Speed Kills How PacBell’s New DSL Service Trips Up the Competition
Hal Plotkin, Special to SF Gate
Monday, January 18, 1999
Pacific Bell’s recent announcement that it is increasing the availability and slashing the price of its DSL service is both great and horrible news.
First, the good stuff: in exchange for a flat $39 per-month fee with no per-minute charges, Web surfers lucky enough to live near Pacific Bell central offices — nearly 66% of PacBell customers — will receive guaranteed minimum downstream connection speeds of 384 KBPS. That’s three times as fast as my ISDN line, which usually costs me, all things considered, about twice as much per month.
It doesn’t take Warren Buffett to realize that when a vendor offers you three times more stuff for half the price it’s a pretty good deal. What’s more, customers with particularly good copper lines will receive downstream speeds 11.7 times faster than ISDN — or 1.5 MBPS — for the same $39.
Even better, for a limited time Pacific Bell is waiving the several hundred dollars it plans to charge for installing DSL if customers sign up for one year of service. Under the terms of that deal, new DSL customers will only have to shell out $199 to buy the required special modem and equipment. In a nod to reality, Pacific Bell is even offering to come to your home, free of additional charges, and hook the whole shebang together, including installing the required card in your PC.
The improved customer service is a marked departure from the days when we struggled with ISDN installations and were forced to learn arcana like AT command strings, B-channels, and SPIDs. (On the first of dozens of calls to PacBell tech support during my harrowing ISDN installation, I complained that one of my SPUDs wasn’t working. “Well, what do you expect from a potato?” was the reply).
Now for the bad part: Pacific Bell’s DSL offering may mortally wound long-distance competitors and independent Internet service providers (ISPs). It also means the Internet is moving away from being a two-way street where similar speeds prevail in both directions, receiving and sending.
DSL speeds dramatically increase the quality and reliability of telephony over the ‘Net. As a result, it’s going to be a lot easier — and a lot cheaper — to catch up with my friends in New Zealand. But it is also going to be a lot harder for long distance companies to stay profitable. Some of them are trying to get into the DSL game themselves, most notably MCI, in partnership with mega-ISP Earthlink.
Even so, at the precise moment when such Baby Bells as PacBell are freezing them out of the local loop, the long-distance carriers will simultaneously be losing their traditional customer base to the invigorated DSL-powered IP telephony bandwagon. While long distance companies can offer DSL, the real question is whether they will be able to offer it at prices competitive with the Baby Bells since, in most cases, they still have to pay the Baby Bells to reach those customers.
Traditional long-distance companies might, as a result, be forced into the niche of servicing only those customers who can’t get DSL. (The advanced signal processing technology DSL utilizes doesn’t work if customers live more than a few miles from a Pacific Bell central office). No one knows whether there are enough of those customers to keep PacBell’s long-distance rivals in business. What is clear is that this new development further jeopardizes the viability of PacBell’s long distance competitors. In the long run, we might all come to regret that.
Also, you know that new 56k modem you just bought? Well, if you combine it with your old 14.4 and 28.8 models, you now have a nice — although slightly rickety — set of high-tech coasters. The 56k modems now being sold with most new computers are already obsolete. In the past, you had to wait a few months for your high-tech equipment to become irrelevant. Now, all you have to do is take it out of the box.
In place of the modem that came with your new PC, Pacific Bell will sell you a DSL modem from Alcatel, a company based in France. PacBell says it will support users who prefer DSL modems from other companies, once it certifies their compatibility. In the meantime, though, other modem vendors have been pushed out of the telecommunications food chain.
An imbalance between downstream and upstream connection speeds is another troubling aspect of this new product offering. The imbalance drives another stake into the hearts of those who hoped they’d be able to compete inexpensively with the big guys online. The most popular consumer Internet connections have traditionally offered the same speeds for sending or receiving data. But PacBell’s fastest DSL service, just one version of the technology, takes the industry in another direction.
With PacBell’s main DSL offering, more formally called ADSL, it’s better to receive than to give. Upstream connection speeds, the speed with which you can deliver data from a server in your home or small business, are about three times slower than the speed with which you can receive data. PacBell is also offering a slower speed SDSL service, with identical up and downstream speeds, but it tops out at 384 KBPS rather than 1.5 MBPS.
Under this scheme, the world will be divided into two camps: the consumers at the trough who receive data at high speeds, and those who produce or sell data, who will be forced to pay much higher prices to reach the public at a competitive pace. So much for the Net wiping out the intermediaries — at least, the local Baby Bell intermediaries. Amazing, isn’t it, how the march of science has managed to keep them firmly in the loop?
And that brings us to the worst part of this stunning new DSL announcement, buried in the press release like a Bosnian land mine. For just $10 more per month, or a total of $49, Pacific Bell will throw in its own branded internet service. The old adage was that you give away the razor and sell the blades. In this case, Pacific Bell is selling the razor cheap and practically giving away the blades. That is, at least until all the other blade makers have been run out of business.
The ISPs currently offering similar DSL access charge about $200 or more per month for the same service PacBell will now be selling for a ten spot. If independent ISPs don’t lower their prices, speed-conscious Web surfers will probably depart in droves. If the ISPs do lower their prices, though, they face insolvency. Right now, most independent ISPs are just barely hanging on, unable to make profits on the $20-$30 per month flat rates that have become standard for analog and ISDN service.
The struggling ISPs have been playing the waiting game, hoping to hold onto eyeballs until they are bought by larger companies, or until they can figure a way to make their investments pay off. The mantra in the ISP business has long been “wait until next year.” When I contacted one independent ISP the day after PacBell’s DSL announcement, the owner sighed. “It’s going to be a very cold winter,” he said.
Just as Microsoft is criticized for using its hegemony over PC operating systems to control everything else on your desktop, PacBell is positioning itself to use its stranglehold on local service to take over the ISP business. Of course, you still have the option of going with an independent DSL internet service provider. But, it’s likely doing so will continue to cost considerably more.
With all its combined market power, for example, the Earthlink/MCI combo envisions charging between $40 – $60 per month for DSL internet access. It’s very unlikely smaller ISPs will be able to beat those prices. As a result, there may be far fewer independent DSL ISPs around in a year or two. I wonder what happens to PacBell’s monthly $10 DSL internet access charge then?
Ironically, AOL, the longtime bane of Net fanatics, may step in and save the day. The company has announced it will offer a similar DSL service to 7.5 million homes on the East Coast by the end of 1999. Prices are expected to hover near the low end, but customers will no doubt be saddled with the pay-for-play onslaught that subsidizes AOL.
And cable operators, too, are pledging service and prices competitive with DSL. However, they face technical hurdles of their own since most current cable net access technologies only work as advertised if few people in your neighborhood use them. Not exactly a winning business model: the more people who use it, the worse it gets.
To be sure, PacBell’s new DSL service looks like a winner. It may even be a big enough advance for consumers to justify the damage it will almost certainly do to long-distance carriers. But I have to wonder whether PacBell could have made the move without cutting the throats of independent ISPs with that monthly $10 fee. It seems a sorry reward for the risk-taking entrepreneurs who brought us low-cost internet access in the first place.
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