5/18/98 Upside article. Qwest on a Tear
[No ASND references, but good article on Qwest and other new ASND customers]
upside.com
By David Futrelle
Joe Nacchio professes to be a little puzzled by the
widespread assumption that he's running a
telecommunications company. He prefers to think of his
company, Qwest Communications International Inc. of
Denver, as a sort of Silicon Valley startup stranded on the
wrong side of the Rockies.
"We've never defined ourselves [as a telecom company]," Nacchio
says. "We see ourselves much more intellectually and culturally
affiliated with the Valley than we do with, say, the New
York-Washington corridor." Qwest is, of course, the fiber-optic
upstart that catapulted itself into the telecom big leagues in March by
announcing that it was swallowing long-distance carrier LCI
International Inc., a company more than twice its size. The deal, like
WorldCom Inc.'s audacious (pending) purchase of MCI
Communications Corp., was powered by high-flying stock: $4.4 billion
worth, to be precise (see stock chart, below). The company expects
the transaction to be completed in the third quarter of 1998.
If and when the deal goes through, Nacchio, Qwest's president and
CEO, will find himself in charge of the fourth-largest long-distance
company in the world. Combined, the two companies had revenues of
$2.3 billion in 1997--and a market capitalization of more than $11
billion at the time the deal was announced. "Suddenly, Qwest matters,"
proclaimed USA Today the morning after the deal went down--a
characterization Nacchio was happy to remind me of when we spoke
that afternoon.
Qwest is indeed a hot property--a company
seemingly bubbling over with possibility. But as
Qwest attempts to move beyond its early glories,
it is entering what may become the most difficult
phase of its existence: This is the time when a company built on
promises needs to start delivering on them. Qwest's record, so far, has
been impressive. But there is no guarantee it will succeed in the future.
Qwest and a host of other fiber-optic network builders are
not-so-quietly preparing for the future--not only adapting to the new
realities of telecom but in many ways helping to create them. It's a
strange new world--one that may bring as many surprises to Qwest as
it does to the rest of us.
Pipe Dreams
Just what is this thing called Qwest? It's hard to say, exactly. Qwest
itself has sometimes had trouble clarifying what it does. The company's
press releases describe it as a "multimedia communications company
building a high-capacity, fiber-optic network for the 21st century." Its
IPO prospectus described it, in part, as a "facilities-based provider of
communications services to interexchange carriers and other
communications entities and to businesses and consumers. ... "
Whew, that's a mouthful. Nacchio labels his baby "an IP multimedia
networking company." But much of what makes Qwest Qwest can be
summed up in one word--bandwidth. Before the LCI deal was
announced, Qwest's little secret was that it wasn't really a telco at
heart--it was a construction company, a layer of fiber-optic lines.
Construction money made up the bulk of Qwest's 1997 revenues--a
little more than $580 million, as opposed to about $115 million for
commercial services and bandwidth wholesaling. And while revenues
for the year rose an impressive 200 percent, most of this increase
came from construction services, which grew more than 300 percent.
But if Qwest is a construction company, it's a construction company
with attitude--and an ingenious plan. Qwest was (and is) in the
business of laying fiber-optic pipelines for other companies--most
notably GTE Corp., WorldCom and the smaller long-distance carrier
Frontier Corp. But for every piece of fiber Qwest lays for someone
else, the company installs another for itself, which means that its
customers--who are also its long-distance competitors--have covered
much of Qwest's network construction costs. Qwest, to put it baldly,
has managed to get its rivals to pay for a major portion of the high-tech network that may one day bury them.
Qwest on a Tear | next page: Qwest's Network Dreams | Internet
Telephony Pioneers
Qwest stands to emerge from its pipe-laying era with a 16,000-mile
fiber-optic network, which (when completed) will serve 125 cities
across the United States, representing about 80 percent of the
country's voice and data traffic. As of early 1998, less than a quarter
of the network was up and running, but if all goes as planned, the
network will be mostly lit by the end of the year and completed by the
second quarter of 1999. According to Nacchio, work is progressing
ahead of schedule, and the company is looking to expand further.
