Oppy on WCII [part 3]
A number of higher-speed technologies are beginning to be deployed that will
improve customer access to the Internet. Some of these technologies include
fixed wireless (WinStar, Teligent, ART), Digital subscriber Lines (XDSL)
(Covad, Northpoint), and high-speed cable modems (@Home, Roadrunner). These
technologies offer greater bandwidth and more speed at a lower overall cost
per kilobit than the existing infrastructure copper infrastructure. We
believe wireless access technology and cable modems will play a significant
role in the residential market while xDSL and fixed wireless will play a
significant role in the business market.
The increased availability of faster access speeds to business and residential
consumers should drive continued rapid growth in the number of Internet users.
Exhibit 9 - - Internet Hosts
Finally, the intensity of electronic messaging is increasing. E-mail is
already traveling over data networks, and the size of these messages has been
increasing as more and more have data files attached. As the Internet moves
from a vehicle primarily used for e-mail and basic Web graphics to a more
mainstream viewing medium with full-motion video, the bandwidth demand per
user could grow over 75-fold.
Exhibit 10 - - Bandwidth Demand
Sales and Marketing
WinStar utilizes a "building-centric" focus towards its sales and marketing.
We believe this is a highly efficient vehicle for accelerating growth.
Indeed, WinStar currently has roof rights to over 4,200 buildings nationwide
and should reach 8,000 roof rights by year-end. WinStar has over 15,000
customers.
WinStar markets its services through combinations of direct sales, television,
print and other media. WinStar has three different salesforces: general
account, large account, and broadband data overlay. WinStar's sales force
has grown from less than 100 in 1994 to approximately 500 today. Sales
offices have grown from a handful at the end of 1996 to 30 today.
WinStar's general account salesforce, which numbers about 350-375 salespeople,
focuses on small to medium-size business. The salesforce is compensated on a
salary and commission basis, with a roughly equal mix of compensation if quota
levels are met. We do expect modest near term growth in this salesforce
although we expect the company to share general account salespeople across
different markets.
WinStar's large account salesforce focuses on large businesses and Government
customers and numbers about 50-75 salespeople. This salesforce is compensated
with a higher base salary than the general account salesforce and salespeople
may receive bonuses of up to 50% of salary. we expect the large account
salesforce to increase to about 100 by year-end 1999.
The broadband data overlay salesforce focuses on selling WinStar's data
service products. This salesforce, currently about 75-100 salespeople, is
expected to expand significantly to 125 people by the end of 1999, and should
help tap the rapidly growing data services market.
WinStar primarily targets customers located in "on-net" buildings. In the
past, WinStar entered a new market by reselling the services of the incumbent
providers to its customers, intending to transfer these customers to its local
broadband network once deployed. Now that the company has reached what it
considers to be a critical mass of network and an almost fully developed
salesforce, the company has recently intensified its sales and marketing
efforts on customers located in buildings connected to its local broadband
networks (on-net) . In other words, WinStar is increasingly selling behind
the network so that a customer can be put on-net from day one, and there is
thus no need to resell and then migrate the customer. We expect these efforts
to result in greater profitability as the company's local broadband networks
continue to expand and a greater percentage of its customers are located in
on-net buildings.
As part of this objective, WinStar uses various creative marketing strategies
to expand its customer base in newly wired buildings. One such program is
"Project Millennium," described earlier, which is currently being offered to
businesses located in approximately 1,000 buildings in 13 of WinStar's
existing markets. Under Project Millennium, first-time customers who sign a
one-, two- or three-year service contract, receive up to $1,000 per month of
free local phone service during the first one-third of the contract term.
From a sales perspective, the program has resulted in increased sales
efficiency as reflected in a substantial jump in so-called "one call sales
closings" which is, as the name implies, an instance when a customer switches
service on a sales person's first sales call upon the customer. The company
reports that the rate increased from 7% pre-Millennium to 19% in the
Millennium program.
In those markets where WinStar has not yet completed its network. the company
will continue to sell in front of the network. The company will, however,
focus on large accounts that it will be able to migrate onto the network
rapidly. In such markets, WinStar seeks to have at least 66% of its customers
on-net within 24-36 months of entering the market.
WinStar has 23 switches in the ground currently (and over 100 data switches)
with about 20% of all access lines on-net and 40% of lines on-switch as of
December 31, 1998. Assuming the success of Project Millennium continues
as we believe it will - - the on-net percentage should increase approximately
2-3% a quarter and approach 66% by 2002.
