Beginning of the IP Communications Service Shakeout?

The lead players are calling their effort a “next generation CLEC,” a managed services local exchange carrier able to provide a full range of IP voice, security, VPN, and Internet services nationwide

The deal should come together in August, when managed IP communications services provider MegaPath merges with national integrated voice-and-data-communications provider Covad Communications Company. At the same time, the combined entity will acquire Speakeasy, a Best Buy company. Speakeasy is a leading VoIP, data, and IT service provider.

“This really allows us to combine ourselves into a single business, so we can better serve our customers,” said MegaPath Chairman and CEO Craig Young.

The new arrangement between the three companies could help to create critical mass, Young said. Speakeasy has some 30,000 seats, Covad another 30,000 and MegaPath serves 12,000 to 15,000. Speakeasy in particular has put a solid footprint in the dirt.

“They have been in the market with a hosted VoIP product for the last couple of years, so they have a bit of a hard start,” Young said. “It’s not just being launched. They have feet on the street across the United States.”

With a network of some 8,000 channel partners, Speakeasy already has built a substantial roster of small business customers. Best Buy bought the company in 2007 and will continue to be a minority investor, Young said.

The three partners come to the effort from different perspectives. Speakeasy beings small-business expertise, while Covad delivers an intelligent broadband services platform. MegaPath brings experience in the delivery of hosted IP services.

Young said he is counting on a pair of fortuitous technical overlaps to help make the gears mesh as smoothly as possible during the transition.

First, the three companies all operate on the BroadSoft VoIP platform. “They both have the same platform that we are running, so that should make things go smoothly,” Young said.

At the same time, there is another significant overlap, in that both Speakeasy and BroadSoft already are deeply integrated into Covad systems. About 80 percent of Speakeasy traffic passes through Covad, as does 40 percent of MegaPath traffic, Young said. “Since they are already electronically bonded, that makes integration less risky and less complicated.”

As systems integration moves forward, the principles also will be integrating their various enterprises.

The wholesale arm will continue to operate as Covad Communications, while Speakeasy will take responsibility for all non-wholesale business. Young will continue as executive chairman of the combined businesses.

Young has a track record of shepherding companies through similar growth spurts. He was appointed vice chairman and president at AT&T Canada at the time of the $3.5 billion merger of MetroNet Communications with AT&T Canada. He was president and COO of Brooks Fiber, a pioneer local exchange carrier that was acquired by WorldCom for approximately $3 billion.

With their unique capabilities, the partners here could forge what Young is calling a first: The ability to provide a full suite of hosted services in an entirely IP environment.

“Other people, the AT&Ts and the Verizons, do they have similar products in their portfolios? Yes they do,” he said. “They thing they don’t have is a pure IP network. They still have analog networks, TDM switches. They can’t provide full IP services across their customer base. That’s what everyone is trying to get to and now we have it.”

In order to get to that point, MegaPath has cobbled together operating agreements with 41 partners nationwide.

Looking ahead, Young said he envisions this latest cooperative effort as being more than just a way to expand services and build a customer base. If all goes as planned, the longer-term picture is to use the combined efforts of these three partners as a jumping-off point for future acquisitions.

“When you put them together it gives you a very compelling product offering and a service offering. There is more product, more distribution and more facilities. The main thing, though, is that it gives us a platform, a way to roll up other small VoIP companies who have been playing in the VPN space for five years and don’t really have any place to go.

“We’ll have our hand out to a lot of those folks to ask if they want us to join us going forward,” he said. “To do that you need presence around the country, you need size and reach and product. Now we’ll be able to give them all that in a bigger company that they can join.”

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