Covad Communications Group, Inc. -  DSL Service - Category Main Page 

(408) 952-6400

110 Rio Robles

San Jose, CA 95134

www.covad.com   

Sales

$389 million

Business Description 

We are a leading provider of high-speed Internet connectivity and related communications services. Our services include a range of high-speed, high-capacity, or broadband, Internet access connectivity and related services using digital subscriber line, or DSL, T-1, Virtual Private Network, or VPN, and Firewall technologies. With over 1,800 collocation facilities, we believe we have the largest contiguous national broadband network. We provide services throughout the United States in 96 metropolitan statistical areas, or MSAs. We also plan to add approximately 200 new collocation facilities to our network in 2004, which will expand our coverage to 109 MSAs, passing more than 50 million homes and businesses. As of December 31, 2003, we had approximately 517,000 DSL and other high-speed lines in service.

We sell services indirectly through resellers, as well as directly through Covad.net, our direct sales channel. The majority of our sales are generated by approximately 300 resellers, including AT&T Corporation, or AT&T, America Online, Inc., or AOL, SBC Communications, or SBC, XO Communications, Inc., EarthLink, Inc., Sprint Corporation, MCI WorldCom, or MCI, Inc., MegaPath Networks, and Speakeasy.net. Our business is currently undergoing a transition in which sales of stand-alone DSL services by our reseller partners have slowed, and we continue to experience higher churn among our existing stand-alone DSL customers, due to competitive pricing pressures and other factors. As a result, our business strategy is increasingly focused on sales to wholesale customers who sell a bundle that combines our high-speed data service with their voice services. This transition presents a substantial business opportunity for us to join with our voice provider partners to provide bundled product offerings nationwide. While we believe that the company is favorably positioned to take advantage of this opportunity, the amount and growth rate of sales of these bundled products by our resellers are inherently difficult to predict, and we cannot predict how rapidly, or whether, the growth of these products will offset declines in sales of our products as a stand-alone DSL offering.

Covad.net ended 2003 with approximately 72,000 DSL lines in service, up from 43,000 lines at the end of the previous year. Covad.net sells unbundled DSL products and related value-added services through multiple channels including telesales, field sales, affinity partner programs, and our website. Covad.net focuses on the small business market and also sells to enterprise customers that purchase our services for distribution across their enterprise. Covad.net also provides dial-up Internet access services to approximately 37,000 subscribers as of December 31, 2003.

Industry Background
DSL technology first emerged in the 1990’s and is commercially available today to address performance bottlenecks of the public switched telephone network. DSL equipment, when deployed at each end of standard copper telephone lines, increases the data carrying capacity of copper telephone lines from analog modem speeds of up to 56.6 kilobits per second, for the fastest consumer modems, and Integrated Services Digital Network, or ISDN, speeds of up to 128 kilobits per second to DSL speeds of up to 8 megabits per second downstream and up to 1.5 megabits per second upstream, depending on the length and condition of the copper line.

The passage of the 1996 Telecommunications Act created a legal framework for competitive telecommunications companies to provide local, analog and digital communications services in competition with the traditional telephone companies. The 1996 Telecommunications Act eliminated a substantial barrier to entry for competitive telecommunications companies by enabling them to use the existing infrastructure built by the traditional telephone companies rather than constructing a competing infrastructure at significant cost. The FCC develops and implements rules under the 1996 Telecommunications Act. The 1996 Telecommunications Act, as interpreted by the FCC, requires traditional telephone companies, among other things, to:

• allow competitive telecommunications companies to lease telephone lines on a line-by-line basis;

• provide central office space for the competitive telecommunications companies’ DSL and other equipment required to connect to leased telephone lines;

• lease access on traditional telephone companies’ inter-central office backbone to link the competitive telecommunications companies’ equipment; and

• allow competitive telecommunications companies to electronically connect into traditional telephone companies’ operational support systems to place orders and access their databases.


Our Service Offerings

We offer eleven business-grade services, two consumer grade services, two managed security services, email and hosting services. Our business grade services are called TeleSpeed, TeleSoho, and TeleXtend, and our consumer-grade services are called TeleSurfer. Our direct sales channel also offers managed security services and VPN services under the TeleDefend brand, in addition to email and hosting services. In addition, resellers may purchase high-capacity network backhaul services from us to connect their facilities to our network, the Internet and to provide direct technical support for their end-users.

