Bell Atlantic's DSL Effort Crawls Behind Other Baby Bells

As a group, regional phone companies face stiff competition from AT&T and start-ups for the high-speed Internet access market.
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Bell Atlantic (BEL) reigns supreme over the wealthy, populous Northeast region, but the phone giant has been moving at a snail's pace to deliver quick access to the Internet.

At a breakfast with analysts Wednesday to outline its broadband strategy, Bell Atlantic is expected to reveal anemic digital subscriber line, or DSL, sales. Some industry insiders are even suggesting that the Baby Bell may need to spin off a division, or create a separate subsidiary, akin to its wireless business,

Bell Atlantic Mobile

, to handle the high-speed access business.

"I think they have every intention of setting up separate division," says Michael Balhoff, a telecommunications analyst with

Legg Mason Wood Walker

, who has a buy on Bell Atlantic,

U S West

(USW)

and

GTE

(GTE) - Get Report

. "

DSL is a potentially large revenue source for them and it would be appropriate if they set it up to adequately respond to that," Balhoff says. (Legg Mason has no underwriting relationship with any of the regional Bell telephone companies.)

Bell Atlantic officials would not answer questions regarding DSL subscriber numbers, and downplayed any speculation that a major shakeup may be in the works.

The DSL technology, which allows fast Internet access through existing copper phone lines, is the phone industry's answer to cable modems. And as studies show, it is sustained demand for high-speed data and Internet services that will provide growth for the phone companies. Last Wednesday, Bell Atlantic said second-quarter earnings rose 11%, to $1.2 billion thanks to growth in wireless and data services.

But the Baby Bells as a group have been slow to roll out their broadband strategy. In the past eight months, Bell Atlantic has acquired far less than 20,000 subscribers, according to analysts and industry executives. This puts Bell Atlantic at the back of a crawling pack of Baby Bells.

SBC Communications

(SBC)

, which started the year with 3,000 subscribers, signed on an impressive 32,000 subscribers as of the second quarter. U S West, which runs its DSL operations through a separate

!nterprise Networking

division, leads the pack with more than 52,000 subscribers.

"The regional Bells are about steady returns, they're not growth companies, and not aggressive in areas where they may lose money," says Mike Smith, a senior telecommunications industry analyst and consultant with

Stratecast Partners

. Smith advises telecom service providers, including the Bells.

That may be hurting some of the smaller ISPs. Privately held Huntington Beach, Calif., ISP

Flashcom

signed an alliance agreement with Bell Atlantic in June, but President and CEO Brad Sachs says the company's slow uptake and shifting technology decisions means that he has been unable to sign on any subscribers thus far. "They're a phone company, for chrissake," says Sachs.

On the horizon is the threat of

AT&T

(T) - Get Report

, which is spending $110 billion to amass a cable empire capable of delivering broadband services -- everything from multiple phone lines to instant Internet access -- to hundreds of TV channels and video services simultaneously.

The Bells also face heat from start-ups such as Santa Clara, Calif.-based

Covad Communications

(COVD)

and

NorthPoint Communications

(NPNT)

of San Francisco, which are picking off the small- and medium-sized businesses by undercutting the Bells' conventional T1 high-speed lines.

"I think a lot of people are overfocused on DSL, at least from a financial standpoint," says Bruce Roberts, an analyst with

Dresdner Kleinwort Benson

, which has a buy on Bell Atlantic and a hold on U S West. Roberts said there is still limited awareness of DSL among general consumers, but another barrier could be the hefty $40 to $60 monthly charge.

"If I am looking to see who is determining the DSL market, I see companies like NorthPoint, Covad and

Englewood, Colo.-based

Rhythms NetConnections

(RTHM)

," adds Stratecast's Smith. "They are deploying DSL from the time they get up in the morning to the time they go to bed at night. It's what they do."

Bell Atlantic needs to find that intensity if it wants to play the DSL game.