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High-speed gold rush

A playing field for phone and Net-based services has leveled, allowing communications upstarts to compete with industry behemoths.

    In glass, there's communications gold.

    So says a slew of strapping young communications upstarts seemingly springing up by the day, imbued with a sense that the market has shifted and the technology is ripe. They are trying to take advantage of a playing field for telephone and Net-based services that has been leveled to a large extent, allowing them to compete with industry behemoths like AT&T.

    Their aspirations have been compared to some of the most ambitious projects to link people and resources together in this country's history: railroads, highways, fossil energy pipes. For the likes of Qwest Communications, Level 3 Communications, Frontier, Williams Communications, and IXC Communications, among others, success may be judged by how many more people they can coax to connect to the networked information age through their fiber-optic strands, sometimes referred to as "glass"--a testament to the changing scope of the telecommunications industry.

    Some examples of initiatives under way:
    • Qwest, which has gained a certain cache in the industry for its use of railroad rights, has planned a domestic 18,500-mile network to serve about 130 cities. It is scheduled to be complete in the second quarter of 1999. About 8,850 miles of the Macro Capacity Fiber Network have been activated so far, according to the company, which also has plans to extend its physical plant to Europe through a submarine cable system and will complete a section that slithers 1,400 miles into Mexico by the end of this year.

    • Level 3 says it will spend $8 billion to $10 billion to lay a 19,000-mile national network based entirely on Internet protocol (IP), the transmission medium of the Net. IP is the standard that will largely lower the cost of voice communications due to the increased cost efficiencies gained by treating voice traffic as just another data "packet." The company also has right-of-way agreements with railroads, largely west of the Mississippi, that will allow the company to build 9,000 miles of its planned network. The company currently leases bandwidth from Frontier to offer services to customers.

    • Williams hopes to complete 32,000 miles of fiber optics by the year 2000, a year ahead of schedule, according to company executives, based in part on the company's roots as the largest carrier of natural gas in the United States. The company has utilized the real estate those pipes use as a means to implement its network, which it hopes will satisfy the wholesale needs of businesses and other third-party carriers, such as current customer US West.

    Emerging carriers aren't in love with the network, 
they're in love with what the network can do for them The so-called glass fibers being laid in plastic conduits across the country by these carriers can stuff the equivalent of about 750 million phone transmissions into a single fiber, a startling technological feat that will largely drive economies of a far different scale for bandwidth and long distance into the new millennium.

    But there are several challenges for these firms, including regulatory hurdles, Wall Street pressures, and the pace of change in telecommunications. Qwest, for example, has been blocked by the Federal Communications Commission in its efforts to have various regional Baby Bells market its long distance service.

    Furthermore, the nascent market to provide telephone services literally over the Net through a computer--an adjunct sector--may have been set back recently with word that the FCC will soon decide that telephone calls made to service providers should be subject to long distance, not local, rates. That's a sign that emerging telecom players will have a lot of regulatory work ahead of them.

    Also, some companies' current valuations on Wall Street are based in large part on the opportunities that a new-age network will offer young carriers. That perception so far does not jibe with current revenue streams. Some even admit they are all talk at the moment: "We're all hype, I'll be the first to admit it, but behind the curtain it's real," said Kevin Dundon, vice president for network engineering at Level 3. Furthermore, new-age carriers like Qwest continue to see their dominant source of revenues largely derived from traditional long distance and leased line services, an acknowledgment that market realities often supersede technology innovation. At a recent press conference, Qwest chief Joseph Nacchio admitted that new entrants need to have self-sustaining cash flows--in other words, implement a strategy to "feed the ducks when they are quacking," Nacchio said.

    Also, though data is surpassing voice in many telco networks, currently about 80 percent of revenues for carriers come from traditional circuit-based voice calls.

    Yet analysts remain bullish on the prospects for what will no doubt become a glut of high-speed bandwidth and associated use of IP to lower costs. "I think it's just like the highways of the 1950s. Now every time we build a new highway, people fill it," said Judy Reed Smith, chief executive of Atlantic-ACM, a telecommunications strategy and research firm.

    Using IP, these new-age carriers can gain an advantage through the lower costs of providing service, analysts say, forcing incumbents in the market, like AT&T, to react with their own plans, despite huge investments in older circuit-based voice infrastructures. "It's a huge advantage to have that cost differentiation," Smith noted.

    We've avoided the old legacy technology. That really adds up to network advantage. Atlantic-ACM recently completed a study that shows that while traditional carriers such as AT&T and Sprint will continue to grow at a steady pace, their share of an ever-larger pie will decrease in the coming years, due to competition from the likes of Qwest and Level 3.

    IP-based telephony is cheaper for this reason: the system of switching on the IP network is more efficient that the public switched telephone network, or PSTN. With the PSTN, one conversation monopolizes an entire line. But with IP, information is broken down into packets and reassembled after its journey, enabling numerous conversations to make use of that one line.

    "There is a deconstructing industry right now," according to Matthew Bross, chief technical officer at Williams Communications, speaking at a recent industry conference.

    "We think IP has one because that's how people use the network today," said Level 3's Dundon. "Everyone agrees that data is going to dwarf voice traffic over time."

    The culture at work within these new entrants has stood out to some. Carly Fiorina, president of Lucent's global service provider business, has seen the world through the eyes of incumbents, having worked for AT&T before Lucent was spun off more than two years ago. Now she runs a reported $19 billion business that helps to build out the networks of these emerging players.

    "They aren't in love with the network, they're in love with what the network can do for them," Fiorina said. "They're focused more on the network as an end to itself, rather than a means to an end."

    As recent positive earnings show, the emerging players such as Qwest and Frontier could be on to something. A Zona Research report noted: "In an era when so many Internet-related firms are finding it hard to make a buck, we think the real point here is: If you own the pipe, you may become the piper that gets paid."  

    Go to: Policing the pipelines