SBC-Covad Deal May Mean Fewer Choices

This week’s $600-million deal between SBC Communications and high-speed Internet access specialist Covad Communications may well be an excellent move for both companies. But it could also reduce competition and discourage rivals in the red-hot residential market for digital subscriber line service, a speedy Internet connection offering known as DSL.

That may be especially true in California, where consumer demand for DSL is voracious and where Santa Clara-based Covad was expected to aggressively challenge SBC’s Pacific Bell unit in the residential DSL market.

Now, industry folks believe the deal with SBC would severely reduce Covad’s enthusiasm for an assault on the consumer market, leaving it to pursue business customers in regions where it competes with PacBell and other SBC-owned phone companies.

For consumers who want to buy DSL, that means they are likely to have fewer alternatives to the local phone company. That prospect is a scary one, considering the ongoing problems with installation and service quality at PacBell and its DSL affiliate, Advanced Solutions Inc.

Under terms of the Covad-SBC pact, SBC and its companies will buy DSL services from Covad for resale to customers both within and without the home territories of its phone companies. The agreement includes incentives for SBC employees to sell Covad service to business customers (but not residential prospects) that guarantees Covad $600 million in revenue over six years, starting next month.

SBC also will pay $150 million to take an estimated 6% ownership stake in Covad, which has seen its stock price sink. Covad won SBC commitments to certain performance standards, and in return agreed to settle all its outstanding legal fights with SBC companies, including an antitrust lawsuit and several pending arbitration cases.

Covad had been a leading critic of PacBell and other phone companies, claiming in lawsuits and regulatory complaints that the firms were engaging in anti-competitive behavior and illegally hampering the progress of DSL rivals.

Legal pressure from Covad and others helped win concessions from SBC in Texas that have helped improve prospects for Covad and other DSL competitors. In May, an arbitration panel ruled that PacBell must pay Covad $27.2 million in damages and costs (in addition to an earlier award of $740,000) for illegally obstructing the competitor’s DSL service. PacBell had appealed the decision.

Covad also will be rewarded with a wholesale price for SBC copper lines that is far better than that offered to most other DSL competitors.

Earlier this year, DSL competitor NorthPoint Communications joined forces with phone company Verizon, which until then had been a major NorthPoint competitor. The nation’s No. 3 non-phone company DSL provider, Rhythms NetConnections Inc., could well be next to team with a major phone company.

Dave Burstein, editor of DSLprime.com, an Internet site devoted to DSL matters, believes the Covad-SBC agreement and others like it are reducing DSL choices for consumers.

“The [federal government’s] policy has been promoting competition, but now two of the three largest [independent DSL providers] have major telco ties,” he said. “So will the competition be real, or will the telcos maintain their dominance?”

Times staff writer Elizabeth Douglass can be reached at elizabeth.douglass@latimes.com. Recent 411 columns are available at https://www.latimes.com/411.