Covad Chief’s Plan: Partner, Price, Promotion

When Charles Hoffman took Covad Communications‘s top job 18 months ago his focus was the company’s survival. The broadband wholesaler’s customers, mostly overextended Internet service providers (ISPs), were failing at a rapid clip and their unpaid bills threatened to drag Covad down with them.

Judging the situation untenable, Hoffman, who came to Covad after running a Canadian wireless firm, advocated a pre-emptive Chapter 11 filing to protect assets and expunge debt. Initially, creditors balked at the plan, which repaid them just 19 cents on the dollar. But mindful that stakeholders of other failed concerns, namely NorthPoint, had recouped even less, they acquiesced.

Vindication came when the Santa Clara, Calif., company emerged from bankruptcy in December 2001 largely intact — a feat dozens of its hobbled sector-mates were unable to achieve.

Now, with a year of post-bankruptcy progress behind him, Hoffman is pursuing an ambitious three-pronged strategy to spur growth in 2003. The cornerstone of the company’s plan is expanding outsourcing contracts with large telecoms carriers.

“Our contintuing goal is to be number one in wholesale,” Hoffman said in a wide-ranging interview with “Our top five customers — Earthlink, AT&T, AOL, Sprint and SBC — really provide the bulk of our revenue.”

To be exact, 85 percent of Covad’s sales come through such agreements. And the company is off to a fast start in 2003, extending its relationship with AT&T.

Under the pact, which runs into 2005, AT&T-branded DSL will be offered to residential customers over Covad’s network. The agreement gives Covad access to tens of millions of potential subscribers in Chicago, New York, San Francisco and other hubs.

As carriers remain skittish about large, in-house initiatives, Hoffman is confident Covad will remain in a good position to lock-in longterm outsourcing deals.

Besides carrier deals, Covad will continue to sell direct, with an emphasis on current dial-up users. While clearly a believer in the benefits of broadband — faster downloads, the ability to deliver audio and video — Hoffman doesn’t subscribe to the “build-it-and they-will-come” theory. Customers are price sensitive, especially in a down economy.

So Covad plans to cut rates by $10 per month in some markets by year’s end, bringing its basic DSL bill to $29 per month. A similar move last year, prompted many competitors and partners to trim rates as well, a move Hoffman said helped the industry.

“We think (a $10 rate cut) doubles the addressable market,” said Hoffman, who noted that the rate would allow them to compete with so-called “value ISPs.” It’s unclear which markets will be first to see the lower rates.

Also under the heading of direct offerings is a new bundled service for small business customers. Currently in testing in San Francisco, Covad is offering DSL and local and long distance calling, e-mail and Web hosting. Hoffman sees potential in voice services, however, recognizes the imporantance of deals with phone companies and won’t push in markets where Covad’s partners operate.

The company could also grow its base by opportunistic acquisitions. Though stabilizing, there will continue to be consolidation in 2003, and where it makes sense to pickup network assets and customers, Covad will do so, Hoffman said.

Finally, Covad will look to establish a name for itself this year, through stepped-up marketing and branding. In addition to promoting the company, Covad will try and educate consumers about what it believes are the advantages of DSL technology over the competing cable modems, Hoffman said.

While DSL is more popular in most other countries, cable broadband hookups hold a 2 to 1 advantage in the United States. Through lower prices and education, Hoffman believes DSL providers can close the gap by 2005.

Hoffman does not believe that a Federal Communications Commission proposal to eliminate a requirement that Baby Bells provide discounted access to lines and facilities will brake Covad’s progress. The change doesn’t affect Covad because it only uses the copper last mile of phone companies’ systems, Hoffman maintains.

Some analysts aren’t convinced that FCC changes wouldn’t ding Covad, however, it’s impossible to gauge impact until the FCC fleshes out its plan later next month.

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