Headlines July 6, 2000

• AT&T secret access deal cleared Qwest merger
• Nacchio to US West We own you - now go away
• SBC tosses lifeline to ISPs - team up
• Verizon's $39.95 price makes the market
• Tioga's Tom Sennhauser "It's exciting to run the ship yourself"
• Avio buy yields Centillium 100 meg home network

Fetter has it right - the industry is doing very well, despite Wall Street. We've reported the installation and other problems, but the growth is outstanding and above most estimates, and the technology is proving to work even better than expected. Broadband is so central to the future of the industry that AT&T and US West made a separate peace on the issue essential to the Qwest buy. Although the story below is more like a spy novel than trade press, the source is an official document from the companies, released by a freedom of information act request by the Seattle Post. We have to learn about such techniques ourselves. We're going to spend some time in Washington where some key issues are upcoming, including Tauzin's bill deregulating the bells and the FCC look at DLC/remote terminal that may squeeze the CLECs. Wish us luck, and all help appreciated.

AT&T secret access deal cleared Qwest merger

April agreement just released

The Seattle Post used the freedom of information act to persuade the State of Washington Utilities Commission to override AT&T's objections and release the document.  "AT&T agreed to drop its opposition to the merger. In exchange, U S West and Qwest would refrain from supporting "open access" activities"  according to a secret agreement. The story is http//seattlep-i.nwsource.com/business/tele01.shtml      

Nacchio to US West We own you - now go away

8 of ten execs out by last week; final toll to come, but $600M to execs

With a $194M + payoff, Joe Nacchio drove a blue-and-white Qwest service truck, complete with orange ladders mounted on top, through a smokescreen and parked it on the edge of a stage shaped like a giant Q, from which he addressed 10,000 employees. He promised better service to customers, an expansion of VDSL (Trujillo was the only telco executive to be smart enough to bet on VDSL/fiber-to-the-curb, but Nacchio had frozen the deployment.)

    Nacchio is tough, and tough on employees. In a field where good people are hard to find, that's probably not a wise policy. Trujillo's unbiased promotion policy encouraged some very able people to rise to the top. A few months ago, after US West torpedoed the DT deal, Nacchio showed his anger before a roomful of analysts. "Anyone at US West who doesn't get with the program, we will be happy to help find jobs elsewhere." They will be hard to replace. Lower level workers will have a union to back them up, while executives are receiving $600M in bonuses and severance. Many mid-level managers are likely to be fired, and retirees are afraid Qwest will raid the pension fund. The Denver Post reported "The Colorado Public Utilities Commission and its counterparts in 13 other Western and Midwestern states will have their work cut out for them, ensuring that service quality improves and that rural communities don't get short-changed." Note anyone looking for a job with experience in DSL should take advantage of our offer below of a free, anonymous posting. Some good connections have been made.

    In severance, general counsel Mark Roellig receives $5 million in cash, after his pleadings in Minnesota helped get the deal through.  CFO Al Spies receives $4.75 million, Greg Winn gets $3.9 million, and they and others will receive $57M in accelerated options. But it the last months were agony U S West spokesman Phil Burgess sniped. "We need to get a decaffeinated coffee machine over there at Qwest." We bet he won't be there long. The reporting by Andrew Backover and others at http//www.denverpost.com/business/business.htm is excellent.

SBC tosses lifeline to ISPs - team up
Cuts deal in Texas that leaves some in the game

Texas ISPs feared for their future because SBC's current retail pricing and wholesale DSL tariff threatened to drive them out of business. So they filed a challenge to SBC's long distance proceeding, and SBC cut a deal. The Texas ISP Association withdrew their complaint at the Texas PUC in return for SBC agreeing that a co-operative group could band together and get volume rates - details still being worked out. Sara Boteler of SBC told us they welcome the agreement and look to the ISPs as key allies to market the service in smaller cities. She's promised to help us understand the tariff and promotions so we can (over the next few weeks) evaluate the charges they are totally skewed in favor of SBC's own affiliate. We welcome advice from everyone on how to understand the true costs, a profound issue at Verizon as well. GTE has been far more successful in DSL than Bell Atlantic, because well over 60% of their subscribers come through ISPs. We strongly encourage Bell Atlantic to release a similar number going forward  - it will be a crucial test of whether BA's claim that DSL offers you a choice of ISPs is being effectively delivered in both territories.

    CNET broke a second SBC story we are researching. SBC's own ISP has apparently geared down the speed of the news feed because of capacity problems. We'd expect that from the cable guys who attack users as webhogs, SBC's brilliant ad campaign, or some of the DSL companies from whom "best efforts" service isn't. But we gave SBC an achievement award three months ago for promising quality service. We hope we don't have to take back our report, confirmed by SBC that "SBC is designing their network to actually deliver the speeds promised, whether 1.5M or 7M. That requires a $1.5B investment in the ATM backbone - but will protect SBC from charges of false advertising plaguing the cable companies and those DSL companies that can't deliver."

Verizon's $39.95 price makes the market
Will Covad, Rhythms, NorthPoint match?

We reported two months ago that BA would drop the price, matching SBC & BellSouth, but they waited until they believed they could service the predictable influx of orders. Order through their website, and get the first month free and the modem for $99. Catherine Hapka of Rhythms told us last year they could compete with the telcos price, even if it went down to $30 this year, but so far the DLECs, loaded with orders they are having trouble filling, are charging higher rates than the telcos, and ISPs are getting squeezed out of the consumer market. Line sharing, nominally in effect throughout the nation, drops line costs to about $6/month, so a $40 price is clearly possible if the CLECs run efficiently. After all, Bell Canada believes they can make money at $27 (US) per month, (cable competition is setting the market price in Canada). But is it smart for the CLECs to drop prices, given the present difficulty filling orders?

    Bell Atlantic did the ethical thing, and extended the price drop to all current customers as well. Covad's last price drop was not extended to existing customers, producing anger and presumably churn that could devastate ISPs. Smart consumers will never want to sign a contract if CLECs continue that practice.

Tioga's Tom Sennhauser "It's exciting to run the ship yourself"
Globespan's COO jumps aboard Orckit spin-off

With 120 design engineers, and chips in wide use, Tioga is instantly a leading DSL chip house. For now, they have their hands full supplying Orckit, but intend to diversify and win other customers around the world. Fujitsu actually produces the current chips, including advanced SOC designs, but they will be looking for second sources. "DSL is exploding, and we're going to grow along with it," he added. Globespan's recent purchases have valued early stage engineering companies at $3M per engineer (why did you think it's so hard to hire?), so the value of Tioga, with mature products, is presumably much greater. Orckit itself got clobbered on the market, as product problems cut sales this quarter, while key customer GTE was just swallowed by Verizon. Alcatel DSLAMs have been in place at GTE for several months, and they hope to win future orders away from Fujitsu/Orckit.

    Globespan's Armando Geday has developed a severe company style that is doing very well in the marketplace and  attracting recruits like Mike Ziehl from Analog Devices. Sennhauser promised us Tioga will present itself differently to press and the industry, being very open in their dealings. Makes being a reporter much easier.

