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Broadband Access
Covad: we’re not just a DSL company anymore
Wholesale services, enterprise voice drive new revenue
by Sean Buckley
Founded during the great Internet bubble in the late 1990s by two former Intel executives, Covad Communications was one of the many emerging CLEC class that was able to ride the wave of new competition created through the FCC's landmark Telecom Act of 1996.
But much like the raft of .com companies that burned through millions of dollars in liquid funding, the CLEC market of the late 1990s party ended abruptly when these operators ran out of cash in building out their respective networks. Unlike its fellow CLEC brethren Rhythms Net Connections and Excite@Home, Covad did emerge from bankruptcy.
Fast forward to 2009 and the CLEC seems to be on even ground.
Covad Communications’ CEO Pat Bennett believes the CLEC has an advantage over publicly-traded companies.
In April 2008, Covad was acquired by Platinum Equity Group for $470 million in a public-to-private acquisition.
And when people ask Bennett what has changed since being bought by Platinum, his response is that Covad is no longer beholden to Wall Street’s near-term obsession of quarter-by-quarter results.
“What I think has impacted us the most is being able to run the business more focused on delivering bottom line growth as opposed to chasing Wall Street and trying to constantly deliver top line growth,” he said. “That may sound very simple, but in reality it has a dramatic impact on the business.”
The downfall of always chasing top-line growth is that while these short-term decisions could help a company’s quarterly results, they might not be the best for the long-term growth.
Focusing on short-term results can impact how a company can support its existing services.
“We probably put too many of our resources in the past into developing what would be our next leading product or service and maybe not enough resources in taking care of what we already had,” Bennett said. “That’s not to be critical of the past, but it was the nature of chasing revenue growth.”
Figure 1. Pat Bennett Vital Statistics
Realigning wholesale
As it continues to assert itself as a private company, one of the first moves Covad has made was to refocus on its initial strength: selling wholesale bandwidth services.
To say Covad is a wholesale bandwidth force would be an understatement. With presence in over 2,000 COs, Covad counts some of the largest service providers, including AT&T, Verizon and Earthlink on its fingers.
The service provider’s wholesale business, however, has been an evolutionary work in progress. Initially selling ADSL2+ and SDSL connectivity, Covad’s wholesale business itself has evolved initially from one where it was selling large carriers and ISPs consumer-grade DSL services to more business-centric services.
“In those days, our consumer business represented 70 percent of all the lines on our network, and about 30 percent of those lines would have been in that area of SDSL services and IDSL,” Bennett said. “When we introduced T1s in late-2003, we gradually began to shift our focus as the market shifted, and today our fastest growing products are the higher-bandwidth products.”
Now, the revenue split is 70 percent business lines and 30 percent consumer lines.
Key to realigning its wholesale service business is the continued focus on its automated provisioning system. Depending on the ILEC it is working with, 65-80 percent of its orders flow through the installation point without any human intervention.
“When I talk to our partners what I hear most often from them is that we love doing business with you, we love your automation, we love the fact that you push lots of tools out to us so we can take better care of our own customers, but we wish you had more bandwidth and more footprint in other cases,” Bennett said. “We really believe in how we grow the business going forward, wholesale presents that best opportunity to not only grow the business, but grow it profitably.”
Business bundling
But wholesale services are only one part of Covad’s vision. Covad continues to craft offerings for its direct retail business.
Through the direct retail business, Covad is targeting resellers and other service providers that would rather have a partner perform end-customer connections and conduct co-marketing. Then, there are other customers that will just want to buy connectivity.
Focusing on business customers that rely on Internet transactions as part of their daily operations, Covad sells businesses directly a mix of DSL, T1, and bonded T1 services. In addition, Covad plans to launch a Layer-3 VPN service with QoS and CoS capabilities and a DS-3 product.
With ADSL2+ as the anchor, Covad has been serving the underserved SMB space with customers that have 1-100 employees; however, ADSL2+ and even the basic ADSL is finding a home with larger enterprises.
Whether it’s providing a DSL line to a SMB, SOHO, consumers or enterprise, Bennett has noted that even with the down economy none of these segments are giving up their broadband lines.
“It’s pretty certain our product is no longer a luxury for businesses and really not for most consumers,” he said. “People have become so dependent and get so many services and capabilities through the Internet that you see more people giving up their home telephone line and using their cell phone, but keeping their Internet connection.”
Instead, Bennett points out that consumers and enterprises will effectively look at more economic broadband alternatives. In the enterprise case, companies will not necessarily give up their connections, but rather replace their T1 lines with basic ADSL, for example.
“We’re seeing some activity in the enterprise space where a company might have been connecting a lot of its locations through a T1 and will take a little more risk on the reliability side because those ADSL lines don’t come with the same level SLA as a T1,” he said. “They’ll trade off that reliability for a better cost in these economic times.”
Covad’s addressable services market is not just about data connectivity alone. VoIP is becoming another value-add service.
Through the installation of its nationwide MPLS backbone, the CLEC not only has abundant OC-192 bandwidth, but also QoS and CoS capabilities on the network to support a wide range of VoIP services.
Figure 2. The Covad Network
“With our 2 PVC voice product we have been able to become a key provider of services to people that want to run their VoIP traffic across our network, which in the past was something we did not offer,” Bennett said.
Interestingly enough, Covad’s direct business is having a positive side effect on how it can better craft products for its burgeoning wholesale business.
“The other thing the direct business does is it gives us the opportunity to get a first hand experience with end-users and to understand what they’re looking for in our products so we can develop those on the wholesale side of our business, not just for partners but to make sure that we’re developing products that meet the needs of the end users of those partners,” Bennett said. “We get that first hand interaction with the end-user through the direct business.”
A network enabler
Like other telecom market segments, the CLEC market has gone through its own wave of consolidation in recent years—a weeding out if you will of the wheat from the chaff.
The CLEC market has gone through a period of contraction in recent years with many players either going out of business or being consolidated through rapid acquisition.
Right now, Covad is not revealing any plans to make any acquisitions of new assets. Given the challenges involved in building out a nationwide network, Bennett sees potential opportunity to help other providers.
“I think in general it’s favorable, and the current economic conditions are very favorable to Covad,” he said. “The reason is many smaller guys got into the network side of the business that wanted to provide Layer-2 services, or they wanted to take Layer-2 and layer other value-added services on top with components of a network but were not truly network operators.”
Not necessarily saying that it wants to look at acquiring other CLECs, Bennett believes that with many of these smaller carriers struggling to build out their networks, Covad could become a wholesale partner to fill in the fellow CLEC network gaps.
“As people have had to focus on the profitability of their business model and make choices between am I going to be a direct provider to the market or a network operator, and does my network have the size and scale to make it pay,” he said. “Many of them have decided that being a small operator does not work if you don’t get to a certain scale. That has opened up opportunities for us to migrate those customers off of those smaller networks onto our network and provide those underlying network services for those customers.”
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