QWEST MAPS OUT A NEW ESCAPE PLAN

After nine months with Chairman and CEO Richard Notebaert at the helm, Qwest Communications has offered a glimpse of a future that will focus to a large extent on distancing itself from past sins.

The RBOC's plans include expanding its meager wireless network into a national footprint, pushing its DSL service further into untapped territories, adding new IP-based offerings that target business customers — particularly large enterprises — renewing its commitment to video over DSL, and launching marketing programs designed to wrest customers back from cable companies.

At this point, however, Qwest is uncertain how it's going to pull all this off. Take its wireless plan, for instance: The RBOC, which said as recently as early this year that it would sell its wireless business, freely admits that its localized CDMA network — which serves just six metro areas and about 1 million customers — is unprofitable and inadequate in the current environment. But given the enormous buildout costs of expanding into a national presence and the current state of its balance sheet, Qwest concedes that such growth is more likely to come through acquisitions or partnerships than internal effort.

Nevertheless, it doesn't seem to matter to Notebaert how Qwest gets there, so long as it does.

“We have to be in wireless, and we have to have a national footprint,” Notebaert said in an interview with Telephony last week. “But we don't have to own all of the assets.”

Though the wireless sector already is saturated with national players, the move makes sense in the context of bundled service offerings, which have proved effective for cable operators in voice and data markets.

However, Andrew Cole, senior vice president of the global wireless practice for Adventis, suggested a more practical motive. “The company didn't generate enough interest from possible buyers in their wireless business,” he said. “Many potential buyers were interested only in their customers.”

Verizon Wireless and Sprint PCS are the most likely partners because they both use CDMA, Cole said. “Sprint is the more likely of the two, given that they're smaller and would be more eager to get more revenue and subscribers,” he said.

A partnership would make more sense than an acquisition, said Dana Tardelli, senior telecom analyst for The Aberdeen Group. “All of the major players paid a high price to get into the game, so they won't sell for peanuts,” Tardelli said. “And Qwest isn't in position to drop big money anyway.”

Qwest's plan for expanding its DSL footprint is more developed. Notebaert reiterated a pledge last week that he made in February: that Qwest would increase its capital expenditure budget for DSL by $75 million.

Qwest previously committed to a range of $30 million to $40 million for this year to increase capacity within existing facilities. The additional budget, helped in part by the FCC's recent decision to free the RBOCs from line sharing, will be spent deploying 1400 remote terminals and 150 DSL-enabled central offices in areas not currently served. The expected result will be a 20% increase over the 4.2 million DSL-enabled households and businesses across its 14-state footprint. “The FCC made a courageous decision,” Notebaert said. “Thanks to the triennial review order, we're very positive on broadband.”

Much of the results, though, will depend on where the company deploys the new equipment. Should Qwest deploy primarily in metro areas, already entrenched competitors may be difficult to dislodge. If, on the other hand, most deployments are in rural markets, the customer base may not be large enough — particularly higher-profit business customers — for Qwest to generate enough revenue to justify the investment. “DSL happens in MSAs for a reason,” Tardelli said.

Matt Davis, director of broadband access technologies for The Yankee Group, said he doesn't think profitability will be a problem. Customer acquisition costs have dropped dramatically with the price of electronics about one-fifth what they were just four years ago and the increase of self-installs, he said.

Davis also was bullish about Qwest's video plans. Though currently unprofitable because of high infrastructure and programming costs, Qwest will continue its VDSL service in Phoenix, Boulder, Colo., and Highlands Ranch, Colo., where it has a combined 40,000 customers. In the meantime, the carrier is looking to partner with a satellite service provider for video content.

As cable companies get more serious about voice over IP, video represents one of the only ways for wireline carriers to fight back. Case in point: In Omaha, where Qwest has lost a great deal of market share to Cox Communications, the RBOC is launching a grass-roots marketing program this week in which employees will volunteer time to go door-to-door and ask friends and neighbors for their business.

“We've lost more market share in Omaha than any other major market because we weren't focused on it,” said Annette Jacobs, executive vice president of Qwest's consumer unit. “Telephone companies used to be local, but we've been taking a mass-market approach. The result is we let Cox take that market.”

Jacobs added that Omaha is a pilot program that could be rolled out to other areas where Qwest has experienced declining market share.

But using volunteers doesn't impress Cox. “I'm not saying it won't be effective, but I wouldn't rely on volunteers if I thought a situation was that out of control,” said David Pugliese, vice president of product marketing at Cox.

Regardless of the results, the challenges driving Notebaert certainly have changed from the time he took the reins from Joe Nacchio in July 2002. He walked into a maelstrom due to Qwest's alleged accounting improprieties — some of which the company has acknowledged, and some of which are still under investigation. Notebaert has pledged that the company will cooperate fully. Beyond that, he won't allow himself — or his charges — to dwell on the past.

“I told people when I got here that I left my rearview mirror in Chicago, but I brought a big windshield,” said Notebaert, who previously headed Ameritech and Tellabs. “We're only looking to the future. It doesn't help to do anything else.”

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With additional reporting by Toby Weber in Chicago.