JATO/NorthPoint the rules change again
Regional? National? Facilities based? Reseller?

JATO, a second tier city provider rapidly building facilities, found customers wanted one vendor - wherever the need, which for the plum accounts often included large cities. So they will resell NorthPoint service nationwide, immediately raising their coverage to over 1/3 of the United States. NorthPoint is going operational with its national backbone, which will enable a reseller to hook up at one point and sell customers anywhere on the network. DSL.net, a similar provider out of New Haven, has moved even farther, inundating Manhattan with offers to resell other's services. Sensible business, but tough on Wall Street, which doesn't know how to value a company with multiples approaches.

Avio buy yields Centillium 100 meg home network
Paul Allen's video home chip

Avio VP of engineering Roy Batruni designed a gigabit ethernet phy for Enable, and now is bringing a speed bump to home networking. Allen, of Microsoft and Vulcan Ventures, is one of the largest broadband investors in the world, and presumably believes the chips will come to market faster with Centillium to provide the structure. Eugene van Bergen is the CEO of the Interval Research spin-off. The company is being coy about the purchase terms (we may have to read their next SEC filing to find out), but the product is strategic and the new part-owner able to connect them to worldwide cable holdings.

    Separately, TI bought Alantro for $300M in stock for their part of the home network, 802.11 wireless LANs. 802.11 looks to become a ubiquitous standard in next year's hottest market.

Briefs

• Subscriber numbers fascinate us, although we'll be the first to say they are over-emphasized, especially by the stock market. So we are contacting all the larger providers for an update as well as a midyear interview. No one other than the companies has the real number, so we try to tease out the numbers before the formal release that comes about a month late. The game is played by officials or corporate IR types giving "guidance", sometimes widely (Bob Knowling of Covad, in the conference call that set off the Wall Street DSL provider panic a few weeks ago) and sometimes only to selected analysts. Selective disclosure is strictly against SEC regulations, of course, but we can work around it if they identify the relevant analysts for us to contact ourselves. One day, SEC Commissioner Levitt will succeed in his crusade for more open information, but we'd rather avoid being the test case. We usually can persuade them to talk directly by showing IR types our subscription group of 150 Wall Streeters, from ABN AMRO to W.R. Hambrecht, with multiple subs at both Morgans, Bear, CIBC, CSFB, DLJ, etc., which is very helpful. Everyone's estimates are getting closer as an informal network compare what we learn, and all information is very much appreciated. We're trying to obtain numbers from the larger ISPs as well, a little harder because most aren't public or obligated to disclose. Until recently, most had so few paying customers they held back, but that's changing.
• SBC/Pac Bell moved self-install out of trial and into field service, hopefully cutting their waiting time for service. Three months ago, they had 100,000 people in the queue, indicating a average time to install of two months or so. SBC's pr people have been saying it takes 10-20 days to get an install appointment, but unless an enormous percentage of the installs fail, the arithmetic doesn't add up, nor correspond to our reports from the field.
• The Broadband Content Delivery Forum will meet in Boston July 10 & 11th, and encourages press and analysts to attend.

Chips

Globespan's S-1 confirmed our report last week that Lucent is delivering large volumes of DSL equipment, taking 14% of Globespan's (rapidly increasing) shipments. Cisco took 29%, and Xavi in Taiwan took 6%.

International

India's Dishnet now has 1,200 subscribers, with 3,000 in the queue and a dedicated national fiber backbone being developed to support them, along with the first independent ISP international connection.

Mexican elections should lead to considerable opening for competitors, which might include Covad or Rhythms. Telmex's megarich Carlos Slim was probably (previous president's) Carlos Salinas' closest friend in business. Slim survived the corruption and murder scandals that put Salinas's brother in prison, and remained close to the ruling party. With SBC behind Slim (and now investing with him throughout Latin America), Telmex has scared off most competition, although MCI fought back through diplomatic channels. The new right wing government talks of openess, although resisting Slim's embrace will be tough.

Products

Wailan announced a $3000 12  port G.shdsl line card for Q4

Deals

Nightfire inked ADC for distribution. Swami and friends are delivering on their ambitious plans to link all providers for on-line ordering and provisioning, and are among the most interesting folks in the industry.

Stock Market

Million dollar salaries are earned by Wall Street analysts based on their client relations, understanding of their industry, and a special facility with words. One report this week last week shows how to read their work. At top, it reiterated a "strong buy" on a client company, but if you read it carefully the analysis was devastating. Keep them happy to retain the investment banking business, but get the information out to build your reputation. Don't apply the same rules to us, please. Calling a chip vendor "better than most competitors" is a strong compliment from us, because the competitors in this field are very good. But if a sell-side analyst says the same, it's a way to "damn with faint praise."

Good luck to Sunrise Telecom, set to IPO next week. Rather than a new player, they are a respected maker of test equipment with substantial experience and a large customer base. The $5B market cap of relative newcomer Turnstone should be a good sign for them. Chase H & Q has the offering.

Globespan filed an S-1 to allow Texas Pacific to sell 5M shares, or almost a quarter of their holdings, and Pairgain to sell 500,000 acquired in a deal for an engineering group. Officers Armando Geday, Nick Aretakis, Thomas Epley and Bob McMullan are each selling about $10M. Former shareholders of  iCompression are also selling 500,000 shares.

Virata filed for a 4M share secondary through CSFB, raising $150M+ for the company and $50M plus for selling shareholders.

People

• Jim Southworth is the CTO of Adevia of London, with an extraordinary group of allies. The website simply says "Secure broadband services for Europe's businesses." No details yet, but watch them. Concentric will miss him, but he promises to remain active in the DSL Forum.
• John Marrren of Texas Pacific, the controlling stockholder, and formerly of MSDW, joined the board of Globespan.
• @Link appointed Andy Buffington Southwestern Division President as they prepeare to enter markets such as Dallas, Houston, St. Louis, Kansas City, Little Rock and Oklahoma City.
• Tony DiNovi and Soren Oberg of Thomas H. Lee & Lane MacDonald of Alta Communications joined Digital Broadband's Board of Directors. Interesting provider with a strong backbone.

Headlines July 13, 2000

• Viva Vivek!
• Covad - be big, or be indirect
• SBC's smart rental deal for PC's/DSL
• USB modems are easy
• Double your pleasure, double your lines, with Netopia bonding
• Someday our chips will come
• Briefs on Microsoft software rentals, BA, ConnectSouth, Carnivore, Paradyne, Virata, Centillium, TI, EU loops, Asante, Maxgate, Lucent built-in test, Verizon, bundles, Intermedia woes, DT, Knowling portrait, Vectris, Broadband Gateways,

 If I have seen further it is by standing on the shoulders of Giants Isaac Newton

It's time to thank you for your help, as we begin Volume 2 after 52 issues. We were inspired to begin DSL Prime by interviews with Mike Malaga, Jeff Waldhuter, and Pete Castleton. The eighteen months since have been extraordinary, as we learned the field virtually from scratch and with the generous tutelage of hundreds of you, far too many to mention individually. Help greatly appreciated, and with our cashflow now positive, we can grow rapidly going forward. 