The specific number of potential end-users who qualify for service will vary by central office and by region and will be affected by line quality and distance. Prices for our end-user services vary depending on the performance level of the service and the underlying technology used to deliver the service. Our prices also vary for high volume customers that are eligible for volume discounts. See “Item 1. Business—Risk Factors—We may experience decreasing margins on the sale of our services, which may impair our ability to achieve profitability or positive cash flow” for a discussion of some of the risks associated with our ability to sustain current price levels in the future.

TeleSpeed

We launched service in December 1997 with our TeleSpeed services. These services are intended to connect individual end-users on previously unused conventional telephone lines to our DSL equipment in their serving central office and from there to our network serving that metropolitan statistical area. The particular TeleSpeed service available to an end-user depends in large part on the end-user’s distance to their respective central office.

TeleSoho

Our TeleSoho service was introduced in September 2001. We designed this service for the Small Office/Home Office, or SoHo, customer segment, with merged features from our consumer and business services. The service is asymmetric, offering speeds up to 6.0 megabits per second downstream and up to 768 kilobits per second upstream, and can be delivered to customers using a self or professional installation. TeleSoho is provisioned with an ADSL router capable of supporting up to four end-users and can support one fixed Internet Protocol address.

TeleXtend

Our TeleXtend services were introduced in November 2001. These services allow end-users to connect to our network equipment in their local central office over a T1 line. TeleXtend services are not limited by distance from the servicing central office. As of December 31, 2003, TeleXtend services were available in 1,519 of our central offices.

TeleSurfer

Our TeleSurfer service was introduced in April 1999 and is designed for consumers. This service is asymmetric, offering speeds up to 1.5 megabits per second downstream and up to 256 kilobits per second upstream. We generally deliver this service to customers using self installation over a line-shared or line-split loop. Line-sharing, line-splitting and self-installations reduce the monthly recurring cost and the up-front cost for installation of the service.

Asynchronous Transfer Mode, or ATM, Network Services

We also provide DS3 and OC3 circuit backhaul services from our regional network to a reseller’s site. This service aggregates data traffic from individual end-users in a metropolitan statistical area and transmits the packet information to the customer over a single high-capacity interconnection. The service utilizes ATM protocol that operates at up to 45 megabits per second for DS3 circuits and up to 155 megabits per second for OC3 circuits.

Broadband Internet Access Service

This service currently bundles Internet protocol services with our high-speed connectivity services to provide a complete connection to the public Internet. The additional Internet protocol services include end-user authentication, authorization and accounting, Internet protocol address assignment and management, domain name service and Internet protocol routing and connectivity.

Value-Added Services

In addition to access services, we offer three suites of value-added services to end-users that purchase our service directly from us. These services include:

TeleDefend. This service is designed to meet the security and private networking needs of small to medium-size businesses. TeleDefend is a managed and monitored service. We currently offer two versions of TeleDefend – TeleDefend Firewall, which protects businesses with only one site, and TeleDefend VPN/Firewall, which allows businesses with multiple sites to communicate securely.

Email and Web Hosting. In March 2003, we introduced our first suite of stand-alone email and web hosting services. These services will target small to medium-size businesses. These services will allow such companies to have a custom domain name, for example www.mybusiness.com, as well as business-class email and web hosting. All services will come with anti-spam and anti-virus protection and easy-to-use Web site building tools and templates.

Voice over Internet Protocol. In February 2004, we announced plans to offer Voice over Internet Protocol, or VoIP, services to business and consumer customers. These services enable customers to use the Internet to make local and long distance phone calls instead of using the regular telephone network. We anticipate that we will introduce VoIP services in the second half of 2004.

 The markets for business and consumer Internet access and network access services are intensely competitive, and we expect these markets will become increasingly competitive in the future. The principal bases of competition in our markets include (in no particular order):

• price and performance;

• discounted rates for bundles of services;

• breadth of service availability;

• reliability of service;

• network security; and

• ease of access and use.

We face competition from traditional telephone companies, cable modem service providers, competitive telecommunications companies, traditional and new national long distance carriers, Internet service providers, on-line service providers and wireless and satellite service providers.

Traditional Telephone Companies. All of the largest traditional telephone companies in our target markets offer DSL services. As a result, the traditional telephone companies represent strong competition in all of our target service areas and we expect this competition to intensify. The traditional telephone companies have an established brand name and reputation for quality in their service areas, possess sufficient capital to deploy DSL equipment rapidly, own the telephone lines themselves and can bundle digital data services with their existing voice services to achieve economies of scale in serving their customers. Certain of the traditional telephone companies are aggressively pricing their consumer DSL services as low as $26.95 per month, placing pricing pressure on our consumer grade services. The traditional telephone companies are also able to offer consumer services through remote terminals, and the FCC’s Triennial Review order provides that the telephone companies are not required to provide us with access to remote terminals.

