BLECs: Generation Next

Small carriers cash in

Broadband is coming, vendors like Cisco Systems would have you believe, as they tout their products with glossy ads pitching the idea that 1.5 megabits per second to a home could be as statistically unremarkable as owning 1.7 cars or having 2.8 kids.

But the market that was set to become a hotbed of broadband access is in deep trouble.

Carnage in the building local exchange carrier sector, which specializes in wiring large buildings like hotels, office towers and residential high-rises for high-speed Internet access, suggests that selling broadband even to a highly concentrated group of customers is hard work. The list of struggling BLECs seems endless — Allied Riser Communications, BroadbandNow, BroadBand Office, CAIS Internet, Darwin Networks, Eureka Broadband, ReFlex Communications and Urban Media.

People didnt stop wanting to buy fat Internet connections. But many BLECs have burned through too much capital trying to build too much of a network with too few customers, analysts, including The Yankee Groups Imran Khan, are saying. Darwin, for example, has blazed though $91 million since last September and is bankrupt, he says.

Thus, all eyes are on the BLECs left standing, like Everest Broadband and Intellispace, both private, both cautious in their development and both claiming to have cracked the code to making money in competition with much larger broadband rivals.

"This is not a complicated business. It is all about discipline and perseverance," says Joe Varello, executive vice president at Everest. According to Varello, Everest has been targeting only the buildings that would guarantee at least 15 customers.

The technology is the second part of the equation. Everest, Varello says, sticks to low-cost Ethernet connectivity, thus never spending more than 10 cents per square foot in the building it prepares to receive broadband services. Typically, the company seeks to make $18,000 to $37,500 per month on a $40,000 investment in a building.

Rising Revenue

Everest executives claim to have signed 500 customers, and say that they are adding 100 new accounts per month. This puts the companys annual revenue at $7.2 million, on the low end. That sounds quite high in comparison with a much larger competitor, Allied Riser, which reported a $173.4 million loss on revenue of $14.3 million in 2000.

While Everest doesnt open its books to the public and there is no saying how close the companys actual revenue is in relation to these projections, investors seem to have liked what they have seen so far. At the height of sector pessimism in January, Everest closed on a $50 million financing round that included Softbank and Pequot Capital Management as investors.

Another BLEC that raised money in this tough market is Intellispace, which closed a $60 million round in February, with Cabletron Systems and J.P. Morgan Chase & Co. participating.

Intellispace tells a tale similar to Everests. It is also smart about the buildings that it picks and relies heavily on Ethernet. But Intellispace keeps the cost of its network down by relying on Riverstone Networks, a metro networking equipment vendor. Riverstone claims that its optical metro backbone router helps service providers sell broadband by leveraging both existing copper infrastructure and new dark fiber deployments.

Nick Maynard, another analyst at The Yankee Group, sees the metro-carrier market splitting into operators of last-mile services — Everest, Intellispace and Yipes Communications — and metro backbone operators, like Level 3 Communications and Telseon. This food chain, he says, would spread the cost of provisioning broadband in the city more evenly, enabling more competition.