Bell Companies Blamed for D.S.L.'s Woes

http://www.nytimes.com/2001/08/06/te...rchpv=nytToday

August 6, 2001



Bell Companies Blamed for D.S.L.'s Woes

By KATIE HAFNER

A year ago, Hossein Farmani, president of aNet Communications, a small Internet service provider in Los Angeles, catered to a loyal group of longtime customers. ANet was no AOL, but Mr. Farmani was content to preside over a small community of 5,000 or so users.

Yet the customer loyalty proved to be highly elastic. Mr. Farmani discovered that providing competitively priced D.S.L. service — a form of high-speed Internet connection — had become close to impossible. Lured by lower prices to Pacific Bell Internet, the big telephone company's own Internet unit, half of Mr. Farmani's customers had deserted aNet.

"In a year or so, we won't have any customers at all," Mr. Farmani said. He added he could not lower his prices to match Pacific Bell's because of the high fees the telephone company charged him to connect his own D.S.L. customers to the network. Unlike some rates that telephone companies charge, fees for D.S.L. connections are typically not regulated.

Small Internet service providers like aNet represent the last vestige of the Internet's original homespun character. Yet the aNets of the world are struggling, and many of them blame the regional Bell operating companies for their endangered status.

If it were simply a matter of the giant telephone companies' using their greater economies of scale to provide better, more affordable high-speed Internet service, the issue might be nothing more than a poignant tale of a declining mom-and-pop industry. But many business and consumers complain that D.S.L. remains too costly and too difficult to obtain simply to cede the field to the Bell companies.

So far, according to the Yankee Group, a research firm, fewer than three million American households have D.S.L., a fraction of the households with slower- speed Internet access.

"Being the local-loop carrier puts the Bells in a monopolistic situation," said Zeus Kerravala, a Yankee Group analyst. "They have deep pockets and strong market share and can wait out any economic downturn. So they make promises they have no intention of keeping."

Mr. Farmani, for his part, is one of hundreds of Internet service providers across the country who have become increasingly disgruntled with the regional Bells. The service providers say the big phone companies unfairly use their market dominance and control of the local phone networks to make it difficult for them to provide D.S.L., or digital subscriber line, service.

Although D.S.L. signals travel over regular phone wires, the service requires installation of a special modem for the customer's computer and requires third-party providers to place special equipment at or near the phone company's central office — or to buy such connections from the phone company. The connection fees the phone companies charge service providers, as well as the degree of cooperation that phone companies extend to the providers, have a big impact on how effectively the outside providers can compete with the phone companies' own Internet services.

Last month, a group of California Internet service providers that included aNet complained to state regulators that Pacific Bell was using its network dominance to create a monopoly in D.S.L. service.

The group's grievance has not been the only one. In April, after a complaint by a local Internet company, the Kentucky Public Service Commission ordered BellSouth to lower its D.S.L. rates to smaller Internet service providers. Dozens of similar complaints have found their way to regulators in other states and to the Federal Communications Commission.

The California complaint came after months of discussions with Pacific Bell and its owner, SBC Communications, said David Simpson, a lawyer representing the Internet service providers.

"We brought I.S.P.'s from hither and yon to meet and talk with them in good faith about dozens of problems we wanted to solve, and it turned out to be a complete waste of time," Mr. Simpson said.

Mr. Farmani and others say that pricing is one of the biggest problems.

A Pacific Bell affiliate, SBC ASI, sells its D.S.L. lines to aNet at $30 a connection. To break even, many I.S.P.'s must charge at least $60 a month. With such an advantage, Pacific Bell Internet was recently able to raise its own customer rates for residential D.S.L. service by $10 a month to $49.95.

"It's like `let us shoot ourselves in the head, please,' " said Dane Jasper, owner of Sonic.net, an Internet provider in Santa Rosa, Calif. "This is draconian. They'll get away with whatever they can get away with for as long as they can, until someone makes them stop."

Mr. Jasper, who joined in the complaint to the California commission and is considering further legal action, said he had lost hundreds of customers to Pacific Bell.

Joe Izbrand, an SBC spokesman, said the issues could be resolved without regulators' intervention. "We intend to continue working closely with I.S.P.'s who resell our D.S.L. service," Mr. Izbrand said.

