Some more stuff regarding xDSL and fiber optics for your weekend reading pleasure. BTW, QWEST has been making very nice runs.
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COMPETITIVE INTELLIGENCE REPORT
Qwest Adds DSL Sizzle with Covad
REPORT ID: 190119-0020-01.NV
REPORT DATE: January 21, 1999
ANALYST: J. Zeribi
VENDOR IMPORTANCE RATING: High
INDUSTRY IMPACT RATING: Very High
CURRENT PERSPECTIVE RATING: Positive
REPORT SUMMARY
EVENT SYNOPSIS (From the vendor press release): Qwest Communications
International Inc. announced today that it has made its first strategic
investment in Digital Subscriber Line (DSL) local networks through an
agreement with Covad Communications Group, Inc. By the end of 1999, Qwest
plans to have access in 22 key metropolitan markets, including Boston,
Chicago, Dallas, Los Angeles, New York City, Philadelphia, San Francisco,
Seattle and Washington, D.C.
DSL enhances Qwest's ability to provide customers with high-speed,
end-to-end connectivity to its nationwide IP-based network and the
Internet. Qwest is investing $15 million in cash in Covad.
Covad is a packet-based Competitive Local Exchange Carrier that provides
DSL communications services to Internet Service Providers and enterprise
customers. Covad has signed a multi-million dollar, multi-year agreement to
purchase network capacity from Qwest to interconnect its high-speed local
networks.
ANALYTICAL SUMMARY:
We are positive on this announcement by Qwest and Covad regarding the
deployment of DSL services. This is a no-brainer for both companies: Qwest
obtains a critical component of its strategy (sub-T-1 broadband services)
while Covad signs up another high-profile carrier for its services. This is
an important announcement for the industry, as the DSL market appears to
have reached a critical phase over the past couple months with major
carriers like MCI WorldCom, Sprint, AT&T and others announcing substantial
DSL plans. The introduction of the first next-generation carrier only
pushes that model further and makes it likely that others, like IXC
Communications, will soon be joining the fray.
ANALYTICAL ASSESSMENT:
VENDOR IMPORTANCE RATING: High.
We believe that this announcement is of high importance overall to Qwest
and Covad.
· Qwest is on its way to meeting its Q2 1999 deadline for completing its
18,000+-mile nationwide fiber optic backbone. As the company continues to
aggressively roll out applications and services to fill its pipes, DSL will
play an important roll connecting to users with a facilities-based strategy.
· Covad, which has already filed an S-1 Registration statement with the SEC
(indicating an intention to IPO in the near future) must expand its
relationships beyond the typical regional ISPs to national caliber telco
players like AT&T (see "AT&T and NEXTLINK Make Plays for DSL by Investing
in Covad," 190104-0008-01.NV) and Qwest.
· Until now, Qwest did not have a strategy for connecting directly to
end-users. This move was required by the company to match the abilities of
other IXCs to reach end users, such as Williams's ability through a deal
with WinStar, and MCI WorldCom and AT&T through DSL.
INDUSTRY IMPACT RATING: Very High.
This announcement will have a very high impact on the industry overall, and
as such, we anticipate that other vendors in this market sector will be
forced to take action in the near term.
· Qwest has often set the standard for next generation fiber carriers in
terms of application and service deployment. This DSL announcement clearly
complements its deals with industry powerhouses Netscape (now, more
importantly, being acquired by AOL) and Microsoft, and should make
competitors nervous as they contemplate their local service strategies and
partnerships.
· Covad has signed up important telco vendors AT&T, NEXTLINK, and Qwest as
part of its stable. Competing data-CLECs like NorthPoint and Rhythms will
need to assess their partnership strategies to determine if they need as
strong a relationship with their partners as Covad appears to be developing
with AT&T, NEXTLINK, and Qwest.
· As with the entrance of MCI WorldCom, AT&T, ICG, NEXTLINK, and e.spire
into the DSL fray, Qwest brings important market endorsement of xDSL
technology. As it markets and sells its DSL services, we anticipate greater
awareness by businesses and consumers of this option, ratcheting up its
popularity.
