What these eyes have seen

There's a certain something about one-time Bell company executives that makes their confidence, determination and insurgency goals even more plausible when they become leaders of competitive service providers.

Any capable leader can, after all, claim that she is going to take a competitive communications operation to a dominant position against the RBOCs. Anyone can push the legacy hot-buttons. Fewer, however, can say that they actually lived the RBOC life, breathed RBOC air and know the RBOC environment so well that they are intimately familiar with what not to do.

Liz Fetter, the newly promoted CEO of NorthPoint Communications, is one who can.

Fetter became part of NorthPoint's expansion in March 1999, when she left a position as vice president and general manager of U S West, where part of her responsibility was to lead the incumbent's DSL deployment, to become president and chief operating officer of NorthPoint. She recently was named to the CEO position when Michael Malaga, the company's chairman and co-founder, was appointed CEO of NorthPoint's new VersaPoint venture, with Amsterdam-based VersaTel, designed to extend DSL across Europe.

NorthPoint started by focusing on small and medium-sized business customers and has since expanded its strategy to encompass residential customers. It has been on a roll, if its fourth quarter 1999 numbers are any indication. NorthPoint had 23,500 customers at the end of 1999, having more than doubled its subscriber base in one quarter. It had secured co-location space in more than 1560 central offices, 1027 of which were fully operational by the end of last year. With commercial service in 33 major metropolitan areas, NorthPoint's network passed 31 million businesses and homes at the end of last year. The company plans to pass more than 50% of all businesses and 45% of all homes by the end of 2000.

But things are changing with NorthPoint - with all the data competitive local exchange carriers (CLECs), really. Even as they continue their aggressive network buildout strategies, these competitors are taking steps to forge crucial retail alliances and, perhaps most important, to bring content into their folds. They have discovered that high-speed pipes are not enough: To dominate, they need not only to rebuild the network, but also to facilitate creation and delivery of the next generation services it will support.

"We're going to add value to the network and bring a high-quality capability to the desktop by injecting content directly into the network nodes," Fetter says. "It's of enormous strategic importance to the company, and over time, it will become a significant source of revenue."

Having a Blast

NorthPoint's concerted content efforts became clear less than two months ago, when the company announced that it had developed strategic alliances with content developers and distributors through an initiative called Blast. The project was positioned by NorthPoint as a natural step in the straightforward process of completely overhauling the concept of broadband service delivery.

"It's an extension of what we've been doing all along, which is rebuilding the Internet from the ground up the right way," Malaga says.

Blast is actually a platform intended to make it easier for content providers to deliver information and services - everything from streaming media and software to Web content and application service provider (ASP) offerings - to NorthPoint's customers. At the time the initiative was announced, trial partners for the program included Akamai Technologies, ClearBand, CoolCast, Digital Island, Equinix, iBeam, Into Networks, Media Station, Microsoft, On2.com and Vidazzle.

The arrangement is non-exclusive. NorthPoint does not actually own any of the content, but rather serves as the jumping off point from which content can be blasted to its growing base of hungry high-speed access customers.

"We will be striking strategic agreements to offer the network distribution channel to the people who do own the content," Fetter says. "Now we have something that's very distinctive to offer our partners and customers."

NorthPoint's node strategy is what allowed it to pursue the content opportunity. The company has been aggressive in its efforts to be first to market and to build a distribution node at which it can aggregate facilities and connect to ISP partners, says Ray Solnik, vice president of strategic business development for NorthPoint. The nodes provide a entry point at which content providers and ASPs can drop their content into NorthPoint's high-speed pipes.

"That's where the real kicker is for us in terms of our revenue model," Solnik says. "Once you have this network platform in place, you can deliver all sorts of opportunity."

For NorthPoint's access distribution partners - the ISPs - the advantage is that they can go to one place to pick and choose the content they want to offer with assurances that the network supporting it is capable of doing so, Malaga says.

"We're assembling all of the content together and injecting it into our network through our ISP partners," he says. "Because we connect to so many ISPs and the ISPs connect to alternate carriers, the content distributors are getting maximum exposure. They benefit greatly because now this content doesn't go streaming across the network."