    Starting Monday the 24th, The IEC-sponsored DSL ComForum in Chicago will be the most valuable DSL show of the summer, well worth the trip. If you see us there, make sure to ask our favorite Steve Jobs story, who is opening MacWorld Expo here in New York next Wednesday. Not nearly as well organized, but perhaps more fun, will be H2K. 3,000 are converging on New York for Hackers on Planet Earth 2000. 72 straight hours of wild disarray, with Emmanuel Goldstein, Captain Crunch, the authors of Back Orifice, the teenager who wrote the Linux DVD software, ex-spies, and Martin Garbus, one of the great First Amendment lawyers, (who on Monday goes to court to defend Emmanuel against the record industry.) It will be the best place in the world for research on firewall adequacy. But if you are recruiting more corporate types, check below - we had inquiries from a respected global strategist as well as the leader of a national project.

Just tell colleagues to email subs@dslprime.com, or just send their email yourself.

Viva Vivek!

Dennis Barsema moves to vice-chairman at Redback

Vivek Ragavan came aboard with the purchase of Siara, and has been Redback's main public face for the last few months. He now takes on the jobs of President and CEO. Siara was purchased for $4.5-8 billion (depending on when the stock is valued. The first is announced, but the latter is more accurate) in order to acquire a management and engineering team of great ability, several of whom are now coming to the fore. Barsema deserves enormous credit for building the company to the $20B market cap it has today, and has reaped generous awards. He has sold $60M in eight separate sales, and has over $200M + remaining. His comments about the transition have been very gracious, and we appreciate that he has reached out to encourage us several times. But like almost all the companies in DSL, the venture capitalists (superVC Vinod Khosla is on the Redback board) have much greater holdings than the managers, and make the final decisions.

Covad - be big, or be indirect

ISPs being steered to master resellers

A substantial ISP was recently told not to become a Covad partner, and instead work through a reseller. We were amazed, because the Covad regional manager a while back has asked us for information about that ISP, whom he was actively recruiting. But Covad now has a clear strategy of working through a handful of larger outfits, to whom the was directed. Covad's Nani Daniels explained their channel program has provided for smaller ISPs to work through selected large ones, and that direct resale of Covad generally only works out over 5,000 lines per year. That implies that if Covad sales for the next year are 300,000 lines, then 25-40 ISPs (some do more than 5K) would suffice, a small fraction of the hundreds currently signed up. Daniels was clear this is not a new change of strategy, related to the Laserlink/Bluestar direct sale model, or Bob Knowling's lowered estimates because of those deals. "Covad's distributor program has been in place since January 2000, and hasn't changed recently." We missed reporting the change until we just heard from ISPs.

    Dan Melmed of DSLNetworks told us Covad and other DLECs have been referring ISPs to their reseller program. "Our experience makes us ready to handle the volume orders that ISPs and ASPs can develop, with multiple data CLECs providing flexible choices of service and very wide coverage, with qualification tools online. We welcome ISPs with several dozen lines a month, and will try to find ways to accommodate those even smaller, sometimes by referring to our larger resellers." Gerry Ansel of Zyan, Covad's third largest reseller, said they also welcome ISPs as agents.

SBC's smart rental deal for PC's/DSL

$300/customer promotion mis-reported as "free PC's"

The news reports came in all day Wednesday - SBC was offering a "free PC" with DSL. There wasn't any "free PC", of course, and the SBC release was very clear about that. The headline was ``All-Inclusive'' Promotion Featuring DSL-Ready Compaq PC", and the second sentence clearly said the cost was $59.95/month, twenty dollars more each month for 24 months. That's $480, and with a reported processing fee as high as $200, customers are paying $600 or so to rent a PC worth about $800. That's a perfectly fair deal, which was accurately reported in the text of most stories. SBC was slightly disingenuous, suggesting the computer was worth $1000, when that day's papers offered similar for $700-800, but the headline writers, loving the word free, were egregious.

Economics behind the deal

The large computer makers (Dell is ready for an announcement, too) are plum contracts being heavily fought over, so it is not clear how much SBC is paying for the machines. We've been working with a computer maker trying to understand DSL costs, to aid in a negotiation like this. ILEC direct costs to deliver DSL work out to about $20/sub/month; overhead and marketing take that up to probably more than today's $40/month charge. But that $20/month margin is an attractive target, and the OEM was looking to capture a large share of that in the deal. So we are not sure whether Compaq may have been able to charge a high price for the machines, or SBC may have been able to get a large discount for buying by the hundreds of thousands. In either case, the deal is comparable to the $400 rebate Compuserv, Prodigy and Microsoft have been offering dial-up subscribers, and less than the typical CLECs $700 cost to acquire each customer. So this was just a mainstream promotion, with the added feature of preconfigured PCs that should simplify installs.

USB modems are easy

Conexant jumps in with 6 customers

Che Kwan hopes Conexant can bring its success in analog modems into DSL, and announced the low-powered USB chipset and six customers, including Accton and Digicom/Creative Labs. The list price of the chipset, including the USB controller, is $45; adding SDRAM and other components will bring the complete manufacturing costs to about $65. Of course, prices in volume are negotiated; I included these details to illustrate the manufacturing cost of a modem, which will soon make possible $99-125 retail prices. Centillium is already shipping a similar USB chipset, which integrates the USB controller and memory on-chip, giving them a possible advantage. Conexant's part is fabbed at .18 micron, but Alcatel's Didier Boivin pointed out the design of the analog part of the chipset is more important in meeting power requirements. Alcatel also is sampling a bus-powered USB modem chipset, which does not require such an advanced process.

Someday our chips will come

Chip vendors going full out

Extraordinary progress is coming in semiconductors. By 2002-3, twenty five $2B 300mm fabs are scheduled, delivering .13 micron processes and producing 4-6 times as much as current generation fabs. IBM and Intel are arguing in the trade press about whether SOI is required, or current processes will produce fast enough chips, but the speed/density increases are coming. Expect 4 times the density on a line card, for example. But today, DSL chip makers are essentially sold out of current production, so the excellent results they are reporting should be no surprise - although they are lifting the stock prices. Five conversations with chipmakers this week, including two of the largest, confirm the situation does not look to change soon. None is ready to take large new orders for nearterm delivery, or to over-fulfill to current customers, although all are satisfying the commitments they have made. (Nancy Fares of TI, we previously reported, may be able to do better, with priority at TI's own fabs.) The vast majority of analysts expect chip supplies to remain tight, as wireless telephony gobbles a quarter of worldwide capacity, and few plants are coming on line this year. One chipmaker is looking to deliver 15-20 million DSL chipsets this year, while another has potential orders for 15M and hopes to be able to produce 12 million of those. The chip orders implied are higher than any estimate of actual subscribers, one reason the capacity is not in place. In times of scarcity, manufacturers build inventory and double order; when things catch up, the chip markets have been known to crash. Currently, DSL chip prices are significantly above last years' predictions, as a price war loomed last summer. We see no evidence supply will get better and prices fall. But at some point, DSL chips will resume their plunge towards the $10-15 price point that will make them standard in systems.

