DSL provider Speakeasy grows despite industry turbulence
From the March 1, 2002 print edition of Puget Sound Business Journal
Jeff Meisner
The landscape is littered with providers of high-speed Internet access who went down in flames, but one local company will try to expand in the coming year in anticipation of burgeoning demand.
Speakeasy.net Inc. of Seattle, which recorded between $30 million and $40 million in revenue last year, is looking for as much as $10 million in venture capital for further nationwide deployment of its services, said president and chief executive Michael Apgar.
Speakeasy hopes to complete the financing by May. It has previously raised about $20 million from venture backers.
But analysts say the 135-employee firm faces a number of challenges, including an evolving regulatory environment and the current depression in the telecommunications sector.
Apgar said Speakeasy, which provides digital subscriber line (DSL), T-1 and dial-up services, saw its revenue grow by about 350 percent last year - at a time when many DSL providers bit the dust. Apgar said most of the growth is the result of word of mouth, but Speakeasy did acquire some assets from defunct DSL providers such as Rhythms NetConnections Inc., Bazillion Inc., Northpoint Communications Corp. and Excite@Home Inc.
Still, the year was literally a trial by fire for the company. In May 2001, the Speakeasy Cafe in Seattle's Belltown neighborhood was damaged beyond repair after a fire broke out, forcing Apgar to close the Second Avenue Internet oasis down.
But Apgar said the fire's overall impact on Speakeasy was minimal because "it accounted for only about 1 percent of our total business."
The firm, which offers service in more than 80 U.S. cities, was not profitable in 2001, though it expects to be in the black some time in the third quarter, Apgar said. Its top three markets are New York City, San Francisco and Seattle.
Most of the new capital is slated for customer acquisition and sales and marketing, he said. Speakeasy's previous venture backers are an impressive group, ranging from Granite Ventures LLC of San Francisco (formerly called Hambrecht & Quist Venture Associates) to the Matthew G. Norton Co. of Seattle, Texas Instruments Inc., the Ares/Apollo investment firm and the well-connected Washington, D.C.-based The Carlyle Group.
Founded in 1995, Speakeasy resells DSL, T-1 and dial-up Internet service to businesses and to homes, with a special focus on online gamers.
It leases about 90 percent of its DSL connections from Covad Communications Group Inc., a competitive local exchange carrier, or CLEC, based in Santa Clara, Calif., that recently emerged from Chapter 11 bankruptcy through an eleventh-hour, $150 million bailout by SBC Communications Inc.
A CLEC delivers alternative dial-tone and data services in competition with the so-called incumbent telephone companies, sometimes using the incumbent carrier's equipment and phone lines. Investors funded CLEC infrastructure buildouts with billions in equity and high-yield debt in the late 1990s hoping to break the Bell companies' hold on the telecom industry, especially in the DSL and broadband sector.
But in the past year much of the CLEC industry imploded under the weight of its own debt. The result has been a number of high-profile flameouts that may have left consumers wary of entrepreneurial telecom providers.
Aside from Covad, Speakeasy has a less-extensive reselling agreement with New Edge Networks Inc. of Vancouver, Wash. Speakeasy handles the flow of data over its own Internet networks and handles customer billing and support.
In addition to basic Internet access, Speakeasy provides online gaming and music, e-mail, security and virtual private network services.
Realizing the danger of relying on such a limited number of CLECs, Apgar said Speakeasy is negotiating deals with other similar providers to mitigate the effects should one of its major partners fail.
But industry experts say relying solely on the CLECs for access to DSL lines could be risky.
Patrick Brogan, a telecom analyst with The Precursor Group Inc. of Washington, D.C., is not convinced that even with the SBC-led bailout of Covad, the CLECs make solid business partners.
"The financial markets are really spooked about the CLECs," Brogan said. "I don't know that they're any more stable now than they were 18 months ago."
Lisa Pierce, a research analyst with Giga Information Group Inc. of Cambridge, Mass., said it is equally important for Speakeasy to secure more strong content providers.
"Access to DSL and broadband is generic, so it's up to the individual ISP to do what it can to get great content. It's the only way for them to differentiate themselves," Pierce said.
Apgar said the ISP's focus in the content arena is gaming and music. The firm has a network of high-speed online gaming servers that any user in Speakeasy's national network can access. Speakeasy subscribers also can download music files, called MP3s, from eMusic.com.
Speakeasy's focus on business customers and online gamers is a good niche for the ISP to target because many CLECs, Covad included, are not offering much in the way of services, Pierce said.
"Business customers don't just want a connection, which is essentially what Covad provides," Pierce said. "They want things like voice mail, e-mail and secure data transmission between sites."
However, Speakeasy does face competition from other DSL providers such as Earthlink Inc., DirecTV's DSL unit and cable companies like AT&T Broadband, Comcast and OptimumOnline.
Apgar said the ISP will seek partnerships with other types of broadband providers too, including cable modem services and fixed-wireless connections, to lessen its dependence on DSL.
But Precursor's Brogan is skeptical of the strategy.
"Certainly the cable companies are much more stable than the DSL sector, but they're also less open to sharing their facilities," he said. "The way the Telecom Act is set up, they don't have much incentive to be open. It's the same situation as with the Bell companies, really."
The fixed-wireless sector is an even bigger question mark, Giga's Pierce said.
The two major fixed-wireless modem providers, AT&T Corp. and Sprint, have either canceled their plans to expand into that business or scaled them back considerably, she said.
Reach Jeff Meisner at 206-447-8505 ext. 103 or jmeisner@bizjournals.com.