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| Mark Floyd |
Like much of the rest of the high-tech industry, the DSL market over the last several months has been shaken to its very core. The valuations of many competitive DSL providers have plummeted, with stock prices of several major players in this group dropping from nearly $100 a share to somewhere in the single digits. Meanwhile, a handful of DLECs facing financial difficulties have shut their doors entirely. That's the story on the service provider side of the fence.
But how are the suppliers of equipment to these struggling carriers weathering the storm? xchange's executive editor Paula Bernier recently spoke with Mark Floyd, chairman, CEO and president of Efficient Networks Inc. (www.efficient.com), the market leader in DSL customer premises equipment shipments as reported by the Dell'Oro Group (www.delloro.com) and Cahners In-Stat Group (www.instat.com), on the DLEC crisis and how he expects it to shake out.
X: With the collapse of the NorthPoint Communications Group Inc. (www.northpoint.net)/Verizon Communications Inc. (www.verizon.com) deal, the changes of corporate leadership and strategy at Covad Communications Co. (www.covad.com), and other turmoil in the DSL industry, how do you see this industry segment's prospects?
Floyd: Broadband is going to happen because there's such a demand for broadband. People have figured out that best-effort data service is just the beginning for DSL. Security and VPN capability and managed services will be added. In a year or two, CLECs, ILECs and IXCs will be able to offer multiple voice, video and data services in the same way they do over leased lines today. And compared with frame relay and T1, DSL connections are much cheaper.
We have a lot of the data CLECs, and they will still be good customers. But you need good, sound economic models, and you need to have cash in the bank. A bunch of regional DLECs won't be able to grow because they won't be able to attract money, and their cost base will be higher. So there will be consolidation.
X: It was recently announced that Efficient expects its sales to fall about 20 percent from the fiscal first quarter 2001. What happened?
Floyd: We had two large orders that were keyed up and we thought we'd get in the quarter and we did not. I think it has to do with provisioning issues of DSL. I think the orders will still happen. Our fiscal first quarter of 2001 ended in September and that was $127 million, so analysts are saying it'll be flat to 20 percent [growth from now to the next quarter].
X: How is Efficient bracing itself for the demise of many DSL companies, which are its customers--such as Jato Communications Corp. (www.jato.net), which just went out of business?
Floyd: What we saw was, at the beginning of this year and late last year, venture capitalists financed lots of companies in broadband, and financial markets got way ahead of themselves because stock prices were so high. So companies were funding companies not based on well-thought-out business cases.
The residential cost base of CLECs is higher [than ILECs], but financiers only looked at how many lines were deployed and not at the cost of customer acquisitions, etc.
In July and August, we saw a pullback because smaller ISPs were not financially stable and then data CLECs couldn't get money again. Covad, even though they have their issues, they still have a lot of cash. And then NorthPoint said they are running out of cash because they thought the Verizon deal would go through.
There are a lot of private companies--vendors and carriers as well--in this space, and when they go to get second- and third-round financing, they'll find a different climate. These rounds coming up will be interesting.
Efficient went after ILECs and PTTs worldwide. If ILECs didn't roll out DSL, it wasn't going to be broadly based. I think that's served us extremely well.
X: Can CLECs really compete in the DSL arena or is the service going to be almost exclusively the realm of the ILECs?
Floyd: I think this is a market that a CLEC can compete in, but they'll do better if they have competitive values when they go to medium and small business.
In residential, they don't have the marketing muscle, they don't have the installed base, and they still have to fight for line sharing. They have more hurdles to overcome. In the summertime, three data CLECs kicked off residential access. Now Covad said it'll continue with some of it as long as it's on line-shared loops.
X: Do you expect to see consolidation in the DSL vendor community as a result of the struggle facing many DLECs?
Floyd: Oh, you better believe it. We've seen the acquisitions of Pairgain [by ADC, www.adc.com ] and Promatory [Communications Inc., www.promatory.com by Nortel Networks Corp., www.nortelnetworks.com ] and Diamond Lane [Communications Corp. by Nokia Telecommunications, www.nokia.com ], and others are about to happen in the DSLAM marketplace. There are companies that are still small, like Paradyne [Corp., www.paradyne.com ] or Copper Mountain Networks Inc., [www.coppermountain.com] that are still figuring out their place. Lucent [Technologies Inc., www.lucent.com ], Cisco [Systems Inc., www.cisco.com ] and Alcatel [USA, www.usa.alcatel.com ] own the bulk of the market. Alcatel has more CO ports out there deployed than anyone else in the market, but that's starting to change. And then Siemens [AG, www.siemens.de ] is stepping in.
We've already acquired one CPE company, FlowPoint Corp. Ramp Networks [ www.rampnet.com ] just got acquired by Nokia. The market is just in the initial stages of consolidation.
Since we are the largest DSL CPE supplier, we hope to be one of the guys on top rather than one of the companies getting acquired. I'd rather produce my own products internally. But you have to build a company really fast to survive.
X: Many vendors have already announced, and the DSL Forum was expected in late January to unveil, plans for DSL autoconfiguration. What impact will that have on the market? And what is Efficient doing on this front?
Floyd: We have self-installs and self- configuration today. There's the Open DSL Forum and other efforts that we support. But each network has its own diagnostics and management schemes. We bought MMD (MultiMedia Development Corp.), a software company that does provisioning for broadband networks for integrated services, in September. When you start putting voice over DSL, one of the keys is management. One of the hurdles is how to provision and manage QoS.
X: In a recent press release, Efficient noted that Cahners In-Stat Group predicted that the DSL market will grow from just over 10 million ports shipped in 1999 to over 90 million ports by 2004. Do you still feel these numbers are accurate in light of all the recent changes in the DSL market?
Floyd: It will increase. That's accurate. We are a global company. The business in Southeast Asia is growing and Europe is just now starting to take off--British Telecom [Telecommunications plc, www.bt.com], France Telecom [www.francetelecom.fr] and Belgacom [S.A., www.belgacom.be ] are starting to roll out DSL now. And we just started to ship in South America--Brazil could be a very big market.
X: How is the new push on fixed broadband wireless expected to affect DSL sales?
Floyd: It will get its market share. To me, it's all broadband access, whether wireless to the network or wireline to the user. We will roll out wireless products ourselves. We're a broadband access company. Later this year, you'll see wireless products from Efficient.
X: How does introduction of gigE in the MAN/WAN expected to affect DSL?
Floyd: I don't think that's an issue.
