Covad takes ‘less expensive’ NextWeb route

For Covad Communications, acquiring wireless ISP NextWeb for $24.7 million is less expensive than continuing to depend on costly copper loops from incumbent telcos and funding the lobbying activities and antitrust lawsuits required to keep up with those ILECs on the regulatory battlefield.

Charlie Hoffman, president and CEO of Covad, told Telephony this afternoon, “We always thought that wireless access would be an ultimate goal. One very compelling reason is that it’s less expensive,” he said. Covad can reduce recurring service delivery costs by up to 60% if it uses wireless instead of T-1s, according to Covad and NextWeb. “We have had lobbying, and we still have antitrust suits [pending against both Verizon and BellSouth], and that has become a big expensive way of competing. We want to stay focused on creating profitability.”

Hoffman added that the agreement it announced this morning to acquire NextWeb came after careful consideration of several criteria, but first and foremost was that NextWeb runs a profitable operation. The company, which sells service to enterprises and small businesses throughout California, and more recently Nevada, has been EBITDA-positive since late 2003 and has tripled its revenue growth over the last four years.

Covad expects to be EBITDA positive by the middle of 2006, and Hoffman said, “We want to make sure that NextWeb remains a profitable operation.”

Covad’s pending purchase price includes $4 million in cash, $19 million in Covad stock and the assumption of $1.7 million in debt.

NextWeb’s service can reach about 200,000 business locations in California and Nevada. The company currently has about 3000 customers, based in San Francisco, Orange County, Santa Barbara and Las Vegas.

The planned acquisition could also have major impact on the WiMAX market as it adds another company with a national footprint to that market. Covad had been testing WiMAX for the last two years, including a trial in San Francisco since late last year, and had been planning for a commercial rollout.

“Two years of trying WiMAX proved to us that the technology works, and that the market is ready,” Hoffman said, adding that Covad will benefit especially from WiMAX’s reach, far longer than the limitations of DSL.

Graham Barnes, founder and CEO of NextWeb, said that as WiMAX becomes a commercial broadband access technology, his firm will be better off being part of a larger service provider. “WiMAX is a market that will have a lot of large players in it,” he said. “For us, the timing of this agreement is ideal.”

Though NextWeb has itself been aggressive in acquiring wireless ISPs in its own region, Barnes said selling to Covad also allowed the company to reach an ultimate goal of creating an exit opportunity for its original investors.

While Covad is eager to move into wireless, NextWeb also sees a benefit from teaming with a company providing a different form of broadband access. “Having DSL is important for us, allowing us to create a redundant service package with DSL and wireless.”