WinStar emphasizes selling a bundled suite of services. Bundling benefits
WinStar by reducing customer acquisition costs and billing costs as a
percentage of revenue, increasing network utilization, heightening sales
productivity and lowering customer churn and higher margins. The company
reports that about 40% of its Millennium customers are currently taking
multiple servTces.
We expect WinStar to also move towards "solution selling." The company has
expertise in a wide range of products (local exchange, Web hosting,
long-distance, enhanced data services such as frame relay, ATM, Internet and
intranets, private networks, etc.) that enable it to focus its sales pitch on
solving customers' business problems. We believe this type of integration will
help lock in WinStar's customers for the long-term, primarily because it
reduces their in-house technical and administrative burdens and increases
their costs of switching vendors.
Small and medium-sized customers generally do not have a highly sophisticated
in-house communications/IT group that has the time to manage the different
service providers and vendors. Many also are too small to implement the types
of systems integration services offered by large telcos and IXCs. As a result,
this market represents a huge opportunity for the ICPs, particularly WinStar,
which will shortly have a larger scope and size than many peers.
NETWORK
In December 1998, WinStar announced its intention to embark upon an ambitious
plan to expand its network. WinStar intends to double the U.S. reach of its
broadband network from its current 20 markets to GO markets over the next two
years and to serve an additional 50 major international markets within five
years.
Exhibit 11 Network Map
We believe WinStar's aggressively network expansion is timely. Building a
local exchange network is time-consuming and expensive and, therefore,
difficult to replicate. We believe each market will be able to support only
3-4 competitors, so being one of the first competitors with local facilities
is a significant competitive advantage. It is very difficult to resell local
exchange services profitably (witness MCI Metro's losses in summer of 1997 and
the difficulties encountered recently by local reseller USN Communications) so
we believe owning facilities is essential to success.
Local Broadband Networks
WinStar's local network design directly reflects WinStar's effort to offer a
solution to the increasing need for bandwidth to a larger addressable market
than fiber or copper-based connections. The network is designed to bring
broadband last mile connections to the substantial majority of buildings in
each of its markets, and focus on those that do not have last mile fiber or
which do not justify the cost of last mile fiber.
WinStar uses a wireless connection to establish connections between buildings
in which its customers are located and its hub site buildings. Transmissions
are carried between these locations using wireless connections between
antennas placed on the roof of each building. Accordingly, securing access
rights for its antennas is a crucial step in the construction or expansion of
its local broadband networks. As of December 31, 1998, Winstar had access
rights to more than 4,200 buildings. The company selects hub site buildings
to maximize the number of customer buildings which will have a line of sight
to the hub. Connections between the hub sites and its switching facilities are
made using fiber or, in some instances, a second wireless link. The company's
switches thereby effectively deliver voice, data and video traffic to
customers directly connected to its network, the public switched telephone
network or the Internet.
WinStar's Wireless Fiber capacity is an integral component of the local
broadband networks for the origination and termination of voice and data
traffic and the interconnection of hub and switching sites. Each point to
point Wireless Fiber link at 38 GHz currently provides up to eight T-1s of
capacity (equivalent to 192 voice lines) or one DS-3 of capacity (equivalent
to 672 voice lines) - The company's deployment of point to multipoint
facilities allows a link to support up to one OC-3 equivalent of capacity
(equivalent to approximately 2,016 voice lines). Significant other features of
Wireless Fiber services include a large amount of bandwidth in each channel,
allowing for high subdivision of voice and data traffic; a range of up to five
miles between transmission links (although the company generally maintain link
distances of less than three miles or shorter distances in certain areas to
meet the company's internally established performance standards); and
performance engineered to provide up to 99.999% reliability, as tested by
WinStar.
Each 38 GHz Wireless Fiber path consists of paired antennas generally placed
at a distance of less than three miles from one another within a direct,
unobstructed line of sight. The antennas are approximately 12 to 15 inches in
diameter and are typically installed on rooftops, towers or windows. Point to
multipoint technology allows a single hub site antenna to be used to form
multiple wireless Fiber paths with antennas located on numerous customer
buildings. Each of these hubs will typically be able to address all of the
buildings in line of sight with that hub using as few as four hub site
antennas.
