I spent some time recently at Covad, the largest DSL networking company in the U.S. Covad is my DSL provider, though I have at other times had DSL service from Northpoint Communciations and Pacific Bell. The reason for our meeting was simple: I had no idea how DSL really works. Do you? I didn't think so.

There is nothing exotic about DSL, just byzantine, because there are lots of extra actors and bellydancers along for the show. If you are a dialup Internet user, for example, there is at least an illusion that it is just you, the phone company, and your Internet Service Provider. But DSL typically throws a company like Covad into the mix, somewhere between the phone company and the ISP.

In a sense, we don't really need Covad OR the ISP, at least according to the local phone company. When the local phone company is your DSL provider, they play all the roles, which ought to be better but usually isn't. This is because phone companies are slow learners, v-e-r-y s-l-o-w, and it can take them an age or two to get their DSL business running right. But a Covad, Northpoint or Rhythms — the three national DSL providers so far — actually count on DSL for making money, so they have to do it better. Though there are horror stories everywhere, it is typically quicker to get a DSL connection through one of these outfits than through the phone company.

Here I must admit that there are occasional advantages to having the phone company provide your DSL. In my experience, they don't pay much attention to published data rates and just let those bits flow. So the closer you are to the phone company, the faster your connection, all for the same price. When I lived in Burlingame, Pacific Bell was feeding me up to six megabits-per-second. They didn't care. Outfits like Covad, on the other hand, give you only what you pay for.

Of course, Covad and the others actually are phone companies. They are Competitive Local Exchange Carriers (CLECs), as opposed to the Incumbant Local Exchange Carrier (ILEC), which in my case is Pacific Bell. ILECs hate CLECs, and vice versa. They are like feuding siblings forced to share a bedroom, with the bedroom in this case being the ILEC's local hangout, the Central Office (CO). Covad is in 1,800 central offices right now and plans to be in 2,000 by the end of the year.

Only CLECs and ILECs can put equipment in the CO, which is the major reason why your ISP even needs an outfit like Covad. And while ILECs can put pretty much anything they like in their CO racks, the CLECs, like unwanted cousins, are limited to certain equipment that the ILEC admits won't "damage" their network. Remember when U.S. phone companies owned all the phones and warned that other phones couldn't be trusted? Well, this is the same kind of baloney.

Here's how a DSL provider functions. They have a rack at the telephone company central office, and this rack is filled with DSLAM's (Digital Subscriber Local Access Multiplexors). Regular old phone lines are terminated at the DSLAM, where their digital signals to and from the DSL modem or router at your house are consolidated and kept separate from regular voice traffic. There is no DSL dial tone — it's just a pair of wires. The DSLAM combines these DSL signals so they can be connected to Covad's backbone through a T-3 line at 45 megabits-per-second.

So far, we haven't yet made it to the participating ISP. You'll also note from this that Covad has 1,800 T-3's. That is a LOT of T-3's, given that most ISPs only have one or two. But T-3's are cheap for Covad, since, as a CLEC, they can buy them at cost from the ILEC. That bugs the heck out of the ILEC, too. This is yet another reason why the local phone company is usually the slowest player in getting your DSL line installed, even though all they have to do is identify the wire pairs that an outfit like Covad will use to reach your house.

All those T-3's are connected to Covad's backbone, which they lease from Level 3 Communications, an enormous owner of optical fiber. Where the connection to the participating ISPs finally happens is over another T-3 that connects the ISP to Covad's backbone. In this case, the T-3 is provided by Covad, but paid for by the ISP, which also gets a deal since Covad only marks up the T-3 price a little. These T-3 lines to the ISPs connect to the Covad backbone at one or more of 22 Digital Service Gateways around the country.

What Covad provides to the ISP are services defined by layers one and two of the ISO seven layer model. Layer one is the physical layer (the wire) and layer two is the data link layer, which defines things like packets, headers, etc. So what Covad provides are the pathways for connection, but none of the bits that actually flow down those paths. To this point in the network description, for example, there is yet to be anything that can be described as a TCP/IP router. So far, it is just bits.

Since Covad and Level 3 sit between you and your ISP, it doesn't really matter that much where your ISP actually is. If you think about it, this architecture means that you and your neighbor could both have Covad DSL lines going through the same CO, yet have different ISPs based in different parts of the country. An ISP in Rhode Island is about as close as one in San Francisco. But because of the high cost of marketing in both Rhode Island and San Francisco, most ISPs remain local.

Still, Covad does a nice business providing what are in essence turnkey ISPs. Did you buy your PC from Gateway and sign up for Gateway's ISP? At least a part of that "ISP" is Covad, with most of the other parts being provided by folks like UUNet, that rent virtual Points of Presence — the actual numbers called by dial-up users. In fact, it is possible, with a little calling around, to start an ISP that doesn't actually do anything except appear to be in business. Everything from DNS to e-mail to Web hosting to billing can be subcontracted. You, too, can be a national ISP by lunchtime.

There is actually a pretty good reason for being such an ISP, too. Wall Street values ISPs at $3-4,000 per user, which is on the order of 15 times revenue or approximately five times as much as IBM is worth on a revenue basis. This makes some sense for a capital-intensive business that has to lay cable and install servers and fight with phone companies and the FCC. But our ISP is leased, not owned. We have no capital, no cables, no phone company fights. All we have is a comfortable little IPO and a chance to shove all our revenue into marketing and appear to grow like crazy for a year or two, then sell out to Earthlink or Verio. Those larger outfits, which Wall Street values at $6-7,000 per user, only want us for our customer base, not for the equipment we don't own or the network connections we've borrowed.

Does this make any business sense? I didn't think so. Let's do it.

As for Covad, they tend to look on the ISPs as marketing and sales organizations. But this, too, shall pass. In search of earnings in the reality-based Internet economy of 2001, companies like Covad will start selling direct, cutting out the ISPs. So if we are going to make a go of this instant ISP scam, we'd better get going soon.