All Things Digital

Vonage’s slow death is … well, it’s slowing.The financially struggling Internet-phone company reported today a smaller first-quarter loss thanks largely to prudent cost cuts.

Great news for Vonage (VG), which has been tormented by a barrage of costly legal battles and set upon by new and powerful rivals. The company’s net loss shrank to $8.96 million, or 6 cents a share, from a loss of $72.3 million, or 47 cents, in the year-earlier quarter.

Sadly for Vonage, the company’s Q1 loss isn’t the only thing that shrank. Subscriber growth did as well. The company signed up just 30,000 new subscribers in the quarter, a big decline from a year earlier when it added nearly 166,000 subscribers. Worse, turnover rate increased to 3.3% from 3% in the fourth quarter.

Still, Vonage is a bit healthier than it’s been for some time now. So while it may not exactly be on the road to recovery, it’s at least crawling in its general direction. To that end, the company’s inked a deal to resell Covad’s DSL service under the Vonage Broadband name. An interesting idea, in that it will allow Vonage to bundle a broadband offering with its Internet telephony services like most other phone and cable companies on the planet. But DSL? Really? At a time when Verizon (VZ) is expanding its FiOS fiber-optic service and Comcast (CMCSA) is boosting the speed of its high-tier cable broadband?

In 2010, it could take as long as two minutes to download an episode of “Chad Vader–Day Shift Manager” from YouTube, instead of the few seconds it takes today. This according to a new study from Nemertes Research Group, which claims that the Internet could be approaching its capacity. “Our findings indicate that core fiber and switching/routing resources will scale nicely to support virtually any conceivable user demand,” Nemertes explains in “The Internet Singularity, Delayed: Why Limits in Internet Capacity Will Stifle Innovation on the Web.” “But Internet access infrastructure, specifically in North America, will cease to be adequate for supporting demand within the next three to five years.”

And what does that mean in lay terms? “Users will experience a slow, subtle degradation, so it’s back to the bad old days of dial-up,” said Nemertes President Johna Till Johnson. “The cool stuff that you’ll want to do will be such a pain in the rear that you won’t do it.”

To avoid such a scenario, Nemertes says backbone providers need to invest up to $137 billion in Internet infrastructure capacity–more than double what they’d planned. If they fail to do so, we may see that slow degradation to which Johnson referred and a stifling of innovation. “It’s important to stress that failing to make that investment will not cause the Internet to collapse,” Nemertes explains in its paper. “Instead, the primary impact of the lack of investment will be to throttle innovation–both the technical innovation that leads to increasingly newer and better applications, and the business innovation that relies on those technical innovations and applications to generate value. The next Google, YouTube or Amazon might not arise, not because of a lack of demand, but due to an inability to fulfill that demand. Rather like osteoporosis, the underinvestment in infrastructure will painlessly and invisibly leach competitiveness out of the economy.”

Nemertes’s last point about underinvestment in infrastructure is one worth noting. Because in the run-up to the Telecommunications Act of 1996 the incumbent telecoms promised to provide fiber-optic connections to millions of households across the country. In exchange, they were given some $200 billion in tax cuts and higher service rates to pay for it. But the telecoms didn’t spend that money on fiber upgrades–they spent it on long distance, wireless and inferior DSL services. “By 2005, if the Bell companies had actually delivered on their broadband promises, approximately 86 million households would have had fiber-optic-based services,” Bruce Kushnick, executive director of New Networks Institute, explains in “The $200 Billion Broadband Scandal.” “These state commitments also would have rewired schools and libraries, hospitals and government offices. And in most states, the plan called for ALL customers to be rewired equally, whether they were in rural or urban areas, rich or poor. Universal broadband was to be accomplished state-by-state because customers were, in essence, de facto investors funding these network upgrades.”

Something to think about when the Nemertes’s study begins popping up in telecom arguments against Net neutrality, as it almost certainly will.

Earlier this summer AT&T was widely criticized for failing to promote the $10-a-month DSL deal it had agreed to offer as a condition for the Federal Communication Commission’s approval of its $86 billion megamerger with BellSouth.

Well, turns out that criticism was undeserved because, according to AT&T CEO Randall Stephenson, no one really wants $10 DSL anyway. “We haven’t made it difficult to find,” Stephenson told the Atlanta Journal-Constitution. “To be honest with you, that’s not a product that our customers have clamored for. We still have $15 offers out there in the marketplace, even $20 offers, for 1.5 megabit speeds. Those are really kind of the minimum speeds that give a good user experience. So I don’t want to necessarily offer up a product where the user experience is not what I would consider really state of the art. That $10 product is kind of in that mode.”

The Federal Communications Commission should have been a bit more rigorous in describing its conditions for approving the $86 billion megamerger between AT&T and BellSouth. Because AT&T seems bent on satisfying them in the most unsatisfying way possible.

Over the weekend, the company began offering high-speed Internet service for about half its normal price in some states. The $10-a-month-deal was among the concessions AT&T agreed to in exchange for approval of the merger with BellSouth:

Within six months of the merger closing date, and continuing for at least 30 months from the inception of the offer, AT&T/BellSouth will offer to retail consumers in the wireline buildout area, who have not previously subscribed to AT&T’s or BellSouth’s ADSL service, a broadband Internet access service at a speed of up to 768 Kbps at a monthly rate (exclusive of any applicable taxes and regulatory fees) of $10 per month.”

A fairly straightforward directive, but one lacking the specificity that would have made it truly effective. Because while it might require AT&T to create a $10 DSL offering, it doesn’t say anything about publicizing it. And AT&T, which presumably didn’t care much for any of the concessions it agreed to, seems to have seized upon that fact and hasn’t really announced the $10-a-month-deal, let alone promoted it. The plan wasn’t mentioned in a Friday news release about AT&T’s DSL service and a page on the AT&T Web site describing DSL options doesn’t list it. To find it, you’ve got to click on the “Term contract plans” link at the bottom of AT&T’s residential high-speed Internet product page. Here’s a direct link.

Apparently there wasn’t enough money in AT&T’s multimillion-dollar “Need Something?” advertising campaign to promote low-cost Internet access.