New fabs reported http//www.electronicnews.com/enews/Issue/FreeIssues/2000/07102000/index.asp

** 2Wire's HomePortal™ 1000, Best in Show CES 2000, sets the standard for residential gateways through its support for multiple services over DSL, including data, voice and entertainment and brings the wide spectrum of broadband services to life. www.2wire.com (ad)

Double your pleasure, double your lines, with Netopia bonding

Greater capacity, higher reliability

With DSL costing less than half what a T-1 costs in most areas, the most reliable system would be two DSL circuits to different providers, preventing an outage if one goes down. The extraordinary resilience of the net is based on similar re-routing, and this soon will be within the capabilities of an ordinary router, such as Netopia. Netopia is working with standard multilink PPP, and bonding will just be an interface and software upgrade. This month, they are shipping a four line IDSL version, with ADSL/SDSL due Q3, and multiple providers to come.

    Bonding IDSL is yet one more way to extend DSL reach at modest cost, and deliver universal service. It can work through DLCs and as far as six miles! In volume, the extra hardware to deliver 288K bonded IDSL would cost less than $200, and more often than not there is spare copper already in place. A 432K triple bonded service would cost $400, or not much more than the typical marketing costs implied in the SBC PC deal or the Bell Atlantic Intel deal. Those marginal costs have been confirmed to me by router and modem makers, and correspond to the volume costs of several loop extension techniques. All it would take is an ILEC-volume order. Bell Atlantic - the folks in Washington who have to approve your long distance requests often live at the other side of a DLC. Solve their problems!

Briefs

• Microsoft is unveiling details on software rental/ASP plans today, and CNET believes they will be one-twenty fourth of current list per month. This would amount to a massive price hike for most customers, which is why Microsoft has been a strong backer of several ASP companies.
• Bell Atlantic's promotion with Intel is suggestive of the marketing costs absorbed in customer acquisition. They are giving a free modem $99 and a free month $40, free install/order/setup, and an implicit subsidy in that $99 modem price, for a total package of about $300. Not much difference from SBC's presumed cost in the PC offer above.
• ConnectSouth has opened Austin, Waco, Tulsa, Mobile, Birmingham, New Orleans, and Biloxi/Gulfport, with an emphasis on value-added services for business.
• Carnivore, the FBI program to install monitoring boxes in all ISPs, is one of the most important stories in Internet history, being covered well by Wired and the major media. We are very anxious for email or a phone call from anyone with details, starting with the simple fact of whether a box is installed in your network. Presumably, anyone working at this level knows how to anonymize most effectively, much easier now with the Internet.
• Paradyne reported sales of 3,600 DSLAMs last quarter, and over 10,000 to date. We suggest that analysts tracking DSLAM sales make sure Paradyne is properly ranked, especially if they have a special category for "business DSLAMs."
• Apologies to Andrew Backover, whose name we misspelled when crediting his very helpful Denver Post articles on Qwest.

Chips

• Virata shipped their millionth Helium chip, doubled revenues to $25M this quarter, and announced a large order from Arescom. Arescom is growing rapidly in Asia, and looking at some big deals in the US.
• Centillium ADSL chips were chosen by Sunrise for their test module. Sunrise IPO this week more than doubled. Who said the IPO market was dead?
• TI liked the SBC/Compaq deal, having just won the Compaq account and looking at several hundred thousand units.

International

• We think it total hypocrisy for the US, whose companies are buying telcos around the world, to raise objections to Japan's NTT buying Verio or Germany's DT buying Sprint.
• China is about to approve new rules for telecom, which will, at least on paper, open the market to foreign participation. But China remains a proud, autarkic nations, and many investors have been burned because they have not learned how to work with the Chinese system.
• European Union Commissioner Erkki Liikanen, backing an effort to force open loops this year, believes, "Local loop unbundling is the key to the breakthrough of high-speed Internet in Europe and requires strong and urgent measures." But the reports we get from the field suggest that the incumbents are making things very difficult, and the EU faces an uphill battle. But dozens of DLECs and CLECs are jumping in with ambitious plans and strong financing.

Products

• Asante just released their $200 Friendlynet switch/router, which works with a DSL or cable modem to create a simple network. We had excellent experience with Asante for Mac connectivity products, so this will be an obvious choice for a mixed network. Jim Hsia told us they include a serial port for a backup modem, a print server, 4 10/100 switched ethernet ports, and hardware hooks and mounting screws to allow the unit to be secured in a schoolroom. DLink's similar unit was strongly recommended by Dave Angell in "DSL for Dummies". MaxGate, a division of Umax, announces a seven port switch at a slightly higher price.
• Lucent began shipping the embedded test module for Stinger, much of which we believe is OEM'd from Sunrise Telecom. This is the first integrated test unit to reach the market, although Alcatel and others are working on similar. Nearly all providers now order external test units for their DSLAMs, having learned the necessity the hard way, and Turnstone has done remarkably well serving that market, and developed well-regarded software specific for DSL. The designer of one of the most popular DSLAMs told us his great mistake was not building in test, which customers were resisting paying for, and that it will be in his next model. But the putative saving from the internal test unit may prove worthless if line-sharing takes off, because line testing will have to be performed in front of the splitter.

Stock Market

• Goldman and Merrill will handle the forthcoming $15B IPO of Verizon Wireless. Salomon and Morgan are apparently being the fall guys for the Genuity disappointment.
• Quarterly conference calls begin July 19th with Qwest, SBC, BellSouth, Rhythms, Covad, NAS, AT&T, Lucent and NorthPoint following within the week. Verizon is a week later. The street listens to the calls, and the markets often move. A primary source of company information, way beyond the associated press release. The questions often give you a good feel of what the street is looking for.
• Are you planing for the complete bundle? SBC, BellSouth, Verizon, and AT&T plan to include wireless as an attractive package. Verizon already bills DSL on the same bill, and is experimenting with consolidated wireless billing in New York. Dan Reingold of CSFB think it essential. "Wireless will be a key part of the bundled, integrated telecom service offer going forward and that a wireless resale strategy has proven to be very difficult to execute in the past and would therefore be a very poor substitute in the future to owning and controlling a nationwide wireless asset." Unless collaboration develops, that's bad news for competitive providers who only offer pieces of the bundle.
• Intermedia has retained Bear Stearns to explore strategic alternatives with regard to Digex, including the possible sale of the large ISPs. They are facing a funding crunch brought on by an order shortfall, much of which they blame on BellSouth problems, whom they just sued for anti-competitive practices.
• Handelsblatt predicted IPO proceeds of eight to 10 billion euros if DT floats T-Online, proceeds of which would be applied to acquisitions. We are so tired of daily rumors of what DT will buy, we hope they stay capital-constrained instead. Is today VoiceStream, BellSouth, Qwest, Worldcom, or Sprint? We've lost track, and no longer follow the soap opera.

