Nextlink looks to rise above telecom rivals

Amid a sea of similar telecommunications companies, Nextlink Communications may find it difficult to differentiate itself from its competitors.

5 min read
Amid a sea of similar telecommunications companies, Nextlink Communications may find it difficult to differentiate itself from its competitors.

Nextlink, backed by cellular pioneer Craig McCaw, is using a potpourri of technologies to bring voice and data services to small and mid-sized business customers. So far, however, the company's success has been mixed.

Although Nextlink showed solid revenue gains, the company posted a wider net loss in its latest quarter as it continues to build its local phone and wireless networks nationwide. Ultimately, Nextlink said it will climb into the black by offering consumers virtually every communications service in the book, once its networks are complete.

Yet analysts say that because there are so many new firms that offer similar voice and data communications services--often based on identical technology--it will be the little things, like customer service, that differentiate one company from another.

"The cruel little fact of the telecommunications world is that there are only so many arms merchants from which to buy the guns. But the bullets are all the same caliber," said Robert Rosenberg, president of Insight Research, a New Jersey-based telecommunications market research firm.

stock chart "The only thing [Nextlink has] to sell is its ability to understand the market and offer a grade of service that is a little bit better than the next guy."

A crowded market
Nextlink's strategy is representative of a larger trend for firms to become "integrated communications providers," or companies that can offer any type of telecommunications service to a wide range of customers.

Nextlink offers local voice services, long distance by reselling wholesale capacity from other carriers, and Net access via direct fiber or digital subscriber line (DSL). The company plans to offer commercial broadband wireless service in Dallas and Los Angeles later this year, and will unveil a number of advanced data services, including virtual private networks, Web hosting, and simple application service provider offerings during the first half of next year.

"You're going to want to own the customer," Nextlink spokesman Todd Wolfenbarger said. "There's a couple of ways to do that. You can send them the bill or you can own their phone number, or both."

Carriers such as Qwest Communications International and Level 3 Communications as well as smaller companies including Concentric Network, PSINet, and Verio also aspire to offer services from Internet protocol-based telephony to e-commerce. Broadband wireless companies such as Teligent and WinStar Communications also offer wireless services similar to Nextlink's.

But all of these firms are fighting over a largely untapped market: the small and medium-sized business customer.

"That's why…it's going to come down to execution," said Jeannette Noyes, communications analyst with market researcher International Data Corporation.

"[Nextlink] is at a point where they need to differentiate themselves. One way they can do that is by cost. They're really very facilities-focused, which has helped them keep their costs low."

Nextlink hopes to offer a full range of services while larger firms, like the Baby Bells, are still blocked by regulatory restrictions.

"We compete today against the long distance companies by offering local where they cannot," Wolfenbarger said. "We compete against the [local firms] by offering long distance, which they can't do. And, we can do it at a 10 to 15 percent cost reduction."

Yet once rivals' networks are complete, markets are open to increased competition, and prices are flat across the board, Nextlink believes it still can succeed by offering a wider range of services--particularly fixed wireless, which can be introduced faster than fiber networks or DSL.

"We feel like we've got more tools in the chest," Wolfenbarger said. "What those tools give us is a chance to control the network and the quality to offer the simplest services possible."

There is a huge market opportunity for all-in-one communications service bundles, especially for small and mid-sized companies that are underserved by large firms like AT&T and MCI WorldCom, analysts said.

"A lot of people talk a good game, but at the end of the day few companies are doing it," said Stuart Conrad, an equity analyst at Deutsche Bank Alex. Brown. "[Nextlink] is doing it. They're knocking on doors, selling service."

Construction, not profits
Like many upstart communications companies, Nextlink has placed a premium on building its new networks rather than turning a profit.

The company plans to build local fiber networks in a total of 60 markets in the United States, including the top 30 media markets, by the end of next year. So far, the company has completed construction in 46 markets. Nextlink also entered into a cost-sharing agreement with Level 3 for its long-haul network.

"They've got a diverse set of assets, and a diverse set of technologies," said Conrad. "I'd like to know one other company that is building local fiber networks, DSL co-location, a national network, and the breadth of wireless spectrum that these guys have."

Nextlink reported a net loss of $141.6 million, or 1.27 a share, earlier this week. The loss was wider when compared with a net loss of $68.9 million, or 0.79 a share, a year ago. At the same time, revenue grew to $75.1 million from $37.8 million a year ago.

Big-name backing
Well known for his pioneering ways in the cellular phone industry, McCaw owns a 30 percent equity stake in Nextlink, but controls a majority voting stake in the company. Analysts say his association with the firm has helped its image on Wall Street.

"It's a huge credibility factor and it's a huge source of capital. It gives investors confidence the company can tap the capital markets," Deutsche Bank's Conrad said.

Nextlink is not to be confused with Nextel, one of the nation's largest mobile phone service providers--and another McCaw company. Nextlink and Nextel are separate companies that do not work together currently, Wolfenberger said.

McCaw's investment arm also holds a stake in Teledesic, a satellite data company, and in ICO Global Communications, a satellite-based phone service. ICO Global filed for bankruptcy protection in August, but with McCaw's $1.2 billion investment, plans to return to business in 2001.

Bloomberg contributed to this report.