A matter of degree

With the strained economy bearing down, once-hot areas such as optical component manufacturing have lost much of their steam. For carriers, many in the industry insist that bandwidth wholesaling has become a casualty of the infamous but debatable “bandwidth glut.”

While some analysts are warning of that bandwidth glut and service providers are operating at lower capacity, others describe the current conditions much differently. The question that remains, though, is whether bandwidth wholesaling has flattened out across the board or is sinking for a select few.

“There has been a lot of chatter about the lack of wholesale business by some carriers,” said Joe Nacchio, president and CEO of Qwest Communications. “That's appropriate because [so many] were late to the game, and they don't have the capability to have a low-cost position.

“In the wholesale business we have clearly emerged as an industry leader,” he added. “We had particularly strong performance [in that segment].” We had good margins on all deals and essentially benefited from the quality of [the network].

Broadwing will supply Teleglobe with nationwide OC-192 wavelength services The $180 million purchase of services is mostly made up of 20-year indefeasible rights to use Deal also involves co-location, network consulting, engineering services and local access services

Others, too, are claiming of wholesaling success. In June of this year, Broadwing Communications reeled in a $180 million wholesale agreement from Teleglobe (see box). Prior to that, Broadwing pulled in $32 million from El Paso Global Networks to build a fiber route from Houston to Los Angeles.

“WorldCom continues to be a rolling customer of ours,” said Rick Ellenberger, CEO of Broadwing, noting they have moved up to become Broadwing's number two wholesale customer.

Despite positive numbers for some, it would be hard to argue that the segment hasn't suffered. In particular, those with a dark fiber strategy are finding times tough even in metropolitan markets once thought to be the segment immune to the current downturn.

“We are benefiting from a flight to safety as other carriers who are less mature have announced negative news about either their cash flows, financial viability [or] installation rates,” Nacchio said.

According to Nacchio, that “flight to safety” is happening on the long-distance and local side. Nacchio also believes Qwest has “the lowest-cost operating network,” which has enabled them to “close in on AT&T.”

“Clearly several carriers have fallen off the table in the last quarter from Chapter 11 and stocks [being] down,” Nacchio said. “But our wholesale backbone business has never been better than it is now.”

Supportive of the notion of a smaller market, Time Warner Telecom put out a request for proposal for a large amount of capacity recently, and while 20 would have shown up a year ago, only three did, said an industry source.

Giving credence to the argument that the wholesale downturn is limited, some carriers continue pulling in high-dollar deals.

And despite its recent wins, Broadwing is gradually losing one of its largest customers: Level 3 Communications.

“We did see a 20% decline [in the Level 3 business], which we had anticipated,” Ellenberger said, noting that although the company has won some new business from Level 3, it will continue to decline as the provider turns up more of its own network.

“Some say there is no wholesale market,” said Nacchio, who told analysts during Qwest's second quarter earnings call that Enron is moving out of the wholesale business and took a write down.

Enron, however, denied the company is leaving the wholesale market. “He is mistaken. We have no intention of getting out of the business,” said a spokeswoman. “Maybe he misunderstood some coverage.”

Earnings did indicate that Enron took a loss for the quarter on its broadband business, and the company is restructuring that unit and has been forced to cut some jobs. Despite those negatives, Enron has devoted an entire group to focus on wholesale generation, the spokeswoman said.