AOL inks 5-Year DSL pact with Covad

America Online Inc is to buy wholesale DSL services from Covad Communications Group Inc for five years, the companies announced yesterday. The deal is the latest in a series of tie-ins between ISPs and broadband network operators in the US, and highlights AOL's desire to get internet users signing up for higher speed, higher cost services.

Covad's network passes 40 million US homes and businesses in 94 of the nation's biggest metropolitan areas. Previously, AOL has bought DSL services from regional providers such as the Baby Bells, and Covad is the first nationwide operator it has partnered with.

As part of the deal, Covad has issued warrants to AOL to buy 3.5 million Covad shares, about 1.5% of its outstanding common stock. The purchase price will be between $1.06 and $5, and Covad estimates the total it will get from AOL will be in the region of $3.5m, which will be recorded on Covad's financials as a deferred customer incentive.

AOL has been focusing for the last 18 months on rolling out its internet services to consumers in markets where Time Warner Cable, its soon-to-be-spun-out sister company, has a cable network presence. Rival EarthLink Inc has matched the rollout city-for-city in a US government-mandated partnership.

The company, an AOL Time Warner Inc unit, will also get access to AT&T Corp's cable network (and AT&T Comcast Corp's, depending on when the merger closes) under a three-year deal announced last month. Ultimately, AOL wants to be able to offer broadband, be it cable or DSL, to consumers all across the US.

Covad offers DSL directly to consumers and businesses and also sells its services wholesale to ISPs including Sprint Corp and EarthLink. Its share price jumped 16% yesterday when news of the AOL relationship emerged.

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