Oct 09, 1998
Silicon Valley: Diving In to Telecom's Sea Lanes
By Jeffrey Hoffman
Staff Reporter
fnews.yahoo.com
SAN FRANCISCO -- The battle to control the sea lanes of telecommunications -- undersea fiber-optic cables that will carry calls, faxes and data transmissions, the international commerce of the Information Age -- is beginning to heat up. In these early days, a new venture called Global Crossing (Nasdaq:GBLX - news) , one of the year's most successful initial public offerings, appears to have stolen a march on rivals.
The company, headquartered in Bermuda and Los Angeles, is embarking on an ambitious, multibillion-dollar plan to build fiber-optic loops that will link the U.S. with Asia, Europe and Latin America. Through deals with land-based carriers, including Qwest (Nasdaq:QWST - news) in the U.S., Global Crossing will be able to offer phone and Internet carriers seamless connections between the world's 100 largest cities.
The tremendously expensive business of laying cables, which may be under miles of salt water, has long been dominated by a consortia of giant telecom firms like AT&T (NYSE:T - news) , Deutsche Telekom (NYSE:DT - news) ADS) and Nippon Telephone & Telegraph (NYSE:NTT - news) ADS). But so far, these groups of bureaucratic behemoths have been slow to react to the tremendous increase in data traffic.
Global Crossing, which raised $400 million when it debuted in August, aims to meet intercontinental demand for bandwidth -- the amount of data that can be squeezed into a cable -- much as Denver-based Qwest and Austin, Texas-based IXC Communications (Nasdaq:IIXC - news) are doing domestically, says Chief Executive Jack Scanlon.
"We're the first independent guys to build a trans-oceanic network," says Scanlon, who ran cellular and space operations at Motorola (NYSE:MOT - news) before joining Global Crossing in April. "While other networks are being planned, we're the only independent network that's fully contracted with suppliers and fully financed."
Indeed, with $3 billion in the bank, thanks to debt and equity financing and one trans-Atlantic cable already in partial operation, Global Crossing appears to be alone in the water, for now. One possible rival, Project Oxygen, a $10 billion plan being put together by the Woodcliff Lake, N.J.-based CTR Group, is slated to be running in 2002. But all may not be well under the current market turmoil.
"I think Project Oxygen will face difficulties unless they start delivering on the plans they've announced." says Tom Soja, head of the Brookline, Mass., telecom consulting firm T. Soja & Associates.
Just last week Global Crossing announced it would start building its second leg, a $700 million network to connect 18 European cities to the U.S., Asia and Latin America. The first segment, Atlantic Crossing, is already carrying traffic between the U.S. and the U.K., and a leg linking the Eastern seaboard with the Caribbean will be in service late next year. The global network will be complete in 2000, when the company finishes a U.S.-Japan connection and a U.S.-Mexico-Panama-Caribbean link.
When completed, it will control what will likely be the first and only comprehensive worldwide fiber network. That could pay big dividends in a world of deregulated telecom, which will include hundreds of small carriers competing with the few dozen monopolies that currently dominate the industry.
Through deals with land-based carriers such as Qwest, Global Crossing can offer small telcos and ISPs one-stop shopping for connections from Frankfurt to Chicago or Osaka to Denver. In the past, they had to negotiate separate deals for the land and sea legs of a circuit, and the connection to a land-based switch can cost as much as the trans-oceanic part of the call. According to Soja, Global Crossing's new system will significantly drive down the cost of international connections.
"The Internet has evolved from a fundamentally one-way text system to what's becoming two-way video. Video consumes about a thousand times more bandwidth than text," Scanlon says. Data traffic on U.S.-Japan and U.S.-European lines is growing at 85% a year -- versus 10% to 15% growth in voice calls.
Behind those numbers is the fact that most of the world's Internet servers are in the U.S. while the fastest growth in Net usage is in Europe and Japan.
"Our business is the international long-distance business, and that's the typical Internet connection," says Scanlon. The biggest challenge would be to stay with demand.
Global Crossing has sold $550 million worth of capacity on AC-1 to customers including Deutsche Telekom, Swisscom and GTE (NYSE:GTE - news) . It's also signed a deal (terms not disclosed) with Japan's second-largest phone company, DDI, to buy capacity on the planned U.S.-Japan link, a joint venture with Marubeni, the giant Japanese trading firm. Global Crossing reported a loss of $159.2 million on revenues of $101.3 million in the first half but expects to report positive cash flow and net income for the third quarter.
Even though the company faces rosy prospects, investors and analysts say buying Global Crossing's stock remains a long-term bet and not for those expecting returns anytime soon.
"It's truly a construction project," says Tom Friedberg, telecom analyst at Denver-based Janco Partners, who compares Crossing to Omaha, Neb.-based Level 3 Communications (Nasdaq:LVLT - news) , which is building a 15,000-mile U.S. fiber-optic network. "I think Scanlon has a great management team and seems to be well financed, but they've got another two-plus years before they have a comprehensive system. If you look at it on an earnings basis, you're crazy."
Friedberg recently met with Global Crossing's management but decided not to initiate coverage. Still, he doesn't doubt the company will have plenty of customers, once its system is finally completed.
David McDonald, portfolio manager at Boston's Essex Investment Management, says he has a "sizeable" stake in Global Crossing. "You're betting on increased data flows, increased use of the Internet, better technology for undersea fiber optic transmission and the ability of a company to deliver that end-to-end."
McDonald adds that the company would make an attractive acquisition for a large carrier like WorldCom (Nasdaq:WCOM - news) , British Telecom (NYSE:BTY - news) ADR) or AT&T. "It would be a strategic fit for anybody who wants a global network."
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I'm not sure GBLX is the most sucessful IPO YTD but on balance
a good read.
Regards,
Denis |