"When the dust settles," he says, "we're going to have a 24,000-mile
network." Qwest plans to spend more than $2 billion to get the fiber
laid and lit.
And it's doing so two pipes at a time: One pipe contains 96 strands of
fiber, half of which will be sold to competitors and half of which Qwest
will retain. (Unlike most fiber-optic lines that are in place, Qwest's
network is designed with upgrades in mind.) Next to each fiber-filled
pipe, Qwest is also laying a spare. In technical terms, the company is
laying fiber "designed with a highly reliable and secure bidirectional,
line-switching OC-192 SONET [synchronous optical network] ring
architecture," as Qwest's press releases put it. In nontechnical terms,
this means some pretty big pipes: Company officials say the network
will be able to carry all the voice and data traffic of AT&T, MCI and
Sprint.
Nacchio is well aware of the ironies inherent in
Qwest's buildup strategy. "[Qwest] owes its
birth, to a certain degree, to Frontier and GTE,"
he says. "To secure what we believe was the
important low-cost position in the future, we
overbuilt the network and sold off the excess at
sufficient gross margins that we had enough cash
flow to cover about two-thirds of our construction bills."
Of course, the plan could backfire, giving Qwest's competitors little
Qwest networks of their own--not to mention a technical leg up that
could allow them to emerge even stronger in the carrier-eat-carrier
long-distance industry. But Nacchio says he isn't worried about this
possibility. "They are fundamentally different companies [than Qwest,]"
he argues. "They're old-line telephone companies with fiber assets. I
think of us as a Silicon Valley company that's got all this bandwidth.
I'm not worried about them as innovators."
What Qwest is bringing to the industry, Nacchio argues, is not only a
massive supply of bandwidth but a new attitude surrounding that
bandwidth. According to Nacchio, the old telecom-industry
oligopolists bring new capacity online almost grudgingly. Qwest, by
contrast, is looking forward to a future that exceeds our present
imaginings, where abundant bandwidth helps to inspire new
applications--and create new demands. When this world arrives--and
Nacchio thinks it will be sooner than most people believe--Qwest will
be ready. Although the company is still small (at least compared with
AT&T), Nacchio says, "If you look at the amount of broadband
capacity we bring on and the cost levels [at which] we bring it on, we
are already influencing a change in this industry."
Qwest isn't the only company that believes if you build it, the
applications will come. IXC Communications Inc. of Austin, Texas,
has been building up its high-bandwidth network during the past
several years. And the vision of a bandwidth-rich future has inspired
some old network builders to get back into the business. For example,
the Williams Network, the communications arm of the Williams
Companies Inc. of Tulsa, Okla.--which built the WilTel fiber-optic
network ultimately bought out by WorldCom in 1996--has thrown its
hat back into the fiber-optic ring. Meanwhile, former MFS
Communications Inc. network builder (and ex-Qwest board member)
James Crowe is heading Level 3 Communications Inc. of Omaha,
Neb., a fiber-optic spin-off of the Peter Kiewit Sons' Inc. construction
empire--which has committed a reported $3 billion to Level 3's
network buildout.
To some, all this fiber-laying seems highly imprudent, to say the least, while others worry about the possibility of a future bandwidth glut. But there are those who see in it the promise of a fundamentally new information economy. According to David Isenberg, a former Bell
Labs researcher, we are entering the age of the "stupid network." Not
meant in a pejorative sense, "stupid" networks instead describe a
bandwidth-rich information matrix "whose design is guided by plenty,
not scarcity ... engineered for intelligence at the end user's device, not
in the network," Isenberg says.
Traditional telcos, Isenberg notes, have built their networks around an
assumption of bandwidth scarcity--and centralized control through the
phone company's digital switches. But while this kind of "intelligent
network" offers some advantages--for example, enabling phone users
to make rudimentary choices before completing a call ("Press 1 for
reservations," and so on)--it is fundamentally limited because the
choices are determined by existing network equipment.
