Railroads look to tap broadband boom

Union Pacific, the nation's largest freight railroad company, is climbing aboard the increasingly crowded telecommunications train.

The company yesterday formed Fenix, a new subsidiary that will house three existing companies that oversee Union Pacific's communications and technology assets, including wireless software products, work force management software and transportation industry-specific software. Fenix, effectively a holding company, will also create a fourth firm to tap opportunities in wireless access and high-speed, or "broadband," networks.

The railroad is the latest entrant in a growing stream of old-world transportation and utility companies dusting off long-held assets that are suddenly turning to gold in the telecommunications revolution. Railroads in particular are finding that the rights-of-way land grants the U.S. government gave them as long as a hundred years ago, once worth almost nothing as real estate, can now produce businesses worth billions of dollars.

"It's pretty clear that most of the new (communications) carriers don't have their roots in communications," said Blaik Kirby, vice president at Renaissance Strategy, a business and technology management consulting firm. "They have roots in construction, utilities and some of the long-haul pipeline companies because they're construction and right-of-way-intensive businesses."

Although Union Pacific's main business is a vestige of transportation yesteryear, it has nevertheless created strong communications and technology assets for internal operational uses and is seeing them anew with the advent of lucrative new-economy businesses.

With its stock price on the decline during the past year, Union Pacific's move may serve to boost shares and, as many executives say, "unlock value" within the company. It hopes to garner higher profit margins than the long-distance freight shipping business generates by addressing the communications market, which has grown exponentially in recent years.

Union Pacific has 33,000 miles of rights-of-way along its vast railroad lines and 1,400 wireless towers. This gives it the potential to create

Gartner analyst David Neil says "old-world" companies branching out into telecommunications face hurdles, including their own management. see commentary

massive fiber-optic and wireless networks to rival those being built by Qwest Communications International, Global Crossing and other emerging communications carriers such as wireless providers Teligent and WinStar Communications.

The No. 1 railroad company is not alone in its quest for communications riches. Spurred by falling profits in their traditional businesses, and in some cases by deregulation, other transportation companies, electric utilities, gas and oil pipeline companies, and construction firms are embracing communications, building networks and forming new units with an eye toward increased revenue and initial public stock offerings.

Qwest and Level 3 Communications built their fiber-optic networks along railroad rights-of-way. Philip Anschutz, a major Qwest shareholder, was instrumental in gaining the rights-of-way from Southern Pacific Railroad for Qwest's domestic network. Similarly, Williams Communications built a massive fiber-optic system along the oil and gas pipelines of its parent company.

Burlington Northern Santa Fe, another of the largest U.S. railroads, says it doesn't own many of the technology assets that Union Pacific is folding into Fenix. Nevertheless, like other railroads, it has long leased rights-of-way on its tracks' real estate to fiber-optics companies, most recently to wholesaler PathNet.

Other industries hop aboard
Major construction firms also have gotten in on the act. Peter Kiewit Sons, an Omaha, Neb., construction company, has a significant stake in Level 3. And Ledcor, Canada's second-largest construction company, formed the communications carrier 360networks in 1998.

The electric utility companies also are aggressively diving into the communications market. For example, Montana Power plans to exit the energy business in favor of the wholesale fiber-optic bandwidth market, which it will pursue through its Touch America communications unit.

Houston-based energy giant Enron also is building a fiber-optic network via a subsidiary, as is Florida Power through its Progress Telecom affiliate. And dozens of local power companies are beginning to offer local phone service and other communications services, often using existing communications assets the companies owned for internal use.

"For the most part it's an incremental revenue source that helps offset the impact of deregulation or slower growth in their sector," Renaissance's Kirby said.

Some analysts believe that providing wholesale network capacity to communications carriers, rather than the more difficult and costly process of selling communications services directly to businesses and consumers, is the obvious choice.

The wholesale approach would be "an easy, no-brainer market," said Lisa Pierce, director of global telecommunications research for Giga Information Group. "It's all about taking advantage of your infrastructure...Not many industries are blessed with right-of-way or excess capacity."

In addition to generating new revenue, Fenix executives expect to spin off the technology and communications companies as IPOs.

"The best thing to create long-term value is spinning these companies off," said Osmo Hautanen, chief executive of Fenix and a former executive at Nokia and Philips Electronics. "These technology assets right now are trading at one times revenue, and I believe that there's much more value there than that. I'm sure that the electric utilities and the rest of these guys are looking at it the same way."

Hautanen said the communications unit is in the process of holding discussions with potential partners that would help shape the strategy of the company, such as whether to provide communications services on a wholesale basis to carriers or directly target business customers and even consumers.

"I can see a large European carrier saying, 'I've wanted to be in the United States for years, but I haven't been able to find the right deal,'" Hautanen said.

Pierce said some utility companies and railroads may not embrace communications services in the future when it comes time to upgrade their networks and invest in the latest technologies, however.

"I don't think we can assume that everyone is in it for the long haul," she said.

News.com's John Borland contributed to this report.