Bell Atlantic's New Unit Points to Bluer Skies for DSL Sellers

Companies such as Covad could gain a foothold in selling DSL to businesses.
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If you reached this page through a high-speed Internet connection, then you're either a) at work, or b) among the scant 1.5% of U.S. households with broadband access.

That fact illustrates the slow spread of highly touted new technologies aimed at speeding Internet access. The rollout of digital subscriber line, or DSL, technology to consumers and businesses is lagging far behind plan, as local phone giants responsible for the lines grapple with equipment-installation problems and other bugs.

For upstart telcos such as

Covad

(COVD)

,

NorthPoint

(NPNT)

and

Rhythms NetConnections

(RTHM)

, which sell digital subscriber lines to businesses, that's meant falling share prices and frustration over what they see as a sluggish response by the regional Bell telephone companies that control more than 90% of the nation's local lines.

But that may be about to change. On Monday,

Bell Atlantic

(BEL)

, acting on

Federal Communications Commission

guidelines, is expected to announce the formation of a DSL subsidiary in New York as a condition of entering the long-distance business.

"Some of the Bells' excuses about the difficulty of meshing various networks have been valid, but at the same time they realize that these

competitive DSL companies are going to kill them on price," says

Wasserstein Perella

analyst William Klein. "I mean, I have seen cases where they have moved couches and filing cabinets in the way so the

DSL companies could not set up their equipment." (Klein follows Covad, NorthPoint and Rhythms but has no rating on them. Wasserstein Perella has done no banking with the Bells or with Covad, NorthPoint or Rhythms.)

With this ugliness behind them (they hope), the DSL sellers will renew their plans to deliver on broadband promises.

Diamonds in the Sky with Lucy

DSL has been hailed as the single greatest advance in communications since the phone itself. The technology dramatically increases the capacity of conventional copper phone lines, enabling video, telecommuting, real-time stock trading, distance learning and myriad e-commerce applications. As such, it represents one of telecom's most sweeping business opportunities.

Yet for a 10-year-old technology, DSL has been long on promise and short on delivery. "Investors let hype get the best of them and then reality kicked in," says Wasserstein Perella's Klein, referring to the much slower-than-expected rollout of the start-ups' DSL services.

The telcos say the Bells are part of the problem. As of November, after a year of effort, Bell Atlantic had a mere 20,000 DSL subscribers, according to Chairman Ivan Seidenberg, who revealed the closely guarded number for the first time during a recent investors' conference. Consequently, the company will fall far short of its subscriber target of 100,000 for the year.

For example,

Network Plus

(NPLS)

claims that Bell is late on its commitments 40% of the time, resulting in delays of 20 to 40 days. "They are wholly inadequate, but that might be by design," says CEO Robert Hale Jr. Shares of Network Plus, which sells local long-distance and DSL services primarily to businesses, are down 43% since a July 19 high.

Bell Atlantic officials say their competitors' accusations are unfounded, and add that the new subsidiary won't change the pace of their DSL rollout.

"The governors on

the DSL-selling telcos' growth are really the Bells," he says.

Accordingly, investor enthusiasm for these DSL companies has waned in recent months. The shares have pulled back from their levels this spring, when NorthPoint and Rhythms went public. Covad, up 7/8 Friday to 59 3/16, is down 20% from its high in April. NorthPoint, up 3/4 to 27 3/8, is down 40% since May. And Rhythms, off 1 3/16 to 32 5/8, is down 64% since April.

Power Move

The FCC is under extraordinary political pressure to grant Bell Atlantic entry into the long-distance market in New York, so many analysts and industry executives see the subsidiary fiat as little more than a face-saving gesture by regulators.

This is the second action in as many months by the FCC to loosen the Bells' grip on their local networks and help speed competition. Last month, the FCC ordered the Bells to share their lines with rivals at wholesale cost. That cost has yet to be determined, but once in place, it's expected to reduce what is now a $20 monthly charge to $5 or $10.

In essence, Bell Atlantic's DSL move will have it sell services to its subsidiary as it would a rival telco.

SBC Communications

(SBC)

was forced to do the same thing as a condition of its merger with

Ameritech

. Establishing a subsidiary creates a separation between Bell's wholesale data business and its retail DSL business, making operations visible and pricing policies enforceable. It's an attempt to put Bell on equal footing with its competitors.

Since the data business represents less than 11% of the Bells' revenue, their shares are not dramatically influenced by the performance of their DSL operations. But as data, like wireless services, begins to see more rapid growth, analysts say the old-guard telcos will increasingly

turn to tracking stocks in order to recognize the different valuations of different divisions. A tracking stock, unlike a common share, is not an ownership stake but allows investors to track the performance of a division.

The DSL sellers have won a battle, but now they must stop the blaming and start the deployment. Analysts say it's only a matter of time until the Bells get the kinks out and start spinning their copper wire into gold.