Covad's Survival Tactics

Its rivals were shut down, NorthPoint by AT&T and Verizon, but Covad has survived. The company's survival tactics can and should be imitated by independent ISPs.

by Alex Goldman ISP-Planet Managing Editor [October 5, 2007]

ISPs are familiar with working an industry that could be shut down overnight by their suppliers or the FCC. Regulatory uncertainty has done even more harm to the industry than the actions of an FCC hostile to independent ISPs, and especially hostile to those that are not facilities-based.

Serving non-facilities-based ISPs is the business of San Jose, Calif.-based Covad, or it was, when the company was founded. Covad fought early legal battles about the interpretation of the 1996 Telecommunications Act. Like MCI in its heyday, Covad was a legal firm with a small telecommunications enterprise.

Survival now
But times have changed, and if the FCC shut down competition tomorrow, Covad would survive. The company has built lines of business that do not involve using the monopoly's copper.

Some of Covad's ISP customers don't like this: that a supplier, Covad, is also competing with them in the retail market. It's a legitimate complaint, but that's exactly what makes retail wireline such an awful business: every supplier is also a competitor. The worst break all the rules with impunity.

The first new line of business is VoIP, a business that the monopolies would also like to shut down (see VoIP Battleground in RBOC Monopoly War). The second, a more interesting line of business, is urban fixed wireless broadband, supplied to enterprise customers.

Covad did not invent the urban WISP business (perhaps it was Telerama, perhaps TowerStream, perhaps someone else). Covad purchased NextWeb in 2005, an acquisition we applauded at the time (see Covad's Acquisition of NextWeb Makes Sense).

As of June 30, 2007, the company reported 3,600 fixed wireless broadband customers, up from 3,500 at the end of 2005. While this may appear to pale beside the 516,000 wired broadband users and 3,800 VoIP sites the company serves, we believe that the fixed wireless business is the least likely to be shut down by capricious regulators or monopolies.

If the monopolies were allowed to block competing VoIP providers tomorrow, and if all reselling agreements were terminated, this is a business Covad could fall back on.

VoIP
The news is not quite so rosy for VoIP. Although Covad ranks low in our quarterly VoIP rankings, it is a relatively large provider of business VoIP services. The problem that Covad faces is that customers aren't buying full-featured VoIP, with unified communications and all the other features that it can offer. Instead, they are all too often satisfied with digital phone, which provides some of those features but all of the cost savings of VoIP.

On the other side, companies like M5 and Smoothstone are emerging, VoIP specialists that have used VoIP to provide services most customers don't even know are possible.

On the third hand, there's Digium, bringing open source Asterisk to the enterprise customer. For businesses with some in-house open source talent, this solution allows them to control their own destiny.

The uncertain future
The contrast with fixed wireless is stark. In urban fixed wireless there is, at the moment, no large company to compete with Covad. WiMAX may bring competition from the likes of Clearwire, but Covad is already using pre-WiMAX equipment and is prepared to adopt WiMAX when it sees equipment it likes. The SEC filing notes this as a risk, because it will require equipment upgrades, but the fixed wireless business requires constant equipment upgrades anyway. The real question is how much WiMAX equipment will cost. The cost will determine the customers it can be used to serve. If it's cheap, the equipment will be widely deployed. If it's expensive, only premium customers will see it.

A bigger risk to the business, noted in the SEC filing, is interference. Spectrum is becoming crowded, and forward looking industry advocates like the New America Foundation are asking the FCC to open up more license-free spectrum.

Providing more open spectrum would make financial sense. The FCC likes to talk about the $40 billion the treasury has made from auctions, but a recent report noted that the $40 billion purchased spectrum worth $520 billion. Rather than give away exclusive rights, the government should open the spectrum to everyone, acting only to ensure that users can cohabitate in the open spectrum.

The fact remains, however, that the future is cloudy. As was true four years ago, we can only predict further uncertainty. That uncertainty will continue to harm all businesses that have to compete on the open market, all businesses except the monopolies in cable and copper.

— End