FPL FIBERNET LIGHTS FLORIDA'S FIRE

At a time when success--or even survival--is far from guaranteed in the optical sector, finding a sustainable and profitable business model isn't simple. Yet it apparently can be done, despite the rigors of the downturn, with the help of the catchy phrase "utility backed."

The sun and ocean breeze may have convinced many employees to abandon other environments and move to Florida, but that's not what caused utility-based FPL Group to form Florida-based capacity wholesaler FPL FiberNet in 1986. Instead, it was the lack of connectivity around the state and the fact that Florida is a natural point of cable contact with Latin America.

Although companies were once rewarded for building sprawling long-haul networks, even with a regional focus, that wasn't enough to continue a sustainable business. As a result, FPL FiberNet added metropolitan connectivity. Because of that tactic, FPL FiberNet's books look far different than most service providers' in these dark days of telecom.

While being EBITDA positive or profitable was the norm a few years ago, now they are goals for companies to reach at the end of this year or maybe next, according to recent predictions. So considering the current conditions, how can a service provider actually turn a profit and be EBITDA positive? However boring the answer, the secret simply may be moving at a snail's pace and having a strong parent company free from telecommunications' roots. FPL FiberNet has so far beaten the odds stacked against service providers, particularly those that don't bear the incumbent nomenclature. The challenge the company faces is ensuring its surprising profitability doesn't erode.

“At a recent meeting [of around 100 service providers], we were the only ones to get up and say we were EBITDA positive,” said David Eckmann, director of business development for FPL FiberNet. “We make enough that it's a significant part of the FPL Group [of companies].”

When the FPL Group, which had revenues of more than $8 billion last year, ventured into telecom, it used its financial and rights-of-way leverage to build what is now the 2500-mile network FPL FiberNet resells to service providers. Initially, the company sold bandwidth on a long-haul basis only because long-haul networks and utility assets offer a natural symbiotic relationship. “We didn't have Qwest, IXC, Williams and other competition then,” Eckmann said. “Pricing was good, and we recovered investment quickly.”

Since then, FPL FiberNet has expanded into metro markets in Florida, following increased demand by service providers and their customers. Most service providers built their networks upside down, said Stephen Courter, chairman and CEO of regional provider Neon Communications, which concentrates on the northeastern U.S. (see sidebar on page ON17). Then providers figured out that driving connectivity into metro areas was key, he said.

“The thing to do is get into the metro,” Eckmann said. “We've put a heavier investment [there], and the metro business has been quite strong.”

Many other now-bankrupt service providers built out networks as fast as possible to prevent competitors from reaching customers first with a better network. But in contrast, many of the utility telcos, or “u-telcos,” have been building out in tune with projected demand. Providers such as FPL FiberNet were moving at the slower growth rate preferred by their parent companies, and that has helped the company keep costs in check and profit from a reality rather than a hope.

To survive current market conditions, providers either must have existing revenue streams or the backing of one of the legacy energy companies, said Ian McPherson, senior analyst for CIR. In light of the potential bankruptcy of Williams Communications, which also had a utility background, the importance of regionalization is apparent. Regional players with fiber assets are in a good position, McPherson said. “They've been building their businesses with reasonable growth expectations,” he said.

Susan Almeida, co-founder of Network Strategy Partners, agreed. The ILECs, utility-based and municipality-based providers are well-positioned, she said. “They are strong enough and have the cash basis to weather the storm. The slower-moving players are simply better off.”

While controlling spending has kept FPL FiberNet in the game, the overall lack of spending and expansion on the part of its customer base has been problematic. But Neil Flynn, president of FPL FiberNet, still sees strong demand for his company's services. For instance, there is still a high demand for the carrier's DS-3 and OC-n services within metro areas. “We're seeing very strong year-over-year demand, even on the dark fiber side,” Flynn said. In light of strangled service provider budgets, the cheaper and fewer the costs, the better.

“Providers don't have the capital to build speculatively anymore,” Neon's Courter said. In theory, that change in circumstances should drive customers to wholesalers.

“We've seen telecom providers fall off the face of the earth,” Flynn said. “That is bringing more customers to us because of our financial viability.”

While FPL FiberNet and others such as Neon now scrutinize the health of potential customers, their customers reciprocate with the same due diligence. Therefore, there are a lot of benefits to being part of an $8 billion holding company, Flynn said. “We haven't had to go to Wall Street as some others have, so we have a great deal of flexibility in fine-tuning each contract,” he added.

Even though FPL FiberNet's focus on a wide variety of service providers — from ISPs to Bell companies — has not changed, the livelihood and breadth of customers has definitely slimmed. But with a customer base that is changing as quickly as the weather in Florida, FPL FiberNet is bracing for what lies ahead by concentrating on larger service provider customers instead of smaller, and perhaps weaker, ones.

The company counts providers such as BellSouth, Genuity and SBC Communications as customers. But with other wholesalers also concentrating on that same group of carrier customers, FPL FiberNet's list of customer possibilities is shrinking. Even though the amount of customers has decreased, the underlying use hasn't, said Larry Spear, FPL FiberNet's vice president of sales and marketing.

One reason for FPL FiberNet's apparent success is the dramatic increase of traffic to Latin America. The provider was a driving force in the creation of the network access point (NAP) of the Americas, which enables connectivity to the region. And in the quest to remain service-provider agnostic, FPL FiberNet was involved with BellSouth's Multimedia Internet Exchange, which also serves Latin America.

Though FPL FiberNet serves only a regional area, it is not without competition. While providers such as Neon are basically alone in the northeastern U.S. since competitor Telergy closed its doors, FPL FiberNet shares the market with others such as utility-backed Progress Telecom. “The problem [FPL FiberNet] has is that there are a few of them down there,” Courter said.

But providers such as Progress Telecom have a different business plan from FPL FiberNet's, Eckmann said. Progress doesn't sell dark fiber, and it also lacks its own fiber in one of FiberNet's most successful areas. “Our network extends further, and while they concentrate on carrier hotels, we go to central offices as well as the carrier hotels and NAPs,” Eckmann said.

“No one else has a similar business plan to us of both dark fiber and lit,” Flynn said. “We can bridge the customer between both worlds.”

Despite dark fiber demand softening and more providers opting for lit capacity, offering both is a key part of FPL FiberNet's success, Flynn said. Larger customers such as BellSouth or SBC, which signed a $110 million dark fiber deal with the company two years ago, usually buy dark fiber. But others, including incumbents, buy lit fiber and then migrate to dark fiber. That additional ability to offer flexible contract terms is a leveraging tool for FPL FiberNet, Eckmann said. “We have the flexibility to allow install or lease, where the competition is so desperate they need cash upfront,” he said.

But with all the talk of being EBITDA positive, profit and strength, it is worthy to note that FPL FiberNet has curtailed its near-term buildouts to control costs. Over the next year or so, the company doesn't plan to expand aggressively. Instead, it wants to get value out of the system it has in Florida, although it will try to bring the network deeper into cities and drop off at building telephone closets.

So despite its energy roots, recovered costs, reduced expenditures and a healthy Florida footprint, how will the company sustain itself?

“We're just scratching the surface on the big guys,” Eckmann said. “Eventually though, the smaller ones will be there, too.”