CEO resignation highlights communications woes

Providing new evidence of the sectorwide struggle among small communications companies, Covad Communications chief executive Bob Knowling resigned Wednesday following recent poor quarterly financial results.

Knowling's resignation, effective immediately, comes just weeks after Covad reported a wider-than-expected third-quarter loss.

The company's recent troubles are just a part of the overall telecommunications market downturn affecting investor confidence. The downdraft has begun to hit some equipment makers and has even reached as high as communications giants AT&T and WorldCom, which are planning significant changes to their business structure and strategies as a result of tepid enthusiasm from Wall Street.

Covad is building a nationwide network of high-speed, or "broadband," Internet connections for businesses and consumers. These digital subscriber lines (DSL) are several times faster than dial-up modems and allow customers to talk on the phone and surf the Web simultaneously.

Analysts expect the DSL and broader high-speed Net access markets to explode in growth over the next several years. But the process of upgrading the networks and installing the services for customers is arduous, and thus far, many of the smaller providers have been slow to launch service.

"Everything we do is new," Knowling said in a recent interview. "We're inventing everything from (the ground up), and when you don't control a critical factor of production, meaning you have to rely upon phone companies...it's a very, very cumbersome process, and it really does take a lot of brute force."

Knowling has described his tenure at Covad as "the hardest job I've ever had in my life."

A champion of the broadband market, Knowling leads a federal task force on delivering high-speed Net access to minorities and rural locations and is one of the most prominent African-American CEOs in Silicon Valley. He was also a guest of President Clinton during the annual State of the Union address last January, sitting next to the first lady.

Despite his track record, Knowling's departure, just the latest in the communications industry, provides a harsh reminder of the severity of the troubles facing the sector.

"A lot of the shakiness from the dot-coms has spilled over into telecom. The field day has ended," said Adam Guglielmo, an analyst at TeleChoice, a communications consulting firm.

Several other top communications executives have announced resignations or been ousted in recent months, including Lucent Technologies CEO Rich McGinn, Excite@Home chief executive George Bell and several top executives at ICG Communications, among many others.

With this year's stock market downturn came a shortage of capital funding for many newer and smaller communications providers, known as competitive local exchange carriers (CLECs). The resulting shakeout has produced sub-par financial results, executive changes, bankruptcy filings, profit warnings and other serious setbacks.

"With the capital markets tightening up, people are paying more attention to profits," Guglielmo said.

Although the communications sector was initially resistant to the stock market slowdown earlier this year--continuing to boast strong optical equipment IPOs, for example--the downturn has caught up with communications companies, analysts said.

"It's natural that there would be some repercussions on service providers and, in turn, equipment vendors, as some of their customers and Internet companies cut back or go out of business," said Lisa Pierce, a vice president and telecommunications research leader and vice president at Giga Information Group, a market research firm.

Analysts believe the situation is more pressing for smaller communications providers, which don't have the same deep pockets as their larger brethren.

"Part of it is that there are too many providers out there," Pierce said. "It may be exacerbated right now by the dampening economy, but we expect to see more CLEC consolidation for the next 18 months."