According to a paper released last month by the School of Information Management and Systems at the University of California at Berkeley, the regional Bell operating companies control 90 percent of the residential D.S.L. market nationwide. The paper concludes that the nation's Bell companies have maintained "unreasonable delays" in providing D.S.L. connections to Internet service providers while charging wholesale prices that are "unjustifiably high."

A network equipment company, 3Com, formerly sold consumer D.S.L. modems, but stopped making the devices because the business was growing too slow.

Bruce L. Claflin, 3Com's president and chief executive, said he believed there was latent demand for D.S.L. among consumers but that "the service providers are insufficiently able to capture the demand."

The phone companies have been reluctant to make a big push into D.S.L., Mr. Claflin said, because the profit margins have not looked attractive enough. At the same time, he said, the phone companies have little incentive to make it easy for others to build D.S.L. businesses.

In New York, Bway.net is an Internet service provider that says it has received too little cooperation from the region's Bell company, Verizon Communications.

When possible, said Joe Plotkin, director of D.S.L. marketing for Bway.net, the company avoids Verizon, choosing instead to resell D.S.L. service from companies like Covad Communications that compete with the regional Bells in the D.S.L. business. Still, Covad and other third-party suppliers rely on Verizon for the physical connections and, Mr. Plotkin said, Verizon has repeatedly delayed installing them.

"We've had Verizon installers not show up on a specific appointment date, and we've had them claim there was no access to the client — in the middle of the business day," Mr. Plotkin said. "What are the clients doing? Hiding under their desks?

"They've taken their monopoly advantage and leveraged it to get 80 percent of the market in D.S.L.," Mr. Plotkin said of the Bells. "It's not what the 1996 Telecommunications Act was supposed to do."

That law required the Bell companies to provide direct competitors like Covad with equal access to their network equipment for delivering a D.S.L. connection to a customer's premises. But Mr. Kerravala of the Yankee Group said the Bells had repeatedly delayed installation of lines. "They drag their heels when they're not the primary company selling the service," he said.

Eric Rabe, a Verizon spokesman, countered the critics. "I'd say we treat these people as customers," he said, "and we're doing our best to serve them."

Of prices, Mr. Rabe said: "Certainly any customer would like to buy what they're buying at a lower rate. But the fact is that D.S.L. is an expensive technology. Verizon has spent $1 billion in the last couple of years to provide D.S.L. service to our customers."

Where true competition seems to exist for high-speed Internet access is not between the Bells and other D.S.L. providers. Instead, it is between D.S.L. technology and a type of high-speed access provided by the cable television companies via cable modems. Although the number of cable modem subscribers remains fairly low, the technology is more popular than D.S.L., in part because it has been in place longer and in part because there are fewer technical hurdles involved in providing cable modem service. There were 4.7 million residential cable modem subscribers at end of this year's first quarter — compared with only 2.2 million residential D.S.L. subscribers — according to the Yankee Group.

"We should be their foot soldiers, going in and getting D.S.L. customers for them so they can compete against the cable companies," Mr. Farmani said of the Bell companies. "But they treat us so badly we are encouraging our clients to sign up with the cable companies rather than the phone company's D.S.L."

Many customers, meanwhile, are expressing frustration over spotty D.S.L. service and inferior technical support from the phone companies.

One disgruntled customer is Jason Greene, a Web-site content manager who works from his home in Boulder, Colo. Highly dependent on speedy access, Mr. Greene got his first D.S.L. connection nearly three years ago. Qwest Communications International, his regional Bell company, supplied the line, and Peak to Peak Internet, a service provider in Boulder, supplied his Internet service.

"I knew when I signed on that it wouldn't be a perfect service," Mr. Greene said. Little did he foresee, however, just how imperfect the setup might be.

"One day it went down and didn't go up," Mr. Greene recalled. In that instance, Mr. Greene was without service for nearly two weeks. Even when the link was restored, for several months after, his D.S.L. connection periodically continued to fail.

"I had no other option on my phone line if I wanted a high-speed connection," he said. "No one else could give me D.S.L. service."

That changed a few months ago when Mr. Greene heard that cable modem service was available for $45 a month through his local cable provider, AT&T. Now he has both kinds of connections, having kept the $85-a- month D.S.L. service because, he said, it is much faster than the cable modem for uploading large files.

In Los Angeles, meantime, Mr. Farmani of aNet has all but acknowledged defeat. He plans to shift his focus to operating Web sites for clients — even if he is not sanguine about his business prospects. "Web-site hosting is a very, very tough market," he said. But it is not as tough as D.S.L.