Recent but not new news about ESPI:
Digging In for a Bigger Piece of the Pie
E.Spire's Aspiration: To Take a Bite Out of Bell Atlantic's Top Telecommunications Markets
By Alan Breznick
Special to The Washington Post
Monday, April 5, 1999; Page F10
Watch out, Bell Atlantic Corp. Another bold new rival is seeking to steal a chunk of the telephone, data and Internet-access business in four of your biggest markets -- Washington, Baltimore, Philadelphia and New York.
That company is E.Spire Communications Inc., one of those pesky competitive local exchange carriers (CLECs) that vie with traditional phone companies in the $103 billion local-telephone market nationwide. Unlike such other aggressive regional CLECs as RCN Corp. that concentrate on consumers, E.Spire aims to lure small and medium-sized businesses, home-office workers and telecommuters with discounted packages of local and long-distance voice and data services, including super-fast Internet access.
E.Spire, based in Annapolis Junction, plans to offer these business-oriented services throughout the mid-Atlantic region by completing a 194-mile route of advanced fiber-optic lines between New York and Northern Virginia later this year. That network will connect 140 miles of new fiber-optic lines in Washington and the Maryland and Virginia suburbs with similar new fiber networks in Baltimore, Philadelphia and New York, giving the company the reach to joust with Bell Atlantic, the well-entrenched incumbent in the Northeast, starting this summer.
E.Spire, formerly known as American Communications Services Inc., is brazenly entering Bell Atlantic's core markets after originally targeting mainly mid-sized and smaller cities in the Southeast and Southwest where the telecommunications competition is less fierce. The six-year-old company now offers voice and/or data services in about 35 markets, including Richmond, Atlanta and Miami, and has installed more than 133,000 access lines in offices and homes, nearly four times its total at the end of 1997.
"We're taking on the Bell operating companies," said Anthony J. Pompliano, the company's founder and chairman who recently took over the helm as chief executive. "The purpose of the company is to compete."
The big question for E.Spire, however, is whether it can remain independent long enough to go up against Bell Atlantic. Wall Street analysts consider the young but rapidly growing company a likely takeover candidate in the next year or two as the huge telecommunications industry continues to consolidate.
E.Spire's stock doubled early last month to more than $10 a share on speculation that Qwest Communications International Inc., a Denver company that last year bought Washington-based LCI International Inc., or another large telecommunications suitor might be courting E.Spire. Both E.Spire and Qwest, a major E.Spire customer, declined to comment on the speculation.
"The name of the game is size and scope," said Frank Murphy, a senior telecommunications analyst for First Union Capital Markets in Richmond. "The small telephone providers are not going to be able to compete."
The major headache for publicly traded E.Spire is that, in spite of the recent stock run-up, it faces intense pressure from investors to start producing results soon. Under its previous management team, the company dialed too many wrong numbers last year, posting much heavier than expected operating cash flow losses of $53.7 million on total revenue of $156.8 million.
As a result, analysts now project that E.Spire won't start generating positive operating cash flow until the summer of 2000, about a year later than initially anticipated. They see the company racking up $50 million to $55 million in operating cash flow losses this year on about $250 million in revenue.
"They've had some missteps," said Ken Hoexter, a vice president at Goldman Sachs & Co. "I think their ability to stay independent comes down to their ability to execute."
For its part, Bell Atlantic doesn't seem terribly worried just yet. Company executives say they view E.Spire as just one of many CLECs trying to snatch a portion of their 23 million-plus residential and business customers.
"There are hundreds of these companies," said Jack Goldberg, president of telecom industry services for Bell Atlantic. "E.Spire doesn't stand out in any particular way."
E.Spire executives term their company's recent financial performance "disappointing" but bristle at E.Spire being labeled an underachiever by Wall Street.
"We don't view ourselves as even close to underachievers," said Pompliano, who replaced former president Jack Reich as chief executive in late November because of "a difference in philosophy" between the two. "I like to think of this company as a small company but a great company."
In an attempt to cut escalating capital, marketing and administrative expenses and improve poor operating margins, Pompliano has shifted the company's direction since he reasserted control five months ago. The new strategy calls for swiftly exiting the resale business, where E.Spire has bought phone lines from the regional Bells at a bulk, wholesale rate and then resold them to customers at a slight markup. Marginally profitable at best, resale has proven to be costlier than expected for many CLECs because of high sales, marketing and customer service expenses.
Instead, company officials aim to steer customers over to the local fiber networks they're constructing, which are less expensive to maintain than the Bell lines are to purchase. Officials hope to have such "on-net" subscribers make up most of their customer base by the end of the year, up from 43 percent at the close of 1998 and 20 percent at the end of 1997, even as they seek to install up to 100,000 more access lines this year.
"Resale was always intended as an entry strategy," said David Piazza, chief financial officer of E.Spire. "Now we're going to cut the umbilical cord."
E.Spire also aspires to grab a bigger share of the emerging commercial market for Internet access and bundled voice and data services. In Washington, a fragmented, $4.5 billion telecommunications market, that means competing with more than Bell Atlantic. WinStar Communications Inc., Nextlink Communications Inc., Teligent Inc., AT&T Corp.'s Teleport unit, MCI WorldCom Inc. and other companies are also chasing small-business customers here.
Late last year, E.Spire set up separate units for voice and data/Internet services for the first time and merged its sales and marketing divisions. It also introduced its first integrated voice, data and Internet access packages, dubbed E.Spire Platinum and E.Spire Gold, for small and medium-sized businesses in 1998.
Finally, E.Spire, which already provides Internet access service to about 78,000 residential and business customers in Florida, announced plans this year to extend service to 25 cities in other states, including Washington and Baltimore, by year's end. In several of these cities, such as Washington, Atlanta and New York, the company will offer both traditional dial-up access and high-speed service over digital subscriber lines.
"There's never been enough emphasis on the data side," Pompliano said. "The whole industry is moving to data."
Analysts generally applaud E.Spire's moves. But they see risks in pursuing such large, hotly contested markets as New York and worry about costs and management turmoil at a company that has had three chief executives in three years.
"Strategically, it's a good plan," Murphy said. "The question is whether they can execute it."
© Copyright 1999 The Washington Post Company
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