CURRENT PERSPECTIVE RATING: Positive.
We are positive on this announcement by Qwest and Covad. Qwest, which is
building a nationwide fiber optic network, was lacking a critical component
in its strategy - local broadband access under T-1 speeds - and DSL adds a
high-visibility, broadband access technology for small to medium business
customers and consumers.
Although this announcement is very elementary, it's very important to
Qwest. The company is lacking a critical component of its local access
strategy, and it is turning to Covad -- at least in the interim -- to
provide this link. "In the interim" because it would not surprise us to see
Covad turn to more than one wholesale DSL carrier to provide those
services, or even to build out its own DSL infrastructure in the longer
term. The pressure is relatively high on Qwest to deploy this type of local
access service: although its primary business plan is centered around
laying fiber, the company is advanced enough in this endeavor to have to
begin filling up those pipes. DSL will broaden the company's addressable
market to small and medium sized corporations that need bandwidth-intensive
applications and services. Qwest needs to get into this market now because
its competitors -- Sprint, MCI WorldCom, and AT&T -- are all deploying
sub-T-1 broadband services. In addition, Qwest is the first next-generation
carrier (e.g., Level 3, IXC Communications, etc.) to roll out this service,
giving it a marketing and product lead. This announcement should further
compel next-generation carriers to look beyond brute fiber, and
aggressively consider rolling out applications and services that take
advantage of this fiber.
The advantage for Covad is also very compelling, particularly as the
company heads towards an IPO. The company's business plan is predicated on
signing up high caliber partners, and this deal with Qwest solidifies the
deals that the company has signed with NEXTLINK and AT&T as non-flukes. It
clearly has the data-CLEC advantage in terms of high profile and caliber
partners, making it important for competitors -- both RBOCs and LECs with
ADSL services and data-CLECs like NorthPoint and Rhythms -- to get the ball
rolling for large-scale partnerships. The fact that Covad has obtained $60
million in funding this month is also a pretty large endorsement of the
company's business model and management team.
Where do we go from here? As we suggested when Covad announced deals with
NEXTLINK and AT&T, there will be more high-profile data-CLEC and carrier
hook-ups in the near future, which should continue to increase the
maturation and market penetration of DSL as a viable broadband solution. As
more and more carriers jump on this bandwagon, we fully expect data-CLECs
to begin differentiating themselves on more than simply coverage. For
example, Covad, through its deals with AT&T, NEXTLINK, and Qwest, may
interconnect all of its POPs and provide substantial end-to-end services.
NorthPoint, on the other hand, is likely to begin tweaking its SLA to offer
more metrics and services. Regardless, the entry of all these mainstream
carriers in the DSL space can only be good for the market as competition
begins to heat up.
ANALYTICAL DATA POINTS
TOP COMPETITIVE POSITIVES:
This is a strong move for Qwest and has the following competitive positive
points:
· Qwest immediately gains direct access to end users through DSL in at
least six cities, with 22 slated to be online by year-end 1999. This will
significantly broaden Qwest's addressable market for business services and
applications.
· Covad gains a very high-profile partner through Qwest, which will serve
the company well as it pitches its services to other potential partners and
heads towards its IPO. Of course, a $15 million infusion doesn't hurt either.
· Qwest has existing partnerships with content and applications providers,
including Microsoft (see "Microsoft Invests $200 Million to Ride Qwest's
Light," 181214-0008-01.NV). The addition of DSL to its product line is
likely to add significant value to those partnerships.
· In addition to its deals with NEXTLINK and AT&T, Covad has also signed a
long-haul deal with Qwest whereby it must use some of the company's fiber
services. This will allow Covad to provide end-to-end services and
applications to its customers, which none of the other data-CLECs can do yet.
TOP COMPETITIVE CONCERNS:
We do not have any competitive concerns at this time regarding this deal.
