Covad CEO Sticks to His Guns

FCC's ruling last week could be devastating to DSL providers like Covad, but CEO Hoffman says the battle isn't over

February 25, 2003

4 Min Read
Covad CEO Sticks to His Guns

The Federal Communications Commission (FCC)'s verdict on industry regulations last Thursday left competitive Internet providers like Covad Communications Inc. (OTC: COVD) gasping in shock (see Powell Loses FCC Vote and The Five Stooges). What's next?

According to one industry player, it's not necessarily the death knell. But Covad's CEO says it will require adjustments to business strategy.

“This took everybody by surprise,” says Covad Chief Charles Hoffman, who only last month insisted that he wasn’t worried about the outcome of the ruling (see Covad CEO Keeps Calm). “This was obviously a last minute decision… It’s just illogical.”

Hoffman has reason to complain. For, although the ruling does little to change regulations that today require incumbent carriers to lease their voice networks and network elements to competitors at low, wholesale prices, it eliminates the possibility for ISPs like Covad to share the high-frequency lines on incumbent networks to deliver broadband services. DSL providers that today are dependent on line sharing, have three years to find alternative ways to deliver their services.

For Covad, which depends on line sharing for about 40 percent of its business, the elimination of the practice could potentially make a big dent in its bottom line. “It’s bad news for Covad,” says i2 Partners LLC analyst Andrei Jezierski. “There’s no two ways about it.”

The ruling certainly shook market confidence in the company’s business model. Following the FCC vote, Covad saw its stock price nearly cut in half. The company’s stock continued to trickle down on Friday, but regained 11 percent in trading yesterday, closing at $0.80.

“I think the market overreacted,” Hoffman says. “We’re not getting calls from customers worried about this… The market overreaction is just a shame.”

Some observers agree. “I was surprised that Covad was given such a beating,” says Network Conceptions LLC analyst Farooq Hussain. “They should be able to pull through… They can deliver to 60 percent [of their customers] without the RBOCs… It’s going to be tougher for the smaller [ISPs].”

The fact that only one of the five FCC commissioners, Kevin Martin, voiced no reservations about removing the line-sharing regulations, and the fact that the commissioners were apparently still hotly debating the issue an hour before they gave their verdict, gives the ruling a doubly bitter taste, Hoffman says. “This was a political deal. We just don’t think that this is legally sustainable.”

Hoffman may be concerned about the FCC decision, but he's keeping his cool, saying the company is preparing to appeal the order as soon as the FCC publishes the new rules. He says he thinks there’s a very good chance that the ruling will be repealed. “Of course, the battle’s not over.”

Meanwhile, however, Covad is not going to just sit around and wait for its appeal. Instead, Hoffman says, the company will start negotiating with the incumbents to try to reach an agreement on new, commercially reasonable rates in case line-sharing disappears. He says he’s confident that the ILECs will be reasonable, since it’s in their best interest to hold onto customers like Covad. In addition, he feels the incumbents will probably want to avoid looking like monopolies and so will prefer to keep some competitors in the game.

“I think the Bells will be sensitive to this. I think we can come up with a commercially reasonable price.”

The bulk of Covad's line sharing comes from the consumer side. About 80 percent of Covad’s 200,000 residential customers are reliant on line sharing today, so if prices soar, the company may be forced to pull out of the consumer business altogether, Hoffman warns. "If [the price] goes too high, then consumer doesn’t make sense... Obviously, we’ll be focusing more on business.” None of Covad’s 200,000 business accounts, which account for about 60 percent of the carrier’s revenues today, are reliant on line sharing.

Even if the order is not repealed, Hoffman says that all is not lost. For starters, there will be a three-year phasing-in period for the new rules. “The business fundamentals don’t change for quite some time. We have a long runway.”

— Eugénie Larson, Reporter, Light Reading

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