article in IBD tomorrow..............
There's Cachet And Profit In
Owning Fiber Networks
Date: 7/17/97
Author: Reinhardt Krause
Build, buy or lease. For second-tier long-distance
phone companies, deciding how to run their
fiber-optic networks is becoming a harder choice.
But owning fiber networks looks like a smart move.
''In the past, it was a simple proposition to make
decent money without owning fiber,'' said Michele
Wolf, a financial analyst at Bear, Stearns & Co. in
New York. ''But a lot of these companies are
thinking about when the RBOCs (regional Bell
operating companies) get into long-distance.''
The largest telephone carriers - AT&T Corp., MCI
Communications Corp., Sprint Corp. and
WorldCom Inc. - operate nationwide networks.
Their fiber-optic networks carry digital data as rapid
pulses of light.
Smaller long-distance players usually lease capacity
from bigger rivals or other wholesale carriers. They
resell long-distance services, often focusing on
niche residential or business customers.
But the telecommunications market is changing fast.
Before the Internet, it looked like there was plenty
of fiber to go around. Not anymore.
Another factor is telecom reform. If Baby Bells get
over regulatory hurdles, they may soon enter
long-distance markets. Other alternative carriers are
eyeing the long-distance business, too.
It all adds up to fierce competition. So it may pay to
own fiber, not lease it.
''It's possible that price competition will get tough
enough so that companies with the lowest possible
operating costs will be the most successful,'' added
Wolf. ''Owning facilities reduces their operating
costs somewhat.''
Rochester, N.Y.-based Frontier Corp. is getting the
message. With about $2.57 billion in total revenue in
'96, Frontier is the fifth- largest long-distance
company in the U.S.
Frontier was formed in '95 when a local phone
company, Rochester Telephone, acquired
long-distance provider ALC Communications Corp.,
based outside of Detroit.
''As larger players enter the business, you want to
look at your cost structure and see where you can
take costs away,'' said Ron Bittner, chairman and
CEO of Frontier. ''One of the big areas in this
business is network.''
Frontier wants to rely less on leasing. It's one of
three carriers subsidizing the cost of a new
coast-to-coast fiber network.
The network is being built by Denver-based Qwest
Communications International Inc., formerly
Southern Pacific Telecommunications.
The investment, Bittner says, will enable Frontier
''to go up-market.'' It wants to attract larger
business customers and offer more data and video
services.
Frontier is paying about $450 million to Qwest.
Stamford, Conn.-based GTE Corp. and Jackson,
Miss.-based WorldCom also are subsidizing
Qwest's network.
In return, the three carriers will own about half of
the fiber network's capacity. It will span about
13,000 route miles when completed in '98.
For smaller carriers, owning fiber can be a rite of
passage to the big leagues.
WorldCom's climb up the ladder was aided by the
purchase of Tulsa, Okla.-based WilTel Network
Services (Williams Telecommunications Group) for
$2.5 billion in early '95. WilTel operated a
10,000-mile fiber network.
Such deals now are part of the phone industry's
competition textbook.
In June, Dallas-based Excel Communications Inc.
agreed to buy Telco Communications Group of
Chantilly, Va., for about $1.2 billion. The deal,
expected to be completed by the end of the year,
merges two resellers in the long-distance market.
Excel and Telco will grow stronger by combining
sales forces, analysts say. But a key part of the deal
involved fiber.
In April, Telco bought the fiber- optic network of
Advantis - the joint venture of International Business
Machines Corp. and Sears Roebuck & Co. of
Chicago - for $170 million.
''By putting the (fiber) facilities in place, with the
size we have, we can fully load a network and get
greater cost efficiencies,'' said Jack McLaine,
Excel's president and chief operating officer.
''It also allows us to begin customizing some of the
products we offer to the business market,'' he
added.
On the other hand, Excel will stay a reseller. It will
lease or buy fiber capacity from other carriers. In
June, Excel signed a pact with WorldCom, gaining
access to its fiber network.
Other second-tier carriers are following a similar
strategy, analysts say. McLean, Va.-based LCI
International Inc. owns about 1,500 miles of fiber
cable in the Midwest, but leases facilities across the
U.S., says Bear Stearns' Wolf.
Several second-tier carriers are customers of
Austin, Texas-based IXC Communications Inc., a
wholesale long-distance carrier. Like Qwest, IXC is
building a nationwide fiber network.
As of March, it had installed about 10,000 route
miles. LCI, Excel and Frontier all lease or buy fiber
capacity from IXC.
Washington-based MCI and WorldCom buy
capacity from IXC, too. Analysts say most carriers
are snapping up fiber capacity where they can find
it.
''In previous years, there was always talk of a
bandwidth glut,'' said Steve Koppman, a senior
analyst at Northern Business Information Inc., a
market research firm based in New York. ''That
was until the Internet. With data and the Internet
growing so fast, there have been capacity
constraints.''
The big carriers, in fact, are trying to boost the
capacity of their backbones without burying new
fiber in the ground. One option is a new optical
technology called wave division multiplexing, or
WDM.
Linthicum, Md.-based Ciena Corp., Italy's Pirelli
Group SpA, and Lucent Technologies Inc. of
Murray Hill, N.J. are selling WDM gear. The
amplifiers pump up capacity by dividing light signals
into multiple channels.
Ciena's customers include WorldCom and Kansas
City, Mo.-based Sprint.
Market research firm Ryan, Hankin, Kent Inc. of
San Francisco says the WDM transmission gear
market will grow from $1.6 billion in '96 to $4.4
billion by 2001.
(C) Copyright 1997 Investors Business Daily, Inc.
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