2001 Lane Reports

DSL a High Stakes Game of Monopoly

Tuesday, May 1, 2001

DSL stands for Digital Subscriber Line technology, a method for providing high-speed remote access to the Internet over ordinary phone lines. Until recently, DSL was described by many as the best value for broadband access to the Internet and many businesses jumped on its bandwagon. However, events in recent weeks could lead many to believe that DSL stands for "DO SHOUT LOUDLY" or even "DRINK SOME LIQUOR" due to the frustration experienced in trying to restore DSL service, or find other Internet access after losing DSL service, when a leading provider of DSL service declared bankruptcy and sold its assets, but not its customers, to a major telecommunications company. Ninety, sixty, even thirty days is a long time to be without Internet access if your business depends upon it. However, these are typical wait times no matter what technology DSL, ISDN, or Fiber Optic is chosen. Also, reverting back to a dial-up or ISDN after using the much faster DSL is like going back to a horse and buggy after experiencing the speed of a Ferrari.

DSL technology works through the existing paired copper twisted telephone lines by compressing the data via routers on each end. This allows for the transmission of voice and data on the same lines. This requires connection to the Internet at the local telephone company. One of the three largest DSL providers went out of business in late March without much warning. The company was not a direct provider, but a wholesale provider which did not offer service directly to customers but contracted with other companies that handled billing and customer service. Thus, the end-user often was not aware that its service was actually coming from the financially troubled company.

The company's woes were partially due to continuous borrowing to build its infrastructure network. In November 2000, a white night investor renigged on an $800 million capital investment as a result of the company having to restate its third-quarter revenue to be 20% lower because one of its clients failed to pay its $9 million bill. Banks soon withdrew their lines of credit and the company filed for bankruptcy on January 16, 2001. During the bankruptcy proceeding a large telecommunications company purchased most of the assets of the company including co-location arrangements, network equipment, and systems and support software. However, the purchaser bought no customer contracts. Therefore, the network was turned off on March 30, leaving tens of thousands of customers with no Internet access, many (like us) without notice.

Worse yet, the entire DSL industry appears to be in financial straits, the other two largest independent providers of DSL services are having their own troubles. The Chief Executive of one recently resigned and its auditors are questioning its continued viability. The other has laid off 800 people, is scaling back operations, and received a notice of delisting from NASDAQ for failing to file its earnings report for Fourth Quarter 2000.

A prominent CEO of another provider is expected to resign as we go to press.

Baby Bells Not Playing Fair:
The DSL industry grew up in part due to the 1996 Telecom Reform Act which required local and regional monopoly telephone companies ("Baby Bells") to resell their network services to competitors. That is, leasing their existing phone lines to competitors. In 1999 the Federal Communications Commission required the Baby Bells to share their phone lines with competitive carriers by June 6, 2000. The Act also prohibited the Baby Bells from offering voice or data long-distance services until they demonstrate that they are allowing competition in their traditional monopoly areas.

However, many DSL providers, including the financially troubled ones, have complained about the practices of the Baby Bells in preventing competition in violation of the Telecom Act. In order to offer DSL service, competitive carriers need to install their own equipment inside the central offices of the Baby Bells. Not permitting reasonable access to central offices and switching stations; requiring elaborate, over-sized expensive security cages for competitor's equipment and arbitrary pricing of such cages; and construction delays have been cited as examples of the Baby Bells bad behavior. Collectively the Bells have been fined millions of dollars by the FCC for such anti-competitive behavior. Many, including the former founder of the bankrupt DSL provider, attribute the financial woes of the DSL industry to this anti-competitive behavior.

DeRegulation Bill could be Final Nail in Coffin:
Last week, the Internet Freedom and Broadband Development Act of 2001 was introduced in the House. This bill would remove the requirement for Baby Bells to prove they are competitive before entering the long distance market. The premise of the bill is that removing the restriction will allow the Baby Bells to narrow the digital divide by offering DSL services to rural parts of the country. Proponents also point out that the bill will allow the Bells to compete with cable providers of broadband Internet services which are not regulated. However, opponents point out that nothing in the bill requires the Bells to offer service to rural areas or prevents them from concentrating on the urban areas. Further, the bill would hinder competition. Critics, including a coalition established by 12 national consumer groups and telecommunications associations, have complained that the bill would re-monopolize the local telephone industry.

Similar legislation was introduced but failed last year. It remains to be seen what will happen with a new Congress and President. However, given the nature of the bill and the current financial state of the DSL industry one can only hope that when it comes to passage of the bill DSL would stand for "DOESN'T SEEM LIKELY."

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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