DSL upstarts drive into telco territory

Tired of your local exchange carrier dragging its feet on delivery of new services? A group of upstart competitive local exchange carriers (CLEC) that have amassed millions in venture backing are getting ready to burst on the scene with new high-speed data network offerings powered by digital subscriber line (DSL) technology.

As these initial DSL CLECs enter markets across the country, they will shake up the big boys by making broadband access to corporate networks and the Internet less expensive and commonplace.

DSL can support speeds ranging from less than the T-1 speed of 1.5M bit/sec up to 6M bit/sec over a single voice phone line.

Savings for corporate network managers could be significant. For example, one CLEC specializing in DSL promises savings of 30% to 60% off the price of traditional access services such as ISDN, T-1 and frame relay.

"[Regional Bell operating companies] have perpetuated a very artificial pricing model. There will be a huge correction in that pricing pretty quickly," said Rich Shapero, a general partner with venture capitalists Crosspoint Venture Partners in conjunction with investment house Warburg, Pinkus Counsellors, Inc., is providing $10 million in initial funding for DSL CLEC Covad Communications Co., based in San Francisco. Shapero said he expects DSL CLECs with national aspirations to attract $50 million or more to get up and running, a measure of the confidence the financial community has in this technology.

Typical venture capitalists expect to recoup 10 times their investment within five years, according to Andy Rachleff, a general partner in Benchmark Capital. Rachleff says that goal can be met by a DSL CLEC that mixes the competitive drive and speed of an equipment vendor with the experience of a service provider.

These DSL specialty carriers have drawn key executives from the ranks of the RBOCs, including NYNEX Corp., Ameritech Corp. and Pacific Bell, as well as from major enterprise network hardware vendors including Cabletron Systems, Inc. and Cisco Systems, Inc. The core team at DSL CLEC North Point Communications, Inc., in San Francisco, consists of people who worked on DSL deployment plans for MFS Communications, Inc.

That kind of experience coupled with big bankrolls separates this new breed of carrier from the initial entrants to the DSL market. Earlier entrants are typically Internet service providers who hang DSL modems on both ends of copper phone wires designed to support burglar alarm circuits. RBOCs have been cracking down on that practice.

DSL CLECs plan to lease copper wires from RBOCs for $20 to $40 per month, provision them, and offer services for less than RBOCs typically charge. They plan to use that lower cost in combination with RBOC intertia to run away with traditional RBOC customers.

DSL CLEC start-ups are ceding the mass-market, residential Internet access customer to the traditional local carrier for the moment because DSL hardware is so expensive that services would be beyond the budgets of most homeowners. But they will be well within the means of corporations setting up remote access for branch offices and telecommuters, DSL CLECs said.

Northpoint Communications is targeting small businesses for remote access and virtual private networks. Covad Communications Co., also in San Francisco, is focused on offering secure private lines that will connect homes to corporate networks and the Internet. CuNet, a division of Network Access Solutions, Inc., in Herndon, Va., will go after corporate remote access as well as provisioning Internet access to customers of Internet service providers. Vitts, Inc., in Manchester, N.H., will offer both voice and data services at speeds up to 6M bit/sec.

While the DSL CLECs and their backers are optimistic, they face significant hurdles.

First, the traditional local carriers all are testing DSL with plans to deploy DSL services by early next year. Slow to implement DSL services or not, they represent well-funded entities that already own the necessary copper infrastructure.

Second, winning legal CLEC status is not easy and requires time and expertise. Approval is granted state by state, and because CLEC is a new legal designation, state regulators are still unfamiliar about how to deal with applicants.

That adds up to delay for widespread DSL services that challenge current data prices, according to Beth Gage, senior broadband analyst for TeleChoice, Inc., a telecommunications consulting firm in Verona, N.J. "I would not expect to see a significant impact for 12 to 24 months," Gage said.