The broadband revolution was supposed to give Internet service providers a way to satiate their customers' greed for speed. And a way to gain market share, add value and drive up revenue.
Only about a year after they began to deploy Digital Subscriber Line services -- turning conventional phone lines into high-speed pipes to the Net -- they may be about to hit a wall.
Bell telephone companies have begun to aggressively push their own DSL access services. And they're doing it at prices so low that many small and mid-sized ISPs can't match them. Or, if they do, they can't make money.
The threat is very real to some smaller Internet companies, such as members of the Texas Internet Service Providers Association. The group sounded an alarm with the US Federal Communications Commission in mid-March, saying that the very existence of some companies is challenged by SBC Communications' new US$39.95-per-month DSL access - and what the TISPA believes are the telephone company's illegal marketing practices.
"Our companies can't compete at those prices and survive," said Scott McCullough, counsel at the 100-member TISPA.
Other small ISPs, such as foreThought.net and Nobaloney.net, expect to survive, as they have before, through better customer service and closer relationships to their customers.
In fact, it's possible that this is actually the lull before the real storm. Coming soon are technologies that could cause real fisticuffs between ISPs and phone companies - technologies that allow consumers to install their own high-speed access equipment and ISPs to put a high-speed data service onto a customer's existing phone line, rather than order and install a whole separate line for data.
"The current market conditions are an anomaly that won't last long," said Judy Levine, vice president of consumer markets at NorthPoint Communications, a competitive local exchange carrier (CLEC) that builds DSL networks and resells the service to ISPs.
"There definitely is economic and competitive pressure on ISPs today, but it won't last long. By mid year we will have line sharing and we will begin to offer G.lite, and at that point, the economics will be very different from what they are now."
Threatened Existence
Trouble with regional Bell operating companies (RBOCs) is nothing new to ISPs. During the early days of the dial-up boom in the mid-1990s, small access providers complained that many Bells were limiting the availability of high-speed digital lines, known as Integrated Services Digital Network Primary Rate Interface lines, that were used to connect customers to a bank of modems. The practice, the ISPs said, caused busy signals and chased customers to competing Bell-affiliated Internet providers. Then, as now, the Bell companies fervently denied the accusations, and regulators ultimately took little notice.
The arrival of DSL is again causing consternation, because ISPs and local competitors say they have to wait up to two months to get DSL lines installed and, during that time frame, the Bell-owned ISPs have been known to steal their customers.
But ISPs hardened in past battles are being as aggressive as their legal budgets will allow in airing their complaints before the FCC and US state public utility commissions from Texas to Florida. As with Primary Rate Interface lines of old, local loops are controlled by the Bells and represent a competitive beachhead that at least some Bells appear extremely unwilling to give up.
"Small ISPs will only survive if something is done at the federal level," said Sue Ashdown, executive director at a new Internet provider trade group called the US Internet Service Provider Alliance. "Broadband is the way people are going to go."
The TISPA recently filed a complaint with the FCC that details what it claims is predatory pricing, DSL customer poaching and blatant favouritism by SBC toward its own Internet affiliate, Southwestern Bell Internet. Most damaging was SBIS' recent promotion of DSL access with free setup and modem for US$39.95 per month, which badly undercut the independent ISPs with which it is officially partnered.
ISPs that buy DSL lines in lower volumes have to pay US$39 per month for the DSL line alone, McCullough said. When the cost of installation, customer equipment, overhead and backbone network costs are added in, the ISP has to price its service well above SBC's just to break even.
"There is overwhelming evidence -- based on both a 'top-down' view of SBC's regulatory gamesmanship in relation to DSL . . . and a 'bottoms-up' review of the documented daily assaults in the trenches -- that SBC and its affiliates in Texas are strategically acting in concert in an anticompetitive fashion to maintain dominance in local service and to obtain dominance in enhanced services," the TISPA wrote in its complaint.
At the heart of that complaint is the TISPA's belief that SBC's regulated phone company is sharing information about ISPs and their customers with its unregulated data unit. SBC officials disputed the charge, but said they are investigating following meetings with TISPA officials.
According to McCullough, Texas ISPs believe SBC officials, from DSL installers on up, are proactively working to shift their customers onto SBIS, and are using the new DSL pricing to accomplish that goal. The TISPA complaint cited numerous cases in which SBC told an ISP and its CLEC partner that DSL could not be delivered to a prospective customer, but sold SBIS' DSL access to that same customer without a problem.
SBC officials said they view ISPs as "very important partners" in extending the reach of DSL, according to spokesman Michael Coe, who added that the company met with the TISPA and is looking into its complaints.
The Department of Justice is apparently unconvinced - it cited SBC's "substandard performance" in providing competitive access to DSL lines as one of its main reasons for opposing the company's entrance into long-distance service in Texas. January data collected by the US Department of Justice showed that performance was actually getting worse in some areas.
FCC officials could not be reached for comment on the disposition of the TISPA's complaint.
But SBC isn't the only Bell company accused of dirty tricks in the DSL wars. Kentucky-based IgLou Internet Services filed a complaint with the Kentucky Public Services Commission alleging that BellSouth is unfairly soliciting its phone customers to become customers of its BellSouth.net affiliate, sharing resources and proprietary information with that company and unfairly pricing wholesale DSL lines to shut small ISPs out of the market.
Like the Texas ISPs, IgLou believes that BellSouth.net is learning of potential DSL customers from the regulated telephone company when the phone company takes a DSL order from an independent ISP.
"There is no way we can compete with BellSouth.net," IgLou co-founder Dan Gregoire said. "BellSouth has the ability to manipulate the market."
According to Gregoire, the lowest wholesale rate, US$29 per month per line, is reserved for ISPs that can commit to selling 40,000 DSL lines. The highest price break, US$45 per line per month, is for ISPs committing to 51 to 200 lines. BellSouth.net currently sells its DSL service for US$49.95 per month. Gregoire doesn't have the option to buy DSL from another wholesaler because players such as Covad Communications, NorthPoint and Rhythms NetConnections haven't entered the Louisville market yet. So he's not selling DSL at all.
BellSouth spokeswoman Ellen Jones would not comment directly on IgLou's complaints, but said: "BellSouth is doing nothing wrong. We are successfully working with ISPs across our region."
Bell Atlantic has been giving US East Coast ISPs headaches, but its DSL problems appear to be purely homegrown. The company has become legendary for delaying and/or botching the hookup of local loops - the lines that connect a new DSL customer to the central office - and was recently fined US$13 million by the FCC for failing to adequately serve its voice and data customers. Critics said the fine was a pittance, and that its payment was a calculated cost of doing business.
"Bell Atlantic is being nearly criminally negligent in following up on [local loop] commitments," said Bob DeLorenzi, chief executive of Patriot.net. Customer orders are lost or seriously delayed, and often customers blame their ISPs, not Bell Atlantic.
Pete Castleton, executive director of broadband data products at Bell Atlantic, said the company is working to improve its mass-market deployment efforts, focusing on streamlining internal processes, but said the pricing of broadband service is a market issue.
"The cable industry set the pricing for residential broadband in the US$40 to US$45 range," Castleton said. "We have to compete with that price, but we didn't set it."
Castleton also denied accusations that the regulated telephone company is sharing information about ISP customers with its nonregulated ISP, BellAtlantic.net. "That is absolutely not happening. These are two totally separate companies, and we have an army of lawyers making sure that doesn't happen," he said. "We absolutely view ISPs as essential to our DSL deployment."
Under an agreement with the FCC, Bell Atlantic is creating a separate data services company that will handle its DSL deployment and other services, beginning mid year.