People

• ob Knowling of Covad clearly believes in himself, but the Mercury profile was demeaning. Read it for the reporting, not the attitude, at http//www.mercurycenter.com/svtech/news/special/knowling/in
• Phil Bode is now doing pr for Vectris, who just announced opening of 20 Texas cities, from Beaumont to Waco, with plans to head north towards Ameritech territory.
• Christin Armacost is now covering networking equipment for SG Cowen, having left Tucker. DSL Prime shies away from investment reporting, not having found any way to predict the market, but we find Wall Street research very valuable and thank the analysts sending their research to us. Analysts play an important role in the industry, and we hope to do a better job reporting their doings.
• Telocity promoted Vicki Foshee, appointing her SVP of Service Delivery tasked to develop core competencies in customer care and service provisioning. Foshee has had a dual career, working at SBC while also rising to Major in the military reserve. A year ago, Telocity had a dream of developing superior customer equipment that would give them an edge, but have re-emphasized just doing a better job at service instead.
• Broadband Gateways new CFO is Randy Schriewer. They have designed the EVOLO residential gateway, due out later this year with support for wireless phones and other features. The gateway market will be crowded, but potentially is large enough for many players. 2Wire is close to volume shipments, and Brian Hinman promised us major announcements before DSLCon in September, while Nokia has a unit on its way to us for review.
• Joseph Keyes takes over as CFO of DSL.net, as Robert Berlin leaves for another position.
• BellSouth Vice Chairman Jere Drummond joined the board at Centillium.

• Headlines July 30, 2000
• DSL is easy to crack
• Blockbuster's blockbuster: great goals, now to make them work
• 8,000 subs a day at Korea's Hanaro, 4,000 at SBC, mid-year numbers
• Earthlink ascending the ISP listings
• What is "open access?" Kennard asks AOL witnesses
• Agranat buy takes Virata everywhere
• $1.3B SpringTide buy puts Lucent in subscriber management
• mBlast is coming to DSL Prime
  
• Briefs: SBC "rentals", AT&T $49 DSL, PacBell line shortage, Winfire 1K subs, Verizon, Nightfire, Covad, BCD Forum, 1.7 gig Pentium, Centillium, Accelerated/@Link, MCK, mPhase, Orckit, Interspeed, Broadjump, Sprint, IP Communications, Ramp, Copper Mountain, Deutsche & British Tel, NorthPoint Canada, AccessLan, iMac, Net to Net, Alcatel 1M quarter, Redback buys Abatis, Orckit/Tioga, Xpeed IPO, NorthPoint for sale(?), Pete Roberts, Dennis Rauschmeyer, Ron Halpern
• Subscriptions are free - just send your email (or colleagues) to subs@dslprime.com

Video: "Destined to become an indispensable, must-have for home entertainment." Verizon's Fred D'Allessio
"We will need to re-architect our entire network" a key partner in the deal, not for attribution

Video is everything this week. Keeping AOL open to content was the guts of Thursday's FCC hearing, while three of the biggest in DSL - SBC, Verizon, and Covad - jumped in with video as well. US West, working with Intertainer, already offers Video on demand, and BellSouth has a billion dollar satellite deal moving forward. The reach of the partners makes this a milestone - residential DSL now includes video. (They are also streaming at 3 meg, enough for live TV, not just pre-recorded movies, the $20-30B market Blockbuster is after. Below, we point out the challenges.)
Many of the smartest people in the industry said video-scale capacity was unneeded. We disagreed, because the engineers building the equipment have universally been telling us that 3-10 times the throughput could be delivered for a small fraction more, allowing this key competitive service. Less than ten cents per month additional would offer 2,000 channels rather than 200 to US West's 50,000 Phoenix subscribers, for example, while Alcatel's new DSLAM, about to be delivered, increases throughput to VDSL levels but is priced lower than the current model. Such a wide range of switched/multicast video is the one offering cable can never match, as we argue in an editorial at the end, after the ads. Cable is going beyond 200 channels to interactive video (great for e-commerce) and experiments with TiVO and Replay video systems, while adding allies - Juno just signed on as an ISP with Time Warner.
This issue is being written from Denver, where we are with a loved one whose mother is gravely ill. Sorry we missed everyone at the DSL ComForum in Chicago, and apologies to those whose calls we haven't yet returned. We've begun active testing of mBlast, and every company in the industry should make sure to get their data to them soon, because we and many others will be pushing it out to the web. More details below on the latest project from the folks at Telechoice. Go, Danny!

DSL is easy to crack
Good thing top hackers are explorers, not malicious
"Of course we can get in, and have." was the universal response at H2K, Emmanuel Goldstein's convention that brought 3,000 to New York. Most of the intrusions are just script kiddies, pinging at random and checking ports, but experts have no problem getting in. We have found no evidence of any expensive problems so far, but that because malicious hackers are much rarer than press hysteria suggests. Prodigy, Earthlink, and AT&T are now including firewalls, and protection is a key Nortel/Shasta product. The clear warnings in the press about the security problem creates an obligation for providers to respond. We would not be surprised if the first costly intrusion brings a lawsuit - vendors have a duty to warn, and not to sell inherently defective services. Far too often, we hear comments like "security is a big problem with cable, but not DSL" (an ILEC), "You don't need a firewall" (two separate ILEC sales reps, when asked) or "We have no security problem" (a CLEC manager). Your technical people know better. Obscure warnings on your web site would be no defense in court if a meticulous lawyer found comments like these or simply proved negligence.

Blockbuster's blockbuster: great goals, now to make them work
DSL Prime has no right to criticize other's late projects. We're months late on our own Voice over DSL newsletter, for example, and have advertisers lined up for DSL Chip News and DSL Euro News but have to write them first. So our report that the massive video deal is looking at extensive trials before delivering on its promise, should not take away from the achievement of Enron. Enron brought together SBC, Verizon, Covad, & Telus to distribute TV quality video over DSL to every major market in America. Enron's Kenneth Lay believes "In the very large entertainment space, the winners will be those who move first, around the world" and that the group will "Get way ahead of anybody else".
But when we researched the actual delivery plans, we discovered they are unlikely to meet the planned substantial results this year and early next. We learned the network is envisioned as Enron-supplied servers in every megapop/ILEC LATA, supplying video at speeds of 1.2 and 3 meg, presumably MPEG-2 moving to MPEG-4. 1.2 meg is reasonable, not great quality if carefully pre-encoded; 3 meg is reasonable for encoding on the fly, which implies they will also offer live events, and could easily offer broadcast TV. Their first goal is to sell movies on demand, a business they see growing from $20B to $30B in seven years.
Enron, however, does not have a solution ready to deliver, and in fact is in negotiations with competitors already delivering to buy needed technology. The providers privately tell us rather than "substantial coverage" expect lengthy "early trials to find what works." For example, one participant believes in downloading selected programs in advance, when the networks are underutilized late-night; another told us that plan had been already discarded. When we pressed for details to understand the service (QOS requirements, number of streams per DSLAM, etc.) we found those answers were "to be tested". All assured us the challenges will be met - but until late next year, they won't be ready for volumes of customers.
Changing the network for video will mean DSLAMs with OC-3 and OC-12 connections, not the T-3's typically installed (otherwise the network clogs if even one in ten users is logged on to video.) The megapops will needed heavier-duty switching. Quality of service features can give priority to video streams (as Copper Mountain, Cisco, and AccessLan have demonstrated), but can only be effective with a limited sign-on to video, which needs massive amounts of continuous bandwidth. Beyond that, modems aren't set top boxes - and gateways to solve that problem are just coming to market. Billing, security, copyright protection, privacy, and variable bandwidth rates all need solutions. (Bell Atlantic is still only provisioning 640K to consumers.)
VOD is high revenue, so some may be willing to sacrifice service quality for other customers to collect the $3.99. But that will only go so far, especially as other video services come on-stream. Can the folks who continue to proclaim "we want open access" limit the video choices only to what Blockbuster approves? Where are NBC, Showtime, MTV, or the new services springing up? There's no moral way to deny them, and it's bad business. We argue in the editorial at the end choice is the only way for DSL to distinguish itself.

