The legacy of the Telecommunications Act of 1996 now includes not only spectacular bankruptcies, but also indications that it has hampered the competition it was supposed to spur.
Covad Communications, the last of the Big Three nationwide wholesalers of DSL service, last week said it plans to reorganize under an unusual “prenegotiated” agreement with bondholders in which it will swap $1.4 billion in debt for 19 cents on the dollar and a 15 percent stake in the company.
The deal — including a Chapter 11 bankruptcy petition for its parent company, Covad Communications Group, later this month — comes on the heels of DSL player Rhythms NetConnections bankruptcy and shutdown starting this week, and the shuttering of NorthPoint Communications in January.
The large DSL providers are only the latest group of Bell alternatives to turn up broke, adding their names to a list so long that some observers are placing blame on the Telecom Act. The law opened the competitive floodgates, but it lacks a meaningful enforcement mechanism. So the regional Bells have remained dominant — some say by making it difficult for upstarts to access their networks — while they ramp up new services.
“The regulation was less effective at creating local competition than one might have hoped,” said Hilary Mine, Probe Researchs senior vice president. “But I think it is also the case that the financial markets expectations were unrealistic.”
Covad spent more than $500 million on network construction in 2000, said Abhi Ingle, Covads vice president of product and market development. “If we didnt do it last year, people would have said Youre crazy. How can you not do it? “
After paying off the bondholders, Covad will have enough cash to carry it through the first quarter of 2002. By then, 35 or 40 of its 50 markets should be breaking even, up from 26 today.
And even while Covad struggles, its customers refuse to believe its out of the game. “Covad is going in and out of a prepackaged reorganization deal. We believe they will go through this just fine,” said Harry Taxin, president and CEO of MegaPath Networks.
Taxin said the Telecom Act has created a competitive environment that even a market meltdown cant undo. “Its easy to blame it all on the Telecom Act,” Taxin said. “But in fact, it unleashed all the venture capital money to drive business, which created multiple potential winners.”