Out There - New Data on CLECs

Posted: 06/1999

New Data on CLECs
DSL Buzz Spreads as CLECs Feed Hunger for Bandwidth
By Gail Lawyer

If you're hot, you're hot. If you're not, you probably don't have a digital subscriber line (DSL) offering.

At least, that seems to be the case now, as every competitive local exchange carrier (CLEC), long distance provider and Internet service provider (ISP) is rushing to announce, trial and launch one flavor or another of DSL technology for high-speed, broadband Internet access and potentially many other services.

The incumbent telcos have been playing around with DSL technology for years, initially believing it would be the remedy for their troubles getting into the video business. But along came the Internet, and the desire for faster connections changed the focus of DSL deployment altogether.

DSL isn't only in the purview of the incumbents, though. Several "data CLECs" have arisen, solely for the purpose of collocating with telcos and deploying DSL technology primarily for wholesale customers or retail corporate customers. With successful initial public offerings (IPOs), as well as soaring stock prices and valuations, Covad Communications Co., Santa Clara, Calif., and Rhythms NetConnections Inc., Englewood, Colo., have blazed a white-hot trail that several other companies hope to follow (see related story).

Rhythms currently has more than 300 central offices (COs) in operation or equipped with their gear, with service available in more than a dozen markets across the United States.

Other data CLECs, such as NorthPoint Communications Inc., San Francisco, and Network Access Solutions, Sterling, Va., also were working on IPOs at press time.

Success of these competitive data providers on Wall Street has validated using DSL technology as a way to bring high-speed Internet access to end users, such as small and mid-sized businesses, branch offices, telecommuters and residential web surfers. Hoping to catch the wave, a slew of additional service providers have announced strategies for using the DSL networks of existing data CLECs or developing their own offerings.

Despite the hype, DSL is still in its infancy. There were only about 74,000 DSL access lines in use at the end of March, according to TeleChoice Inc., an Owasso, Okla.-based consultant group, which presented its findings at the April DSLCON meeting in Dallas. Technical restrictions, such as loop length and quality, as well as the fact that DSL modems are not widely available, play a part in the slow rollouts of DSL, say many industry watchers.

By far, the incumbent telcos are the most prolific deployers of DSL service with 62,000 DSL lines in service at the end of first-quarter 1999, says Claudia Bacco, director of DSL products at TeleChoice. CLECs and ISPs accounted for only 12,000 lines (see chart, "DSL Deployment," below). The ILECs, though, are aiming their DSL service at residential customers to compete with cable modems. About 79 percent of the telcos' deployment has been in the residential market, compared to only 13 percent by CLECs.

Most of the latest plans to surface focus on using DSL to provide business-class services, replacing the costlier T1 connections that companies have been using, or allowing dial-up customers to get more bandwidth for their buck.

A lot of the new entrants in the DSL space are partnering with Covad, Rhythms and NorthPoint to take advantage of their existing collocations in telco COs in major markets around the United States and limit the capital they need to invest to begin providing these services.

Covad, for instance, has collocated in 373 COs that encompass 11.2 homes passed and provides DSL in nine markets nationwide. Plans call for Covad to be in 22 metro areas in the future. Currently, Covad has only 8,600 subscriber lines in service. But those numbers are likely to increase as several carriers begin using Covad for DSL. Those reselling Covad's network include AT&T Corp.; Qwest Communications International Inc., Denver; and NEXTLINK Communications Inc., Bellevue, Wash. Covad also has launched a consumer service, TeleSurfer, which will be available through its national ISP partners, such as Concentric Network Corp., Cupertino, Calif.; Flashcom Inc., Westminister, Calif.; and Verio Inc., Englewood, Colo., as well as smaller, regional Internet access providers.

While planning to work with Covad, AT&T announced in late April it was going to do its own DSL deployment as well. AT&T reportedly has begun market trials of DSL for business customers, and in September the company plans to roll out wholesale service in nine cities as part of its Private Label Internet Protocol (IP) Portfolio. In press material, AT&T said it will have more than 1,200 DSL points of presence (POPs) operating within the next year.

