Covad To Shut Down BlueStar Network

Covad Communications Group Inc. Monday shut down down one of its subsidiaries
in an effort to rein in spiraling operational costs, a move that puts 400
employees on the streets.

It’s the latest in a number of cost-cutting measures taken by the troubled
provider to show a profit, and removes much of the overlap between the two
companies at the central office.

A skeleton crew will stay on board to assist with the network shutdown,
which could happen anytime between now and Aug. 1.

After the dust settles on the closure, Covad expects to have equipment in
1,718 central offices nationwide. Officials said they are helping customers located in
the other 91 central offices find another DSL provider. As for the customers picked up
from BlueStar’s network, they will get snared in the provider’s Safety Net.

Internet service providers (ISPs) find a lot of irony the situation.

Covad has been the subject of considerable ire by many of its ISP partners
this year, as the data competitive local exchange carrier (DLEC) took
customers from failing ISPs in its partner network and incorporated them
into its own customer base. Monday’s news demonstrates that no company is safe
from the Safety Net, even Covad’s own subsidiaries.

Many ISPs have been leery of the company since it decided to get into the
customer acquisition game itself late last year. The Safety Net program is
seen as a betrayal of trust by ISPs who signed on with Covad, which until
then acted only as a wholesale DSL provider for ISPs, a middleman of sorts
between the ISP and the incumbent local exchange carriers (ILECs).

By signing on with Covad, ISPs were reassured, they would aggregate their
DSL orders with other ISPs to drive down the base price for a high-speed
line. Since the wholesaler wasn’t grabbing customers of its own, many ISPs
signed up with Covad.

Martha Sessums, Covad spokesperson, said the ISPs she’s talked to have
never brought the subject up, saying the demand for broadband is larger
than any one company can keep up with.

“There have been very few of the larger ISPs that have had issues (with our
Safety Net),” Sessums said. “Our larger ISPs, like EarthLink, AT&T and
UUNet, they have no problems with it; ISPs have been shown that there are
plenty opportunities for everyone.”

BlueStar Communications was bought out by the data competitive local
exchange carrier (DLEC) in late 2000 and specialized in digital subscriber
line (DSL) services for the business.

Covad, flush with capital funds and a growing popularity nationwide, wanted
to use its new subsidiary to buffet the very slim margins it got reselling
DSL lines to ISPs who, in turn, sold them to residential users. Business
DSL services are highly profitable, since the provider can generally make
good money bundling the service with other offerings and charge higher
monthly rates.

At the time, the deal was a good move and applauded by investors and
analysts. As Chuck McMinn, Covad chairman, said, the original acquisition
was a strategic move made at a time when vertical and horizontal buyouts
made sense.

“Covad acquired BlueStar at a time when the financial market conditions
rewarded growth into Tier 2 and Tier 3 markets and as a fast means of
developing a direct sales model,” McMinn said. “In the current financial
market environment, BlueStar’s cost structure is not sustainable and is not
support by its current revenue-generating capabilities.”

In other words, building a nationwide network with a lot of overlap was a
good idea at the time. But, given the current economy, it was one officials
did not have the luxury of keeping up with today.

BlueStar’s demise is expected to save Covad $75 million over the next year,
the company’s bean counters predicted, a combination of 400 job layoffs and
the overlap of equipment at the central office. Approximately 144 central offices had both Covad
and BlueStar equipment in the same building.

Monday’s announcement further reinforced the provider’s desire to acquire
customers on its own. Not included in the layoffs were the 70 sales reps
and techs brought on board to continue with direct sales and support to end
users and businesses.

“We intend to continue with a direct sales distribution channel utilizing
Covad’s more efficient network architecture and a direct sales effort
consisting primarily of telesales supplemented by a small, in-person sales
force,” McMinn said. “As always, our biggest concern is to serve our
customers as best we can. Our Covad Safety net program has proven
successful at migrating customer lines and providing an easy way to stay

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