Survival of the fittest

The mood was somber at the headquarters of New Edge Networks just before Thanksgiving last year. Up until that time, the energetic 1 1/2-year-old broadband service provider had managed to steer clear of the crises so many other competitive outfits had encountered in 2000. But on Nov. 13, 2000, New Edge reluctantly announced that it would curtail its network deployment until further notice and eliminate 135 jobs—a little less than one-third of the company’s work force.

Like so many other start-up hopefuls, New Edge faced a capital crunch. Despite raising nearly $140 million in its third round of equity and debt funding just one month earlier—a round that upped total invested capital to $302.6 million—New Edge was not fully funded at its current burn rate. Several fund-raising avenues had proved to be dead ends. To keep its business plan fully funded, tough choices had to be made.

The decision resonated throughout the ranks. New Edge prides itself on a cultural uniqueness that borders on wackiness—from calling its headquarters the "Loop Factory" to letting employees decorate their own cubicles to aloha shirts and "Beer:30" happy hours on Friday afternoons. More important, New Edge’s principals seem legitimately passionate about employees’ well-being. The cutbacks inevitably dampened—at least temporarily—the upbeat, euphoric environment and attitude that the company had worked so hard to foster.

"Those folks signed on with their hearts, so to have to do any type of downsizing has a big impact in the short term," says Dan Moffat, president and CEO of New Edge and one of the company’s founders. "I think there’s a loss of innocence."

But the way New Edge handled the funding predicament—quickly, honestly and publicly—appears to have helped the company avoid the fallout that many of its counterparts suffered. While other competitive carriers either flirt with bankruptcy or adamantly deny their own financial peril, New Edge has continued its progress apace—albeit with slightly scaled-back ambitions. New Edge says, in fact, that the industrywide DSL downturn actually has helped it: Earlier this month, the company attributed a surge in orders during November and December to the demise of other high-speed access providers.

Why does New Edge seem to flourish as others around it perish? The answer appears to be attributable to a number of factors: the company’s stringent focus on small and medium-sized markets, an adaptable network base and open-minded technology approach and, perhaps most important, an ability to execute a business plan regardless of the environmental conditions.

In my hometown

New Edge never intended to take the whole world by storm. While other competitive local exchange carriers (CLECs) formed in the mid- to late-1990s were hell bent on unseating the incumbents and becoming the new norm for high-speed communications services, New Edge quietly settled into markets that no one else seemed to notice.

"They’re serving a unique market," says Adam Guglielmo, DSL analyst for TeleChoice. "They’re entering areas where no one else is nearly ready and providing broadband services where no one else can."

That strategy has set New Edge off from the onslaught of competition—both from competitive service providers creating new high-speed networks and from incumbents leveraging their existing networks. New Edge now provides broadband DSL service in more than 450 locations, covering almost 300 cities and towns in 23 states.

"We really took this missionary focus of extending the broadband edge seriously—we still do," Moffat says. "We build the rest of the country. With unlimited capital, we’d be in 1200 COs by the end of the year."

To New Edge, the Covad Communications and NorthPoint Communications of the world have never been a threat because they are not around. New Edge was the first to implement a nationwide network strategy based on serving smaller markets, and so far its competitive counterparts have been too consumed with their own survival to even think about following suit. And the sales strategy New Edge deploys in its own California markets, for example, is totally different from how other competitive carriers attack their own regions.

"We were never afraid that Covad was coming to Chico to bury us. Every step they take further out into the sticks weakens them," Moffat says. "They rely on carpet bombing—coming in with B-52s and doing mass campaigning. Carpet bombing can be done a lot better in San Jose than it can in Chico."

The incumbent carriers, meanwhile, are distracted by the competition from players in much larger markets—and, in some cases, offering primarily residential-focused DSL offerings in those regions. Where New Edge roams, the incumbent LECs (ILECs) have networks and switch installers but no sales or IP people dedicated to data, Moffat says.

"We partner with an ISP that’s ground level, feet on the street in Chico," he says. "They see DSL as a cable modem killer because they can mass-market to consumers. What they haven’t been able to do is data solutions for small and medium-sized businesses."

And it’s not just DSL. With its recent acquisition of West-Net, New Edge also provides frame relay and WAN services to more than 600 companies nationwide. In fact, New Edge currently derives more than half of its revenue from non-DSL services. The company’s network is designed to be inherently flexible so that it can be modified to accommodate different core and access technologies.

"It’s a network that lets us take on the next generation of things," says Steve Hensley, another company founder who is vice president of engineering and chief technology officer. "We did not want a stale box. New Edge took advantage of the fact that DSL was hot, but we’re broadband. We don’t have a magic bullet other than execution."

Expandable toolkits

Because of that broader technology vision that extends beyond DSL, Moffat and other principals don’t like New Edge to be categorized as a DSL provider or even a CLEC. They characterize the company as a broadband services provider—one that seized copper loops and DSL technology as the best near-term opportunity but intends to supplement that with anything the broadband future brings.

Data over DSL was phase one, Moffat says, and the service level applications New Edge now is offering or developing —ATM, virtual private networks, voice over DSL—are part of phase two. That includes services such as frame relay, which Moffat maintains has broad implications in the markets New Edge serves.

