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The Greed For Speed
'Tadpole' telecoms try to make high-speed hay while the sun shines
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Business New Haven
9/4/2000
By: Mitchell Young
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It was good news: The company lost a cool $141 million for the quarter, compared to a loss of just $42 million last year. Quarterly sales increased to $58.2 million from $10.8 million a year ago. But the seemingly monumental loss was less than Wall Street analysts expected. So, that was good.
The lucky company was Santa Clara, Calif.-based Covad Communications (NASDAQ: COVD) which, along with New Haven's DSLnet (NASDAQ: DSLN), Rochester, N.Y.'s Choice One (NASDAQ: CWON), and Bethlehem, Pa.'s Fastnet (NASDAQ: FSST), is part of a group of telecommunications tadpoles. These fast-growing companies hope to emerge from the new vernal pools of opportunity created by the supernatural forces unleashed by the Internet and telecommunications deregulation.
The dense population and small cities of southern New England (and the Northeast generally, not counting New York) has proved an attractive habitat for small companies hoping to stay out of the path of the nation's telecom giants.
Covad is the unlikely granddaddy of this group in terms of the public markets, having gone public in January 1999. DSLnet went public in November 1999, and Choice One and Fastnet had their successful IPOs in the early spring of the new Millennium.
Each of the companies struck while the Internet iron was very hot. Investors, however, quickly lost faith in their own choices even as the companies themselves mostly achieved on their promises. Covad stock is hovering around 16, off its high of 66. DSL.net traded as low 2 3/8, off from a high of 32. Choice One is trading around 17 (a little better than half its IPO opening day price of 30) in spite of a speculative moment that touched on 71. Fastnet has also seen a remarkable change in sentiment as its shares trade near 2 - off a high of 22.
But the fickleness of investors toward these companies can also be viewed on the upside. DSL's stock doubled in value in a single day late last month when the company announced that IBM would sell its DSL as part of its small-business offerings.
Clearly investors are unsure that these telecom tadpoles will live long enough to sprout legs and escape the vernal pool as some rather large bullfrogs potentially are crowding them out of the digital swamp.
These emerging companies are the offspring of telecommunication deregulation, rules that forced major telephone companies to open up their services to other providers - and the wide open spaces of the Internet economy. In November 1999, the Federal Communications Commission (FCC) reduced the costs that phone companies could charge DSL providers for access to their lines. Lower costs meant more competitive offerings and access to smaller businesses and, in some cases, residential markets.
Some providers, like DSLnet, concentrate today on providing its namesake service primarily, while Choice One has elected to field the full range of voice and data services and compete head to head for local, long distance and data by selling a "bundled" package against the "incumbent" Baby Bell companies.
Fastnet takes a different, even more nimble, ISP approach, selling everything from dial-up service to traditional T-1 broadband, depending on the territory and customer.
But it's DSL technology that is getting the lion's share of attention. Indeed, it was problems for Covad and Northpoint Communications (NASDAQ NM: NPNT) in keeping up with demand that spooked some investors in the first place, driving down their share prices.
Northpoint, another upstart DSL player, seemingly found its prince and recently agreed to cede control to giant Verizon Communications. Many industry observers believe the Verizon-Northpoint deal is just the first of many such "couplings."
Northpoint went public at $40 per share and is trading at around 11 today, even as revenues increased to $44 million from only $4 million in the comparable six-month period a year ago. Losses, however were a stunning $192 million as the company chose an expensive strategy of doing battle in most of the nation's top markets.
Using DSL technology, a telecommunications company can send digital information over a typical copper telephone line while achieving data-transmission speeds that are radically faster than modems. The leveraging of this existing infrastructure, the significant public and venture investment and the competitive nature of the telecom marketplace has provided a low-cost, high-speed Internet access alternative to small business and now even residential consumers.
DSL technology, however, must be deployed within three miles of the telephone company's central equipment. The further from the base, the weaker the signal.
SBC Communications (NYSE: SBC), parent of SNET, claims to be the nation's leading DSL provider. The company had 169,000 DSL lines at the end of 1999, and now has more than 435,000 lines in service. According to the company it plans to make DSL available to more than 18 million homes and businesses - representing 50 percent of the company's customers - by years' end.
