Signal to Noise

I’ve been following the progress of two very different companies with a very similar M.O.: capture business at the ILECs’ expense. These two companies are Covad and Vonage. Both share a desire to compete against the Bells, and both offer a net result of the Bells losing revenue. But one is diversified, forward-looking, and asset-rich (Covad) while the other is mired in question marks and is asset-poor (Vonage).
Vonage, the upstart VoIP telephone service provider whose TV commercials are great but whose operating costs are even greater, seems to be simmering in a cauldron that’s about to boil over. Exuberantly chasing after what appears to be, more and more, a disappointment/bailout exit strategy, Vonage finally seems to be hitting the wall. Let’s take a look at their stock.

It’s never been higher than its offering price, which I believe was $15/share. Since then, it has tanked to well below four bucks and stayed in the <$8 neighborhood for many months. Right now it sits at $4.17, having shed more than two thirds of its value in less than a year's time. Jeff Citron, Vonage CEO, has been penalized by the SEC and his leadership obviously isn't providing a potent enough cut to get Vonage on track for success. Plus, mounting lawsuits (one of which recently resulted in a huge award to Verizon), increasingly costly capitulation to public safety regulations, and unhappy customer churn are combining to mortify once-excited speculators. When it rains, it pours. People like Russell Shaw have been hammering these points home for months while I’ve been relatively silent. I didn’t want to start banging on Vonage until I had a counterpoint to describe how a company can SUCCESSFULLY compete against the Bells. Well, now I have that counterpoint.
Covad, the access network that’s been around since Telecom 96 or so, has some nice tricks up its sleeve, and some trading consistency to boot. Though Covad isn’t a huge money-maker at the moment (like Vonage, they’re losing money), its stock price has been consistent at around a buck a share for years, and it has rounded the corner of establishing a long-term business outlook that not only appears to guarantee a competitive position in the coming years, but also protects it from the future by diversifying its operations into new technologies, most notably fixed WiMax.

The important thing to keep in mind about WiMax is this: the costly, confusing provisioning and field service models of CLECs, which have given telco customers a lot of grief over the last decade, is out the window. WiMax provides metro-area wireless broadband connectivity to fixed subscribers, so it can replace the copper last mile with ease. Covad’s Simon McIver informed me that WiMax was going to be a substantial part of Covad’s future access business, and that the first Covad WiMax bubble would be launching early this year in the Bay Area. Simon also told me that the long-term strategy for Covad isn’t access so much as it’s applications.

And this is a sensible approach for somebody who owns and operates a large, independent continental data network. Unlike Vonage, whose model has been applications (ok, ONE application) and ostensibly always will be the same model because Vonage owns no infrastructure, Covad has chosen to compete head-on with the phone company–not on the basis of price alone, as Vonage does, but on the basis of innovation. So Covad will leverage its large access footprint to build out a hosted applications business in the SMB sector. With WiMax in its bag of tricks and a good handle on how to compete with the Bells (by out-innovating them, not out-pricing them), Covad’s networking focus will be on increasing access bandwidth for hosted applications. Plus, Covad will avoid the mire of IPTV and the fiber last mile, which in itself is a juggernaut of anti-competitive gravy handed to Verizon in a silver dish by the FCC. So Covad appears to be making smart decisions all around. Their future looks very bright indeed.

They’re even smart enough to keep their North American phone support people in North America. Vonage hasn’t quite figured that trick out yet.