High-rising market

Incumbents moving into MTUs; ARC downscales plans Because local bandwidth is such a hot commodity, it's no wonder the business of serving multi-tenant unit buildings is set to explode. According to The Yankee Group, the market for broadband services in MTU buildings will grow from just $13 million in 1999 to almost $1 billion by 2003. And the combined market for services and equipment for MTUs will reach nearly $2 billion by 2004, up from an estimated $371 million this year, according to Cahners In-Stat Group.

The new class of carriers serving the MTU market often have experience that traditional carriers don't, such as expertise in identifying high-value properties, negotiating building access rights and managing relationships with property owners.

But now the market for in-building communication services is starting to attract some big names in telecom - at a time when the independent carriers may be running into obstacles both in the financial and regulatory realms (see story on page 35).

For example, in late September AT&T Business Services partnered with OnSite Access to help the service provider accelerate its expansion plans and gain access to the fledgling carrier's infrastructure in the 453 buildings it already has lit. For OnSite Access, the agreement means concentrating its supply of wholesale services and offering customers a wider slate of products, including frame relay and ATM. "[AT&T has] a much more robust platform, and we get much better rates from AT&T," said Rick Miller, executive vice president and chief financial officer of OnSite Access.

The deal included a $50 million investment in OnSite Access by AT&T in a combination of equity financing and senior secured debt.

Industry observers also expect more merger and acquisition activity in the MTU space, especially in light of the problems independent carriers may run into raising additional capital.

Verizon Communications, for example, has its eyes on the MTU market and already has made a move in the consumer, or multi-dwelling unit (MDU), market. On Sept. 15, the Department of Justice approved Verizon's purchase of OnePoint Communications, a provider of broadband services to apartment buildings, condominiums and other multi-unit residences.

The acquisition gives Verizon a foothold in the market for bundling local, long-distance, video and Internet services for the MDU segment. The move arose from a realization that 20% of Verizon lines terminated in an MDU of four or more units, said Mary Ellen Payne, vice president of business and channel development for Verizon.

"If a new CLEC is coming into the business, if they win a building, they win a couple of thousands of units," Payne said. "We clearly saw this was a market where we were vulnerable."

The acquisition also will allow Verizon to offer more residential customers DSL service and turn them up faster, Payne said, citing the problems with distance limitations in high rises served from a central office.

After Verizon wins the expected regulatory approval from the FCC and six other states in its territory, it will have a combined footprint of 650,000 MDUs in 31 major markets. Verizon projects it will grow that to 2 million MDUs over the next five years.

Meanwhile, some independent building carriers are struggling to meet the ambitious buildout targets they have set. Allied Riser Communications, a publicly held service provider that has deployed networks in more than 265 million square feet of rentable space (675 buildings) to date, introduced a scaled-down, "phased" business plan on Oct. 2. The company lowered the target square footage in which it will deploy its in-building networks to 100 million square feet from 240 million square feet in fiscal year 2001 and to 800 million square feet from 1.1 billion square feet by 2004.

In addition, ARC announced plans to slash back-office operations expenditures in line with the more modest construction goals and to reduce the average capital expenditure in each building from $120,000 to $30,000. The reduced capital expenditure targets will be accomplished in part by reducing the size of the switch and router initially deployed in a building, using existing building wire raceways for the installation of smaller conduits, and moving away from the model of deploying fiber up the riser in every building.

Instead, particularly in smaller buildings, ARC will use existing copper wire infrastructure in conjunction with a DSL connection and a DSL access multiplexer in the basement to provide Internet connectivity. "With this reduction, we have a fully funded plan that will enable us to reach EBITDA positive and free cash flow positive by the middle of 2003, and therefore, should not require us to access the capital markets," said David Crawford, CEO of ARC.

However, while it reduces expenses, the revised business plan also reduces estimated 2001 revenues by 40% and limits the carrying capacity of ARC's in-building networks. And that could mean tougher times competing with carriers backed or acquired by the behemoths of landline services. "The utilization of DSL technology within its in-building networks will be a significant reduction in the level of bandwidth vs. the high-bandwidth fiber networks that [ARC] has deployed to date and thus somewhat diminishes the strategic attractiveness of its network strategy," said Mark Kastan, analyst at Credit Suisse First Boston, in a report.

Alliances fight for right to building access While the multi-tenant unit and multi-dwelling unit markets represent a greenfield opportunity, they also present carriers with a problem: how to get access rights to buildings without giving building owners all the profits. The issue has ignited fierce regulatory debate and caused carriers and landlords to form alliances to voice their views.

Many established carriers, unused to the inner workings of real estate, want to install their networks in any building they choose, but landlords want to reserve the right to select service provider partners that maximize their investment.

"The main issue is, Do tenants have the ability to choose their telecom provider?" said Tom Cohen, spokesman for the Smart Buildings Policy Project, a coalition of competitive carriers. "As long as there was one provider, there was no leverage to be used. As soon as you began to get multiple providers, building owners began to realize they could extract something - payment upfront, revenue sharing or create their own provider."

Many carriers want the FCC to regulate open access to buildings just as it regulates access to incumbents' local loop networks. But groups such as the Real Access Alliance, a coalition of national real estate associations and privately held real estate companies, claim the FCC has no jurisdiction in the matter and that the commission's interference would constitute a "taking" of their property.

"We hope that the FCC will allow the marketplace to resolve most of these issues and continue to have dialogue with us," said Roger Platt, a spokesman for the Real Access Alliance. "Building owners shouldn't have to accept the first five service providers that knock on their door."

To stem the call for government regulation, the Real Access Alliance established a voluntary set of guidelines to promote non-exclusivity in building contracts and best practices in the speed of processing tenant and service provider requests for access and service.

Surprisingly, many of the upstart building carriers are on the side of the building owners and are more than happy with the current state of the free market.

"We don't believe there's a need to force open access," said Joseph Basile, CEO of OnSite Access. "The real estate owner has an asset and is trying to figure out how to get the best return. In our view, if they get a small return, it's a proper return for providing us the opportunity to serve our customer."