Qwest needed a sub-T-1 broadband service, and Covad can immediately provide
a solution. Assuming that Covad meets its aggressive rollout targets, Qwest
will have an important DSL access partner. Although this analyst still has
concerns when a reseller sells a stake to a partner, these are becoming
less important as this strategy becomes more common in the data CLEC space
(see "NorthPoint and @Work Announce Partnership and Strengthen Ties,"
180629-0001-01.NV). In addition, after continuing to discuss this issue
with other analysts at Current Analysis, the general consensus is that
these stakes (including @Work's stake in NorthPoint) should not adversely
impact either the partner company or the wholesale company.
TOP VENDOR SUPPORT ACTIONS:
We suggest that Qwest consider the following actions to strengthen this
announcement over the next six to 12 months:
· Qwest should work closely with Covad to figure out when it will be
rolling out services in specific markets. This is doubly important given
that Qwest is in many more markets than Covad (even after Covad's 22 market
1999 target). Qwest may want to consider other DSL resale solutions (RBOC,
data CLECs, etc.) to ramp up its deployment until Covad catches up.
· Qwest should insist on SLAs and other quality metrics from Covad,
particularly given that NorthPoint already offers them free of charge to
all of its customers.
TOP COMPETITOR ACTIONS:
As this announcement should have a very high impact on the industry, we
anticipate a strong, and immediate, response from Qwest and Covad's
competition:
· Qwest is a phenomenal PR partner for Covad -- and although it doesn't
have the market presence of AT&T, there is hardly ever a week that an
article is not written about the up-start fiber carrier. Direct competitors
like Rhythms and NorthPoint should aggressively court similar carriers to
ramp u p their partnerships beyond ISPs. They should, of course, point out
to potential partners that AT&T's, Qwest's, and NEXTLINK's strategic
decision to use data CLECs makes it that much more imperative for carriers
to have similar deals.
· Every major IXC -- Sprint, MCI WorldCom, AT&T, and now Qwest -- has some
form of DSL strategy, providing critical industry backing for this
technology. This should continue to pressure RBOCs and LECs to not only
deploy their DSL technology, but to market it as well.
· CLECs, which have been preoccupied with building out their networks,
developing sales and marketing strategies, and generally trying to get on
their feet, have not entered the DSL fray (with a few exceptions - e.g.,
ICG Netcom). This is non-sensical, particularly given the number of
carriers that are targeting the small to medium business market. We fully
expect more carriers to follow NEXTLINK's lead and sign up as DSL partners
with data-CLECs and other DSL wholesalers.
TARGET MARKETS: Business and residential users
TOP USER ACTIONS:
As we are positive on this move and feel it will have a very high impact on
the industry, we suggest users consider the following actions before
committing to this product line:
· Users should test any high-speed access technology before committing to a
long-term contract, as the quality levels may not be adequate for their needs.
· Users should make sure they understand the implications of signing up for
an SDSL service versus an ADSL service, traditional T-1, or cable-modem
based service. Each of these brings its own attributes to the table, with
different applications better suited to different standards.
· The number of high-speed access technologies (and carriers) is rapidly
increasing, making it important for users to shop around for the best deal.
That being said, users should press carriers for a specific deployment
timeframe, as there is often a lag between intention to serve an area and
actual service.
BACKGROUND INFORMATION:
REPORT ID: 190119-0020-01.NV
EVENT: QWEST COMMUNICATIONS INVESTS IN COVAD COMMUNICATIONS AND ANNOUNCES
STRATEGIC DEAL FOR DIGITAL SUBSCRIBER LINES
REPORT TYPE: Competitive Intelligence
TYPE OF EVENT: Services Expansion
VENDORS: Qwest Communications,Covad Communications
COMPETITORS: NorthPoint, Rhythms, Level 3, Sprint, MCI Worldcom, and a
host of others
MARKET SEGMENT: Data Services,
TECHNOLOGY: xDSL,
TARGET MARKETS: Business and residential users
DATE OF EVENT: January 19, 1999
DATE OF ANALYSIS: January 21, 1999 |
