Survival of the Fittest
Forgive chief information officers for shuddering as they try to connect their companies to branch offices, customers and business partners via the Internet.
The second quarter is nearing its end and the carrier landscape is a minefield of service providers on life-support, delaying build-out plans, carrying enormous debt and burning cash. And with venture capital money drying up and debt weighing heavy, cross-country dreams may die short of either coast.
A look at 12 competitive service providers with nationwide optical network ambitions 360Networks, Adelphia Business Solutions, At Home, Broadwing, Electric Lightwave, Global Crossing, Globix, Level 3 Communications, PSINet, Teleglobe, Williams Communications and XO Communications shows that none earned money last quarter. Their combined losses for the last reporting quarter reached a staggering $6.4 billion, and their combined long-term debt load is $64.3 billion.
The poor financial performance places the competitors in a precarious position as they do battle against the former regional Bells. All of the Bells have revenue-producing customer bases, and all earned a profit last quarter.
Potential customers that a year ago were grabbing bandwidth whether they needed it or not, are today keeping their hands in their pockets. And when they do need fiber, they need it fast and they need it lit with intelligent boxes that can quickly turn traffic into desperately needed revenue.
That trend shifts the advantage to the companies that have a completed or nearly completed infrastructure. Of course, that includes the regional Bells BellSouth, SBC Communications and Verizon Communications which have fat revenue streams and are replacing legacy equipment with newer boxes at near-jogging speed.
The best advantage, though, goes to the companies that combine the customer base of a regional Bell with the agility of a start-up:
Broadwing, which has the Cincinnati Bell customer base and which finished the first nationwide all-optical network in April.
Global Crossing, which will be the first truly global player with a completed optical network.
Qwest Communications International, with a next-generation network and a 14-state customer base from its acquisition of U S West.
Broadwing and Qwest are writing deals and counting revenue while most optical networks are still building out their route miles.
Teleglobe recently signed agreements worth $350 million to buy lit fiber from Broadwing and Williams. As part of the deal, Broadwing and Williams will separately purchase a combined $110 million of Teleglobes network and e-business services over the next four years.
Teleglobe has satellite links that reach 240 nations and territories. The new deals link it to 64 of the top 100 U.S. markets. Teleglobe CEO Terry Jarman says that the company purchased lit not dark fiber, so it could accelerate the rollout of higher-margin services.
The shift to lit fiber is bad news for Level 3, which has seen some dark-fiber supply deals canceled.
The service provider landscape wouldnt look so strange if the industry wasnt in the throes of a hangover from a reckless spending orgy.
"The Internet was the next big thing, and everyone wanted a piece of the action," says Jeff Moore, an analyst at Current Analysis. "They later learned there were simply too many players."
Aerie Networks hopes to attract service provider and Fortune 500 customers with its plan to bury 432 fibers in the ground and let the biggest businesses light their own networks. But its planned 20,000-mile build out is in dead stall because money isnt chasing after schemes to provide merely dark fiber.
"The train had already left the station for Aerie," Moore says.
There is also the issue of technology advances that foiled many competitive business plans. When Dense Wave Division Multiplexing can carry 64 channels of traffic on a single optic fiber, there suddenly isnt a need for two dozen companies with nationwide networks. Likewise, each metro market might have room for only two or three players.
Many competitive carriers with nationwide plans are in trouble, though some have advantages that could yet land them a niche or a bonanza.
360Networks revenue grew 240 percent last quarter, but it is cash poor, has cut back on plans for an Asia network and doesnt show up in bid wars with Broadwing and Qwest. The company is trolling for $300 million to meet loan obligations, and two weeks ago admitted it would miss a $10.9 million interest payment.
PSINet, potent enough a few years ago to pay for naming rights to a National Football League stadium, is in Chapter 11; executives blame too many deals with customers that tanked. At last report, PSINet had just $520 million in cash. It has points of presence in 900 cities on five continents, but its notices of default on equipment leases are rising.
XO has a $2.5 billion gap between its cash on hand and what it needs to complete its network. The fixed wireless player looked as if it might join others in the competitive carrier hospice, but in late April it received $250 million from Forstmann Little & Co. "Getting a chunk of money like that is good news in two ways," says Michael Howard, an analyst at Infonetics Research. "It means they can build out their network, and it will help maintain confidence in XO."
Still, XO is delaying the lighting of its intercity fiber and recently canceled plans to purchase Level 3s dark fiber in Europe.
"XO is a high-wire act with very heavy debt, but also a huge number of customers," Moore says. "They have so many problems and so much promise at the same time. Theyll be one of the true bellwethers for the success or failure of the [competitive carrier] market."
PSINets chances of being acquired are not good. The stronger service providers are acting like vultures, waiting to pick up assets for pennies on the dollar in bankruptcy court.
"So many are going bankrupt that the price of the assets is declining," Moore says. AT&T got a great bargain when it paid $135 million for NorthPoint Communications central office gear, but didnt take its customers.
Similar tightfistedness and the willingness to say "no" to equipment vendors until prices are deeply discounted might save some of the competitive carriers, too.
Competitive carriers say that the incumbent carriers are enjoying "most favored carrier" status. If the Bells win legislation allowing them to sell long-distance in their service regions, the odds against the competitive carriers will increase.
"The incumbent carriers are almost all winning, and the competitive carriers are almost all losing. That speaks volumes," Moore says.
Regional carriers win when they outmaneuver competitors trying to move into the local telephone market. And when the competitors win, the regional Bells still win, because theyre paid for sharing their routes.
"After the nuclear war, there will be two survivors: cockroaches and RBOCs [regional Bell operating companies]," Moore says.