IDT PLANS BROADCAST PUSH WITH WINSTAR ACQUISITION

Purchase gives company an outlet for Liberty Media involvement

A side from acquiring almost $5 billion in network assets for about $30 million in cash and an additional $12.5 million in stock, IDT's purchase of Winstar Communications in bankruptcy court could introduce a new player to the pay TV market.

Under current plans, Winstar will operate as part of an IDT group that includes Net2Phone, a combination that will bring IP telephony service to Winstar's small and medium-sized business users. Longer term, the company hopes to offer broadcast video services to offices. Liberty Media, which controls 64% of the voting stock in Net2Phone with IDT and AT&T, presumably would provide much of the content for the new service.

“During the daytime, we will be the dominant provider,” said Howard Jonas, Chairman and CEO of IDT.

Though still in the nascent stages of development within its entertainment group, IDT feasibly could leverage Winstar's existing network, which uses various fixed wireless frequencies, including local multipoint distribution service, to provide all three services.

“My understanding is we have capacity within the spectrum to do video solutions,” said Charles Garner, Winstar's interim CEO.

Much of the Winstar spectrum originally was earmarked for video transmission, said Peter Jarich, director of broadband research for The Strategis Group. When delivered to a multitenant building, video — particularly broadcast video — becomes much more economical and would compete well with cable and satellite options.

“IDT made a good argument saying Winstar has real revenues out there and real assets and that there are people who will want to get these services,” Jarich said.

Jonas also recognized that Winstar's customer base would be a lucrative target for advertisers, noting that its business viewers “will have a lot more money than people sitting at home watching ‘As the World Turns.’”

In the short term, Winstar's new leadership is focused on increasing penetration rates and cutting costs by shrinking the planned footprint, including the elimination of an undetermined number of the 39 Lucent 5E switches from the network.

“We are not taking buildings that are wired today and ripping out the wiring,” Garner said. “But there are some buildings that are signed up for access rights that we won't proceed with.”

Winstar is averaging about 2% penetration in the buildings where it has equipment and has many buildings with virtually no customers, Garner said.

“We don't need a 25% penetration to make money on this,” he said. “If you can increase the sales from $500 to $1000 [per month] per building, we're profitable.”

IDT's move into fixed wireless comes at a precarious time for the market. Last year, AT&T closed its fixed wireless operation, and Sprint announced it no longer would accept new multichannel multipoint distribution service customers.

“If I were Sprint, AT&T or WorldCom, I'd be making the same decision,” Garner said. “You can't compete against the ILECs that way. Every customer you want already has a provider. And you're competing against a company that amortized its network 40 years ago.”

Winstar's new financial structure gives a 5% equity stake to a group of former Winstar creditors and leaves the company with virtually no debt, putting it on a level playing field with ILECs, Garner said. Moreover, combining Net2Phone's IP telephony service with Winstar's platform and IDT's connections will lead to innovation in product development.

“In the long run, there are some home runs between IDT, Net2Phone and Winstar,” Garner said.