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Meet the Young Turk of telecom

Bucking the conventional wisdom about building a business in a downturn, Telseon CEO John Kane believes now is the time to realize expansive ambitions for his telecommunications start-up.

It may be a bad time to build a business in the telecommunications industry, but that suits Telseon Chief Executive John Kane just fine.

Telseon provides communications connections to businesses and other network operators in metropolitan areas such as New York and San Francisco. What's different is that Telseon relies largely on Ethernet, a time-tested technology for corporate networks, to deliver data. In doing so, the company has reduced its costs by using cheap, off-the-shelf networking gear from the likes of Riverstone Networks instead of cumbersome and complicated telecommunications switches.

The premise of Telseon is that the long-haul communications routes between cities were the focus of many during the late 1990s boom, but that left a shortage of capacity in and around cities. Taking advantage of abundant fiber in the ground, Telseon is building networks in numerous markets, sometimes with the help of others such as energy and communications giant Dynegy.

Telseon appears to be a start-up in an advantageous position, but others have similar aims on the market. Fellow new entrants tackling the niche from various points of view include Yipes Communications and GiantLoop Network. They all are being joined by the stalwarts of the telecom industry, with AT&T and SBC Communications recently divulging plans to get into the metropolitan network connection business and WorldCom expected to announce similar intentions soon.

Telseon may be a Young Turk of the industry, representative of the rapid changes taking place in communications. Kane said many of the equipment providers that formerly dominated the market--such as Nortel Networks and Cisco Systems,--may have to adapt to newer network operators such as Telseon that don't kick the tires and install equipment over a five- to seven-year time frame. "Now it's bang-bang," Kane said.

Kane is a 25-year veteran of the telecommunications industry, with a stint most recently at the failed ICG Communications. He sat down with to discuss how his start-up can navigate the industry's current stormy seas and when the telecommunications industry might drag itself out of its morass.

Q: Why are metropolitan areas and networks a hot spot in telecom? Won't the same contraction occur to all the network operators and equipment providers targeting this market?
A: I don't think the metro space has been reasonably exploited yet, so I don't think you have the duplicity of assets in the metro space that you do in long-haul networks. So I don't think you're going to see them contract. We're buying fiber from multiple providers in almost every metropolitan area. People say, "Why do you do that? Isn't it more complicated?" Well, yeah, but it's where the customers are that need the service. That's where we try to get the fiber. We're driven by where the concentration points are, not where the fiber is.

Right now everyone has a closed network over here, a closed network over there...The guys who are at the biggest risk because of this are the big guys who have integrated network solutions: the Lucents, the Nortels, the Ciscos. Other people are trying to buy fiber from one provider, then trying to build a network infrastructure near that fiber asset. We looked at where the traffic was and where the closet fiber was that we could get access to. In the San Francisco area, for example, I believe we have nine different dark-fiber vendors.

What are the problems associated with building a network today?
Right now everyone has a closed network over here, a closed network over there. They don't talk, they don't interoperate. They increase cost, complication and don't add any value. The guys, in my mind, who are at the biggest risk because of this are the big guys who have integrated network solutions: the Lucents, the Nortels, the Ciscos--the guys who have been selling this massive management layer that sits on top of their technology.

You don't find a lot of their boxes in our networks because we created our own core infrastructure layer, our own network integration layer. We have engineers who do that work. We can facilitate plugging in component-level boxes--best-of-class, lowest cost--and we can innovate faster because when a 10-gig (gigabits-per-second) box (equipment) comes along and meets our technical standards and industry standards we can plug that box into our infrastructure. I don't have to go to Cisco and say, "Let me see your 10-gig box because I'm married to your infrastructure, so how are you going to bring 10-gig to the market? What's the price going to be?" Now I can go to Cisco, but I can also go to 10 people or 20 people because I'm standards-based and I control the integration layer, which is very unique.

So where does your equipment investment go?
Most of our investment went in with the dark fiber. Now it goes mostly into Ethernet switching because of the way we partnered with Dynegy to deploy ONI Systems (an optical network-equipment maker). That has the effect of looking like capacity to us rather than capital investment. We don't write the check to ONI.

Your last round of financing was for $175 million in February. Looking at that, how are you doing as we head toward the end of the year?
The amount of money we raised last spring was earmarked for execution of a revenue plan, so those things are locked together and are on track, from our perspective. In theory, we're funded to profitability out of that exercise of last year. Based on where the market is, we're probably okay. If the market slows down anymore than it already has, then who knows? That's not a surprise. It's kind of like, "What does your crystal ball say the future is going to be?" Mine's been broken for a while. I sent it out for repairs and we're probably not going to get it back for a while. It's become a little bit unpredictable; how far does the slide go?

So why did the telecom industry contract as abruptly as it did?
It didn't matter if you were selling your service at a loss as long as you were adding more units or selling more lines or whatever it is--it didn't matter. You had an unfortunate period of time when we lost track of business fundamentals. It doesn't matter how much money you can get; you can always get more, and it doesn't matter if you're efficient in your use of capital as long as you keep growing. And it also doesn't matter if you show business outcomes, like profits, revenues. It matters more that you show statistics: buildings passed, miles of fiber.

If you had a good story you could raise money; you could get out there and stay ahead of the reality curve by continuing to throw money at growing your metrics. It didn't matter if you were selling your service at a loss as long as you were adding more units or selling more lines or whatever it is--it didn't matter. You could get more money and just keep going. As long as the financing markets would come in, you could go along, go along. Everyone was euphoric together and happily stepped off the cliff together.

Then we realized we'd stepped off the cliff, and we looked around to see where the cliff was, and we'd lost sight of it. Now you get this free fall because the marketplace said, "You were stupid and you were stupid and you were stupid--you were all stupid." We all got caught at the same time. There were no chairs to sit in when the music stopped.

So what happens now?
Telecom certainly abused the financial system pretty aggressively...the billions of dollars of high-yield debt, the public offerings, the secondary offerings. The amount of money raised by the telecommunications industry is staggering.

Telecom usually gets beat the best and the first and usually comes back better and sooner than the general economy. I would be looking to telecom to start retrenching and to start building back up as a good positive indicator of the overall economy.

In retrospect, it is interesting that the telecom downturn had an almost dot-com to dot-bust quality to it. This surprises me, since most telecom executives are veterans of the industry, not 20-somethings looking for a quick buck. How do you account for that?
I think that's very true, and I think the same can be said of the financial community. They should have known better too. I think we, as a culture and as a people, generally got caught up in the euphoria that you couldn't lose. Nobody wanted to be left behind, so you abandoned your business fundamentals to get on the bandwagon.