TCS Daily

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By Dhruv Khanna - March 20, 2000 12:00 AM

Glassman: Dhruv, would Covad even exist if it weren't for the Telecom Act of 1996?

Khanna: Oh, no. Covad would not exist but for the Telecom Act. We were founded on the basis that we will be allowed, as a matter of law, to use the incumbent facilities, their local loops with the copper wires that go from customer premises to the central office, that we would be allowed to co-locate our telephonic equipment and other equipment in the central office and then use the unbundled trunks to build a network. So, the Telecom Act is a cornerstone of our company.

Glassman: Tell me about the company. How many homes are you reaching now, how many states? Also, how much have you done in the last year and how much do you expect to do next year?

Khanna: Sure, we are today providing services out of well over a thousand central offices, in approximately thirty different geographic cities, if you include a city like San Francisco and its surrounding areas as a city. And in those cities, we are providing basically blanket coverage, where we are in virtually every central office in that region. What does that amount to nationwide today? More than a quarter of all homes and businesses. So more than 25 percent of all homes and businesses in the U.S. have our business available to them.

Glassman: And how many are you actually connected to?

Khanna: We are - at the end of last year, we were providing

service to 57,000 end users and that has grown from 3,900 end users at the end of 1998 to 57,000 at the end of 1999. So we are seeing really phenomenal growth in terms of our subscribership.

Glassman: Now last year, the FCC passed a new rule that was intended to force the Bells to allow you to compete with them, unbundling their services and allow you to rent just what you need from them. Do you feel that the regulatory path is now cleared for Covad? And, can you succeed with the current regulations?

Khanna: Yes. The regulatory path that we need to conduct our business has now been cleared with two very important rulings that we wanted from the FCC last year. One concerned cable co-location, which basically allows us nondiscriminatory access to the central office. And second, in November of last year, we won a ruling which gave us the ability to do line sharing which gives us the ability to provide our data service over their voice service on the same line. For the first time, we were given nondiscriminatory access to their local loop lines in the same way they have access.

So both of those rulings gave us what we thought we were entitled to anyway way back in 1996 under the statutory phrase, "non-discriminatory access." But these two FCC rulings have made abundantly clear, even to the incumbent, that non-discriminatory access means non-discriminatory access.

Glassman: Now, do you market your services only in your own name? Khanna: We market our services under our own name and also our services are resold by Internet service providers. So we co-market our service in part with the ISPs. In many cases we bring customers to them as a result of our bundling campaign. They provide the Internet service and we provide the high-speed DSL service and we leverage their sales and marketing force in order to get additional DSL lines out to the public.

Glassman: Are you providing services in New York City? Khanna: Yes, we are and New York is one of our largest metro areas. We have well over 100 offices operational in the New York-New Jersey area, and we've been providing there for over a year now.

Glassman: Now I live in New York and I have to say that I've had a very difficult time getting DSL services and I think the fault lies with the incumbent here in New York. I have tried with a group, I think that it is called Red, and they had a hard time getting me hooked up because they got very little cooperation from Bell Atlantic.

Is this a familiar situation? In other words, despite these rulings, are you getting cooperation?

Khanna: Well, the truthful answer to that is we are getting a mixed level of cooperation. Initially, when we started out our business and started offering our service, we were getting a lot of resistance, a lot of lack of cooperation and they were not taking us seriously. Now, we're seeing that they have begun to take Covad a lot more seriously. We have a billion dollars in the bank. We have been deluged with demand and therefore been placing large and increasing volumes of orders with the incumbent.

We have overall been getting increasing cooperation over time. It has been difficult. It has been a huge challenge. So there is a fair amount of truth to the sentiment expressed in your question.

Glassman: Of course, part of the problem is that the Bell monopolies compete with you, isn't that right?

Khanna: Yes, that's correct. The Bell companies as well as GTE act both as our key supplier as well as our key competitor. You know, they supply us with local loops, without which we can't provide service. The same way, McDonald's can't sell hamburgers without the beef patties.

