Filling a Phat Niche

PhatPipe brings broadband to industrial parks.

The broadband build-out stopped short of Bayside business Park in Fremont, Calif. Pacific Bells central office is too far away to provide DSL. The cable modem network bypassed this industrial neighborhood. Baysides tenants—R&D operations, semiconductor fabricators, software developers. e-commerce startups and other small tech firms—were starved for bandwidth.

"They basically had two choices: ISDN at 128K, or a T1 at $3,000 installed and $1,491 per month," says Mary Blaser, who manages Bayside for parent company ProLogis Trust. Then there were Ma Bells legendary installation delays; new orders often went unfilled for seven weeks or longer.

Bayside would be the perfect test bed for ProLogis new partnership with PhatPipe Inc. PhatPipe proposed to deliver DSL at up to 1.1Mbps for $399 per month, within 10 days of receiving a new order. Further, ProLogis would get 65 percent of the gross profits. It takes an unusual business model to make money that way.

A Sprawling Park The Bayside project was a little bigger than most and required a more complex architecture.

"A typical park might have 10 to 15 buildings clustered near each other," explains Mike Harman, PhatPipes senior VP of operations. Each building usually has one or two anchor tenants who lease little office space and warehouse or manufacturing space. The rest of the building may be divided into suites as small as 1,400 square feet.But at Bayside, some 56 buildings are spread over a miles-long campus. Some have one to three large tenants, while others may have dozens of small tenants.

"We brought in 12 T1s and aggregated demand in clusters" of buildings, recalls Harman. A T1 line ran into a hub building in each cluster. RC Networks SDSL concentrators aggregate traffic from all of the buildings tenants.

Each hub building also housed a BreezeCOM BreezeACCESS point-to-multipoint wireless access point. BreezeCOM nodes in other buildings within each cluster passed aggregated traffic from their tenants.

A Tenants Dream The flexible combination of a wireless inter-building network and in-building DSL over existing copper enables PhatPipe to turn on a new customers service in as little as two days. Capacity is sold in increments of 168Kbps, from 384Kbps up to 1.1Mbps.

"PhatPipe really saw the need for companies that wanted to move into a site that was already set to go" with broadband, says ProLogis Blaser. "As soon as I mention that were Net-ready, they say, Great—we want to lease it! " More than 60 percent of Baysides existing tenants dropped pricey ISDN and T1 service for PhatPipe.

One of a Kind Founded in November 1999, PhatPipe is unique among BLECs (building local-exchange carriers) in several ways.

First, PhatPipe specializes in industrial campuses like Bayside Business Park. Most such properties lie outside of core cities and densely populated suburbs, in the "digital desert" where broadband is rare.

"Other BLECs sell vertically," says Harman. "ARC [Allied Riser Corp.], Onsite, Broadband Office—sell in densely populated areas with expensive technology thats already being sold there. PhatPipe focuses on the industrial MTU [multitenant unit] broadband marketplace."

Also, PhatPipe has virtually no capital tied up in infrastructure. "We design and quote a parks network, and the property owner pays for it," explains Harman. That investment, and PhatPipes generous profit sharing, make property owners committed partners in marketing PhatPipe services to tenants.

The company doesnt need expensive head-end switches at telco central offices, either. "We lease DS3 lines from WorldCom and provision them for T1. We have colocation nodes with WorldCom in every city where we do business."

Finally, Internet access is PhatPipes marketing channel, not its final product.

"Our strategy is to sell communications services in order to develop relationships with tenants," says Harman. WorldComs local and long-distance voice services are usually the second thing that tenants buy. PhatPipe also offers computer products from HP and Microsoft, office furniture, equipment and supplies, even ladders and bathroom fixtures. "Eventually, we will add more services to our portfolio. E-procurement, for instance, will enable tenants to buy manufacturing materials based on aggregated demand."

Industrial-Strength Investors PhatPipes investors include the five largest industrial real estate investment trusts, which represent more than 500 million square feet of property in 98 countries. PhatPipe estimates these partner-customers provide access to about $300 million per year in Net access and e-business service revenues. Thats still a drop in the bucket. The industrial market for broadband service is estimated to be $11 billion per year, and PhatPipes five partners control less than 2 percent of leased industrial floor space.

PhatPipes emphasis on broadband as a sales channel rather than just a product has great potential. Industrial tenants require many of the same goods and services regardless of what busi- ness theyre in. "You wouldnt believe how much corrugated cardboard these guys buy," notes Harman. Aggregating the purchasing power of small businesses as well as their Internet traffic makes profitable sense.

But PhatPipes hold on its customers is tenuous. The property owners control the network infrastructure and can give any ISP access to it. PhatPipes generous profit-sharing tends to keep owners loyal, for now. Owners will have little incentive to change partners as long as PhatPipe provides reliable service to tenants—and new revenue streams to landlords.