SBC's DSL service will be available to more than 80 percent of its customers by the end of 2002. In Connecticut, SNET expects to best those percentages and timetables.
SBC and SNET will get there by deploying DSL equipment at the neighborhood level, effectively overcoming the three-mile limitation. SNET is currently conducting a trial of the new technology in Danbury, and will likely begin widespread deployment in 2001.
By placing base units closer to customers, DSL speeds will also increase. And while this is good for SBC, it may prove a godsend to smaller telecoms as well. Unlike high-speed Internet cable access, phone companies are required to provide access to their DSL lines to other Internet providers. In Connecticut four companies now provide Internet access over SNET hardware. More are expected soon.
The commitment of giants like SBC and Verizon to the DSL bandwagon doesn't seem to have the upstarts terribly worried, according to Sonny Hunt, president of Fastnet.
"The great thing about the Internet today is there is room for competition," says Hunt. "The advertising dollars all promote awareness of DSL. We're not seeing [competition] from the national carriers; they're focused on the major markets and on residential service."
Fastnet's initial strategy is to conserve capital for the long term by reselling DSL lines deployed by other carriers such as Covad and Northpoint. Its current rollout is a footprint that seeks to tie the Washington-to-Boston corridor together as a super-regional ISP. Hunt adds, "We've identified 200 other markets that fit our criteria."
More expansion of service is essential to their growth. Hunt says, "In the secondary markets we're still not seeing it widely available. Eighty percent of the customers that call us don't have the service available at their locations."
The key survival strategy of the tadpoles is marketing to small and mid-sized companies in secondary and tertiary markets, as exemplified by Choice One. Choice One is itself a new breed among the emerging telecoms. It is a Competitive Local Exchange Carrier (CLEC) seeking to provide the full range of telecommunication services.
According to Ythan Lax, Choice One's director of corporate communications: "Our bread-and-butter is the bundled package. Being a competitive carrier to SNET, we're one of the few that integrate our services offering both voice and data. That allows us to sell at a reduced cost."
Lax explains that Choice One is facilities-based which means it places its own telephone switching and data equipment in the markets it serves. Currently Choice One is active in 11 states and 26 markets. As of the end of second quarter Choice One had 224 equipment co-locations; 178 have voice all have data capability. With the recent $515 million acquisition of US Xchange, a privately-held facility-based CLEC headquartered in Grand Rapids, Mich., the company will have approximately 90,000 lines in service.
DSL service is a hot product, Lax says. "Throughout our footprint we are seeing tremendous demand.'
Michael Schaffer, president of Schaffer Hotels in New Haven, is one of the mid-sized businesses sold on high-speed access. His company is installing DSL service in its Holiday Inn and Howard Johnson hotel properties.
"We will have all of the rooms at the two hotels wired for DSL as well as the conference rooms and we will have DSL access available in our lobbies," Shaffer says. The company expects the deployment to be complete by the end of September.
"Up until now all we offered were dataports on our phones so guests could access the Internet over standard telephone lines."
It's services beyond basic Internet access that the tadpoles expect to help them stave off their mega competitors.
DSLnet has more than 6,000 DSL accounts, and has deployed equipment in more than 400 cities and towns across the U.S. DSL.net's Chris Parente says: "We're seeing more of customers take up more than the connectivity. This company is moving to being an ISP and ASP (application service provider) for small and medium-sized businesses."
Web site-hosting, e-mail, firewall security and virtual private networks (VPNs) are all services that the companies are beginning to provide in earnest.
According to Hunt, Fastnet already hosts more than 7,000 Web sites and Choice One's Lax says his company provides a more secure hard-wired version of Virtual Private Networks for businesses that use services in multiple locations. DSLnet's basic package includes unlimited IP addresses and e-mail services, something that the phone companies typically charge significantly more for.
Parente weights in on the competition by adding: "There are some areas where there is not this menu of competitive options. If you're New York City, you've got your options - but there are a lot fewer in Birmingham, Ala."
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