From Network World
Cisco, AT&T throw weight behind new carrier
Newcomer Velocita building nationwide fiber network to
offer managed wavelength and other services.
By DENISE PAPPALARDO AND JIM
DUFFY
Network World, 04/23/01
RESTON, VA. - In a most unusual setup, start-up
carrier Velocita is readying a nationwide
broadband network to be funded in large part by
Cisco and based mostly on AT&T's extensive
rights-of-way.
The company, which has been operating since
1998, is building a big chunk of AT&T's next
generation optical network in return for the
rights-of-way, $220 million and other incentives,
according to a Velocita 10-Q filed last fall. Cisco
may be forking over $485 million in funding and
equipment financing, according to an 8-K filed 10
days ago. The Cisco funding still needs approval
from the SEC.
Velocita will initially be a carrier's carrier, but may
eventually offer an alternative to enterprise
customers concerned about using other new
carriers that are scrounging around for new
funding. A rash of competitive local exchange
carriers failed in recent months, stranding
customers and leaving unpaid debts on the
doorstep of overenthusiastic equipment makers
that supplied gear to CLECs on credit.
While Velocita is happy to have AT&T and Cisco
supporting it, the company hopes to make a name
for itself by delivering a slew of advanced services
such as managed wavelengths, VPNs and
high-speed private lines.
Cisco, which has proven particularly vulnerable to
the CLEC meltdown, seems certain it won't be
stung by Velocita. The vendor's equity stake in the
new carrier is valued at $200 million and the
financing at $285 million.
This is the first time Cisco has taken an equity
stake in one of its customers.
"It's unusual, but what Cisco needs is a
prototypical network that they can point to and
say, 'This is how we believe networking needs to
go,' " says Current Analysis analyst Chris Nicoll.
"Cisco's got a very different viewpoint than Nortel
or Lucent on how an intelligent optical network
should be architected. They can't point to a
WorldCom, or Broadwing, or someone who's got
a network in the field and say, 'This is the
implementation of our strategy.'"
Forcing Cisco's hand
Others say today's capital environment is forcing
Cisco to invest more if it eventually wants to
receive more.
"In the past, Cisco has opted not to purchase
equity as it did not want to have an ownership
interest in any of its customers," investment firm
UBS Warburg stated in a recent report. "We
believe Cisco has broken this policy [because] the
capital markets are virtually shut for new, emerging
carriers. We believe Cisco will only do a small
number of such equity investments and only as
long as equity markets remain tight."
UBS Warburg added that Velocita's unique
arrangement with AT&T and its management team
attracted Cisco's unusual investment. But the
start-up carrier's relationship with AT&T adds
another twist.
Velocita may end up competing with AT&T, but
the more likely scenario is that AT&T will work
out an exclusive arrangement with Velocita where
that will not occur.
"AT&T's network is archaic and the cost of
operating it is much higher than its competitor's
networks that have been built in the last five
years," says Christine Heckart, president of
TeleChoice. "The company's choices are to
outsource its network operations and concentrate
on its customers or to buy another provider."
"AT&T is going to try to maximize the value in its
existing network as well as position itself for the
future," Nicoll says.
AT&T owns warrants that, if exercised, would
result in a 9.5% ownership stake in Velocita.
The new company's management team includes
Chairman Bob Annunziata, former CEO of Global
Crossing and founder of Teleport; CEO Buddy
Pickle, former president of Teligent and UUNET;
and President Bob Collet, formerly of Teleglobe
Communications and Sprint.
All are industry veterans with a track record of
innovation and sustained growth. A Cisco
spokeswoman confirmed that this was a big
incentive for Cisco's investment, as was Velocita's
unique arrangement with AT&T and "shared vision
for an end-to-end IP+optical network."
"While we typically will not invest in customers,
we will evaluate select opportunities as they come
up," the spokeswoman says.
Velocita will initially purchase $225 million in
Cisco gear over two years, including: the ONS
15800 dense wavelength division multiplexing
system for long-haul transport; the ONS 15454
SONET add/ drop multiplexers for metropolitan
and regional applications; the 12400 series gigabit
routers; and the 7600 Optical Services Router.
The carrier will essentially be an all-Cisco shop.
"Cisco brings the ability to integrate the optronics,
data and higher-level layers into one system,"
Collet says. "It's a very powerful motivator for
working with Cisco. I've been in the business a
long time. It's an absolute nightmare to work with
multiple vendors."
Nationwide build-out
Velocita will use the Cisco gear to light an
18,500-mile nationwide OC-192 fiber-optic
network over the AT&T rights-of-way. Velocita
will spend $984 million by year-end to light the
first 10,800 miles of the network, according to the
10-Q.
"We're in the process of lighting routes between
Jacksonville, [Fla.] and Houston before the end of
the second quarter," Collet says. This will be the
first portion of the Velocita network that's
supporting traffic. It will start offering wavelength
services soon after.
Velocita may be unique in its ability to build
networks of this type. The company was launched
in 1998 as PF.Net, a network construction
company modeled after the utility industry, which
has a depth of expertise in pipeline construction
and the difficulties of conquering terrain.
In the fall of 1999, PF.Net won a contract from
AT&T to upgrade the carrier's nationwide
fiber-optic network. The contract enabled PF.Net
to build over 5,000 miles along AT&T's
rights-of-way, and to construct its own network
alongside the AT&T conduits.
A year later, PF.Net won a second contract with
AT&T, extending the network to more than
18,000 miles.
PF.Net - which changed its name to Velocita in
January - was one of three companies that AT&T
chose to construct its next-generation network.
The other two are Touch America and Cap Rock.
Those companies also have access to AT&T's
rights-of-way but Velocita is the only company
that's taking full advantage.
Velocita is swapping fiber with Touch America,
and also has an agreement with AT&T to jointly
market and sell dark fiber on the routes of joint
construction.
Other Velocita investors include PF Holdings and
Odyssey Investment Partners. PF and Koch each
own 31% of Velocita. Odyssey invested $125
million in the company and $225 million from
private investors.
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