Thus, unlike traditional ICPs, WinStar is not dependent on the existing ILEC
infrastructure, and can completely bypass the copper facility. So-called
"wireless" access networks are actually a combination of fiber/wireless
network features generally based on a hub/spoke layout. The wireless portion
of the network is the "link," or connection between the customer premise and
the network node. The wireless link (spoke) connects a customer with the
carrier's hub site (or base station or node), with multiple customers served
from a single node. Nodes are, in turn, typically connected to the carrier's
switch via fiber with multiple nodes served from a single switch. Switches
are usually linked together via leased long-haul fiber to form a wide area
network capable of carrying high-speed voice, data and multimedia traffic,
although wireless backhaul at lower frequencies is an option. The link
between the customer and the node is actually comprised of a pair of radios,
one at the customer premises and one on the node. They communicate via
microwave signal.
The cost of constructing a Wireless Fiber last mile connection is
significantly less than the cost of creating the same connection using fiber.
Further, the overwhelming percentage of construction costs for Wireless Fiber
is attributable to technology, whereas only a small percentage is attributable
to labor. Accordingly, the company's cost of establishing broadband last mile
connections to buildings using Wireless Fiber service is falling as an
increasing number of vendors are manufacturing wireless radio equipment and as
more advances are being made in radio technology. We expect these trends to
continue.
Exhibit 13 - - Point to Multipoint Metropolitan Area Network
As Exhibit 13, shows, the advantages of wireless access will be accentuated as
WinStar integrates point to multipoint technology into its network
infrastructure. WinStar began the commercial deployment of point to
multipoint technology during the fourth quarter of l99B with its rollout in
Washington, D.C. and PMP is expected to be nationally deployed by year-end.
Point to multipoint technology adds another dimension to WinStar's ability to
create network capacity and presents significant advantages over network
buildout using only point to point technology. These advantages include the
reduction of capital expenditures because a single hub-based multipoint
antenna can simultaneously carry transmissions to multiple customer buildings,
and the more efficient management of the company's wireless capacity because
multipoint technology allows the company to allocate the same spectrum among
multiple customers to be used when required.
PMP basically reduces the capital cost of adding a subscriber in half by
eliminating 1 of the 2 radios necessary to complete a link between the
customer and the node. A single PMP radio at the node can supply a link with
multiple customer sights, such that incremental subscribers can be loaded by
simply adding a radio at the receiver site (node). PMP reduces the
incremental radio link cost to add a building to the network from
approximately $12,000 per addressable building under point to point to $6,500.
A PMP radio costs approximately $4,500 and $6,500 installed. PMP also reduces
the capital cost to connect a building from approximately $50,000 to $25,000
versus point to point. Both technologies offer a significant cost advantage
over fiber based networks which have incremental link costs of approximately
$300,000 and a capital cost to connect of approximately $400,000. WinStar
estimates that the number of lines sold to break even on capital for PMP,
point to point, and fiber linked buildings to be 10, 20, and 165,
respectively. Significantly wireless also offers time to provision advantages
over fiber.
WinStar also ranks among industry leaders in buildings connected to its
network; the intended expansion should enhance its position in this space.
Indeed, by year-end 2000, we estimate that WinStar will have more than 8,000
buildings connected to its broadband network - - a sum that will likely exceed
the fiber or wireless connections of any other provider, including AT&T and
MCI Worldcom. This building-centric focus should lead to significant profit
opportunities and create substantial barriers to entry.
Roof Rights
Winstar must obtain roof rights on each building where a transceiver will be
placed. WinStar ended 1999 with access rights to more than 4,200 buildings,
and the company expects to obtain access rights to s,ooo buildings nationwide
by year-end 1999. In 4Q98, the company obtained 715 building access rights
compared to 600 in 3Q98.
The company's plan has been to negotiate, prior to receipt of actual service
orders (i.e., prequalification), roof rights for the installation of Wireless
Fiber links on buildings in the metropolitan areas covered by its wireless
licenses. This includes hub site buildings which give direct lines of sight to
a number of other buildings the company targets and buildings that can provide
interconnection access to other carriers' points of presence, switch locations
and local access nodes These prequalification activities may include the
payment of option fees to the owners of the buildings. On the regulatory and
legislative fronts, the company is seeking national reform that would enable
telecom service providers to acquire roof rights based on customer selection
of a company as its service provider rather than at the discretion of a
building's landlord.
Historically, WinStar has negotiated roof rights on a building-by-building
basis. The company recently began to negotiate for roof rights with owners
of portfolios of buildings. For example, in December 1998, WinStar acquired
roof rights to a portfolio of more than 600 buildings owned or controlled by
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