Several other DSL providers are pursuing content initiatives, and others are considering making voice services the value-adds to their network enhancement efforts. For NorthPoint, voice is somewhat in the background of the content initiative for strategic and mechanical reasons.

"For us, content is much more distinctive. Voice is really being commoditized," Fetter says. "The challenge with DSL is that we still have that length limitation, and as you get further out, the voice quality suffers."

All the way home

One of the distinctions of NorthPoint's strategy, compared with some of its data CLEC counterparts, is its residential service play. While other DSL providers might be indirectly pursuing residential customers through distributors,NorthPoint is in the thick of things with residential service trials and distribution agreements with the likes of Microsoft and RadioShack.

"There's another untapped market in the consumer space we're now addressing," Solnik says.

Attacking the residential market is where Fetter's RBOC experience is perhaps most applicable, and that strategy takes NorthPoint head-to-head with her former employer and others of the same ilk.

"The competitors in the consumer space are different from the competitors in the small and medium-sized business space," Fetter says. "In business, there are the data CLECs - the RBOCs haven't done a good job of serving those markets. On the consumer side, the biggest competitors are the RBOCs, AOL/Time Warner and the AT&T cable play."

The RBOCs have been slow to react to the high-speed needs of their residential customer base, Fetter says, using her own alma mater as an example. "U S West has been very distracted by this whole Qwest thing," she says. "It's very political."

NorthPoint's relationships with Microsoft and RadioShack are at the heart of its residential strategy. RadioShack owner Tandy Corp. has invested $20 million in NorthPoint and selected the company as its preferred provider of DSL services in stores and on its Web site.

"These services are all relatively complex. Their strategy is to be the home connection center of America," Solnik says. "If there's going to be someone who's an expert, our guess is that it will be them."

The carrier also has struck a joint marketing agreement with Microsoft that includes a $30 million investment by Microsoft. NorthPoint is the preferred provider of DSL service for several Microsoft sales channels, including MSN, and the two companies are developing a customized MSN portal for DSL customers. For NorthPoint, the alliance has distinct branding advantages.

"There's really no chance we're going to have the kind of brand awareness they have in a quick time frame," Solnik says. "The challenge for us is to fuel awareness of DSL."

NorthPoint has many other partnerships and distribution alliances for its residential and business customer targets, including Yahoo!, Verio, @Work, Cable & Wireless and Level 3 Communications, and with incumbent competitors such as SBC Communications, Pacific Bell and GTE. In the residential market in particular, though, the hurdle for NorthPoint is in mind share.

"The biggest challenge is getting all the households across the U.S. to think of someone other than AT&T or their RBOC as their `phone company,'" Fetter says. "We're looking at ways to address that without becoming a circuit-switched network."

Back-office barriers

Like so many other competitive communications providers, NorthPoint is struggling to create an operations support system (OSS) to serve the complex service ordering and provisioning needs of DSL that has the scalability and flexibility required of an expanding network enterprise.

NorthPoint currently uses a provisioning system from Eftia OSS Solutions, for example, but the carrier is not confident the system will be able to grow with it.

"It's a one-size-fits-all customer care and order management system," says Mike Parks, NorthPoint's chief information officer. "It will sustain us for a few quarters, but we don't feel it's the tool for us to go forward with over time."

NorthPoint's current OSS approach is a multivendor mix, with systems supplied for various OSS functions by the likes of Telcordia Technologies, Vitria, Siebel Systems and Eftia. That's typical for a competitive service provider because most have very specific OSS needs that can't always be met by a single-system approach.

"We're looking at more of an integration of systems as opposed to one system that does everything," Parks says. "We've gone to the market and said we need an environment that is scalable and flexible and reliable."

Still, NorthPoint's chief information officer is frustrated with the solutions being offered by the operations software community, particularly given the complications brought on by interconnection with incumbents, and service ordering through ISP partners and retail outlets.

"The OSS developers greatly underestimated the complexity of this business and the number of challenges we're dealing with," Parks says. "It's a complicated process because of the number of companies involved in delivering the product."