8,000 subscribers a day at Korea's Hanaro
4,000 daily at SBC
Hanaro's figure, reported by a supplier, has to be confirmed, but several equipment vendors tell us they are shipping so much to Korea we believe it close to the mark. Korea Telecom reported 415K in mid-June. Korea has the advantage of a compact, urban population, as well as 40% living in apartments. One efficiency has been to wire a building or neighborhood at one time, often supported by a basement DSLAM or Lucent AnyMedia. Early moves into content (including education and video) as well as strong government support have also helped. Hanaro is little known outside Korea, unlike its investors Lucky Group, Samsung, Daewoo, and Hyundai. They're also expanding to the US for resale, initially to Korean-owned businesses, but we don't know who their DSL providers will be.
SBC is leading in the US, at 399K, up from 201K last quarter. Simply matching that rate would put them at 800K plus at the end of the year, but SBC told us they have achieved a daily rate over 4,000 by the end of July. If they can keep it up (and self-installs will help), they will easily make their 1M yearend goal. They had 100,000 in the queue in April, implying the average install took 6-8 weeks.
Verizon now moves up, because of the absorption of GTE, which was far ahead of BA in DSL. Guidance is 71K for the quarter, 221K total. GTE was far ahead of BA partly because their pricing encouraged ISPs, and we hope that isn't lost.
US West added 39K DSL subs to reach 175K. VDSL in Phoenix is up to a world-leading 51K. Only 277 COs are DSL equipped, so they probably have the highest take rate in the country - as well as a scandalous failure to serve their communities. Nacchio asked Forbes "Sol who?" and talks of laying off 20% of the work force. He's also promising to dramatically improve service at "US Worst". We don't think it's likely he'll do both. Don't underestimate the ability of a smart, tough kid from Brooklyn - but give him a book on manners. He's going to have an easy ride financially for a couple of years, funding the company by eliminating the dividend, but the team that built America's most advanced DSL service is gone. Joe Zell's at Convergent, Liz Fetter at NorthPoint, Bob Knowling at Covad, and Catherine Hapka at Rhythms, while resumes are hitting the street from some of the best who stayed.
Covad reached 138K, up 48% on the quarter, but Bob Knowling threw a shiver through the ranks when he said "Any company that's grown as fast as we have has 20-30% inefficiency." Covad had layoffs a few months ago, and we don't know who may go in cost-cutting. Even without Bluestar, they are up to 1700 COs and 42M passed. Worried about "channel conflict" as they sell direct, they've dropped their projections for the year, but our conversations with key ISPs suggest they are holding fast, as Covad is currently the most reliable DLEC.
NorthPoint is ahead in innovative services, and VersaPoint in Europe is getting off the ground. But they are still struggling with field installs, and have not yet been able to capitalize on Covad's shift to more direct sales.
Telus, the local phone company in Western Canada with a large Verizon stake, announced 46K subs, headed to 80K the end of the year.
Rhythms is at 31K and with resale agreements priming them for rapid growth.
Broadwing/Cincinnati Bell is moving toward video for its 29K subscribers, a 5% penetration of its market area.

Earthlink ascending the ISP listings
Prodigy, SBC captive, leads at 246K
Earthlink is at 60K DSL subscribers, making them probably the largest "independent" ISP. (Sprint owns a major share, and has the option to buy the rest.) Flashcom was at 30K for its S-1, and is higher now. Telocity's quarterly revealed they are up to 13K, and Concentric reached 13K a quarter ago and are growing rapidly. Phoenix won't give us a firm number, but an executive previously told us they are over 20K. AOL has converted only a small fraction of its 23M subscribers, but the absolute number may be larger than suspected.
Mike Lunsford of Earthlink told us they are limited only by the capabilities of their vendors. 10% of their 4 million customer would be 400K, and we believe they can generate that response as soon as providers can service that many subs. They just included a free firewall (Zone), and have a loyal customer base they built with far better than average support. They have about 20K cable modem customers as well, but they expect 80% of their broadband going forward to be DSL. They're the second largest ISP in the US, with a much greater commitment to DSL than AOL. (BellSouth has been growing their ISP dramatically fast, and believed they had passed Earthlink in their territory. Both companies have released actual numbers to us, and Earthlink appears to be leading, including an adjustment for sections in the BellSouth states served by independents. But it looks like a close race.) Because they already have the customer base, their cost of acquiring customers is very low; they may be one of the first to actually make money on subscribers.

What is "open access?" Kennard asks AOL witnesses
We reply: "It's the content, not the companies"
"Open the edge" we urge. But not just to ISPs. America's principles of freedom of speech should require networks to accept open the door to diverse video content, without undue tolls. Specifically, the direct way to meet the goal of diversity is for providers to give the same access to all content, a promise ABC solicited from Time-Warner. The only practical technical means today is allowing servers at the edge of the providers' network, such as Enron, Akamai, and potentially dozens of others are supplying, at no cost to the network. (It's impossible to distribute TV-quality video over the Internet, which reliably delivers no more than 200-300K. Our interviews with the top engineers at Real, Microsoft, Sorenson and Intertainer find getting quality at 750K is perhaps attainable state-of-the-art. See for yourself, with the samples at Microsoft's own broadband initiative. They run one-third screen, because that's all that's practical at 300K. Loads of value in that, but the primary medium today is television quality at full screen. We report here that SBC & Verizon are promising just that - they should voluntarily open the networks before government forces them to it.
It then becomes the responsibility of the network to deliver that content at the speed they are promising customers, or face charges of false advertising. No fine print on the contract about "best efforts" can hide the fact that Pac Bell is promising 1.5 meg, advertising it heavily, and can design a network capable of delivering it.
Kennard said diplomatically "I think everybody agrees the broadband platform should be an open platform." He's totally wrong, of course. AT&T @Home officially refuses to transmit video, and unofficially has promised their cable partners they will maintain that restriction, because anyone watching an Internet service is one less customer for HBO and other critical cable revenue sources. Reality is the cable business model is to limit program choice, so they can extract the best deal from the few networks they allow on. DSL providers are facing the same decision - do we provide freedom of choice, or do we effectively prohibit program sources that don't pay us well? Public policy should require we allow all programming through that's technically feasible, and long term, the diversity of choice is the best way to beat competition.
The press reports just skimmed the issues, but the audio is at www.radiowallstreet.com (it was on the right panel as we wrote) and most of the statements at http://www.fcc.gov/csb/aoltw/07-27-00_enbanc/agenda.html .

