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Optical/IP

Covad CEO Keeps Calm

At a time when most service providers are tensely awaiting a Federal Communications Commission (FCC) ruling on whether or not to give the regional Bells regulatory relief, Covad Communications Inc. (OTC: COVD) president and CEO, Charles E. Hoffman, says he’s not all that worried about the verdict.

“We don’t think that it’s going to affect us at all,” he says. “All we use is copper last-mile line-sharing.”

While most of the debate and discussion surrounding the FCC’s regulatory review has centered around which elements, if any, should be included in the unbundled network elements platform (UNE-P), another part of the equation is whether line-sharing should be upheld (see Fed Reg Debate Heats Up).

While the Bells claim that today’s regulated line-sharing puts them at a disadvantage when competing against cable companies offering high-speed data services, the CLECs such as Covad insist that it is the only way to maintain competition in the space (see SBC's Beck Is Big on Broadband and Courts Coming Through for CLECs). Line-sharing is crucial for competitive broadband carriers like Covad, because it enables them to provide high-speed data services over the same line a customer uses for voice services, even if the customer does not use the carrier's services for voice. Covad claims that line-sharing should get much of the credit for the recent rise in the number of broadband users in the U.S. According to a recent FCC report, more than 14 million Americans had broadband subscriptions in June last year. That's a 27 percent increase from the same period of 2001.

“2003 will be much more of a growth year for broadband than 2002,” Hoffman says. “Broadband is finally taking off… There’s a buzz about it.”

Not everybody thinks Hoffman should be resting so easily. If the CLECs lose access to these lines, many observers believe the broadband space will be completely dominated by the Bells and the cable companies. “I think that Covad could be hit pretty hard,” says Network Conceptions LLC analyst Phil Jacobson.

Hoffman feels confident the Commission will find in the CLECs' favor. Although one commissioner, Kevin Martin, has been very vocal in voicing his opinion that line-sharing should be abandoned, Hoffman says he hopes the other four commissioners will come to Covad’s aid.

Even if the FCC’s regulatory review rules for the RBOCs, Hoffman doesn't think it will be as devastating to the CLECs as many seem to think it will. The implementation process will probably be drawn out for a long time by a slew of lawsuits from both the competitive carriers and states wary of loosing their regulatory control, he says.

“I think it will be very uncertain for a while,” he says. “I don’t think the FCC will eliminate competition altogether.”

He’s not taking any chances though. “I’ll be lobbying all next week to make sure we’re not collateral damage."

Even if line-sharing remains untouched after the whole debacle is over, Covad’s business could still suffer, Hoffman concedes. The company has wholesale partnerships with many of the large competitive carriers, like AT&T Corp. (NYSE: T) and MCI (Nasdaq: MCIT), which could be hard-hit by a change in UNE-P regulations (see AT&T, Covad Team on DSL).

But wallowing in uncertainty for a long time could also have its price for carriers like Covad. Investors will likely postpone putting a lot of money into the space until the issue is resolved, in Jacobson's view. “It’s going to be really hard to raise money when people know that your business model [could go] down the toilet,” he says.

“The uncertainty is causing [telecom] investors to be more cautious,” Hoffman admits. But Covad, he insists, is in a strong financial position. He points out that the company, which will be announcing the metrics for its fourth-quarter results next week, has $230 million in cash and only $50 million in debt.

In afternoon trading today, Covad’s stock was up 3.33 percent, trading at $1.24 a share.

— Eugénie Larson, Reporter, Light Reading
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BobbyMax 12/5/2012 | 12:53:55 AM
re: Covad CEO Keeps Calm Covad's past performances have not been exemplary. Its share one time was sharing $120.00 a share. At this point the company management, based on the inside information, dumped millions of shares. In fact Covad's former CEO took the lead in dumping his stocks. All the time he has information on revenue, but he made himself rich without caring for the shareholders.

FCC/SEC has not brought any action against the management of Covad. Millions of shareholders and employees have lost all their investments in Covad. It is not possible for Covad to trade at $120 even in a century.

Management have betrayed the confidence of SBC, Verizon and the public.

Almost all Clecs have gone out business. RBOCss do not have provide line sharing or anythong else to the CLECS. They want to live off the efforts of other people. COvad has disappointed both SBC and Verizon.
bmerz 12/5/2012 | 12:53:49 AM
re: Covad CEO Keeps Calm Perhaps someone can clear something up for me. It relates to the Incumbant's willingness to deploy advanced access networks.

