Covad

I recently had a chance to interview Jeff Ahlquist who serves as Vice President of Corporate Development and Strategy at Covad. As you no doubt know the company has become a big player in VoIP and has done a good job branding itself these past years. I wanted to delve into the company more and learn how they are doing. I was wondering how the VoIP market is treating them.

Here is my very candid interview:

What is biggest barrier to your success?

Jeff thinks the biggest barrier is market education and the validation of VoIP as a technology ready for prime time. He further believes demand generation is another barrier.

From here our conversation went into the area of pure hosted VoIP providers. Covad doesn't want to be considered a pure hosted VoIP provider and they understand there is more to the market than just hosted solutions as not every company wants to go this route.

This is why the company has focused on a portfolio of options consisting of a traditional hosted services as well as a product called PBXi that is similar to the offering from Cbeyond Communications as it plugs into a current PBX.

I asked about the competitive landscape and Jeff replied that they have own network so they are well positioned in the market.

What about 911 support?

In regards to E-911 compliance. Covad has two types of customers: those who get their broadband service from Covad ("managed circuits") and those who get their broadband service from another provider ("unmanaged circuits"). Covad is at 100% compliance with its managed customers. On the unmanaged side, Covad isn't there yet. Covad is working diligently on the issue and will be providing full 911 functionality to nearly 99.5% of its stations in Q1.

What is your pricing?

The price boils down to three parts for a hosted solution:

First there is access for SDSL, T1, etc.
Then the equipment price which us supplied by a dealer/VAR.
Finally the monthly service fee per seat/all your long distance and features for ($30-$50) depending on total number of seats.

Will prices in the hosting market go lower over time?

Jeff feels the price will compete well with PBXs. He tells me the up front costs are lower for their hosted solution and he also feels the price is lower on an ongoing basis. For example Ahlquist mentions you don't a technician for moves/adds/deletes when you use a hosted provider.

What about the cost of service for truly large enterprises?

Ahlquist says they don't do many really large installs. Their sweet spot is 20-150 seats. (This guy is gaining points for honesty. Rarely does anyone tell me they don't do something)


How do you compete with on premise equipment?

There are many interesting ways Covad can attack this problem. They can complement it with PBXi service or they can have a hybrid of on-premise and hosted. They can also add phones that are hosted and even add a dashboard for voicemail.

How is your reseller market?

They have approximately 400 dealers selling their service. These dealers can also sell PBXi product with hardware.

What is the reason resellers would rather sell a service instead of a PBX?

This boils down to customer need primarily. In addition there are compensation differences as resellers get a recurring fee for service and also get to sell equipment along with the service. In the end, Covad takes on the brunt of operating costs of ongoing service.

Is pure hosted better than hybrid?

This depends on the deployment. There is room for everything based on customer need. With a hosted solution, upgrades are easy. Customers aren't locked in. You can't easily upgrade a PBX Jeff points out. It is a piece of hardware. Covad upgrades their service all the time. They provide a constant service refresh which is cheaper and provides a lower TCO.

How is your solution better than Centrex?

Centrex was static and used centralized equipment. It was not a software platform. With IP you can easily integrate apps into service according to Ahlquist. Telephony becomes an IP application. You take all the value of IP applications and apply it to communications.

Then Jeff pointed out the ease of distribution and consistency. With Centrex you were limited to the LEC in the region you were in. When you went to a different area, the service changed. IP Centrex does not have these drawbacks and stays consistent internationally as well.

What competition from other hosters?

There is a lot of competition out there but this validates the category according to Jeff. It doesn't take a lot to become a hosted provider. He is concerned that some players may taint the industry by providing inferior service. "This can hurt the VoIP reputation," he concluded.

What is the feedback from customers?

It has been good. The customers have been direct and poignant. In addition Covad has done some custom voice work which companies love according to Jeff. Other customers are ecstatic that their VoIP service came back in 48 hours after the hurricanes in Florida while the LECs were down for weeks.

Will hosting gain share? When?

It is gaining share. The analysts are pushing out expectations a bit. Some businesses are waiting to see how it plays out but as ILECs get into game it will validate the space. He feels 2006 will be good year which will be one year behind analyst predictions

Do enterprise customers need education on the hosted market?

Yes

Who should be doing the education?

"You guys" meaning TMC/Internet Telephony and analysts. There needs to be market awareness built through advertising. The LECS won't push hard to validate VoIP as they have a core TDM network. Jeff added that equipment providers may not push the market in the hosted direction either – but they do sell phones to hosted providers. He feels that Covad and others are the ones that need to drive market forward.

Are you concerned about a Skype-like hosted model?

This will cost money to produce but if it is offered as a loss leader – yes there is potential danger. Jeff went on to say that VCs won't give money to acquire customers at a loss. He thinks this model is easier to pull off in the consumer market than business.

Covad has been a major marketer in getting businesses aware of VoIP and they have been a great educator of the market. With a number of products and services in its portfolio the company is in a position to be a supplier to all but the largest of enterprises. As a carrier providing voice and broadband the company is in a great position to not only provide VoIP but VoIP at guaranteed service levels.

In my view, the company's decision to sell a hosted solution and one that allows companies to work with a standard PBX is very smart. In the end, companies will go hosted when they are ready. Covad is well positioned to supply customer's VoIP needs, regardless of what they are.