NorthPoint, which is in 17 markets nationwide and plans to add another 11 by the end of the year, also is working with ISPs such as Flashcom and Verio. In addition, NorthPoint has received equity investments and commitments for DSL lines from many competitive providers. ICG Communications Inc., Englewood, Colo., invested $10 million in NorthPoint and said it will buy up to 75,000 DSL lines. Frontier Communications, Rochester, N.Y., and Cable & Wireless USA, Vienna, Va., both have equity stakes in NorthPoint and plan to use the DSL technology to extend the power of their high-speed national backbones to the desktop. Cable & Wireless also says it will explore the possibility of using NorthPoint to deploy DSL services internationally.

Some providers have not settled on one data CLEC for their wholesale DSL needs. Intermedia Communications Inc., Tampa, Fla., recently said it will be using both NorthPoint and Rhythms in areas where it does not have its own facilities.

Qwest is another company that is spreading its wealth among data CLECs. In addition to its arrangement with Covad, Qwest made a $15 million equity investment in Rhythms and has promised to purchase "performance class" DSL service from Rhythms in 31 metro areas.

Another major Rhythms' customer is MCI WorldCom Inc., which in January invested $30 million in the company and committed to buying 100,000 DSL lines. Rhythms also is working with ISP EPOCH Internet, Irvine, Calif., which will use the data CLEC's network in California and expand with Rhythms into other markets across the United States.

Most providers are using DSL primarily for a high-speed, "always on" Internet access solution, others are laying the groundwork for providing multiple services, including voice over DSL-enabled lines. The market still is focused on the basics of getting service deployed and figuring out how to provide ubiquitous coverage, Bacco says. "They're not yet moving to value-added, sophisticated options," she adds.

But there are a few exceptions. Covad, for instance, has its TeleSpeed remote service, which uses DSL at local points to connect traffic to a national backbone. DSL Networks, San Francisco, has a similar concept and is partnering with data CLECs in each city to get traffic into a national network.

Another example of advanced DSL applications is Rhythms' multiple destination routing service. This allows work-at-home end users to access the Internet separately from their corporate local area network (LAN), alleviating traffic congestion and security concerns experienced by corporations with teleworkers. Rhythms also offers a service called PBXpress, which brings the features of an office's private branch exchange (PBX) system to remote workers using DSL. This is one of the first commercial voice over DSL offerings on the market, according to Bacco.

Integrating voice, data and other traffic over DSL will be the key to growing DSL service, providers say.

"DSL is merely a technology that's wonderful for local access. But we need to consider what are the value propositions, rather than just putting a stamp on the side of our race car that says we have DSL," says Catherine Hapka, Rhythms president and CEO.

Hapka believes that by putting voice, video and data over a single line, Rhythms is redefining the next generation of CLECs. "We're efficient CLECs because we're starting with a new technology that's one-tenth the cost of substitutes [such as T1 lines], and we can put many services over it," she says.

MGC Communications Inc., Las Vegas, is well positioned to be a big name in integrated services via DSL thanks to its 207 collocations in seven tier 1 markets, say industry analysts.

"We didn't intend to be a data CLEC or a voice-only provider. We couldn't find the right way to address the duplication of networks," says Neild J. Montgomery, president and CEO of MGC. That was the case until MGC discovered the solution offered by Accelerated Networks Inc., Moorpark, Calif., which allows for voice and data channels to be provided over a single unbundled loop using DSL.

MGC has been testing the technology in Las Vegas and will begin deployment throughout its network by the third quarter. By year-end 1999, Montgomery says MGC will be able to address 20 million lines.

GST Telecommunications Inc., Vancouver, Wash., recently completed a trial of DSL technology with Covad in the San Francisco area, but has yet to choose a partner for its network-wide rollout.

"Where we see DSL fitting in is in extending our Virtual Integrated Transport and Access (VITA) network to the customer premises," says David Williams, vice president of strategic marketing for GST. GST hopes to offer local, long distance, Internet access and virtual private networks (VPNs) via DSL to small businesses. "This is a great thing because most of those offices are outside the reach of our fiber and T1s are too expensive for them," Williams adds.

Dallas-based Allegiance Telecom Inc. has decided to do an integrated offering based on DSL, starting in Dallas, New York and San Francisco. Allegiance will put DSL gear in its existing collocation spaces and plans to have 100 COs equipped by year's end.

"DSL is a great delivery mechanism for all our services," says Scott Brothers, Allegiance's vice president of marketing. "It takes costs out of our systems because we need fewer unbundled network elements (UNEs) and it frees up capacity at the CO level."