Does UNE-P include specific technololgies or just functions? For example if an incumbant wante dto lay fiber deeper into their access network would it be part of UNE-P under the current regulations regardless of what service runs over it?

Thanks,

B
fgoldstein 12/5/2012 | 12:53:47 AM
re: Covad CEO Keeps Calm > Does UNE-P include specific technololgies or just functions? For example if an incumbant wante dto lay fiber deeper into their access network would it be part of UNE-P under the current regulations regardless of what service runs over it?

UNE-P is, for all intents and purposes, a form of POTS-line resale. The network components are whatever the incumbent would use for itself. So if the incumbent moved POTS lines onto fiber-fed DLC, then the UNE-P would move along with it. A "voice" loop is a voice loop, regardless of how it's provisioned.

Covad, of course, is not UNE-P; it's UNE-L. That is, they use the loop UNE with their own equipment. In that case they are dependent on copper to the end user. ILECs' putting in fiber would knock off Covad, unless (as currently required) the ILEC makes the "stranded" old copper available to CLECs. ILECs, of course, don't like that -- they'd prefer to stick in more fiber for the specific purpose of making the subscribers "out of reach" to Covad and other CLEC DSL providers. Such subscribers could still be reached by CLECs for plain, analog, voice-grade-only, don't-even-try-a-modem POTS, but that's not much of a business for a UNE-L CLEC.

The ILECs' regulatory strategy is cagey -- they're separately trying to shut off all avenues of escape and/or profitability for CLECs.
ravencaw 12/5/2012 | 12:53:46 AM
re: Covad CEO Keeps Calm There will never be any competition in the last mile as long as any one company owns all the wiring in a market. And since most people don't want 10 wires going into their house to facilitate competition (and the city would not allow that), copper facilities that we've all paid for over and again with our phone bills should become public property. With no one company owning this facility, real competition can open up. Right now we have basically a corporate socialist system with the dominant corporations asking for the government now to squash their competition. That's not capitalism at all in my book.
BlueWater66 12/5/2012 | 12:53:45 AM
re: Covad CEO Keeps Calm I've heard a lot of talk about seperating the "wiring" from the "service". If the RBOCs were split up into service and physical wiring companies, that would solve a lot of issues.

A wiring company would have interest in supporting as many service providers as possible. There is a lot of discussion in Europe about this. Unlikely to actually take off in the US.... too bad.
willywilson 12/5/2012 | 12:53:43 AM
re: Covad CEO Keeps Calm If the RBOCs were split up into service and physical wiring companies, that would solve a lot of issues.

A wiring company would have interest in supporting as many service providers as possible. There is a lot of discussion in Europe about this. Unlikely to actually take off in the US. ... too bad.


You are absolutely correct. The phrase you're looking for is "structural separation." It is what happened with the long-distance industry in the early 1980s, and the result was cheaper rates, more traffic, higher profits for the industry and more technical innovation.

The same thing could happen in the access network if:

1. The FCC would stand its ground with respect to the Telecom Act. Congress, the Supreme Court and the state regulators have done so, but the FCC has telegraphed its intention to rip the guts out of the Telecom Act via the coming order on broadband. This has frozen new investment in competitive carriers.

2. The FCC would actually enforce the Telecom Act. It has never done a good job of this, and lately it has been even worse.

3. The securities regulators would aggressively prosecute the Evil Axis of Fraud -- corrupt investment banks, corrupt venture capitalists, corrupt company executives -- who wasted and stole so much money during the false telecom bubble of 1998-2000.

Unfortunately, none of these things are going to happen because they upset too many apple carts. No one is going to jail. There wil be no serious financial penalties. Competition will be curtailed. The result will be less innovation, lower growth and a slower economy.

The culprits: Greed and corruption at the top, and stupidity and laziness among those in a position to point the finger, i.e., the media. A sad story, but life is full of sad stories, no?
photon_mon 12/5/2012 | 12:53:43 AM
re: Covad CEO Keeps Calm ravencaw wrote:

"There will never be any competition in the last mile as long as any one company owns all the wiring in a market. And since most people don't want 10 wires going into their house to facilitate competition (and the city would not allow that), copper facilities that we've all paid for over and again with our phone bills should become public property. With no one company owning this facility, real competition can open up. Right now we have basically a corporate socialist system with the dominant corporations asking for the government now to squash their competition. That's not capitalism at all in my book."

