given the sour investment climate, the dollars for that equipment may not be
so abundant. We'll have to carefully monitor this one. The market may ramp
up more slowly if the investment climate remains difficult in 2001.
So where does that leave us in 2001? DSL demand will remain strong.
Deployment will proceed briskly, but largely paced by the ILECs rather than
the CLECs. My bet is that only a few of these will survive, and the ILECs
will emerge to serve the largest portion of the broadband access market. As
for IP dialtone over broadband pipes, it may happen but more slowly than
many have thought. The investment capital needed for softswitches, VoDSL
gateways, and other equipment may not be there. But no need to worry -- it's
only the end of the beginning.
Jim Machi is director, product management, CT Server and IPT Products,
for Dialogic Corporation (an Intel company). Dialogic is a leading
manufacturer of high-performance, standards-based computer telephony
components. Dialogic products are used in fax, data, voice recognition,
speech synthesis, and call center management CT applications. For more
information, visit the Dialogic Web site at www.dialogic.com.
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