RealTime IT News

Covad Spins, Wall Street Punishes

In all the controversy surrounding the Federal Communications Commission's (FCC) ruling Thursday on local phone and broadband competition, a little noted provision of the decision involved the phasing out of a rule requiring the Bells to "line share" with competitors.

The FCC said line sharing, which allows higher frequency DSL signals to coexist with voice calls over copper lines, will be phased out over the next three years and competitors that use the Bell lines to provide DSL service will have to renegotiate inevitably higher rates to use the phone company's entire loop.

Since line sharing doesn't require the Bells to build extra lines or equipment, companies like Covad Communications and EarthLink that offer DSL have been able to carve out a niche market to offer competing broadband service to the Bells and cable companies. Currently about 40 percent of high-speed Internet connections rely on line sharing provisions.

Wall Street certainly noted the rule change. Covad stock fell 38 percent overnight to 68 cents shares and was down another 10 percent in mid-morning trading on Friday.

The Santa Clara, Calif.-based Covad, however, took a sanguine view, pointing out that the FCC action "does not directly" affect Covad's access to second-line loops and T1 facilities that the company uses to serve business customers, which accounted for more than 60 percent of Covad's recurring revenues in 2002.

Nevertheless, Covad had harsh words for the FCC.

"The FCC passed on the opportunity to guarantee that broadband competition continues on a level playing field across the country," said Covad CEO Charles Hoffman. "We agree with Chairman Powell's statement that line sharing has clear and measurable benefits for consumers. In his dissenting statement on the decision he says the panel talks glowingly about facilities-based competition, but the decision gives facilities providers the back of their hand."

The result, Hoffman said, will be "less choice and increased prices for consumers and small businesses if local phone companies set unreasonable prices for last-mile access."

Hoffman said Covad must transition over three years its existing line-sharing customer base to new pricing arrangements. New line sharing customers may be acquired at regulated rates only during the first year of the transition, after which time new customers can only be added pursuant to terms and conditions negotiated between Covad and local phone companies.

In addition, during each year of the transition the FCC-mandated maximum price of the high-frequency portion of the loop will increase incrementally towards the cost of a whole loop in the relevant market.

Putting the best possible spin on the situation, Hoffman added, "The FCC's retention of UNE-P maintains Covad's ability to continue bundling our data services with the voice products of our strategic partners in offering consumers and businesses an alternative to local phone and cable TV companies. We will continue our focus on bundling services with our partners and on our sales to business customers. The ultimate effect on our consumer broadband business will depend on our ability to negotiate fair and reasonable prices substantially lower than the whole loop cost that will ultimately be permitted under FCC rules."

Independent technology analyst Kevin Werbach, who previously served as Counsel for New Technology Policy at the FCC, said, "The elimination of line sharing may kill off the independent DSL market, which would be a huge loss. The only way the telecom market is really going to change is if there are new platforms and ways to provide new kinds of services. Voice over IP over broadband is one such possibility, but it requires open broadband networks. They may not exist if the last-mile owners control the services."

Ironically, FCC Chairman Michael Powell, who strongly supports deregulation, is a fan of line sharing and voted against the provision.

"Line sharing rides on the old copper infrastructure not on the new advanced fiber networks we are attempting to push to deployment," Powell said in his dissent. "Indeed, the continued availability if line sharing and the competition that flowed from it likely would have pressured incumbents to deploy more advanced networks in order to move from the negative regulatory pole to the positive regulatory pole, by deploying more fiber infrastructure."

Powell added, "This decision actually diminishes the competitive pressure to do so."