Is a Ponzi scheme?

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From: Adam Rifkin -4K (
Date: Thu Jan 06 2000 - 13:18:14 PST

One FoRKer recently got me interested in DSL investments, and I found
this writeup from .

The line that caught my eye was:

> Though it won't be launched until April 1, customers can start
> signing up for the service Wednesday by logging onto
> To receive a FreeDSL modem, users must also refer
> at least 10 people, who must sign up for the service.

Isn't this a pyramid scheme? How can they possibly expect this to work?
Sure enough, we find the line in :

> You must also obtain ten qualifying referrals, as explained hereunder,
> to obtain a free modem from BDG.

As far as Due Diligence goes, I'm surprised the article below doesn't
mention Broadcom, which (among other things) makes chips for DSL modems.
Nor is there mention of Redback, a DSL services and equipment company:

> Digital Subscriber Line Service Comes of Age
> By Cindy Christ, January 5, 2000

> This weekend, five of my friends said they had just signed
> up for Digital Subscriber Line (DSL) service to access the
> Internet from their homes. Most use speedy broadband service
> at work or school, and could no longer stomach the agonizingly
> slow experience of surfing the Web over a standard dial-up
> modem.

> Five people does not a trend make, but if you factor in a bevy
> of Wall Street prognosticators talking up DSL service -- which
> is 30 to 50 times faster than 56K dial-up modems -- it seems
> safe to say that DSL is on the verge of reaching critical mass.

> Just take a look at the numbers: At year-end 1998, about 50,000
> DSL lines were installed in U.S. residential and business
> markets. By mid-1999, that number had already more than tripled
> to 160,000, according to International Data Corp. This year,
> the number is forecast to soar nearly fivefold to almost
> 783,000.

> What's more, despite expected falling prices for DSL service,
> IDC estimates revenues will jump past $2 billion by 2003.
> Credit Suisse First Boston is more optimistic, projecting DSL
> revenues will expand from $303 million in 1999 to $4.1 billion
> by 2003.

> "The development of the DSL market will be closely tied with
> consumer and small business Internet adoption. Work-at-home
> Internet users as well as power users are quickly becoming
> frustrated with slow dial-up speeds, and small businesses with
> multiple users accessing the Internet are looking to upgrade
> their access," said Amy Harris, research analyst for IDC's
> residential and small business telecommunications services
> programs, in a recent report.

> According to NxGen Data Research, the percentage of U.S.
> households online will climb from 31 percent today to 54%
> in 2002.

> Federal legislation requiring Regional Bell Operating Companies
> to open up their lines to competing DSL providers will give
> the technology a much-needed shot in the arm by cutting costs,
> which now range between $40 to $60 per month, in half.

> In addition, the new law will make DSL service more widely
> available by spurring local phone companies to action. Though
> DSL technology has been around for 10 years, phone companies,
> which control 90 percent of the nation's local phone lines,
> have been slow to implement the service. With this new ruling,
> which takes effect around the middle of the year, the Bells
> must either jump into the market head first, or have their
> lunch eaten by DSL upstarts who've been gobbling up market
> share.

> Demand for enhanced services, such as streaming video and
> audio and Internet telephone service, also will fuel the DSL
> rollout.

> This is not to say, however, that DSL is without rivals.

> "[The] growth of the DSL services market will also be impacted
> by competing technologies such as cable modems," said IDC's
> Harris.

> So far, with more than 560,000 users, cable operators lead the
> high-speed access race. But with only 30 percent of American
> homes cable-modem ready, operators must invest billions to
> upgrade old, one-way cable systems to new, two-way data
> highways.

> Wireless broadband satellite services like Direct TV, owned by
> Hughes Electronics (GMH), and EchoStar (DISH), which offer Web
> access via PC and TV set-top boxes, is expected to capture
> rural markets and users located beyond three miles from a
> central teleco office, where DSL performance is spotty.

> With the industry still nascent, investors may be confused
> about the best way to profit from the burgeoning DSL market.

> Analysts say investors can use two strategies. One is to invest
> in DSL component makers, like Cisco Systems (CSCO), Aware
> (AWRE), France's Alcatel, Orckit Communications (ORCT),
> PairGain Technologies (PAIR), Amati/Texas Instruments (TXN),
> Tut Systems (TUTS) and Paradyne Networks (PDYN).

> Lately, the DSL equipment market has been growing at triple-
> digit rates. And both Aware and Lucent spin-off Paradyne have
> had upward earnings revisions.

> The second way to play the theme is by investing in DSL service
> providers, such as Covad Communications Group (COVD), Rhythms
> NetConnections (RTHM), NorthPoint Communications (NPNT) and
> Efficient Networks (EFNT).

> This week, a number of brokerage houses made positive calls on
> Covad Communications. Goldman Sachs said Tuesday it raised
> Covad shares to its "recommended" list from "market
> outperformer."

> Gruntal & Co. also upgraded Covad, which was included Monday on
> "Standard & Poor's PowerPicks 2000," a widely followed index of
> stocks that 29 S&P analysts expect to be the best picks for the
> year.

> In September, Covad set a highly ambitious goal to offer DSL
> service in 100 top U.S. cities by 2001, reaching 40 percent of
> all domestic homes and businesses. Next year, the company will
> launch a $50 million ad campaign to help it meet its goal and
> establish brand-name status.

> In the most recent quarter, Covad's total subscriber lines shot
> up to 31,000 from 16,700 in the previous quarter, an 86 percent
> increase.

> Local phone companies, which are expected to ramp up their DSL
> offering this year, are another play on the service area,
> including SBC Communications (SBC), US West (USW), Bell South (BLS)
> and Bell Atlantic (BEL).

> But because data transfer makes up less than 11 percent of the
> Bells' revenue, their share prices may not reflect rising DSL
> sales. This could change, analysts say, as the market for
> expanded services picks up, allowing telcos to issue tracking
> stocks that highlight DSL revenues.

> Citing accelerating sales driven by data, Internet and wireless
> demand, Credit Suisse First Boston started coverage Wednesday
> on U.S. telecom companies. Analysts rated Bell Atlantic a
> "strong buy," setting a 12- to 18-month price target of $102.
> Bell South was rated a "buy," with a $65 price target. SBC
> Communications also earned a "buy" recommendation, with a $74
> price objective.

> In a surprising move, The Broadband Digital Group, run by the
> same people who started online ad firms AdForce and AdSmart,
> announced Tuesday it would provide consumers with free DSL
> service.

> Though it won't be launched until April 1, customers can start
> signing up for the service Wednesday by logging onto
> To receive a FreeDSL modem, users must also refer
> at least 10 people, who must sign up for the service.

> Free dial-up Internet Service Providers made strong advances
> this year, but analysts don't expect FreeDSL to make a dent in
> the market. Some even doubt that the company can make good on
> its promise.

> "The market is supply-constrained right now," said Mike Wolf,
> an industry analyst with Cahners In-Stat Group, according to
> "I think people are already signing up as fast as
> providers can roll the services out."

> Other experts also discount the free service, noting that while
> free ISP service is available, most people haven't cancelled
> their ISP subscriptions.

> Although the future of free DSL service is in doubt, investors
> can be sure that one way or another, high-speed Internet access
> is here to stay.


.sig double play

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