Hosted voice-over-IP services represent Covad Communications’ growth engine of the future, company officials say, and the broadband wholesaler has laid the groundwork for that engine to start moving forward more quickly.

“The broadband business is pretty mature and certainly a commodity on the consumer side,” said Covad President and CEO Charlie Hoffman in a telephone interview. “[VoIP] is the way we are growing, both in ’05 and ’06. It represents only 4% of our revenues today, but it increasingly becomes a larger portion.”

Covad was a rare survivor of the wholesale DSL meltdown of 2001, and is known for providing DSL connections to other service providers nationally, but is changing that model to take more control of its own destiny, Hoffman said.

“Sales growth [of hosted VoIP] has been less than initially expected,” he conceded. “But we are in a great spot for ‘06 with fully trained sales force armed with automation and scaleable systems. 2005 was the year for us to pick it up nationwide – we went from everything manual to everything automated. We expect real growth this year.”

“Our objective is to grow our direct business,” Hoffman said. “We built from nothing to 25% of our revenue. Now we expect to grow it in a three-year plan to 50% of our revenue. We still want to enable our wholesale partners but not be dependent on what they sell to grow our revenue.”

Covad has invested heavily in integrating GoBeam, the VoIP company it acquired, and in rolling out its capabilities nationwide, said Tim Gaines, Covad senior vice president of field sales, and is now reaping those rewards. The company was recently named as the U.S. market leader in hosted VoIP services by In-Stat, with 28% of the market.

“Our challenge was to take GoBeam and scale it to deliver in the top 125 markets in the country,” Gaines said. “We have been very busy hiring, recruiting and training a sales force and a channel to be able to deliver and support this in markets broadly around the country. We’re booking new business at a rate almost 10 times what [GoBeam] did prior to being part of Covad. And we are tackling the even bigger task of figuring out how to provision, deliver the service, acquire customers and support them. We have taken quantum leaps in scale and competency this year.”

Gaines believes Covad is well positioned as hosted VoIP takes off in the small to mid-sized business world. In-Stat is projecting 10-fold growth in the market to $1.27 billion by 2009. In the hosted VoIP realm, customers do not have to purchase on-premises VoIP gear such as PBXs. Service intelligence resides in the network to deliver high-speed Internet access, local and long-distance voice and productivity features such as integrated messaging and find me, follow me service.

Covad is offering two hosted VoIP options. Covad VoIP PBX offers a single managed connection for voice and data to customers who won’t want on-premises gear to manage. Covad VoIP PBX is aimed at companies who want to keep using their existing PBX or on-premise phone system while gaining the cost and efficiency advantages of a single IP connection for voice and data.

Central to the Covad strategy is its up-front sales work to help customers determine the right solution and optimize their savings, Gaines said.

“One of the lessons we learned in the early days is that this is a fairly sophisticated, not easily understood service,” he said. “When we go into a customer, we are the experts in next-generation services. We are able to show a small to mid-sized business how they can save money, both in terms of hard dollars and in terms of soft-dollar productivity savings.”

Covad already has a relationship with many of the small to-mid-sized businesses as a DSL provider and often can deliver significant up-front savings based simply on eliminating multiple connections into a business, he said. But things such as reducing the time employees spend checking multiple messaging platforms can be harder to quantify.

“We can apply a discovery-oriented process designed to find the answer to the question of whether there is a legitimate application for this solution in your business,” he said. “And if there isn’t, we will tell you. Most of the time, there is a significant savings, but it may be in areas they didn’t anticipate.”

Covad also presses an ease-of-use advantage, with its dashboard, a personal communications portal that makes it easier for end-users to take advantage of VoIP features, as well as both on-line and in-person training and support.

“Our number one advantage is our network,” Gaines said. “We are the only company a customer can go to get an integrated voice and data solution that is owned and operated by a single vendor and managed on a quality of service basis that is Covad end to end.”

Hoffman is actually hoping Covad will get more competition from name players in the hosted VoIP market.

“We need some validation of this – if the bigger players get in this, our market share goes down but overall sales go up,” he said. “We aren’t much of a brand – we are still a wholesaler and it is difficult to build that brand. We are working with all the major players on the broadband side and providing broadband for their VoIP, so we kind of win even if they win.”

That includes the big guys – Covad provides broadband connections for both AT&T (outside the SBC region) and MCI Communications, which is ranked second by In-Stat in hosted VoIP.