_______________________________________________

I agree with the need to open up access to competition. On the flip side, simply seizing these lines (if even legally possible) to make it happen would likely have a disastrous effect. What would be the future incentive for a provider to invest in access lines, if they can't be guaranteed a "reasonable" (subject to interpretation, I know) ROI and barrier to fly-by-night competitors?

As you mentioned, and to some extent I agree, perhaps in many cases access lines have already provided a handsome ROI many times over. There
shouldn't be a perpetual monopoly.

But - correct me if I'm wrong - there would STILL be colocation and bandwidth usuage issues in a lot of areas. Just like we cannot have separate access lines for separate service providers, we likely won't have separate facilities (COs, huts, muxs, trunks) serving the same neighborhoods. So inevitably one provider would have to lease bandwidth, ports, and facilities from another. And we all know how that telecom policy has worked out (or more accurately, has NOT worked out).

Of course there's been a lot of previous posts on this board concerning the subject. Ones that go delve into minute yet complex regulatory and ROI issues. From folks who know a whole lot more about this subject than I do. But I've yet to see a post specifically address possible solutions, at least to my satisfaction.

Is the best possible solution to open up access once an ROI threshold for a given line / building / subdivision / industrial park / etc. have been met? And who would objectively monitor for this criteria? Or would this become an even bigger litigation nightmare?

IMHO, if we're talking about significantly altering the Incumbents' access revenue model, at least consider that they need to be adequately compensated for government-required colocation / bandwidth sharing that they currently provide for their competitors (according to what I've read) at below cost.

For the record, I don't work for any Incumbent service providers (never have). If anything, I am biased for consumer choice (and theoretically the lower prices that should result). Open access needs to be resolved, but if government intervention over the years (esp. 1996) has taught us anything, it's that a seemingly competition-friendly policy can actually have unforseen yet disastrous consequences.
willywilson 12/5/2012 | 12:53:40 AM
re: Covad CEO Keeps Calm Is the best possible solution to open up access once an ROI threshold for a given line / building / subdivision / industrial park / etc. have been met? And who would objectively monitor for this criteria? Or would this become an even bigger litigation nightmare?

This question was addressed by the Telecom Act, past rulings of the FCC and the U.S. Supreme Court in rulings in 1999 and 2002.

The FCC's formula, known as Total Element Long Run Incremental Cost (TELRIC) takes these issues into account. If the incumbent builds a new facility, it is required under current law to provide competitive access at rates determined by applying TELRIC.

However, the FCC has very broad discretion to carve out exemptions. It has already allowed the incumbents to screw competitors with respect to DS-1 backhaul, and in a few months the FCC will adopted a so-called "broadband" rule that will effectively declare the entire network exempt from the Telecom Act.

Oh, there will be litigation out the wazoo, but in the meantime there will be little or no investment in competitive carriers. The shell of the "Telecom Act" will remain, but in practice there will be no competition. The press will be too stupid and lazy to figure it out.

This is how corruption works in a complicated industry. If you're expecting competitive entry via the telephone plant, forget about it. The fix is already in, and Powell & Co. will rubber stamp it in a very short period of time.
rjmcmahon 12/5/2012 | 12:53:39 AM
re: Covad CEO Keeps Calm A wiring company would have interest in supporting as many service providers as possible. Unlikely to actually take off in the US.... too bad.
______________

Maybe not. Think of it from a Congressman's perspective. One would think that having to buy your job using other peoples money every 2 or 6 years would get a bit tedious.

Maybe Senator McCain will take on this issue? He could force the FCC to prototype structural separation which would enable independent broadcasters, which by definition would include free "air time" for those running election campaigns. Targetting the swing states now could help him get things ready for a 2008 presidential election run.

The broadcast media elite, who currently control the cable infrastructure (not to mention the election outcomes), will never give Senator McCain an honest shot at the presidency. But noticing the voting demographic does use the web to get their issue information suggests the media elite can be bypassed.

We can all make some political posters- separation of Media and State, by 2008. Wouldn't that be great?

Only structural separation and a democratic, bandwidth abundant, communications infrastructure can actually swing the balance of power back from folks like CEO Roberts towards folks like Senator Specter. It could free all Congress members from spending so much of their time fund raising, funds which only end up in the hands of the media elite.
willywilson 12/5/2012 | 12:53:39 AM
re: Covad CEO Keeps Calm Only structural separation and a democratic, bandwidth abundant, communications infrastructure can actually swing the balance of power back ...

Sounds great until we hear the other part of RJ's pitch, which is having the government throw a bunch of money at building FTTH. Oh yeah, and I'm sure they will be really good at it, too.
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