Q & A with New Edge Networks: DSL at the Crossroads

There’s no doubt the price of a fast, first-to-market approach has impacted many high-speed Internet providers.

A growing number of yesterday’s competitive local exchange carriers and Internet service providers are today’s headlines, many forced to file for Chapter 11 bankruptcy protection or go out of business entirely.

I had the chance to sit down and talk with New Edge Networks president, chief executive officer and co-founder, Dan Moffat, and discuss some of the issues facing DSL providers like broadband deployment, staff cuts, and competing with the regional Bell operating centers or Baby Bells. Moffat also expresses his hopes for the new Federal Communications Commission under the conservative Republican administration after eight years in the hands of liberal Democrats.

Q: Like NorthPoint Communications, Rhythms NetConnections and Covad Communications, you have had to do some cost-cutting yourself. Are more staff cuts planned down the road?

Moffat: No, we don’t plan on any more staff cuts. Now, with that said, you never want to make a blanket statement that you’re not going to make business adjustments, so what we did when we got our financing in October, we could’ve taken two views: one is ‘great, we got our financing, full speed ahead;’ the second view is ‘great, we got our financing, lets trim our sails and make sure that we’ll be able to weather the storm we think is coming.’

We took the latter view and we made the cuts shortly after our financing and that’s put us in a very nice position in terms of getting through the year and getting additional financing.

Q: What is the impact of all the bad news and what contributed to this turn of events? Last year at this time, it seemed CLECs and ISPs were in the midst of a broadband “Golden Age.”

Moffat: It impacts the sector in that it makes investors more nervous. Whenever you’re doing an infrastructure rollout, (for example) if you go back and look at wireless and cable TV, there’s a natural shakeout that occurs, a shakeout and consolidation. We’re entering that shakeout and consolidation phase now. NorthPoint mentioned they were coming out in a restructured manner and it will be very interesting to see who comes out with them and at what valuation and how that works out.

But, you know, there are going to be winners and losers. You got a whole bunch of people that jumped in (to DSL), kinda like a gold rush thing. A whole bunch of people come in and stake their claim and some of the folks don’t operate well or they’re unable to create the value or they get squeezed like in the situation with NorthPoint where they make a big deal and it doesn’t come to pass, through no fault of their own.

It doesn’t mitigate that there isn’t gold “in them thar hills,” you know there is broadband gold and that there are going to be some solid winners that come out of this. We’re seeing a lot of folks in our markets wither or go away, you know, a lot of the folks that jumped in after us, and perhaps had funding or operating problems, and that just diminishes our competition and makes it easier for us.

Q: Many analysts predict that resellers, CLECs and ISPs can’t hope to beat out the Bells when it comes to DSL. Is that true?

Moffat: I think that’s a silly argument. There are many players who resell and lease from the RBOC facility, but have their own value-added services. For example, frame relay. It’s on RBOC facilities but you put frame products on it. We’re doing the same thing, we’re just leasing RBOC facilities and its lines and putting a nifty technology called DSL on it.

The RBOCs are very focused on (Plain Old Telephone Service) and consumer DSL is just as an extension of POTS. You know, you’re using the same telephone line as POTS, using the same technicians, and the same central offices, so it should be very straightforward for them, but they’re having troubles

and they’re not meeting their targets.

Any time you get into any of the advanced services, for example business-class DSL or IP services, it becomes real problematical for the RBOCs. They’re just not set up for that.

Also, you want to deliver a high quality of service. They are just not set up for premium quality services. So, when I say it’s us and the RBOC in the markets, I’m not going to compete with them for consumer DSL, which they do quite well and they price against cable modems. We’re focused on business-class DSL, high quality of service, and targeting people who want and appreciate that (service).

Q: What about the aborted Verizon buyout of NorthPoint? Wouldn’t a move like that give them instant presence in the business DSL market?

Moffat: It’s interesting, because one of the arguments that the RBOCs make (to state and federal regulators) is ‘turn us loose and we’ll create more competition.’ Really, they have not shown much stomach for going out of their area and competing like the regulators would like them to do.

Now, they’ve done it under duress. If they need to get a merger done, they’ll target 25 cities, throw together an organization and go through the motions, but they know that to go out and compete in someone else’s market gets them way away from their core competencies, which is their POTS.

In terms of buying competitive local exchange carriers, that requires some nerve and imagination that they haven’t exhibited to date. I thought the Verizon deal was a gutsy move and the right move and I’m disappointed that they backed out of that. Not only for NorthPoint, but because it was a watershed event for Verizon and they backed out.

Q: For the first time in eight years, Republicans are in the White House. How will a conservative administration, under the likely direction of Mike Powell, affect competition?

Moffat: We’ll be happy if they live up to the letter of the law. (I) think they’re going to be non-interventionists and that’s fine as long as they stick to the letter of the law. If they go in and start changing things in the Telecommunications Act of 1996 or start promoting initiatives that are RBOC-friendly that’s going to be difficult for all competitors.

(I) think its more likely they’ll be non-interventionists, though. They won’t intervene on behalf of competition or be activists like the previous administration, but if they live according to the letter and the spirit of the law, that’s fine. I think that what we had in the past was competition-friendly, and we’re hoping it will go neutral (in a conservative, Republican administration), and we’re hoping that it doesn’t go unfavorable.

There’s a real danger if they become activists in an unfavorable manner, but it’s more probable they’ll just enforce the letter of the law and things will stay pretty much the same. If they start to undo (current policies) then that’s going to be a real issue.

Editor’s Note: New Edge is a national DSL wholesaler and broadband Internet service provider headquartered in Vancouver, WA. The company’s novel business plan, focusing on tier two and three cities throughout the U.S., has afforded them a measure of success in today’s troubled broadband deployment arena.

By focusing its attentions away from the saturated markets of tier one cities like New York, Los Angeles and the like, New Edge has been able to achieve good subscriber penetration in the cities with less than 100,000 souls. Many times, the local Baby Bell is the only competition in town. The company then resells the DSL service to local ISPs.

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