Network Access Solutions Corp. (www.nas-corp.com), a regional DSL provider in the northeastern United States, is attempting to ride a retail strategy and a $150 million equity infusion from SBC Communications Inc. (www.sbc.com) and Telefonos de Mexico S.A. de C.V. (www.telmex.com.mx) to a national presence. X-CHANGE's Business and Finance Editor Ken Branson grilled NAS Chairman and CEO Jonathan Aust about making the national leap.
X: What is NAS' business model, and how does it differ from other DSL providers?
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| Jonathan Aust, Chairman and CEO, Network Access Solutions Corp. |
Aust: We've approached DSL from a slightly different perspective. We started in 1995 as an integrator. Our business was integration, network design, management and security services to medium and large-sized corporate customers, through a direct sales force. As we started to move into broadband and DSL, we instituted a couple of strategies that differentiated us. Number one, we thought DSL was a great scaling opportunity relative to market share. We didn't think it would be a high-margin item forever. We wanted to own the customer relationship, so we chose not to go the wholesale route that Covad [Communications Co., www.covad.com] and NorthPoint [Communications Inc., www.northpoint.net] did. We chose the direct route, so we continue to have a large direct sales force--130 as of today.
From that, we said, let's look at the technology itself, and see what else we can do aside from Internet access. And what we found was that DSL technology could be architected to allow us to develop replacement services for those private, strategic, corporate networks that we had been designing. The Internet access marketplace for DSL over the next four or five years is somewhere around $4 billion to $5 billion; for strategic networks, it's $35 billion to $40 billion. What we decided to do was to go after that, in addition to the Internet. That's why you see our average revenue per unit of $175 per month per line.
X: So, what specific services does NAS offer?
Aust: We've taken DSL beyond the Internet to offer a suite of corporate services.
We chose a regional rather than a national strategy. We thought the challenges of dealing with multiple RBOCs were so great that we would be better served by concentrating on one region and dominating that region before we moved on. Additionally, we need to be in more central offices so we can hit every branch that a bank might have. So, in 1999, what we did was focus on putting a CO footprint in Bell Atlantic territory that gave us an 85 percent coverage. National providers look at about 45 percent, mostly downtown in Tier 1 or maybe Tier 2 cities. We always believed DSL would be a commodity over time, and that the RBOCs would get into it more aggressively. So, we provide value-added ser vices: VPN, Internet, voice, security, hosting--all of these things we now look at adding to our strategic service bundle.
X: Tell us about the agreement with SBC and Telmex, in which those two carriers made a $150 million strategic investment in NAS.
Aust: The real excitement we saw in this opportunity was that, in a very short period of time, we can absolutely fulfill the promise of broadband and DSL.
In 1999, we were focused on putting down the footprint, and then we were looking to grow geographically and vertically with strategic service. This is really the initial phase of funding for geographic expansion. And we are expanding into BellSouth [Corp., www.bellsouth.com] and US WEST [Inc., www.uswest.com] territories. So, look at it as strategic funding and the furthering of a strategic partnership.
Our goal is to serve 90 percent of all businesses and residences in the top 50 markets throughout the United States. SBC will continue Project Pronto (DSL rollout strategy) in their 13 states, and we will then take our Bell Atlantic footprint and very rapidly build out BellSouth and US WEST.
X: How will services be branded?
Aust: We have major areas that have operating groups: network architecture, info systems, sales and marketing. And the mission of these three groups is to define all of this. So for instance, the network committee, the first thing they'll do is define standards and equipment vendors for residential and SOHO [small office/home office] DSL services. Sales and marketing people will sort out the branding.
The way we look at it initially is that SBC will sell in their territory, and to the extent they have to provision outside their territory, they'll provision across the common network, and they'll be a wholesale customer of ours. The converse is true. If we sell a customer in Boston, and need to provision in Dallas, we'll own the customer and be a wholesale customer of SBC for that portion of the network. Our goal is to make this a seamless ordering, billing and provisioning experience for our customers. And we expect to look at each service and product and segment, and then, as a partnership, look at the branding question. We're into medium and large businesses. But SBC and Prodigy have consumer brands.
X: SBC has made agreements with other DSL providers. How does the one with NAS compare?
Aust: Concentric [Network Corp., www.concentric.com] will fill a short-term need for SBC to provision DSL services. That's an interim wholesale solution. That's a deal they had to make while we were still working out our needs and requirements. So that's a one-time shot. The NorthPoint deal was with Pacific Bell Internet for IDSL [ISDN DSL] services. That was a business unit of SBC making a choice in that marketplace. But we have a complete infrastructure buildout plan, and an integration plan relative to a joint platform, network and sales and marketing that are much more ... seamless, intensive and thorough. I wouldn't be surprised to see another investment from them in us.
X: Wouldn't it be easier for SBC to simply buy NAS?
Aust: I think one of the benefits we've got here is independence, and every option is open to us. But this investment signals a major commitment to SBC.
X: Are you talking to anyone else?
Aust: We talk to people all the time. Everybody talks to everybody all the time. But we have a chance to do something different here. We have a chance to make it possible for an employer in San Jose to get transferred to Baltimore, pick up his ADSL [asymmetric DSL] modem and get started again with no problem. There are a lot of people you can partner with but only a handful that can create the kind of synergies that we have here.
X: NAS recently filed an S1 with the Securities and Exchange Commission [www.sec.gov]. How many shares will be offered, and when do you expect that secondary offering to take place?
Aust: There's an interesting scenario here. We had filed for roughly 5 million shares, and we're reviewing that right now. We had intended to raise approximately the amount of money that SBC and Telmex invested. So do we want to execute now or later? Hopefully, soon we'll have some things worked out where we can make a statement about that.
X: Was a nationwide footprint always in your plans?
Aust: No. We were focused primarily on the regional footprint. The national footprint was one of those things we felt was there if we executed on the regional model. Then we would be in a position to ask if it made sense. And frankly, we looked at it from a strategic basis. We would not have gone out and just built it. We were going to partner with somebody, either another CLEC or somebody like SBC. I really applaud the Covads, NorthPoints and Rhythms [NetConnections Inc., www.rhythms.com] of the world; they're doing a great job. But we can be quicker and deeper with partners.
X: Thinking over the time you've spent as CEO at NAS, what's been the high point?
Aust: Every day. I know that's a silly sounding answer, but my God, we're building the next generation of network in this country, and it's the most fun I've ever had. We're not building another network; we're building the network that's going to propel this country into the 21st century. This current stage of build is just the necessary part before we get to services and us.
X: What's been the low point?
Aust: It's an ongoing thing. We're building a company; we're building a network; we're building a culture, and there are challenges every day. But never have I run into a situation where I said, jeez, this is too much.
