COVAD TO ACQUIRE NEXTWEB; WISPERS OF A TREND?

Covad Communications' announcement last week that it plans to acquire wireless ISP NextWeb should deliver operational cost savings to a broadband service provider perennially squeezed by leased loop costs. The deal also will give Covad something it needs — sharp revenue growth from a profitable organization — as Covad itself seeks to be EBITDA-positive by mid-2006 and cash-flow positive by the end of 2006.

Charlie Hoffman, president and CEO of Covad, told Telephony last week, “We always thought that wireless access would be an ultimate goal. One very compelling reason is that it's less expensive,” he said. “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.”

Graham Barnes, founder and CEO of NextWeb, said his company reported $8 million in revenue in 2004 and has experienced triple-digit revenue growth for the last four years while selling broadband wireless Internet service packages to 3000 customers in California and, more recently, Nevada. NextWeb also recently added voice-over-IP service. Over the last few years, the company has acquired or merged with several other WISPs and has extended its potential customer reach to 200,000 businesses in two states.

NextWeb's deal with Covad could prove to be a validation of sorts for the tightly competitive and rapidly growing community of WISPs that, like Covad, battle incumbent telcos and cable TV operators for enterprise and residential business but have done so mostly under the radar using broadband wireless technology that many larger carriers traditionally have viewed as unreliable.

Whether it could ignite a run by other broadband service providers to acquire WISPs like NextWeb is less certain. “You can take your mobile number wherever you go, why not be able to take your IP address wherever you go,” said Craig Mathias, senior analyst for the Farpoint Group. “Covad sees the eventuality of that and what broadband wireless can do for them.”

However, Mathias also said, “It's not easy to compete in the [WISP] business. It will take more effort and more money than most people might think to be successful.”

Hoffman said Covad will continue to be “opportunistic,” though he didn't say whether or not the company is planning any other WISP acquisitions.

From an operational view, Covad's move to acquire NextWeb for $24.7 million — $4 million in cash, $19 million in stock and the assumption of $1.7 million in debt — should make it cheaper for Covad to offer DSL. Covad can reduce recurring service delivery costs by up to 60% if it uses wireless instead of T-1s, according to Covad and NextWeb.

The planned acquisition could also have a 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, which is 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.”

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.”