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Charting the new data Frontier

CEO Joe Clayton knows that delivering data brings in the dollars, and breaking up his phone company into smaller, focused units may bring even more.

Kentucky blue grass and fiber optics don't have much in common, but don't tell that to Frontier Communications chief Joe Clayton.

The leader of Frontier--blessed with a bevy of technology and cursed by a host of competitors with similar aspirations--frankly doesn't seem to care about the intricacies of the industry he's in. He just sees dollar signs in delivering data services.

Frontier is an old phone company with some new parts and a fresh paint job. An outgrowth of the upstate New York-based Rochester Telephone, the company is trying to shed its image as an incumbent local phone entrant by moving into the lucrative market for bandwidth--for business data needs, Web site hosting, and wholesale and retail long distance.

Frontier has various businesses, but no clear niche and few advantages when compared to the large carriers like AT&T and MCI WorldCom, or even upstarts like Qwest Communications International, according to observers.

But the man raised in a small town in Kentucky says that suits him just fine.

"This is fruit laying on the ground, you need a basket to pick it up," Clayton said of the opportunities his company has before it. "Our problem is in terms of scaling quickly to capitalize on the demand that is just exploding."

High on the list of options is a break-up of Frontier into distinct, focused businesses so the company can reap the rewards of a wide-open market. "I'm not worried about revenue being around the corner," Clayton said in an interview with CNET this week.

Rochester Telephone turned 100 years old in January, but Frontier executives are fond of joking that the company, with its new focus, just celebrated its first birthday.

Frontier has been in the process of repositioning the company to reflect its new data drive. The company acquired a Web hosting business--the centerpiece of its data plans--even while it cut costs by selling off non-core assets such as its retail pre-paid calling card business, which it dumped in December 1997.

But that's not all the company might shed.

Frontier executives are considering several different strategic options. Clayton believes parts of his business are undervalued by Wall Street and said last week he is willing to spin off the company's local phone or Internet businesses.

Local phone operations appear most likely to go, according to industry experts.

"They've got a situation where they've got their traditional local phone company, they've got a traditional long distance voice phone company, they've got a hot growth Web hosting company, and they've got this fiber network," said Mark Winther, telecommunications analyst with market researcher International Data Corporation.

"So how do they maximize value from a shareholder perspective? That's their challenge," he said.

Show me a sign
That question is not lost on Frontier.

"Our options are fairly succinct. We could stay as an independent niche player, or we could merge to become the latest, greatest telecom provider," Clayton said, noting Baby Bells, fixed wireless companies, competitive local exchange carriers (CLECs), or foreign telecommunications providers could be interested in partnering with or buying Frontier outright.

Frontier is part of a group of fiber optic mavens that include Qwest, Level 3 Communications, IXC Communications, Williams Communications, and energy giant Enron.

Together these emerging carriers are building thousands of route miles of advanced fiber optic networks intended to take telecommunications into the new millennium. These new networks--which utilize hair-like glass strands that send voice and data as pulses of light--are more efficient than existing circuit-switched networks, allowing the companies to offer low-cost services, largely to business customers.

Frontier, like many of the next generation telecommunications carriers with the exception of Qwest, is not interested in using its network for pitching services to mass market consumers.

"Don't want them, don't need them, can't make money on them," Clayton said.

Heading for the door?
Analysts agree Frontier could reap rewards if it spins off a business unit.

Morgan Stanley Dean Witter recently valued Frontier's local phone business at somewhere between $2.8 billion and $3.8 billion, the long distance business at between $3.3 billion and $4.9 billion, and the data business at about $1.2 billion.

"Based on our analysis, we believe the full value of these assets has not been fully realized," the investment bank stated. "While there are numerous structures that might highlight the value of Frontier's assets, we believe that separating Frontier's integrated communications services from its [local phone] assets is the most logical."

A spin-off could be lucrative. "If you do a comparison to Exodus, which is public, GlobalCenter [Frontier's ISP] alone should be worth nearly $2 billion and I don't think their share price reflects that," Winther said.

Clayton agrees. "I'm amenable to anything that drives our shareholder value. My job as the CEO is to have as many options as possible. Eighteen months ago when the stock was at $15, we didn't have many options," he said.

Flying business class, not coach
To create that value, Frontier and most of its competitors are targeting other carriers with wholesale capacity, large Internet companies with Web hosting and access options, and small to mid-sized business customers with integrated packages of long distance voice and data services.

Frontier believes a cohesive collection of services will be the key to winning this competitive race, prompting the company to rely heavily on its GlobalCenter data unit.

Frontier acquired GlobalCenter in January 1998 in a $185 million stock deal, and has since used the business ISP as the centerpiece of its data-centric strategy. GlobalCenter allows Frontier to offer a variety of integrated data and voice packages, and because the company owns the network, executives say they can compete on price with anyone.

"I believe I can drive my cost curve down as low as anyone in the industry today," Clayton said.

Going global
The company has big plans for GlobalCenter, which competes with companies such as Exodus, PSINet, Verio, and DIGEX, among others.

Earlier this week, Frontier unveiled a 40,000-square foot GlobalCenter Media Distribution Center in Sunnyvale, California. The new facility hosts Web sites for USWeb and The Motley Fool, and is expected to be filled with systems by the second quarter. Frontier already has plans for another center across the street--an indication of the demand associated with outsourcing Web sites.

Frontier, which also hosts sites for Yahoo, USA Today Online, and Playboy Online, expects to double the square footage of its eight domestic Media Distribution Centers this year. GlobalCenter also has Web hosting centers in London and Melbourne and plans to expand internationally into Paris, Amsterdam, or Tokyo, and elsewhere in Europe and Japan.

"Unlike Qwest, Level 3, IXC, Williams, Frontier has got market share," said IDC's Winther. "They've got a Web hosting business and they're one of the top Web hosting companies. Qwest has zero market share in the ISP space and Web hosting. So I think that's worth a lot."

CNET's Ben Heskett contributed to this story.