MEGAPATH OFFERS A RAY OF HOPE FOR ISPs

At a time when most Internet service providers are struggling for survival, MegaPath Networks says its business-focused broadband ISP model is working so well that it's ready to expand.

Last week, MegaPath announced supplier agreements with all four Bell companies that, when combined with its existing arrangements with smaller providers including Covad Communications, gives MegaPath a redundant footprint that serves 95% of the major metropolitan markets in the U.S. (see figure).

“Covad has a well-honed provisioning system, but some businesses are still a little hesitant to depend on a company that just emerged from bankruptcy,” said MegaPath President and CEO Harry Taxin. “These [deals with Bell companies] give them the comfort of knowing there is an alternative.”

MEGAPATH'S SUPPLIER BASE
Services	Providers
DSL	Allegiance Telecom, BellSouth, Covad, IP Communications, New Edge Networks, Qwest, SBC, Verizon
T-1	Allegiance, Covad, IP Communications, New Edge
Customer routers	Efficient Networks, Netopia
Source: MegaPath Networks

Being able to offer the security of Bell service nationwide to businesses gives MegaPath a first-mover advantage for its target market of small and medium-sized businesses, said Dan Foster, MegaPath's chief marketing and sales officer. Microsoft's MSN network also has DSL deals with each of the Bell companies, but MSN targets the consumer market.

MegaPath's offering attracts companies that have remote offices and telecommuters, Foster said. Instead of piecing together multiple broadband offerings from several regional players, customers can turn to MegaPath to provide a nationwide solution.

“The ILECs are not capable of serving RadioShack — there's a ubiquity of coverage required that they can't offer,” Taxin said.

Indeed, regulatory limitations prevent Bell companies from offering data services across local access and transport area lines. But even after these restrictions are lifted, many analysts question whether it will make economic sense for Bell companies to compete in each other's territories.

MegaPath's business-focused ISP model is “brilliant,” said Kneko Burney, director of business infrastructure and services at Cahners In-Stat Group.

“Because Bell companies are so regional, they have trouble offering services to larger customers with remote offices out of region,” she said. “With MegaPath, there are fewer relationships to manage.”

But MegaPath's business model isn't immune to the conditions that have pummeled other ISPs. As more broadband technologies hit the market, it will become increasingly difficult to incorporate them in its offerings. And the ISP still has to convince the market that a viable business can be sustained by reselling Bell lines — a model that bankrupted several nationwide DSL players.

As a Covad customer and a former customer of defunct DSL providers NorthPoint Communications and Rhythms NetConnections, MegaPath knows the potential pitfalls all too well. But by focusing on businesses and avoiding the temptation of overspending on marketing and facilities, MegaPath has a “pretty clean balance sheet,” Foster said.

In fact, MegaPath expects to be EBITDA positive by the end of the year, and a seven-figure funding round should be announced next month that will give it the financial flexibility to make some deals, Taxin said.

“We want to accumulate a bit of a war chest and make some acquisitions,” he said.

Acquisition targets will not be “distressed” properties, Foster said. But there are several ISPs with questionable futures that have not declared bankruptcy yet. MegaPath would like to buy them before they lose customers as their financial difficulties create imminent problems.

“We like buying satisfied customers, first and foremost,” Foster said.