Agranat buy takes Virata everywhere
Ready to embed web servers in set tops, routers, cars, and refrigerators
"IP everywhere!" is a common dream, and few have gone further delivery it than Ian Agranat, whose customers include Alcatel, 3COM, HP, Efficient, Lucent, Nortel and Siemens. He told Gail Robinson of EET: "We see a convergence of enabling technologies and a reduction of barriers to entry that are opening the door to more and more things getting attached to the Net. Given that everything is becoming Web- attached, the Web browser then becomes the natural interface." Virata's Charles Cotton sees immediate application, "We will deliver an `out of the box' solution to the end-user that is easy to install, reconfigure and maintain." This fits Virata's strategy of offering software as well as hardware, which just delivered a 130% gain in quarterly revenue. Agranat stays on to run the division out of Maynard, Mass.

$1.3B SpringTide buy puts Lucent in the subscriber management
Nortel's Shasta growing, but Redback remains the 500 pound gorilla
Lucent had 4% of the company, and had sold the systems to AT&T wireless, among others, but the equipment is really just hitting the market. Anthony Alles, who recently passed on the management of Shasta, told us that Spring Tide was a key competitor on several bids recently. VPNs', firewalls, and other value-added services are the key selling features. Northbridge, Matrix, Oak, Sumitomo, and Global Crossing received a remarkable return on a $62M investment.

mBlast is coming to DSL Prime
Telechoice leads new web effort and looks to sign much of the online media
DSL Prime is proud to announce that we have become a member of the mBLAST e-marketing effort, a new spin-off of TeleChoice, key industry consultants. mBLAST collects from you company information, then provides it to us (and soon, many others) to publish on our site. mBLAST gives you one place to enter your corporate, product and service information. Then, it is "mBLASTED" out, live and in real time, to its network of publications, Web sites, analyst groups, and others. mBLAST has aligned with just about everyone in DSL to use its service. Please, have the marketing/PR person (only) at your company contact mBLAST at newmember@mblast.com so that you can get your password and start entering and maintaining your data. Basic company data (addresses, contacts, email, phone numbers, etc.) input is free, so everyone should do that!

In-box:

We referred to SBC's combination computer/DSL as a rental, and Michael Coe asked us to clarify. While it is not a "free PC", the customer owns it in return for agreeing to pay for the service over time. Therefore, it is not a "rental", but something like a premium on an installment purchase. The $20/month additional, plus $100 plus handling fee, yields $550-650 to SBC. A very similar Compaq is selling this week at New York's largest store for $599; add a PCI DSL modem (OEM in those quantities, $65-75) and a 15" monitor (17" are at Staples and Office Depot for $150) to get the retail value, which seems less than the reported $1000. SBC presumably got a large quantity break, and is doing a credit review of the customer to reduce risk, so this is probably a very cost-effective promotion, and likely to be replicated by other providers. Consider step two - that computer, with a video and local networking card, becomes a home gateway, video recorder, and a high-powered router.

Danny Burstein of Panix pointed out our suggestion of bonding two DSL services for reliability still leaves a single point of failure, in that they would both likely connect through the same CO main distribution frame, and more often that not be forwarded from that CO in the same bundle of fiber. Still, after last year's breakdown on the MCI backbone, a double connection seems a good choice for reliability, and we hope router manufacturers make it easy. (Netopia is working on it already.)

Paul Sun, whose efforts to develop standards for OSS we reported, has started the website oss-forum.com with membership information.

Briefs:

AT&T dropped its price to $49.95 for 608/128, and will provide a free firewall. Covad, Earthlink, and others are continuing to hold to $45-50 pricing, despite the bells drop to $40. Presumably, they don't see any reason to drop prices when they can't even deliver the orders they have in hand. Everyone assumes they'll meet the market in time; meanwhile we urge all consumers not to sign a 2 or 3 year contract unless the ISP specifically agrees to pass price drops to you. NorthPoint has not always done so, a very bad precedent.

PacBell's capacity shortage is hurting. They've maxed out DSLAMs in many COs they claim to serve, and one large ISP tells us they have nearly 2,000 customers in limbo - qualified for service, but no ports available. SBC confirmed to us the problem was not the DSLAM manufacturer (Alcatel is catching up) but rather installation and contractor problems. One consumer, moving 300 feet, was told he could not move his DSL service. Instead, he would be treated as a new order, his port would go to someone else, and there was no estimate available for when he could receive service because they were out of ports in the CO.

Winfire/FreeDSL's Ryan Steelberg told CNET they have installed over 1,000 customers, predominantly in BellSouth territory, but could not get customers served in much of California. He also reported a $17M infusion of capital, with several times that coming within the month, but provided no details. Free ISPs WorldSpy and Freewwweb have gone bust, which has brought cheer to those who question the entire model. But Winfire has sophisticated plans for multiple revenue streams. Most of the initial customers have chosen the faster services priced at $20-35 rather than the free 128K line, and they hope to convert many of the others. Juno (which picked up the WorldSpy & Freewwweb clients) has a similar strategy, reselling Covad.

The new California Internet Service Providers Association hopes to provide clout to ISPs when dealing with government and Pacific Bell. President is Martin Scheel and website is cispa.org. The equivalent group in Texas (tispa.org) is in active discussions with SBC for volume pricing - and DLEC strategies may require similar struggle soon.

Verizon Wireless' transmission of the Rainbow/Push Coalition convention in Chicago is both an excellent demonstration of technology and an important symbol of Verizon's effort to reach a broad community. Marketing takes many forms, and DSL providers as they mature they will do more to reach the quarter of Americans who are people of color. Similarly, AOL's agreement with the American Federation of the Blind is good business as well as required by law.

Covad's sponsorship of the Yahoo Music Awards was another good point of visibility. Covad now has an evangelist to the music industry - Robin Cecola, director of brand programs and promotions.

Nightfire has moved from the rarefied air of Berkeley to the fast-rising Oakland of "Mayor Moonbeam" Jerry Brown, a very smart, sensitive pol with a 45 second attention span. Great soundbites, however.

The Broadband Content Delivery Forum (bcdforum.org) has moved from concept to working groups. The Infrastructure Working Group will be chaired by Gary Disher, VisualMedia and Will Walkoe, Sprint. Marlis Humphrey and Stephen Paul will lead the Market Development Working Group while the Content and Applications Working Group will be chaired by Michael Sepso, Gotham Broadband, and Gennadiy Borisov, The MTVi Group. Next meeting of the group, which will set standards and methods for delivery, is set for October in Europe. Kristi Kosloski, who also handles the DSL Forum, is doing the pr.

Chips:

1.7 gig Pentiums are reportedly coming off the line in Intel's Israel plant in the thousands of units. The 1.3 gig is close to volume manufacturing, and at $795 will power one heck of a content server.
Centillium doubled sales in the quarter, to nearly $10M. Many of them went to Xpeed, which filed an S-1, for CPE for Hanaro. Centillium just inked Medialincs, a rapidly growing networking systems vendor in Korea.

