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Start-up carrier dives into crowded bandwidth market

Aerie Networks announces plans this week to build a 20,000-mile nationwide fiber-optic network, becoming the latest company to dive into the increasingly crowded bandwidth market.

    Aerie Networks announced plans this week to build a 20,000-mile nationwide fiber-optic network, becoming the latest company to dive into the increasingly crowded bandwidth market.

    The new network is expected to carry Internet, video and voice traffic for hundreds of service companies, content providers and other communications carriers. The explosive demand for Internet access and information has created a huge market opportunity for new service providers such as Aerie and others. Stopped in their tracks

    The sheer volume of fiber-optic networks has led some analysts to question whether new companies like Aerie will be able to survive on the lean profit margins that the influx of supply vs. today's demand may bring. But others believe that more bandwidth--the capacity of those fiber optic wires--along with lower costs, will only serve to encourage use, leading to new technologies and Internet-based services.

    Fiber for miles and miles
    Communications carriers are digging trenches across the nation, installing fiber-optic cables to complete high-speed networks.
    Carrier Planned miles Miles installed Estimated cost
    Aerie 20,000 0 $3.5 billion
    Williams 33,000 26,000 $4.7 billion
    Qwest 25,500*** 25,500 n/a
    Level 3 16,000 9,334 $13 billion*
    Broadwing 18,000 17,000 n/a
    Enron Broadband 15,000 14,600 n/a
    Nextlink** 5,000 4,235 n/a
    Global Crossing 16,000 14,000 n/a
    360networks 24,100*** 15,000 n/a
    * includes European, Asian and U.S. costs
    ** includes only metropolitan area networks. Nextlink intercity network is same 16,000-mile network operated by Level 3
    *** includes all of North America

    Source: Companies
    "The question is if there's going to be a glut of bandwidth or whether there's going to be insatiable demand. If we're looking forward ... tomorrow the Internet is about full-motion video, and that requires immense amounts of bandwidth," said Jeffrey Kagan, an independent telecommunications industry analyst. "Nothing's certain in this industry, but one thing we don't have to worry about is a glut of bandwidth."

    Aerie's three-year construction of a new high-speed, or "broadband," network will cost roughly $3.5 billion. The project is slated to begin in the Midwest and along the eastern seaboard as early as June, according to executives. The network is expected to be finished by early 2003.

    The start-up's plan calls for it to install 432 fiber-optic strands per conduit, which is the protective shroud that encases the fiber-optic wires. This gives the company massive network capacity, which is more than four times that of some other new carriers. Aerie's network will connect 194 metropolitan cities, or most U.S. markets with a population of more than 500,000.

    The ambitious plan serves to highlight the intense competition in recent years in the communications industry. Long-established telecommunications carriers such as AT&T, MCI WorldCom and Sprint, which all have older fiber-optic networks, are under increasing pricing pressure from newer entrants such as Qwest Communications International, Level 3 Communications and Global Crossing.

    Those price wars have driven down profit margins, causing some industry observers to question whether additional new fiber-optic network providers will be able to sustain themselves.

    Analysts say that Aerie, by coming later to market than others, will need to show customers and investors a very low-cost structure, something company executives feel quite confident of accomplishing. see story: Cashing in on fiber optics

    "We're coming to market at a time of great advances in optronics and electronics, which means fewer layers and less (equipment)," said Aerie Networks president and chief operating officer Mort Aaronson, a former MCI executive. "At each point (of the network) we've got a cost and speed advantage that allows us to come in at a price point no one's ever seen before."

    Probe Research communications analyst Hilary Mine said newer carriers make up in cost advantage what they lose in name recognition. "The irony is it gets cheaper and cheaper to build these networks each time around," Mine said. "It's just one more example of people taking advantage of the rapidly changing economics of networking."

    Aerie plans to sell its network capacity to other carriers on a wholesale basis; the company will not build local or metro networks so as not to compete with other carriers. Aerie also will sell directly to content providers, Internet access companies and other firms in need of bandwidth.

    "We are purely in the business of putting others in business," Aaronson said, adding that the company has no plans to directly offer services to consumers or to market services under the Aerie brand name.

    Aerie is hoping to use a construction model paved by others, such as energy companies and Qwest, which used rights-of-way along railroad tracks to complete its network.

    Aerie has offered equity to 12 energy companies in exchange for the right-of-way agreements along nearly 15,000 miles of their natural gas, oil and liquid petroleum pipelines. Aerie plans to swap network capacity with rival carriers to round out the remaining 5,000 miles of its network.

    Several former MCI, Qwest, LCI International and Williams executives formed Aerie in August, 1999. The start-up has received funding from VantagePoint Venture Partners, a Silicon Valley-based VC firm. Investors also include: BP Amoco, Buckeye Partners, CMS Energy, Explorer Pipeline, Kinder Morgan, Marathon Ashland Pipe Line, National Fuel Gas, Plantation Pipe Line, PG&E, Sempra Communications, Sun Pipe Line and TEPPCO, among others.

    Analysts said the ongoing network construction is only good news for consumers, regardless of whether Aerie is successful. "From the consumers perspective, who cares if (Aerie) survives, someone will own that network, and the supply will be there," Probe's Mine said.