Nate Davis

When Nate Davis ponders the delights of Europe, he doesn't imagine the glorious ruins of the Parthenon or showgirls performing the Can-Can in the parlors of the Montmarte. Instead, Davis envisions fiber optics dancing with beams of light, point-to-multipoint radios transmitting radio waves from rooftop to rooftop and data centers brimming with hosted services.

But most of all, he imagines the piles of money XO Communications would make if it could implement those networks, all intertwined and linked to the subcontinent's major cities. In Europe, the idea of a transnational, multiregional competitive communications carrier is as foreign a concept as a tractor pull. The first carrier to penetrate that market stands to win the proverbial prize, says Davis, president and COO of XO Communications.

Too bad it won't be XO.

In April, XO decided to cannibalize its European plans for the sake of economic security. Funding the company's business plan three years out became the priority, but that meant sacrificing XO's aggressive expansion plans in the U.S. and abroad to cut future spending. Though Davis says he and CEO Dan Akerson believe it was the right decision, he can't help thinking XO missed its big chance overseas.

“We had to give up a fantastic opportunity in Europe in order to survive,” Davis says. “I'm just sick about it because I believe Europe's Internet market is going to grow much faster than in the U.S.”

In September, XO was flying high. Nextlink Communications had just sired the new company following its merger with Concentric Network. The much-ballyhooed deal gave the company the critical missing piece to its service offering: a full IP services stack. While XO's stock price was depressed like those of its CLEC brethren, few questioned the vitality of a company that had built up an impressive portfolio of network assets and implemented a sustaining business model.

With the Concentric acquisition, XO was able to expand into the ISP realm, offering not only Internet access but a full suite of ASP services over its networks. XO also got Concentric's ISP business in Europe. That consisted of dial-up access in a few of Europe's major metro centers, but it was enough for XO to begin formulating plans for a massive European expansion.

In late November, XO went public with plans for a “data-centric” focus in Europe's major metropolitan areas, saying it would build metro fiber networks in major cities in five countries, linking them with 24 fibers of optical backbone to channel a terabit of capacity. In addition, XO would export its fixed-wireless access augmentation strategy across the Atlantic, acquiring 28 GHz licenses in the U.K. The final piece was transAtlantic capacity to connect its new networks with XO's infrastructure back home. The whole system was expected to go online late this year.

“We think we had a great business plan,” Davis says. “The growth in Internet outsourcing is staggering. If Europe doesn't catch up to the U.S., the rate of growth there will certainly be higher.”

But the most promising aspect of Europe, Davis says, is the chaos encompassing its data market. While wireless carriers have started seeing the advantages of consolidation, forming vast mobile communications empires like that of Vodafone's, broadband carriers have yet to make that jump.

“In the next couple of years Europe will start consolidating,” says Lydia Leong, an analyst with the Gartner Group. “Capturing the customer is very important at this stage. If XO waits too long, there will be no incentive for customers to switch over to another carrier.”

Leong is preaching to the choir as far as XO's president is concerned. In fact, Davis says, it's hard to find reasons not to expand into Europe — except, of course, for the big one: money. Building out new networks and a new business is very time- and capital-intensive, two luxuries XO doesn't have right now. Though Davis insists XO is better off than most, the panic hitting Wall Street and the unfortunate demise of other CLECs such as Winstar Communications are all cause for worry.

Davis bristles at comparisons between XO and other CLECs or ISPs, pointing out that only part of his company's business is in the local exchange market and the Internet access market. But he admits that the financial stakes have become far hairier in recent months, and despite XO's independence from other CLECs, it still has to play the same Wall Street games.

“It worries me, but I wouldn't say I'm scared. A person who is scared doesn't take action, and we took action,” Davis says. “We needed to be in a position where we'd have enough money to fund our plan through 2003. We raised $750 million in the toughest of markets. We did that in just nine months.”

According to XO's calculations, the company has to raise an additional $750 million before mid-2003 to put it in the clear until 2005. But in order to meet those targets, XO had to cut $2 billion from its spending plan. XO revised contracts with Level 3 Communications. It will delay lighting its inter-city fiber network, choosing instead to lease long-haul capacity from Level 3. And XO will slow expansion in existing U.S. markets, focusing instead on penetrating with its current infrastructure.

But perhaps the biggest drain on capital resources and operating costs was the planned European expansion. XO essentially would have been faced with building a new version of itself across the Atlantic, pumping hundreds of millions of dollars into network buildout and business development. Akerson and Davis had to stop it dead in its tracks.

“Survival is the word of the day,” Davis says. “We did what was necessary. If the markets get worse we'll have to slash our costs even more.”

Davis admits he often thinks of ways XO could have spared its European operations, but most are brought on by hindsight. Maybe XO should have held off on its ASP plans, Davis says. Or maybe XO should have issued additional shares in the last year.

“Our stock was at $21 a few months ago. Should we have sold equity at that point? Was it going to go back up?” Davis asked. “That's one of those questions like, ‘When did you stop beating your wife?’”

Don't count XO out of Europe, however. Just give the company a few years and better financial markets — XO will be right back across the pond, Davis says. But this time around, XO might find itself sharing.