Cable Modem Service Providers. Cable modem service providers such as Comcast Corp, Cox Communications, Time Warner, Inc. and Charter Communications are deploying high-speed Internet access services over hybrid fiber-coaxial cable networks. Hybrid fiber-coaxial cable is a combination of fiber optic and coaxial cable and has become the primary architecture utilized by cable operators in recent and ongoing upgrades of their systems. Where deployed, these networks provide similar and in some cases higher-speed Internet access than we provide.

Competitive Telecommunications Companies. Many competitive telecommunications companies, such as DSL.net, Inc., Mpower Communications Corporation and New Edge Networks, Inc., offer high-speed digital services using a business strategy similar to ours. Some of these competitors offer DSL-based access services, and others are likely to do so in the future. Companies such as XO Communications and Allegiance Telecom have extensive fiber networks in many metropolitan areas, primarily providing high-speed digital and voice circuits to large corporations and have deployed DSL equipment and provide DSL-based services. They also have interconnection agreements with the traditional telephone companies pursuant to which they have acquired central office space in many markets targeted by us.

National Interexchange Carriers. Interexchange carriers, such as AT&T, Sprint, MCI, Qwest and Level 3 Communications, have deployed large-scale Internet access networks or ATM networks, sell connectivity to businesses and residential customers and have high brand recognition. In early 2001, AT&T and MCI purchased the
 
DSL networks of two of our former competitors. They also have interconnection agreements with many of the traditional telephone companies and a number of spaces in central offices from which they are currently offering or could begin to offer competitive DSL services. Many of these companies provide DSL-based services in competition with us. In addition, some of these companies, such as AT&T, Sprint, and MCI, are our resellers.

Internet Service Providers. Internet service providers such as EarthLink, XO Communications and Speakeasy.net provide Internet access to residential and business customers, generally using a variety of telecommunications services such as T1, satellite, wireless, dial-up, ISDN and DSL services. These Internet service providers can and do compete with us in certain instances at the retail and wholesale levels. Many Internet service providers resell our competitors’ services and could even become competitive DSL service providers themselves.

On-Line Service Providers. On-line service providers include companies such as AOL and MSN, a subsidiary of Microsoft Corp., that provide, over the Internet and through proprietary on-line services, content and applications ranging from news and sports to consumer video conferencing. These services are designed for broad consumer access which enables the provision of digital services to a significant number of consumers. In addition, they provide Internet connectivity, ease-of-use and consistency of environment. Many of these on-line service providers have developed their own access networks for modem connections. AOL’s parent company, Time Warner, Inc., owns certain cable systems throughout the United States. Some of these systems offer cable modem service and AOL has deployed its Internet services over these networks.

Wireless and Satellite Data Service Providers. Wireless and satellite data service providers continue to develop wireless and satellite-based Internet connectivity. We face competition from terrestrial wireless services including: third-generation wireless networks, two Gigahertz (“GHz”) and 28 GHz wireless cable systems, Multi-channel Microwave Distribution System, and Local Multi-channel Distribution System and 18 GHz, 39 GHz and 50 GHz point-to-point and point-to-multi-point microwave systems. Some of our resellers, such as MCI and XO Communications, hold many of these microwave licenses and are offering broadband data services over this spectrum. Other companies hold point-to-point microwave licenses to provide fixed wireless services such as voice, data and videoconferencing. Third generation mobile, or 3G, or augmented second generation mobile, or 2.5G, systems are being deployed or are expected to be deployed in the near future by providers such as AT&T Wireless, Cingular Wireless, Sprint, Verizon and VoiceStream. These wireless services tend to have equal or slower speeds than DSL and are generally more expensive to deploy.

We also may face competition from satellite-based systems. StarBand Communications Inc., Hughes Communications, provider of DirecTV and DirecPC, EchoStar Communications Corporation, Globalstar, Lockheed, Teledesic and others have either deployed or are planning to deploy satellite networks to provide broadband voice and data services. Such services could offer a competitive alternative to our DSL services and these providers may be able to sell services in areas where our DSL network does not currently reach.

DSL Service Providers in the Directory - Covad