So, this is a key ingredient in our business, and they have both the incentive and the ability to impair our business. We, of course, to some extent, anticipated this, take this into our business plan and have been very aggressive in seeking to enforce our rights under the Telecom Act and under the antitrust laws. And as a result of those efforts, as well as the simple business reality that Covad is serving a particular market niche where the demand is absolutely overwhelming, that makes us a compelling provider and we have succeeded in spite of the incumbent, and that's because of the huge market opportunity that we face.

Glassman: I just want to go back to New York for a second. There was a recent fiasco where more than 100,000 consumers had their orders lost and Bell Atlantic was assessed a fine for this behavior. Did that affect you or your customers?

Khanna: Fortunately for us, we were unaffected by that particular OSS problem that Bell Atlantic ran into with respect to AT&T and MCI, who are selling what is called the unbundled network element platform for voice services.

Glassman: So, that was a voice issue.

Khanna: Yes. We've always had ongoing challenges that are more severe. Our volumes are much less than what AT&T and MCI are looking at with respect to voice. So Covad did not lose tens of thousands of orders, but in general at this point in time, we remain extremely unhappy with Bell Atlantic's performance.

Glassman: I have asked you earlier about the Telecom Act. Right now in Congress there is a bill that's been introduced by Congressmen Tauzin and Dingell that would significantly revise the Telecom Act and allow the Bells and GTE to get into the data long distance service. What is your opinion of that kind of legislation?

Khanna: That legislation is fundamentally anti-competitive, it is anti-consumer, and it is pro-monopoly. It seeks to drastically overhaul the careful balance and certainty that was reflected in the Telecom Act. That Telecom Act was a very, very significant piece of legislation that Congress had crafted balancing all of the different parties' interests, both the incumbent's interests, the long distance carriers' interest and most importantly, the consumer's interest.

And what the Telecom Act did was to say, look, you incumbents have a monopoly in local services, a monopoly that is very difficult to challenge from a financial point of view and a time point of view, because it is not easy to develop the infrastructure. And we historically have had state laws that were put in place that had protected you from competition, and you've built a huge monopoly and a huge cash machine as a result of that. Now, if you want into the long business, we will allow you to do that, but you must facilitate local competition. So that was the quid pro quo. And that was the balance of the Telecom Act that led to Wall Street investors pouring money into companies such as Covad.

This particular bill would change the playing field by basically saying, look, forget about what we said in the Telecom Act, we will now give the incumbent a free bite at the apple, and you know, in getting their bite, they will devour the entire apple, which is, you can now provide so-called data services for in-region long distance in violation of the current law, which is 271.

So this basically guts the balance of the Telecom Act, it would gut section 271, it would exempt incumbents' provision of data services on a long distance basis without them having complied with the market opening requirements of the Telecom Act. Covad has no interest in keeping the incumbents out of the long distance business. We have every interest in making sure that they open up their local markets to competition, and that's what Congress should be doing its work in. In fact, any legislation that they are contemplating at this point should be around the enforcement of the Telecom Act and penalizing the incumbents for their failure to comply with the law.

Glassman: So, if Congress guts, as you say the Telecom Act, then there will be very little incentive for the local companies to open up to companies like yours, correct?

Khanna: That's exactly correct. Everybody knows that the importance of data as a telecom service has begun to outweigh voice service. And basically, this legislation would throw out half of the Telecom Act, it will throw out the data portion of the Telecom Act.

Glassman: This would create a kind of disincentive to companies like yours to invest the kind of money you have been correct?

Khanna: Well, we're going to pursue our business aggressively, regardless. I think the real losers would be consumers because we are providing data services that - prior to the Telecom Act, the incumbents were subjecting to a death by trial. There were many trials ongoing when Covad launched its service and they were as I said, literally "trialing" to death HDSL technology. Covad was the first to offer consumers a commercial DSL service. We were the first, in that sense we even beat the incumbents to market back in December of 1997. Consumers never had a choice with the local providers and now Covad is bringing that choice to them.

