Successful Niche Marketing

by Gerry Blackwell

Most marketing strategies are geared to ensuring you beat your competitors. But you don't usually expect to
eliminate competition entirely.

That's what broadband DSL provider New Edge Networks has apparently done with its unique small-
market approach - although the company has had to revise its strategies in recent months, like everyone
else, and diversify to adapt to tough market conditions.

Based in Vancouver WA, New Edge started by offering DSL access services in small cities and towns and
semi-rural areas across the U.S., mainly to business customers. It's co-located in just under 600 telco central
offices (COs) in 350 cities and towns in 29 states. The footprint takes in a population of about 30.6 million.
Most of the focus is on small cities. Nearly half of New Edge's markets have a population of less than
50,000, many of them one-CO towns
.
In many of those COs, not even the local ILEC has competitive DSL offerings, and where the ILEC does
offer service, it is typically more focused on the residential market.
Clearly there are reasons why the New Edge approach has not attracted a host of copycats, the most
obvious being that prospective customers are simply thinner on the ground in small communities than they
are in big cities.

To pursue such a strategy nationally as New Edge has done also means the company had to install more
central office infrastructure and spend more on connectivity than most CLECs to reach the same size
customer base.

But there is another side to the equation, says New Edge president, CEO and co-founder Dan Moffat.
"We wanted to go into markets where others weren't," Moffat explains. "In metro markets, you'd typically
find Covad, North Point and Rhythms, probably others too, plus the ILEC all in the same CO. In most of
our markets, it's just us and the ILEC."

It's clear now, with the demise of North Point and with Rhythms' recent troubles, just how cut-throat
competition has been in those larger markets.
Not that it hasn't been tough in smaller markets too. While New Edge did not have to contend with deep-
pocketed national competitors like North point and Covad - well, formerly deep-pocketed - it did meet
smaller rivals.

Moffat characterizes them as regional players. They included Jato Communications, Vectris
Communications and Connect South Communications. But all three have now retired from the field of
battle.

The mistake too many DSL providers made, Moffat says, was blowing all their capital on roll-outs, leaving
nothing for marketing through the tough times.
The other reason New Edge adopted its small-market strategy is that Moffat, who had worked extensively
with independent telcos as a consultant, knew that contrary to expectations, demand for broadband services
was high in small communities.

"People in these market want the services just as badly as people in metro markets," Moffat says. "Maybe
more so."
For many people in small markets, he notes, living there is a work- and life-style choice. But to get those
benefits, they sacrifice easy access to goods and services, entertainment - and customers.
So many see availability of broadband services as even more vital than people do in larger markets. "For
them," Moffat says, "[broadband] opens up a whole new window on the world."
Finally, despite the obvious concentration of big company headquarters in a relatively few major markets
that New Edge avoids, Moffat notes that 15 per cent of major national companies have bases of operation
within his footprint.

New Edge had a pretty good idea how to market services in small communities because of Moffat's
experience with small telcos. He isn't prepared to spill the beans on all his secrets, but he does mention a
few.

First, New Edge adopted a pragmatic wholesale-retail business model. The preference is always to go into a
new market with a good, strong local ISP partner.
"You want the people who go for coffee [with prospective customers] or sit with them on local Chambers
of Commerce," Moffat explains. "People well entrenched in the community."
But where it can't find a strong and willing partner - some communities didn't even have local dial-up
service when New Edge came to town - it has for the last three months been able to offer ISP services
itself.

Moffat also talks about the need for "guerilla tactics" as opposed to "carpet bombing" when marketing in
smaller communities.
"In a metro market," he says, "you do the roll-through at about 50,000 feet - usually with a big media blitz.
But with our markets, we're more specific and targeted."
"There is much less reliance on mass media. The marketing is usually done more through lists and direct
mail and inside (telephone) sales. And it relies heavily on local knowledge which we mainly get from our
partners."

Local partners always help design the campaigns, though New Edge does have its own templates for small-
town marketing drives. Local partners also share marketing costs, usually splitting it 50-50 with New Edge.
"They've got to have some skin in the game," Moffat says.
But as relatively successful as New Edge has been with this fairly unique strategy on the broadband DSL
side, it likely would not have survived if it had relied entirely on that business.
Luckily, one of the requirements of a national small-market strategy is that you need a fiber ring network to
backhaul traffic from all those little markets to the Internet - or wherever. New Edge's backbone includes
18 regional access points.

The company had been using it all along to offer virtual private network (VPN), LAN interconnection and
related services to regional and national enterprise customers.
Recently it realized these service were actually growing faster than broadband DSL. In fact, they now
account for more than 50 per cent of New Edge's revenues.
So a month and a half ago, the company announced it was scaling back its aggressive plan for rolling out
new markets - at one time it had intended to be in 1,200 COs by the end of 2000.
It also laid off 55 employees and refocused operations to help it take advantage of the wide area services
market.

Does this mean New Edge's small-market DSL strategy really failed. Moffat doesn't see it that way. There's
no question, he says, that demand is still there and will continue to grow.
The drying up of capital markets has had two important impacts, though. It means a wider roll-out by New
Edge is out of the question right now.

But it also makes it difficult or impossible for any new competitor to enter its markets. And that means
New Edge in effect has a competition-free zone.
When capital markets do loosen up again, its position may be virtually unassailable.