The lack of effective OSS solutions is just one of the technology issues NorthPoint and other data CLECs face. DSL technology and the carriers supporting it have been plagued by deployment delays caused by line conditions or OSS ordering and provisioning problems, many of which have somewhat sullied the name of DSL. NorthPoint representatives view that as a necessary step in the development and deployment of a new technology and new services.

"There are a bunch of service issues every company has that we're all on top of," Solnik says. "Everyone is spending enormous resources to deliver excellent quality services. We'll all certainly improve."

"This job is all about continuing process refinement," Malaga says. "In the early stages of any kind of large-scale process, you're going to have some hiccups."

NorthPoint will likely face the same kind of growing pains again as it moves ahead, especially if it opts to expand its technology approach to embrace other modes of access technology and other content distribution initiatives - both of which are certain components of NorthPoint's evolution, Fetter says.

"We think of ourselves as a broadband company, and DSL is only the first technology we're deploying," she says. "You can expect to see a lot of innovation coming out of us in the coming months."

While other data competitive local exchange carriers duke it out - both rhetorically and realistically - over whose DSL network is bigger and better, New Edge Networks is concentrating on leading the charge into uncharted territories.

"We're doing a national wholesale play in second- and third-tier markets," says New Edge President and CEO Dan Moffat. "We try to avoid overlap, and we have reciprocal service agreements with both NorthPoint and Covad. We're complementary."

That approach appears to be selling itself. New Edge, which was founded in June 1999, has raised more than $200 million in funding from CLEC-savvy investors such as Accel Partners, Greylock and Crosspoint Ventures. Morgan Stanley, Goldman Sachs, Meritech, Intel and Comdisco also are backers.

At last count, New Edge had installed DSL access multiplexers in 100 central offices in six states, was operational in 20 of them and had signed 75 ISP customers. The company is building a national ATM backbone, has approved CLEC status in 35 states and has applied for certification in the rest.

In addition to focusing on smaller regions - geographically and demographically - New Edge is avoiding a retail play and working exclusively through ISP partners, a strategy that has the effect of streamlining operations and making the company more palatable to partners, Moffat says.

"People with a retail strategy portion to their plan go a lot more slowly because they have to have a lot more staff," he says. "The other thing is that the ISPs don't always want to work with them because they also compete."

Those are important distinctions to New Edge because its approach is all about speed and compatibility. The company considers itself so compatible, in fact, that Moffat claims to be competitive with NorthPoint Chairman Michael Malaga only when it comes to mountain biking. And the subject of speed is not limited to networks - New Edge considers that its financial success hinges on not being distracted by anything but its DSL data play.

"Having a business model focused on wholesale and data over DSL allows us to go really fast," Moffat says. "Competing against your ISP customers or offering other services like voice over DSL slows you down."

New Edge also is pursuing a content distribution strategy, having recently inked a deal with iBEAM under which it will deliver iBEAM's streaming content to its ISP customers. As for demand, Moffat is confident that the businesses occupying smaller markets are no different from urban dwellers when it comes to bandwidth hunger.

"Ten thousand broadband dot-com business models will bloom, and 9000 of them will fail," Moffat says. "They all need fat pipes."

As one of the more established players in the national DSL race, Rhythms NetConnections is intent on adding layers of service value onto the burgeoning high-speed network it is building.

"Virtually all other DSL providers designed for Internet access," says Robert Kelley, general manager of voice over DSL for Rhythms. "We designed for a wide range of applications, including videoconferencing, streaming and IP routing."

That effort makes network requirements more complex, says Michael Sabo, director of innovation for Rhythms.

"Companies want pipes, but value-added services also increase demand on your network, so customers move up in terms of bandwidth," he says.

Rhythms' fourth quarter 1999 numbers put the company in 42 markets and 73 metropolitan statistical areas. Its network currently passes 33 million homes and businesses, and the company has 12,500 DSLs in service. Rhythms' 1999 revenue was $11.1 million, and its EBITDA for the year was negative $167.9 million.

As part of its efforts to deal with additional demand, Rhythms recently struck a deal with Level 3 Communications under which it will connect its network to Level 3's fiber optic gateway facilities in 27 cities to tap into Level 3's application hosting capabilities.

