Will Naked DSL Chill the Cable Guys?

Qwest's move to offer high-speed Net access without a corresponding phone line could be just what the Bells need to catch their rivals.

Qwest Chairman and CEO Richard Notebaert may be selling "naked" DSL, but that has nothing to do with the tawdry side of the Net. No, what he's doing is only heresy for a regional phone company. And it might be just the thing that kicks the broadband wars between phone and cable companies into high gear. The term refers to a high-speed digital subscriber line purchased without a corresponding analog local-phone line. To date, the Baby Bells have been loath to offer customers "naked" DSL.

That's because doing so would allow those subscribers to eschew standard phone service that offers steady margins to the regional Bell operating companies (RBOCS), Verizon (VZ ), Qwest Communications (Q ), SBC Communications (SBC ), and BellSouth (BLS ). As the telecom markets imploded over the past three years, the surest thing the business had was steady revenue from providing local service. That lifeline largely explains why the Baby Bells have endured the apocalypse with far fewer wounds than the big long-distance carriers or the myriad upstarts -- so many of which have since gone into bankruptcy.

Now, however, more and more customers are dropping their local landline and opting to use a cell phone as their primary voice outlet. And that's raising the pressure on the Bells to drop the mandatory pairing of DSL and local dial tone. Rather than pay the $30 to $50 that most local-phone service now costs per month, plus $25 to $35 for DSL service, these landlineless folks are choosing instead to pay $40 to $50 per month for a cable modem on top of their regular cable service and pocket the difference.

WHAT CUSTOMERS WANT. That landline tax is becoming an unacceptable drag on broadband subscriptions as the RBOCs continue to push to narrow the large lead that cable companies have grabbed in the broadband wars. Cable now has about 64% of the market vs. 36% for the DSL carriers, mainly the Bells, according to Leichtman Research Group in Durham, N.H. At present, 20% of all U.S. households have a broadband connection.

All of which explains why Notebaert broke from the pack on Feb. 25 with an announcement that Qwest would start selling naked DSL on Feb. 28. "Customers are telling us that they want greater flexibility when it comes to selecting communications services, which is why we decided to offer DSL with no phone service," said Notebaert in a press release.

Expect other Baby Bells to follow suit as the Qwest offer will likely prove contagious. More important, Notebaert's move underscores the growing realization at the Baby Bells that broadband hookups will become a bigger revenue source sooner rather than later as more and more households sign up for a fat pipe while cutting their landline or opting for cheaper Net telephony service from their cable companies.

WIRELESS EDGE. The naked DSL play also could presage even more comprehensive and more flexible packages of services from the Baby Bells that let customers mix and match long-distance, local, broadband, and wireless options of their choosing.

This strategy could work particularly well for Verizon, SBC, and BellSouth, all of which have an ownership stake in a big cellular operation. That's something the cable companies, which generally lack the mobile-phone option, will have trouble competing against down the road -- if the Bells can market these bundles effectively.

One thing is for certain. As other types of broadband come online -- from wireless access using Wi-Fi technologies to broadband delivered over electrical power lines -- the race between the Bells and the cable guys to sign up Internet speed freaks will only intensify.