It's a New Year for DSL Resale

Posted: 1/2004

It's a New Year for DSL Resale
Application Bundles Promise Fresh Direction for 2004
By Tara Seals

New Years resolution No. 1: I resolve to add enhanced applications to my DSL broadband service offering. Resolution No. 2: I resolve to tap a viable market for my bundle. Resolution No. 3: I resolve to differentiate myself competitively from other resellers.

While promises about delivering content and applications over DSL hardly are new, their actualization has been hampered by an unproven business case. 2004, however, finally may be the year over-DSL offers go mainstream. With end-to-end quality of service (QoS) a reality and applications such as VoIP and multimedia gaming finding real audiences, some DSL resellers are heading into the New Year with bundles of applications, content and access technology.

Central to this new beginning are the DSL Forums new technical reports, TR-058 and TR-059. Working with carriers, service providers and equipment manufacturers, the Forum has outlined an end-to-end IP architecture with QoS capabilities for DSL. The blueprint is a departure from using an ATM permanent virtual circuit architecture, which offers one class of service: an IP best-efforts level.

We hope to take this to a whole different level of service with a new architecture, which will now enable the continued support of the best-efforts service, but also the ability to differentiate flows with several levels of priority, explains Tom Starr, president and chair of the DSL Forum board of directors and a senior member of SBC Communications Inc.s technical staff. Were expecting this will initially be based on the DIFFSERV QoS model, but I think we will work over time to also look at other, more advanced techniques.

Real-time media applications such as voice and video require adequate resources along the transport path and, therefore, require specific QoS support. Under the new technical report specifications, a variety of QoS flows can be supported for multiple real-time applications over a single DSL connection.

Until now, fast data transfer for Web surfing, e-mail and file exchange have been the key reasons why millions of subscribers have chosen to upgrade to broadband DSL from a narrowband Internet connection, says Michael Brusca, vice president of strategy for the DSL Forum.

However, 2004 will see DSL evolve from mere access to a value-added sale. What that means is, the platform were [creating} would potentially support a different broadband experience for Internet surfing, gaming, multimedia downloads, VPN, VoIP or other services that would require either more bandwidth or had a more deterministic delivery characteristic for the traffic, says Rich Wonders, senior director of broadband marketing at BellSouth Corp., which is migrating its network to the new architecture.

BellSouth resellers are using the ILECs DSL platform and bundling in content. We are seeing many folks starting to shift their models toward a content-oriented model, maybe more so than they have in the past, says Wonders. He adds, the ability for an ASP or reseller to offer an end user a differentiated level of service (e.g. one that allows them to play an online game while another user surfs the Internet) has a huge upside for application service providers and will cause them to accelerate the development and the delivery of broadband applications.

POP THE CORK

For DSL resellers and ISPs, the end game is creating a bigger value proposition with any individual customer. For resellers fighting thinning margins, the ability to add value to a broadband connection sale is crucial, since applications raise the average revenue per customer.

Internet access has been reduced to a commodity, and the pressure on eroding margins has been pretty strong in the last 24 months, says Cameron Christian, vice president of sales and marketing at DSL reseller Velocitus. We cant build a continuing business around a commodity, so we have no choice but to add applications and additional value for the customer. And certainly drive average revenue per subscriber and average margins back up again.

DSL added another 10.7 million subscribers in the first half of 2003, reports London analyst firm Point Topic. This brings the total number of subscribers to 46.7 million. North America added 1.2 million new subscribers in the six-month period.

Research firm Atlantic-ACM says DSL uptake has a compound annual growth rate of 25.9 percent, as opposed to a cable modem CAGR of 19.5 percent. However, tackling the mass market has been tough for service providers. The ISP market is experiencing Darwinism in hypermode, according to Atlantic-ACM analyst Joyce Lo, as subscribers migrate from premium dial-up services such as MSN and America Online Inc. to cheapo dial-up service or broadband. Accordingly, AOL and MSN began reselling DSL, launching branded broadband offerings.

While these strategies may have been sound on paper, theyve had little real-world success migrating dial-up customers to these services, says Lo. MSN recently ended a two-year-old broadband access deal with BellSouth, effectively dropping out of the broadband access business due, in part, to poor returns.

While content and enhanced applications are the salvation, its still an uphill battle for mainstream ISPs, since Internet content [is] considered by many to be a commodity itself, cautions Lo.

Success in the applications world hinges on identifying the right target market, according to Mike Apgar, chairman and founder of Speakeasy Inc., a DSL reseller. We focus on segments of customers that are doing more with their connection and are frankly more demanding around a given application or entertainment vehicle than the mass-market customer, he says. We know theyre willing to pay a little bit extra for that. A small business market thats using a VPN or VoIP solution requires a guaranteed level of latency and SLAs. Its critical to our model that we are able to find ways to add value to broadband connectivity, specifically DSL and T1.

NOISEMAKERS

Though the technology now supports advanced, targeted applications, the question remains whether there is enough demand to justify rolling them out. Movie downloads, interactive streaming media, telco TV and other applications are exciting, but the market isnt there yet. However, applications such as VoIP and VPNs for small business and gaming for the consumer market hold viable promise and will form the majority of over- DSL rollouts in 2004.

Until this year, most of our partners really didnt have a content play, says Hunter Middleton, director of product development at Covad Communications Group Inc. But one area weve definitely seen some changes in this is around the voice options and trying to get a quality VoIP service delivered. We are getting much more traction with partners right now, to look at prioritizing voice traffic and to deliver a high-quality VoIP service.