Glassman: Now, the telephone monopolies have had the DSL technology for many years, but they have not deployed it until recently. Why do you think that is?

Khanna: Well, the phone companies have actually deployed HDSL technologies since the early 1990s and they provided T1 services using HDSL technology. What they didn't do was cut their prices.

Glassman: Right. It was very expensive.

Khanna: Their T1 prices are as high as they currently are and they did that despite the fact that there were cheaper cost-producing ways of providing T1. So, the incumbents have not had the incentive to cannibalize their own revenue, revenue sources which are currently based on monopoly, and obviously competition would throw off all of that. Competition has permitted Covad to do what it has been doing, which is to provide a T1 or a T1 like service or T1-equivalent service for roughly a third or a quarter of the price

Glassman: How much of a role did competition from cable companies offering broadband services play in providing a kind of an impetus for the phones companies to deploy DSL?

Khanna: It would be hard to separate out, you know, and again I don't know what the phone companies' motivations are, but the modem coverage has been very, very sparse. Our coverage, for example is already greater than that of @Home's. The message here is, Covad as a DSL provider, already has broad coverage, working out of over a thousand central offices. By the end of this year we are projecting we will be in 2000 central offices. That kind of footprint is not something that the cable modem product enjoys.

The incumbents have now started, you know, four years after the Telecom Act, deploying 2 wire ADSL technology, we believe that that is fundamentally a response to us. And they understand the scale at which we are deploying this across the country and they have now finally woken up and they are trying to roll it out themselves.

Glassman: What is the average cost of your service to the consumer?

Khanna: Our consumer service is currently available for about $49.00 a month, we believe if you shop around I suppose, and you throw in the ISP portion of it, you are looking somewhere between $40 and $60 a month. That is still not as low as it is going to get over time. Once the incumbents implement line sharing as they were supposed to back in 1996, we expect that prices for consumers will fall. Certainly Covad's pricing to the consumers would fall.

Glassman: $30? Or, how low are we going to see these prices?

Khanna: I think anywhere from $30 to $50, especially if you throw in the ISP service.

Glassman: And how much faster is that than just the regular dial-up service right now?

Khanna: Approximately ten-fold at least, anywhere from ten to fifty times faster. There's a whole range of menu of speeds that you can ask for and obtain, which are based on two criteria. One is your willingness to pay, and second depends upon the distance from the central office.

We have a service that the incumbents do not have, which is called IDSL. IDSL allows us to provide some level of DSL service to everywhere, regardless of how far you are from the central office. So you could be five miles from the central office and Covad could provide you with IDSL service, which is 144 kilobits per second. That's our slowest speed service.

Glassman: Let me just ask you one more question. How do you rate the job that the FCC and Chairman Kennard are doing?

Khanna: I would give the FCC a solid B+ to A-. I think they have a very, very challenging task on their hands, given the political power of the incumbent Bells. I think in the face of that, the FCC has taken a lot of pro-competition steps. So really the FCC has done a very, very good job in the face of political pressure to implement the Telecom Act.

The one area where they fell down, I think, was the granting of Bell Atlantic's New York 271 application. And that was clearly granted not on the merit but based on politics. And we are hopeful that both the FCC and the DOJ will increasingly pay attention to the merits, as to whether the incumbents have in fact fulfilled their obligation, whether in fact they are implementing cable co-location, whether in fact they are in fact implementing line sharing. And both those, those two rulings will in fact be reversed by the Tauzin-Dingell bill and we are obviously opposing that piece of legislation.

Glassman: Actually I promised that that was my last question, but I have one more, about your company. How many customers do you need to be profitable, and when do you think that will happen?

Khanna: I don't know the exact line count that we need, but we're expecting to be profitable in the next two or three years. There are already some of our mature markets, for example in the Bay area, where we are already profitable. That's also true for some of our more mature regions, I think we have already previously announced that five of our regions are already EBITDA positive and that really is a good sign for our business long term and unlike some of the other Internet companies, we're in this to make money. It's a tough business, but we feel we have what it takes to succeed.

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