Covad catches global broadband craze

The provider of high-speed Net connections creates a new subsidiary to manage international expansion, highlighted by a new partnership with Japanese telecom giant NTT.

3 min read
Covad Communications, a provider of high-speed Internet connections, today announced that it has created a new subsidiary to manage a broad international expansion, highlighted by a new partnership with Japanese communications giant NTT.

As previously announced, a subsidiary of Nippon Telegraph and Telephone, NTT Communications and Covad--together with ACCA Networks, a new Japanese competitive local-phone company, and Ignite Japan KK, a venture capital firm--will provide high-speed Net access to major metropolitan areas in Japan using digital subscriber lines (DSL).

Under the plan, the companies will offer DSL trials in Tokyo this fall, with nationwide commercial service beginning next year.

Separately, Covad had initially planned to also announce today that it has formed Covad Communications International, a wholly owned subsidiary that will manage the company's overseas ventures, including the new Japanese service and a similar, previous venture in India. However, a company representative said the announcement will come later this week instead.

The moves represent a concerted international expansion effort for Covad, one of several small companies that have quickly deployed high-speed, or "broadband," Internet connections in major U.S. cities. But the competition between DSL providers and cable modem services is stiff, and the opportunity overseas--particularly in certain Asian and Latin American nations that have grown in economic stature--is attractive.

Domestically, Covad has installed 138,000 DSL connections, and its services are available in more than 80 of the nation's 100 largest metropolitan areas. More than 42 million U.S. homes and businesses are capable of subscribing to a Covad DSL service.

Although DSL connections have increased in popularity, particularly among consumers, competing cable modem services such as Excite@Home and Road Runner continue to lead the market. About 3.2 million households subscribe to a cable Internet service in North America, compared with approximately 1 million DSL customers, according to Kinetic Strategies, a broadband market research firm.

That second-place stature and intense broadband competition in the largest U.S. cities make international expansion attractive for the DSL providers. After all, consumer dial-up Internet access remains costly in Europe, and competition continues to be limited in many foreign countries--but not for long.

"There's a huge opportunity internationally...If we're going to be the network service provider of choice, we have to meet (customers) where they do business," said Rob Davenport, chief executive for the newly formed Covad Communications International unit and former executive vice president for corporate development.

The company is expected to reveal further details about its international expansion plans in about a month, but "clearly the Pacific Rim and Europe are points of interest," Davenport said.

NorthPoint Communications, a competing DSL provider that merged this week with Verizon Communications, formed a joint venture with Dutch company VersaTel in March.

Covad executives announced their intention to follow NorthPoint into the international market shortly thereafter.

The NorthPoint venture was formed to provide high-speed Net service in Europe. The venture launched service in Amsterdam this summer and today launched service in Germany, according to a NorthPoint spokeswoman. The company also has a joint venture in Canada and launched service in Toronto earlier this month.

Likewise, Excite@Home, the nation's largest cable modem service, has had some success with its early overseas efforts. For example, the company's Japanese venture signed up its first 10,000 customers within seven weeks. Also, the company's Canadian cable operator partners have long been among its most aggressive allies.

Excite recently spun off its international assets into a company called Excite Chello.

"Our assessment is that not so much traction has been gained (by competitors) that we're disadvantaged," Davenport said of the competitors' efforts.

Under tomorrow's agreement, NTT and Covad's investment subsidiary will each own nearly 42 percent stakes of ACCA. The Ignite VC firm will own nearly 7 percent, with the remaining equity being retained by ACCA founders.

NTT and Covad will each invest about $11.5 million in the venture, while Ignite will contribute $1.6 million.

It is unclear whether the joint venture will affect NTT's proposed acquisition of Verio, an Internet service provider (ISP), Web hosting firm and reseller of Covad DSL lines. The NTT-Verio deal has caused some concern among federal law-enforcement agencies.

Executives said that although the Japanese venture will offer DSL lines on a wholesale basis to ISP reseller partners, Covad may consider selling DSL directly to consumers in the future--particularly in Europe. Covad acquired BlueStar Communications earlier this year, causing uncertainty about whether its direct retail sales approach would compete with Covad's U.S. customers.