"There are folks who do training programs over frame relay—and I’m not talking about high-tech folks, I’m talking about the Jiffy Lubes," he says. Phase three, Moffat says, will encompass anything and everything broadband, thanks to a network equipped in advance to handle such technological diversity.

"We wanted to build a company that was scalable and got past some of the previous generation CLECs and ILECs," Hensley says. "Hardware and software was maturing on all fronts, and the business models were not. We wanted to treat our network as an operational system. We didn’t want a house of cards."

Hensley’s tenets extend beyond the nuts and bolts of the network and into an operational philosophy that seems to be based on mistakes that others before New Edge have made. The most important aspect of operating a network, he says, is eliminating politics and maximizing education.

"You need to minimize bureaucracy and become a dynamic company, and part of the requirement for that is education," Hensley says. "That’s why you find my desk right next to a technician—who, by the way, has a better computer than I do."

Those same philosophies trickle down into the software and operations support system (OSS) realm, where the capabilities and cooperation—or lack thereof—of operational partners is just as important as having the right sets of tools.

"The ILECs aren’t standardized in how they operate. That would really improve productivity," says Matt Saikkonen, chief information officer of the company. "It’s resource-consuming, and that’s where the expense comes in. If you can develop some standardization, the entire industry will attain the benefits."

In addition to standardized interfaces, New Edge’s OSS environment is based on the concepts of customer self-service and flexibility.

"The thing I learned in the CLEC world was that you needed as few databases as possible," says Natalie Diggins, vice president of operations and another co-founder. "We didn’t design our OSS for DSL; we designed it for broadband. We knew that DSL might not always be the technology."

With that kind of underlying system in place,

the physical acts of technical connection and service activation become simpler, Diggins says—at least from a network technology perspective. New Edge, like every other competitive service provider, still has to grapple with the human element of interaction between New Edge technicians and those of the incumbents, she says.

"We hire service account folks from the World Wrestling Federation," Diggins jokes. "We have legions of junkyard dogs. We find that we duke it out at some levels, but at the tech-to-tech level, there’s a real spirit of camaraderie."

Fiscal responsibility

When New Edge was established, Moffat and the other founders decided to simultaneously save money and create a sense of involvement and originality by giving each employee a couple hundred dollars to decorate their cubicles the way they wanted. The result is the opposite of the corporate world depicted in the comic strip "Dilbert." Parts of New Edge’s headquarters look more like an FAO Schwarz store than a high-tech telecom company.

While that detail might seem trivial, it is one of many characteristics of the company that speaks to both how important New Edge considers its employee culture and the frugality with which the operation is run. The Vancouver, Wash., headquarters, for example, is a converted manufacturing facility for which New Edge paid rent of 70¢ per square foot when the company was founded, Moffat says. Everyone, including Moffat and the other founders, work in cubicles. Moffat’s is adorned by a pirate flag.

Those characteristics also made the necessity of last year’s layoffs even more painful for the tightly knit company. Moffat and the other New Edge officers clearly are strong believers in employee morale and support: Employees that were let go were given severance packages, job placement assistance, accelerated vesting in their New Edge options and New Edge-funded COBRA extension of their insurance benefits. Despite the obvious importance New Edge places on its employees, however, the financial interests of the business had to come first.

"You have to fundamentally believe you will do well by doing right by these people. It will pay off in the way your employees contribute," Moffat says. "But it’s not like we do this for altruistic reasons. There has to be a business advantage."

By most analyst accounts, the cutbacks New Edge made were driven not by the company’s operational inefficiencies but rather by market conditions. Specifically, several potential funding avenues that companies such as New Edge typically use to supplement private equity funding were simply not available when New Edge needed them to be.

"The public equity markets are, for all intents and purposes, closed to telecom companies," says John Hesse, New Edge’s chief financial officer. "The high-yield market is also closed to us, and the senior bank debt market is also closed. I’ve never seen a point at which all three of those markets were closed.

"We made the judgement that it was in our best interest to make that cash last as long as possible until one or more of those markets came back," Hesse says.

In addition to the personnel layoffs, New Edge opted to cap its network deployment at the current 600 central offices—it has co-location applications approved for 1200—until it can generate more capital. In many regards, New Edge is still better off than its publicly traded counterparts that have watched their stock prices plummet even as they, too, had difficulty securing other means of funding.

"It may be better not to be public these days," Hesse says. "It’s an almost Herculean effort to raise a $2 stock back to $20. You effectively have to re-IPO the company and turn over your whole shareholder base."

The question remains as to what long-term effects the current market conditions surrounding broadband service providers—and DSL providers in particular—will have. New Edge, for its part, is confident that demand for broadband services will bring the financial piece of the equation back around.

"If you fundamentally believe that broadband demand can’t do anything but grow, you would think that when the market begins to normalize again, there would be recognition of that," Hesse says.

Things have been looking up for New Edge as of late. Shortly after the cutbacks were made, Microsoft announced it would use New Edge’s DSL service to extend its MSN HighSpeed services to small and medium-sized markets, and sources close to the company say Microsoft also made an equity investment of $5 million in New Edge—both important endorsements of the company’s capabilities.

In Moffat’s view, the big question now is what kind of trickle-down effect the industry’s current financial situation will have on consumers—the ultimate beneficiaries of broadband capabilities. "The real shakeout of the swinging pendulum in investor confidence is that it’s going to delay broadband rollout," Moffat says. "That’s the real societal impact."