Qwest For Low-Cost Bandwidth -- The communications
company is drawing attention with its recent ISP and
long-distance provider acquisitions
By William Schaff
Qwest Communications International Inc. has made some headlines after
announcing acquisitions of a European Internet service provider-Eunet
International-and LCI International, a retail domestic long-distance provider.
Wall Street is obviously pleased, given the share-price appreciation. But IT managers should also take note, because they may be the ultimate beneficiaries.
One of the major budget items for IT managers is communications expense.
In fact, many recent advances in networking and telecommunications
technology were created to offset the high cost of bandwidth. Almost
anything that drives down bandwidth costs has to be looked upon favorably.
Qwest (QWST-Nasdaq), led by former AT&T golden boy Joe Nacchio, is
creating a 16,285-mile protected fiber-optic network to serve more than 125 cities. The expected completion date is the second quarter of 1999. Also, the Denver company has swapped fiber in its U.S. network for trans-Atlantic capacity. This was all done with the help of Philip Anshutz's Southern Pacific
Railroad right-of-way. The initial business plan was to become a carrier's carrier by building up a large network with significant capacity and then reselling to the Bell companies.
What does this capacity imply? Do the math. Six T1 lines cost about the same as one DS3 line running at 45 Mbytes. Roughly speaking, if you want more than one DS3 line, you need fiber. If you want the equivalent of six DS3 lines, you're getting the equivalent of two OC3 (155-Mbyte) lines. However, for the cost of two OC3 lines, you can get one OC12 line running at 622
Mbytes. In other words, once you get up to these levels, you get four times the capacity at half the price. The higher you go, the better the economics.
Using Wave Division Multiplexing technology, fiber has 64 wavelengths that could operate at OC192 (approximately 10 Gbytes), although most currently operate at OC48 (2.5 Gbytes). This implies capacity of each fiber at around 640 Gbytes. Qwest's network will contain two conduits along most of its routes, housing at least 96 fibers in each conduit.
You can see the potential. By using excess bandwidth, Qwest reduces the complexity of the system, since it wastes very little effort in compression. The economics must be compelling, because Qwest recently offered a per-minute rate of 7.5 cents.
But wait. All of a sudden, Qwest decided to buy LCI International. I don't question that LCI brings many complementary assets to the equation. Given the premise that the cost of bandwidth will not be as big an issue in the future, then the capability of directing more traffic through Qwest's network will
disproportionately benefit the bottom line. Additionally, LCI already has an established national marketing and sales organization and a large customer base.
However, there are some unresolved issues. Once Qwest made the decision to move into the retail side, expenses moved up the scale accordingly. Maybe it would've been more expensive for Qwest to establish its own sales and marketing organization from scratch, but who says Qwest has to get into it at all?
Most analysts are evaluating the company on either a discount to private market valuation or a future cash-flow projection discounted heavily to get to a net present value per share. Both methods are speculative at best, with a lot of room for error. The real indicator of progress will be Qwest's construction schedule. With the merger of LCI, revenue and cash flow will increase significantly in the short term. Much of what Nacchio says may come true, but the current values are optimistic. For value, I'd still buy WorldCom-but for an aggressive investment in the ever-changing framework of telephony, Qwest should have a small position as well.
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