DSL

DSL Prime News Weekly: The Inside Source

CEOs come and go, new DSL subscriber numbers, and more.

by Dave Burstein
DSL Prime
[November 2, 2000]

"If they're not having fun, don't invest in the company" —Joe Nacchio

The gilded ceilings of the Waldorf Astoria framed Qwest's Joe Nacchio, clearly enjoying his success (Qwest had Friday passed his old employer AT&T in market value.) Asked if Qwest would buy part of AT&T, he expressed interest in the statue in the lobby, but will pass on any division of the company. Living well is the best revenge. Verizon's Amy Macintosh also claimed a new job—CEO of the Zagat restaurant guides, which should be loads of fun.

But Covad is no fun these days. The board just got the head of Bob Knowling at Covad. Bob's not a saint, but is an excellent manager who will be hard to replace. More layoffs are in sight at Covad and other victims of the stock market.

Knowling no more
He bumped McMinn last year, now McMinn bumps back
The stock dropped from $9B to $800M. so someone had to be the fall guy, and Bob Knowling makes a big target. Covad, like many DSL companies, remains dominated by the VCs, although founders like Charlie McMinn and Dhurv Khanna hold large stakes. Marshall of Sequoia and Shapero of Crosspoint are on the board, and presumably critical to the decision. Knowling is smart, aggressive, hard-driving—and basically has done an excellent job at Covad. That said, he also has an extraordinary opinion of himself, notoriously reported in the San Jose Mercury:

''Nobody can beat me on my home court,'' he had said a couple of weeks earlier. ''I'll bet you, in a game of H-O-R-S-E, I could probably take Michael's butt.''

Whoa. Michael? As in Jordan? Six championship rings with the Chicago Bulls?

''Michael don't scare me. I'm still a terrific shooter.''

And what does Jordan think about this?

''We don't talk basketball,'' Knowling said. ''We talk business. We were discussing a proposition not long ago and Michael told me, 'If I'm going to do something with high tech and you're not on my team, I'm not going to do it.' ''

http://www.svmagazine.com/2000/week29/features/Story01.html

Our personal experience has been courteous, and we reported the Merc story as great gossip but inappropriately focused. Bob's being black means, of course, that many will criticize him for traits reported as strengths in a white man. He came to Covad from US West for a $1.5M signing bonus, and his nearly five million options were once worth over $200M. He's attracted an extraordinary management team, and delivered results. A large ISP Monday told us Covad has by far the most efficient operation of any DLEC.

Results like that impressed the board so much they eased aside Chairman McMinn in the dark of night. McMinn and his six million shares went quietly (the only official announcement was in fine print in an SEC filing), a story we broke last September in the only extra we've published. McMinn now comes back, as Chairman. Frank Marshall, with experience at Cisco and Convex. Presumably the last straw was the 50% stock drop from the $12M non-recognition of revenue from late-paying ISPs. Till the day before the quarterly announcement, Knowling thought he could convince the auditors it could be avoided. The result—a surprise to Wall Street and the board—was a disaster. Relations have been inevitably strained by the market drop. Venture capitalists, Fidelity, and several founders saw losses in the hundreds of millions; top executives in the tens of millions, and many others lost millions in nominal stock market value. The Laserlink folks were purchased for a reported $455M seven months ago, and Bluestar (same VCs) for $200-300M; much of that money has disappeared in the market, although Laserlink's George McGovern and Ed Sullivan had filed to sell a million shares each as soon as they could in September.

Knowling's settlement was one of many details the company refused to divulge this morning. He holds nearly 2M shares, and low-cost options for several million more. The board presumably honored his contracts provision for full pay and bonus of $650K for the next two years on termination. His public friendships with Hillary Clinton and Al Gore remain intact.

Qwest: We'll be a $3B CLEC
VDSL coming back with new Next Level system, Iowa for sale
Nacchio isn't buying Rhythms, this week at least, although it would represent a fast track to the national network they plan. Last year, US West's Joe Zell considered buying a DLEC to enable the national roll, but passed because the price would be in the billions. But at current values, (Rhythms is under $200M, Covad also down over 90%) it would probably be cheaper to buy one than build. Nacchio answered us that Cruciotti, who would make the decision, is looking closely at them, but Nacchio wondered if the price might even go lower!

Qwest presentations throughout the day emphasized the limited return on pure data service, and the profit potential of their diverse services; Augie Cruciotti is leading Qwest into the national market, with Qwest's sales team his main trump card. Nacchio requires a minimum 35% return on capital for every division, so he hopes to cross sell hosting, security, and other services. They're currently selling (and actively seeking partners) in California and Texas, more from Covad's facilities than their own. They won't install local switches until softswitches are ready in a few years, but will backhaul voice over DSL in volume, although that isn't yet product.

Steve Starliper, now at Oresis, briefed us in August on the project, but the financial and volume goals ($3B in sales after four years) announced at the New York analysts' meeting surprised us. Target is narrow: business in core metropolitan areas throughout the country, and volume sales to the corporation's telecommuters. Like all CLECs, the slides are loaded with "small and medium" business, but both Starliper and Cruciotti emphasized they were breaking into the large corporations even more effectively.

Mcleod's $600M deal with Qwest included attractive DSL resale terms Nacchio hopes will be extended to Qwest's CLEC group in Verizon and SBC territory.

Quarter 3 1,600,000 US DSL subs
Yearend looks to 2.3M
Here are the numbers by company. The first is total, the second, increase in Q3. 75% of the subs are the big four telcos, and both telcos and competition grew about 30% in line count.

Company	Subscribers (thousands)	% increase in Q3
SBC	519	117
Verizon	350	130
US West	213	38
Covad	205	67
BellSouth	134	60
NorthPoint	87	25
Rhythms	47	16
Broadwing	35	6

Adding 40K for other providers (NAS, DSL.net, JATO, etc.) yields a Q3 total of 1.6 million, with just under 500K adds over three months. Similar growth would yield a yearend of 2.1M—better results from the telcos will most likely raise that to 2.3 or 2.4 million. That's much less than the company's estimates of over three million six months ago, and not far from the Telechoice and Yankee group projections at the same time.

Next Level's new system winning back Qwest
Stock up 33% as FT, DT look for 100,000 lines, and Qwest coming back in a year
"Motorola's Chris Galvin has moved up new technology by a full year, and brought the cost down even more than the 40% we asked." Nacchio explained, and clearly is looking to build out key cities in US West territory soon after. He added "VDSL is clearly the right choice in many places"—presummably the dozen metro areas Qwest is targeting for growth. Meanwhile, the Enron/Blockbuster video on demand trial will begin on December 15th in Seattle, using 2 meg data rates over ADSL.

Copyright 2000 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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