The two companies plan to co-brand the service as a new product offering to application service providers and ISPs. The deal was driven in part by efforts to make content more accessible to Rhythms' customers, Sabo says. "What Level 3 brings to the party is an Internet data center, and on that flows a lot of content providers that we can bring onto the Rhythms network in a seamless way."

As it extends its value-added broadband network pitch across the country, Rhythms is taking a broad-based approach to partnerships and customer targets in hopes of increasing penetration and recognition.

"Whatever you're selling, if you can get a number of partners that act as your channels, it's leverage," Sabo says. "It's a numbers game."

Like many other telecom innovations spawned out of the PC industry, Covad Communications is no different in its quest to deliver bandwidth. The gap between the power and bandwidth of the PC generated an idea in two Intel employees. And as Covad has multiplied, the message hasn't been blurred.

Dhruv Khanna and Charles Haas quit Intel in 1996 with hopes of bridging the bandwidth gap via DSL. But unlike most instances when employees leave a company, Intel handed them $1 million in seed money to found the data competitive local exchange carrier (CLEC).

Since that time Covad's size has increased, along with the number of competitors to challenge it. But the company is trying to remain focused on its goal of delivering broadband connectivity. "We can't take our eye off the ball," says Khanna, now executive vice president and general counsel for Covad. "First and foremost, we concentrate on building line count, and second, we layer on services. In five years, we will be the AOL of the broadband space."

As of December 1999, Covad had installed around 57,000 lines and was in 51 metropolitan statistical areas (MSAs) around the U.S. By the end of 2000, Covad plans to provide services in 100 MSAs and serve 40% of all homes and 45% of all businesses. To reach those numbers and future goals, Khanna again pointed to Covad's focus.

"It's really about raw, end-to-end execution. There's nothing really secret about it," he says. "[Our competition] can copy our interconnection agreements, but where they really flubbed was their operations support systems."

Covad uses an end-to-end "zero-touch" provisioning process, which helps it streamline and expedite service turn-up, Khanna says.

Concerned that generating content for its network would cloud its underlying goals, Covad is taking the approach of partnering with content providers such as AOL. "We are not going to be producers of content," Khanna says. "We will own the most valuable commodity on the food chain."

Theoretically, if providers want to deliver applications with broadband content, they then will have to turn to a provider such as Covad for infrastructure.

"We are not expecting to make tons of money on the consumer market, though," Khanna says. "It is more about the [number of] eyeballs we reach and the efficiency of a mass market, low-cost procedure."

The main difference between the high-speed access strategy of DSL.net and most of its competitors is not networks or technologies, but customer relationships. And while most data competitive local exchange carriers are using ISPs as their bridge to customers, DSL.net is going all the way by itself.

"We do not sell through other ISPs; we compete against them," says Ray Allieri, senior vice president of sales and marketing for DSL.net. "We do that because we want to control the quality."

DSL.net is focused on building a footprint that can connect with small and medium-sized businesses in second- and third-tier market segments across the U.S., and as of the end of 1999, it had succeeded in doing so in 116 cities. The company posted a total revenue for 1999 of $1.3 million, net losses of nearly $22 million and EBITDA of negative $17.9 million.

DSL.net's smaller market targets, combined with service level agreements and other assets inherent in having a direct relationship with customers, are what will distinguish the company from ISP resellers plagued with quality of service (QOS) issues, Allieri says.

"We're focused on taking the Internet and making it real for small businesses that have previously been locked out economically from high-speed services from the big boys," he says. "The QOS on the ISP side really varies dramatically."

Even with its seemingly stand-alone strategy, partnerships still are important for DSL.net. The company has peering relationships with applications hosts such as Exodus and InterNap, marketing arrangements with Microsoft and Staples.net and content deals with companies such as iBEAM and Akamai.

The "foot race" mentality among Tier 1 data CLECs puts the primary spotlight on number of lines and central offices connected in cities, Allieri says. While DSL.net has to contend with some of that, the intimacy of its markets makes the customer connection even more crucial, he says.

"The advantage we have is that we can [address] that and we also control the end user," Allieri says. "Every touch to the customer is important. These are very tight-knit communities, and there's a buzz that starts."