Covad VoIP is not deployed yet, but Middleton says product development now is being fueled by QoS and resellers that want to move away from a Vonage model (featuring unlimited local and long-distance calling over a customers existing broadband connection) and go to a more targeted interaction, where they combine the content and the network.

Speakeasy, which resells eight underlying last-mile carriers DSL and T1 connections, offers its own Web hosting and VPNs for businesses, bundled with the DSL or offered as an a la carte add-on. Spurred by the new QoS-enabled DSL architecture, Speakeasy plans to launch two VoIP products in 2004: One for residential/SOHO users, and one for small to medium-sized businesses, up to 100 or 200 seats.

Speakeasy has interconnected into its last-mile carriers networks, and so we can provide end-to-end QoS from an SBC connection in L.A., over to our backbone and out to a Verizon last-mile connection in New York,  says Apgar. Thats very powerful when you start to offer VoIP, because youre effectively not even transiting the Internet, its over our private MPLS backbone. That will really start to differentiate our business solution.

Verizon Communications Inc. also announced plans to unveil VoIP service this year, potentially available via resellers. In the second quarter, Verizon will offer a basic bestefforts VoIP service for consumer DSL customers. In the fourth quarter, the RBOC will launch a managed VoIP service over DSL and T1s for businesses and consumers willing to pay more for QoS.

Velocitus is deploying a softswitch to be able to layer voice on top of DSL, for a VoIP offer aimed at small business. It has applied for its CLEC license in some Western states. We think the new softswitch and delivery mechanism will give us a dramatic competitive advantage over traditional telephone companies and clearly against the incumbent, says Velocitus Christian. We can, for about a tenth of the capital cost, produce a functionally equivalent offer. And things like integrating the voice messaging systems with the e-mail systems are a real natural for this product because everythings data already.

The flurry of VoIP rollouts could be just the thing to start the rollouts of other DSL/application bundles. The first step is to get the product out there that shows the value of managing the QoS, says Middleton. I think voice is going to be the first area that really proves that out, and people will see that you can provide additional value by linking the content and the network capabilities together, and it will more rapidly evolve into other areas.

Another business application with promise is broadband-enabled credit-card transaction processing for small businesses. As with VoIP, the broadband piece becomes a platform that allows businesses to do other things: it is the means, not the end. The overwhelming majority of the small businesses that do that [process credit cards] do it via a dial-up connection, says Wonders. But with DSL, they can go from 30 seconds per transaction to less than eight seconds. So if youre a small business merchant and you have people lined up out the door of your dry cleaner, being able to get them in and out faster has value.

For the consumer market, gaming is in demand. Speakeasy hosts game servers at its data centers and provides a file download service that has several hundred thousand files related to gaming, including the latest maps, logs and graphic drivers. Weve done well there, and as we roll out this network next year that takes and interconnects all of our data centers, it will be a gaming ring, so gamers in L.A. can play other Speakeasy gamers in Washington or Chicago, says Apgar. So were working with software developers and what we call clans in gaming to provide for highly differentiated, almost tournament- quality service. Demand is terrific.

One problem in teaming up with household-name gaming providers, such as Microsoft Corp.s X-Box division and Sony PlayStation, is they dont want to restrict themselves to any one network  and so take a network-agnostic approach, says Middleton. Thats really hard to marry that with the network because its scattered and fragmented. X-Box owns its own gaming platforms and centers, he explains. So the industry structure for how these things get delivered can have a big impact on whether youre able to take advantage of the QoS opportunities or not. Nonetheless, Velocitus is looking into the requirements for being X-Box-certified for the WAN segment.

Although thats a really small niche, we think its growing, and those customers are willing to pay for performance, so theyre not quite as costconscious as other consumers might be, says Christian. In order for their experience to be worthwhile online, they have to have a pretty high-performance backend.

Image: Home Networking

REASON TO CELEBRATE

This years DSL resale opportunity doesnt end with QoS support. Ultimately the customer will, on the fly, be able to change the bit rate of the line to match the applications that are running, as well as the QoS packet priority. The user would pay a premium for the time the bit rate is heightened. If theyre doing interactive gaming, having very low latency is important, says SBCs Starr. If they want to download video with high quality, then the bit rate can be heightened to support that for the duration of that movie.

The DSL Forums new architecture is designed to facilitate many service providers connecting into the access network, so a customer also could change from one service provider to another on the fly, depending on the application, rather than being permanently assigned to one service provider.

This innovation could translate into revenue opportunities in the long run, since service providers could have access to accounting information allowing different types of billing arrangements: usage-based, flat-rate, or pay by the hour, day, session or content (e.g., a movie). It puts in place the tools that allow us to move beyond the fixed-rate bill-per-month model to one where there could be a base fee, and then you pay by the drink for some of the enhanced offerings, explains Starr. It couples the network engineering with the business model, to greatly increase the revenue that could be earned by service providers. But furthermore it puts in place what I would call a sustainable business model for spending the resources, because the customers who are demanding the additional resources from the service provider and the access provider are automatically paying for those.

If the business case is proven out this year with VoIP and gaming, other applications that use these technological innovations should follow. Its a bit of a chicken-and-egg scenario, says Wonders. As more applications are built, the more demand will surface. As more demand surfaces, more applications are built. But all of that presupposes there is an infrastructure and an architecture that is ready to deliver those services.