Deals

As we went to press, Accelerated announced a major sale to @Link, the largest customer of Nortel/Promatory.

MCK's EXTender products link the corporate PBX to branch offices and remote users remote users, a natural market for Voice over DSL. Jetstream, Tollbridge, and CopperCom all just announced they will work with MCK. The problem they have to address is that corporate quality voice requires a network engineered well enough to give low latency etc. essentially 100% of the time to all distributed locations; that's an intense requirement.

mPhase is in beta testing at Hart Telephone to distribute video over DSL, with programming from dozens of networks including A&E, BBC, Black Entertainment Television, Comedy Central, C-SPAN, ESPN, and other tests with NBC and FOX affiliated stations.

Interspeed placed a $20M value on its alliance with Contingent Network Services/Lastar, who will sell and install their Edge Routers.

Western Matrix will distribute Orckit's eDSL networks, to carry the Internet throughout a building from a fixed wireless antenna.

IP Communications of Dallas went to Efficient for CPE, and indicated its strategy was to cover 1250 COs in SWBC territory, to go with the 125 cities in Texas already open.

Sprint is using Broadjump to support customer installs, and its working so well they are looking for a 95% self-install rate.

Ramp, another stock market victim, announced a new deal with NorthPoint.
Web Access signed on for $13M of Copper Mountain gear, and CM is putting all its marketing power behind it's basement DSLAM business, formerly OnPrem.

International:

Deutsche Telekom is heading for 100K users, while British Telecom has delayed its DSL service another few months, to howls from the 100,000 waiting customers. Staff at BT are insecure after the last round of layoffs, and some of the best are heading for the exit. That may be slowed by the prospect of stock options, as BT has told Reuters it will float Openworld. We do not understand why BT is charging twice as much as American telcos for DSL, unless they believe they can intimidate OFTEL into prohibiting competition. The rules so far (no SDSL, install charges up to $1,000 for a service that in other nations is available for $300/year) suggest that OFTEL talks of bringing competition but won't deliver. The result: cable companies are taking millions of telephony lines from BT, and profits are already down significantly.
The EU is pushing very hard for local loop unbundling before the end of the year throughout the continent, while several incumbents are resisting just as firmly.

Korean ISPs Chollian and Hitel will be able to resell high-speed Internet service from Hanaro, Korea Telecom, and Thrunet, as the Korean Ministry of Communications made arrangements to increase competition.

NorthPoint Canada turned on Toronto in the joint venture with Call-Net's wholly owned subsidiary, Sprint Canada.

Products:

AccessLan introduced the PL-1000 stackable i-SLAM bringing their intelligent system to the MTU, MDU and hospitality markets. We call units like that a "basement DSLAM", but would welcome a more endearing term.

Steve Jobs at MacWorld described the $799 iMac as the "world's best Internet appliance". He's right, in that a Mac is a much more friendly machine to provide to users than the Compaq SBC is distributing, while potentially much more powerful as a router, firewall, and virus checker, while easily configured with a 20 gig or more hard drive to serve as a video store. Incidentally, the high end dual processor Macs, at 3-4K, are the fastest Photoshop machines on earth, and get one, immediately, for your corporate art department.

Net to Net introduced a G.lite card for their DSLAMs. They have some European customers to announce soon.

Competition Watch

NTT DoCoMo and AOL are close to a global wireless Internet content deal.

Cable broadband subscribers seem to be plateauing, but that is a reflection of a shortage of modems, not reduced demand. AT&T is expanding cable box suppliers to include Panasonic, Philips, and Thomson Consumer, and Sony is delivering boxes to Cablevision, so as these suppliers come on line (and Motorola & Scientific Atlanta catch up), look for cable to become aggressive again, with promotions starting in limited markets and presumably spreading widely early next year.

AT&T is spending $250M for Lucent gear for fixed wireless, while Sprint is expanding fixed beyond Phoenix to several cities.

Stock Market:

A million lines of DSL led Alcatel's superb second quarter.

Redback used $636M in stock to acquire Abatis Systems who have a service portal and ``network aware'' management platform, which lets you order and bill for paid services (like VOD).

Verizon's market move Friday (8% up) in one day moved more money -$10B - than the entire market cap of Covad, NorthPoint, Rhythms, DSL.net, NAS, and Telocity. It was swamped, however, by Nokia's $60B + loss on Thursday, which proves there is no certainty in even a great company. To further put DSL in perspective, SBC last week announced a $400M quarterly rise in data revenue alone. Their industry leading 199K DSL subs added represented only 10% of that. DSL remains a rounding error in actual dollars - for now. The street's attention to the quarterly DSL figures (of the ILECs especially) is wildly out of proportion.

Orckit and chip spinoff Tioga are getting battered on the market. They have had problems with key customer Deutsche Telekom, and need to fear losing key account GTE now that Verizon has taken over, but the combined $300M market cap is remarkably low for companies with a significant DSLAM market share and other product lines with many customers. We leave the market calls to the pros, but at these prices a takeover is easy to imagine. Dale Lindly just joined Tioga as CFO. Perhaps he can convince the street Tioga is selling for less than the value of the engineering team.

Xpeed, with a line of low-cost DSL modems, filed for an IPO through Chase H &Q. 86% of their 137,000 modems shipped in the first half of this year went to Hanaro.

"Is Goldman Sachs shopping NorthPoint for a takeover?" was asked this week. We don't know if this one is true, as rumors about buyouts of Rhythms, Covad, & NorthPoint swirl constantly. But we'd be amazed if some offers don't come soon, because each of these companies has a network that reaches almost a third of US homes and businesses. Forget the $50B bid for VoiceStream - even the $5B NTT DoCoMo is spending for Verio is several times what it would cost to buy either Rhythms or NorthPoint. We reed last week a negative Wall Street report on the DLECs, which saw increased competition and higher costs of borrowed funds as great burdens. But we work every day with these companies, and believe the managements are strong enough to overcome the obstacles they face.

People:

Pete Roberts, who built Phoenix into one of the largest and most interesting DSL ISPs, now is working with Telibrick a building centric provider, and looking for other venture/startup possibilities. His new email is pete@telibrick.net.
Dennis Rauschmeyer, whose book, ADSL/VDSL Principles was enormously helpful in our early research, moved from Pulsecom to TI. But he expects to be emphasizing wireless in his work, not DSL. We agree with him that wireless growth will out-pace even what we are seeing in DSL, but we've decided to stick to our knitting and not jump elsewhere ourselves. It's hard enough keeping up with everything in DSL.
Juan Villalonga, after weeks of negotiation, reached a severance deal with Telefonica ($25M?). Presumably his next job will be in the States, as he has moved to Miami. The Standard reported a former Mexican beauty queen was with him. Anyone need a CEO with multi-national experience?
Ron Halpern left Orckit for Accelerated, where as VP of International Sales we understand he has some customers to announce soon. The 49% stock drop today leaves them well above their IPO pricing - and demonstrates yet again why we believe in leaving the market to the pros.