Tricks of the bandwidth trade
Level 3 plans to lease a portion of a competitors' high-speed network, continuing a trend in which emerging carriers use bandwidth as currency to fund expansion.
The new network builders--Level 3, IXC, Williams, and Qwest--are all in the middle of huge construction projects. The companies' goal? To use the latest in high-speed fiber optic technology as a competitive weapon versus traditional carriers, such as AT&T.
As the carriers continue their ambitious construction projects, however, they are increasingly leaning on one another for capacity through leasing deals and fiber swaps.
These capacity swaps and lease arrangements are nothing new, analysts said. Telecommunications companies have long entered into lease deals with their competitors--and resellers--to provide services in areas of the country where their networks don't yet reach or are incomplete.
Level 3 executives said the lease arrangement with IXC for 7,355 miles of the company's nationwide fiber network was necessary, since demand has exceeded the company's expectations.
Level 3 will utilize IXC's fiber in several large metropolitan markets including Atlanta, Chicago, Dallas, Houston, Los Angeles, New York, Philadelphia, San Francisco, and Washington.
The company struck a similar capacity lease deal with Frontier earlier this year.
Qwest, another member of the new network builders, expects to complete its 18,449-mile domestic network by the second quarter of 1999. Part of the company's strategy has been to overbuild capacity on the network, then lease capacity to other carriers and corporations to fund the continued network buildup.
The series of deals and capacity swaps raises concerns whether these next generation telcos will survive as each others' customers. But analysts said the arrangements make good financial sense.
"Competition in the industry began with everyone leasing capacity from AT&T, and now that there's so many networks we're seeing more of that," said Steve Koppman, a telecommunications industry analyst at Dataquest.
Koppman said it is not financially sound for carriers to build their networks into every metropolitan market, when they can simply lease it from others for less; especially when technological advancements allow carriers to squeeze increased bandwidth out of their networks more today than ever before.
"It usually makes no sense to build your network everywhere," Koppman said.
Rich Mack, with fiber consulting firm Kessler Marketing Intelligence, said the new network builders are wisely using lease agreements as a way to compete in areas now where their networks are not yet built.
"These companies are finding a way to get into the market and compete," Mack said. "It's providing new opportunities for a whole new breed of carrier. It's just a tool for them to get out there and sell telecom services."
"In the past the major carriers were each others' carriers where they didn't have routes," he added.
WinStar swaps with Williams
Yesterday, wireless local phone provider WinStar Communications and Williams
Communications agreed on a capacity swap. Williams is another emerging
carrier that is in the process of building an advanced fiber optic network,
along its parent company's system of natural gas pipelines.
Under the deal, WinStar, which provides local wireless access, will pay Williams $640 million for part of that company's fiber optic network. Williams will, in return, pay WinStar $400 million for access to 2 percent of the company's fixed wireless broadband network.
Analysts said the deal--unlike other fiber optic lease arrangements between carriers--provides a local-long distance synergy between Williams and WinStar. By swapping capacity, WinStar gets into the long distance arena and Williams gets an entry into the local loop, analysts said.