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Zayo plans broadband success in the boonies

Two telecom industry veterans are banking on growing demand for bandwidth in Tier 2 and Tier 3 cities to launch a new broadband services company that will take competition where it doesn’t exist today and attempt to bring profits to struggling fiber-based operations.

Zayo Bandwidth is getting its start with the acquisition of a series of regional fiber networks, and founders Dan Caruso and John Scarano have lined up $225 million in funding from major venture capital firms, including Battery Ventures, Centennial Ventures, Columbia Capital, M/C Venture Partners and Oak Investment Partners. Caruso and Scarano are both veterans of ICG Communications and Level 3 Communications and are strategically positioning their new company to cover areas they believe are not well-served today.

The initial two acquisitions are PPL Telcom, an Allentown, Penn., company that serves the Northeast via a 4600-route-mile fiber network and Memphis Networx, a 200-route-mile fiber network serving that metro area. In addition, Zayo has definitive agreements in place to buy Indianapolis, Ind.-based Indiana Fiber Works (IFW) and Minneapolis, Minn.-based Onvoy.

“Our strategy is to acquire unique fiber-rich assets throughout the country to create a company that provides large bandwidth responsibly, quickly and reliably,” Scarano said in an interview. “We are being selective in the markets we invest in. Where we are buying the assets, there is limited deep metro competition. We generally do not have assets in NFL cities, but mostly in Tier 2 and Tier 3 cities that have ties to NFL cities. By investing in those areas where incumbents have not invested and where other competitive carriers have largely not invested, we will be able to keep up with the bandwidth demands of businesses in those areas.”

Right out of the gate, Zayo is offering a wide product range, including private line services from DS-1 to OC-192, Ethernet point-to-point and multipoint from 10 Mb/s to 1 Gb/s, dedicated Internet access at T-1 speeds and above, wavelength services at 2.5 Gb/s and 10 Gb/s and carrier-grade collocation services for backup and data applications.

Zayo will be investing in the networks it acquires to extend the reach of its fiber network to “high-bandwidth consumer customers,” Scarano said, and in the process, rescue those operations from their current status, which he describes as “treading water.”

“The network is available where there has been an enormous investment and not much return,” he said. “It’s expensive to build networks almost regardless of where you are, but in downtown Seattle, New York City, or Washington, D.C., the population is more dense, and you have more opportunity to recoup your investment. It’s a tougher break-even analysis but still very expensive to build in Tier 2 and Tier 3 cities, where there are fewer customers per mile.”

Much of the fiber infrastructure Zayo will be acquiring was built before the “telecom nuclear winter,” Scarano said, when prices plummeted. As bandwidth consumption grew, prices didn’t immediately rebound, and investors began to realize it would be a long time before they would see a return on the initial investment.

“Each [company Zayo is acquiring] has a different story, but the simple theme that does carry throughout is that current shareholders had decided to stop investing incremental capital because they couldn’t get a return on initial capital — so why invest more?” he explained. “It is expensive to extend services, but the only way to grow is to be responsive, to meet all of the needs customers have. And that requires investment.”

Zayo’s executives and backers believe that pricing is no longer as heavily compressed as it was in the early 2000s and that it is possible to be profitable, especially for a competitor that is easier to do business with than an incumbent, Scarano said.

“The only way to grow at double-digit rates is to be simply responsive, with a simple product profile, take days, not weeks, to get back customers’ quotes, and make it easy for customers to do business,” he said. “Access to our network will be via secure protocol and made readily available to customers that have expansion needs in certain areas. We will offer Web-based access to network inventory that will tie to exactly what is out there. We will make it very easy for customers to see, ‘I need to extend from here to here; can these guys do it readily or not?’ By making it that easy, we stimulate that much more business.”

Zayo will continue to grow through acquisition, he said, although he couldn’t provide specifics. Scarano doesn’t expect his company to be an acquisition target, however, saying it’s more likely investors would work toward an IPO than a takeover. And, he hints, he and Caruso are more interested in running a company than turning a quick buck.

“Dan and I are career operators; both he and I started at traditional incumbents — Dan at Ameritech, me at AT&T and Bell Labs — and we both moved to MFS Communications,” Scarano said. “Frankly, you get the competitive bug; it’s hard to shake it. We’ve spent our careers in operators, in M&A, and we had acquired more recently the ICG company, which we took from public to private and had a wonderful experience — except we sold it far too soon. It’s a great set of assets that we are happy that others are enjoying, but wish we had it back.”

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© 2014 Penton Media Inc.

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