The rise of the Internet, and of the packet-switching technology that
makes it possible, fundamentally changes the equation. The Net is the
"stupid network" in embryo--a system in which the ultimate intelligence
resides in the computers attached to the network, not in the network
itself. On a stupid network like the Internet, Isenberg notes, "the data
[tells] the network where it needs to go," while in a circuit network,
"the network tells the data where to go." And as a digital network
(rather than a voice network rejiggered to deal with data), the stupid
network can easily handle any kind of information sent its way--from
voice calls to faxes to videos of Pamela and Tommy Lee. Bits are bits:
The stupid network, Isenberg says, will "let you stuff bits in one end and get them out the other without getting tangled in cobwebs of
legacy assumptions."
Qwest on a Tear | Qwest's Network Dreams | next page: Internet
Telephony Pioneers
For all its novelty, Internet telephony--placing voice calls over the
Internet--is only the beginning. Until now, more than a few people had
written off Internet telephony as little more than the 1990s version of
ham radio. And for good reason: IP telephony had until recently been
limited, by and large, to computer-to-computer calls and plagued by
scratchy sound quality, irritating delays and equipment compatibility
problems.
But Qwest and others plan to change that. With Qwest's
voice-over-IP service, users don't need special equipment--just their regular phones. And by routing calls over Qwest's high-bandwidth pipes, the company hopes to largely eradicate the frustrating delays that stem from sending calls over the always-overburdened public Internet. Qwest made a splash this year
by bringing phone-to-phone Internet-based telephony to customers in
several Western cities for the low, low price of 7.5 cents a minute.
And the company plans to expand the service to more cities in the near future as it rolls out more of its network and brings LCI's customers
onboard. The key is to bring the new technology to customers as
unobtrusively as possible rather than expect them to upgrade in the
hope of saving a few bucks. "A lot of people have never touched a
PC," Nacchio says. "When I say 'packets,' they say 'schmackets.'
They want to know, 'If I pick up my phone, is it 7.5 cents a minute?'"
Or less: In a foreshadowing of things to come in the long-distance
arena, several competitors quickly undercut Qwest's low-priced
long-distance service, announced in February, with their own
voice-over-IP offerings. For example, IDT Corp. of Hackensack,
N.J., now offers calls for 5 cents per minute, and I-Link Inc. of
Draper, Utah, offers calls from six Western cities for 4.9 cents a
minute. However the cost of these offerings may rise once Qwest,
IDT, I-Link and others start paying call connection charges to the local
phone companies for completing calls.
Yet even with rates dropping to pennies a minute, the market for voice
communications isn't likely to increase more than 10 percent to 15
percent a year in the near future, Nacchio says. After all, how much
more can you really say to your mother-in-law in Petaluma, Calif.? The real future is in data, which most analysts anticipate will exceed voice
traffic in just a few years. According to Joe Noel, a senior analyst at Hambrecht & Quist LLC of San Francisco, the initial surge will
probably be in fax-over-IP service. After that, who knows?
Unencumbered by what Nacchio calls "legacy systems or legacy
mentality," Qwest and the other fiber-optic pioneers can afford to
invest big in new technologies because those investments will ultimately
allow them to sell bandwidth profitably at far lower rates than the
old-style telcos.
For the old-style telcos, the full extent of the damage won't be
immediately obvious. With their gigantic infrastructures and impressive
consumer bases, they'll continue to make money in the short term. But
ultimately, the argument goes, the new bandwidth coming online will
drive prices down relative to volume--lower than the older telcos can
afford. In effect, their business model will be kicked out from
underneath them. "The margins [for the big telcos] are slim," explains
David Cooperstein, an analyst at Cambridge, Mass.-based Forrester
Research Inc. "When abundant bandwidth is built out, their costs will
remain high, but their revenues will head south."
That's when Qwest will really make its mark. "The phone company of
tomorrow is nothing like the phone company of yesterday," says
analyst Jeffrey Kagan of Kagan Telecom Associates, a consulting firm
in Marietta, Ga. "It looks like Qwest-LCI, it looks like
MCI-WorldCom. It's a blending of the Internet and the traditional
telephone networks. It's young, nimble, flexible. [Qwest is] a perfect
example of what the future looks like."
Qwest on a Tear | Qwest's Network Dreams | Internet Telephony
Pioneers
Coming Tuesday: Qwest Growth
David Futrelle writes regularly on culture, media and technology
for Salon, Newsday and numerous other publications.
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