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The Emergence of DSL

Residential broadband access is finally beginning to be more widely available through the use of cable modems and DSL technology. DSL is a technology that allows the existing local loop to carry traffic at very high speeds. With some hardware and software upgrades at both the customer premises and the CO, the existing copper wire can be used to transmit a number of services simultaneously – including voice, data and video. Since inception in the late 1980’s, DSL technology has evolved into a number of forms. In our discussion, we will focus on ADSL (Asymmetric DSL). The "Asymmetric" in ADSL comes from the fact that the transmission to the end user uses more of the available bandwidth than the transmission from the end user to the ISP.

There are major advantages of DSL technology over analog modems for both the carrier and the customer:

For the carrier:

• Additional source of revenue (both DSL alone and sales of additional services, e.g., video).
• DSL enables the data connection to bypass the carrier’s telephony network, and "frees up" voice capacity. Consequently, carriers will be able to dramatically reduce spending on voice equipment/infrastructure.
• Ability to grow voice and data networks separately (as demand arises for each service).
• Demand for broadband access to the Internet continues to grow.

For the customer:

• Increased bandwidth (approximately a 1000% improvement over a 56 kbps analog line).
• Ability to use the phone while using data connection (savings of installing/maintaining a second phone line).
• Nominal cost increase, since cost of a second line and ISP are avoided.
• "Always On" functionality.

End User Bandwidth Demand Continues to Grow

The demand for bandwidth (or transmission capacity) continues to grow. Five years ago, the dominant traffic over the network was text-based information (e.g., e-mail and file transfer). The growth in the Internet since then has been in part due to the increasing graphical content of the web. Today, additional services, including streaming audio and video, require even greater bandwidth (see table).

However, from the carrier’s standpoint, providing raw bandwidth is only the first step. Developing and deploying additional services such as video-on-demand or voice-over packet will not only be additional revenue streams for the carrier, but will also improve the efficiency of the network and reduce the carrier’s operational costs.

Exhibit 2 shows the penetration of various services, including PCs, narrow-band (e.g., analog modem) access, broadband access, cable and television. What becomes clear is that there is tremendous room for growth for broadband access. Carriers now have the proper economic incentive to meet that demand with DSL broadband access.

Growth Drivers

Capital Spending and Revenue

In regard to DSL, both the increase in customer self-installs (versus truck rolls) and the reduction in the cost of modems from $250 to $90 improve the deployment proposition from the carrier’s standpoint. The result is that the cost to the carrier to sign-up a customer for DSL service has declined from over $1000/customer to $300-$700/customer. Since carriers are charging $600/year for DSL access, the economics are now very attractive. This is evident in the growth of data revenue over the past two years, as indicated here:

Exhibit 3 shows the aggregate wireline capital spending, with estimates of the voice component of this spending and total revenue values for the major U.S. carriers. These carriers account for approximately 80% of U.S. wireline capital spending. Total spending has increased since 1997, but with the spending mix shifting towards more data-centric services/equipment and away from voice infrastructure.

We forecast that the carriers will be able to dramatically increase their spending on data, especially the data targeted at growing revenue, while reducing their total wireline capital spending budget.

Traffic Demand Expands

The volume of data traffic that flows through the Internet continues to grow, primarily due to the increase in the:

• number of users (business and consumer)
• devices per user (e.g., personal computer, PDA, wireless handset)
• hours online per user
• bandwidth demand per user
• available bandwidth (e.g., if the capacity exists, it will be used).

Exhibit 4 shows the growth in the number of users connected to the Internet as well as the penetration of cable, PCs, analog modems and broadband access services, as of 2000. It is evident that the volume of traffic flow should continue to increase well into the future.