Covad Chief Is Always On
Covad Communications Chief Executive Robert E. Knowling Jr. strides into an austere conference room, ignoring the usual introductory pleasantries as he settles into a leather chair, Diet Coke in hand. “We’ve got way too many spare cubicles,” Knowling says of the smaller of the two high-speed Internet company’s Santa Clara, Calif., offices that he’s just decided to close. “I go all around the country and I never hear people complaining, ‘Bob, we ain’t got enough space.’ ”
“I’d rather have us tripping over each other, scrambling for resources,” he says.
Nevermind that Knowling has just put $500 million in the bank after a four-day marathon financing round, or that Wall Street analysts call Covad one of the best-positioned companies to profit off the race to deliver high-speed streaming audio and video to the masses.
For Knowling, empty cubicles are just as important to the company’s growth as the surprising number of new digital subscriber lines, or DSL, it has installed in the last year.
For a man who has boldly declared he can beat Michael Jordan at basketball, for someone who gave up lucrative jobs at phone giants Ameritech Corp. and US West and now logs 15-hour workdays, it’s all part of the same battle: to be No. 1.
“What else is there?” says Knowling, in a voice reflecting his Missouri farmland roots. “There’s always a No. 1, and I’ve always wanted to be it.”
Two years ago, Knowling got that wish when he was wooed away as top operations officer at US West to Covad, a tiny company few people had heard of that hoped to solve the problem of the last mile--providing a fast onramp to the Internet.
Knowling has the company’s 1,700 employees working feverishly to provide that pipeline for voice and data.
Always-on DSL services, which send digital signals over copper phone wires, speed up Internet downloads at least tenfold over pokey dial-up modems while at the same time leaving the phone free for regular calls.
It’s been the lack of high-speed access that has slowed the advance of Internet commerce and communications, analysts say.
But times are changing.
Researchers estimate that 4 million people in the United States will be accessing all forms of high-speed Internet by year’s end. Giga Information Group predicts that DSL access will grow to 15 million in five years, a third of it residential.
Covad and two other big DSL companies--NorthPoint Communications Group Inc. and Rhythms NetConnections Inc.--typically bundle their technology with Internet service providers, including Concentric Network, Juno and Mindspring.
Covad has concentrated its business on supplying services to the major cities and expects to be able to reach 45% of all U.S. homes and 50% of all businesses by year’s end.
But Knowling wants more.
Covad recently completed its acquisition of BlueStar Communications Group, which sells DSL service and content directly to small and medium-sized businesses.
The company followed that with an announcement last month that it had struck a $150-million deal with rival DSL provider SBC Communications to allow that Baby Bell to resell its service.
SBC and some of its subsidiaries, most notably Pacific Bell on the West Coast, face lawsuits and consumer scorn about failed promises to quickly install service.
The SBC-Covad agreement underscored that problem and illustrated the tremendous costs of deploying the high-grade special network equipment needed to make DSL work.
It also pointed to the strength of companies devoted purely to that proposition, analyst Doug Shapiro at Banc of America Montgomery Securities notes.
“There’s a certain irony to it,” Shapiro said. “It’s basically SBC’s acknowledgment that Covad does a better job of supplying [DSL] lines than they do themselves in their own region.”
Because of the complicated partnership agreements between Internet service providers and DSL companies, breakdowns in service and installation delays often occur and result in finger-pointing among the partners.
Covad executives acknowledge the company shares some of the blame, particularly with completing installations in cities with large apartment buildings. They say they’ve beefed up their customer-service staff and moved to automate communications with their partners.
Covad now faces a greater challenge--proving to Wall Street it has the strength to succeed in an increasingly crowded market.
The top three DSL providers not only face competition from local phone companies but from alternative providers such as cable access from Excite@Home and Time Warner and fixed-wireless companies NextLink, Teligent and Winstar.
Covad surprised Wall Street with its announcement that it would exceed expectations by 30% and have an installed base of 200,000 DSL lines by the end of September.
But skittishness about telecommunications companies’ profits continue to depress its stock, particularly because Covad doesn’t expect to turn a profit for at least three years.
Covad’s shares closed Friday at $10.06, off 73% for the year. That’s only slightly above all-time lows set Tuesday of $9.75 on Nasdaq, well off a 52-week high of $66 a share. That’s led to speculation that the broadband provider would make an attractive takeover target, though Knowling gives the impression any attempt would bring a fight.
Adversity brings a smile to Knowling’s face.
Though he says he doesn’t like to talk about it, he acknowledges the subtle and not-so-subtle racism he’s faced throughout life when he’s asked about comments that he is arrogant.
“My whole career, I’ve had to balance a sort of double standard,” he says. “Back when I wasn’t in charge, my aggressiveness was considered arrogance and being militant. Those are words used for young, aggressive black males.
“When my white counterparts would demonstrate the same traits, it was termed ‘assertive,’ ‘initiative,’ ” says Knowling, who has joined with Hewlett-Packard Chief Executive Carly Fiorina and others in trying to create more opportunities for women and minorities in the changing world of technology.
But at the end of the day, Knowling says he thinks of himself as a businessman trying to dominate a business, regardless of his race.
“We’ve got a unique opportunity because we’re creating something new,” Knowling says. “The good news is we’re writing the chapters. We don’t have any idea how big this book is going to turn out when we’re done, but we’re writing chapters.”
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Seeking DSL Dominance
Covad has yet to prove to Wall Street that is has the strength to succeed in an increasingly crowded DSL provider market.
At A Glance
Founded: 1996. Went public in January 1999 at $18.
Headquarters: Santa Clara, Calif.
Leadership: Robert E. Knowling Jr., chief executive
No. of employees: 1,700
Competition: NorthPoint Communications, Rhythms NetConnections, Pacific Bell. Source: Covad and Bloomberg News
