Fight Club

Dec 1, 2000 12:00 PM, the Upstart staff

Welcome to twelve rounds of telecom pugilism, as the world champions—the long-haul masters of disaster, the battling Baby Bells and ISP knockout kings—are forced to defend their markets against the rising hopes and falling entry barriers of the young Upstarts of 2001.

We present for your edification a dozen devotees to the sweet science of competitive carnage—twelve telecom contenders who believe that they can outpunch, outdance and perhaps outrun their rivals to be left holding the championship belt at the final bell.

Personally, we’re not guaranteeing that each of these pugs will make it to the Big Bout. Some of them are fresh out of the gym; others have been hanging around the fringes for a while, picking up a few press clippings and maybe a few clips to the head in the process. What we are saying is that taken together, they make up a strong undercard to the main event. Each one has some element of style, some brand of finesse that raises it above the ranks of the clubhouse pugs and ham-and-eggers: a wicked business plan here, some serious financial footwork there, or the pure power of management muscle. Some of them are plugging away in local bouts, while others have had their eye on a shot at the title all along. They’ve all got speed, they’ve all got stamina—they’ve all got heart.

Over the next year, some of these combatants may well get better acquainted with the canvas. But others among this group should work their way up the standings and move up in class.

Title shots and tickets to palookaville will be handed out later. For now, please turn your attention to the squared circle as your referee asks our contenders to shake hands, come out swinging and give us a good clean fight.

They may not be ready for the big time yet, but these telecom contenders hope to build a business—one knockout at a time.

Who are these guys?

Cogent Communications believes the essence of its plan is its minimalism. "We're trying to keep things elegantly simple," says Michael van Vleck, VP of marketing.

Given the complexity of optical, there's something a little ironic about an optical aspirant that plans to dispense 100 Mb/s of unadulterated bandwidth to businesses for $1000 a month calling its plans uncomplicated. But Cogent's take is that optical capability cancels complexity. The company eyed the 25% annual revenue growth for data services and the 2% annual decline in voice revenue and saw the light.

"You're seeing dramatic erosions of market and margin in the voice world," says David Schaeffer, founder and CEO of Cogent. Even the fact that 85% of carrier revenue is still voice was a lure for Cogent.

"We took a different approach and said we're going to go after the lowest-revenue switched bit traffic: the Internet traffic," Schaeffer says. "We built a data-optimized network that would be able to deliver services at a fraction of the price of services over voice-oriented networks."

Cogent's formula of simplicity starts with truckloads of dark fiber purchased from MFN and Williams Communications. The plan is to light that with DWDM gear from Cisco Systems and create OC-48 rings in 20 cities hooked together by an OC-192 national backbone, and all of it guarded by Layer 3 routing protection.

Simple enough so far, right? On to the buildings. Cogent wrangles with landlords for rack space that can hold interface equipment, routers and power systems, then snakes up the risers to link up customers. Still simple.

It gets simpler: The bandwidth customers sign up for is the bandwidth they get. No blocking, oversubscription or congestion. Simple math: If the capacity of a ring is 2.5 Gb/s, the maximum number of 100 Mb/s users is 24. "Our customers will get 100 Mb/s all the time and will not have to share," van Vleck says.

Cogent's targets are bandwidth-eaters like financial outfits and law firms that want to put their IP traffic on glass, van Vleck says, about 500 of which signed in advance of the network light-up.

Generating funds also seems simple enough. $396 million in total so far, including a $280 million vendor facility from Cisco. VC sponsors include Oak Investment Partners, Broadview Capital Partners, Worldview Technology Partners, Jerusalem Venture Partners, Nassau Capital, ACON Venture Partners, Capital Research, Barnard & Co., Comdisco and Boulder Ventures.

Where Cogent's plans start to get more complex is in the lair of the landlords. "It's still a jungle out there," says Scott Stewart, Cogent's VP of real estate. The problem isn't so much in finding rack space but in tunneling through the buildings: "The real push back comes from the overcrowded risers. A lot of carriers have clogged them up."

The company seems to know that its plans will involve precise execution.

"We're bringing to market what is almost a too-good-to-be-true proposition," van Vleck says. "In that lies a certain degree of fragility."

Master plumbers

When your Internet access customers open a branch office in Pismo Beach or want to add supply partners to their extranet for a three-month project, who you gonna call? SmartPipes. At least if CEO Ray Bell has any say. SmartPipes wants to recruit ISPs as channel partners for its high-level managed services, designed to make setting up a virtual private network as simple as - so the old saying goes - pouring water out of a boot.

Bell and company are targeting the $35 billion market in office-to-office connectivity. "The question for a business these days is not `Do I want to get on the Internet?' but `Do I want to move to Internet-based networking?'" Bell says. SmartPipes steps in to help companies construct an Internet-based intranet, giving them an interface to set it up and overlay security policies. Focusing on the enterprise end user, SmartPipes sells a monthly service that allows companies to set up, administer and tear down their intra- and extranets as needed, with minimal support from their ISP.

Bell, who spent eight years at Oracle working with relational databases and then two at Cisco Systems dealing with directory technology, put those two worlds together to develop a policy engine that can track all of a business's devices, applications and policies and regulate the relationships among them. Corporations can send simple policy instructions to SmartPipes' Dublin, Ohio, network operations center, connected to the top eight or nine Internet backbones. Those policies - governing network connections, apps priority, latencies and so on - are translated into instructions to the company's access devices, and voila! An intranet is born.

SmartPipes hopes to draw ISP partners by promising a share of the monthly service fees, plus, of course, the prospect of adding value for enterprise customers without having to beef up their own tech squads.

For investors, SmartPipes offers another draw: a roster of marquee-name backers including Tom Jermoluk - former chair of Excite@Home and now a partner at Kleiner Perkins Caufield & Byers - and Mr. New-New-Thing himself, Jim Clark, a Netscape co-founder. VC power John Doerr sits on the company's board of directors.

SmartPipes is still doing beta tests with a mix of ISPs and enterprise customers, but it hopes to be out and generally available by first quarter 2001. After that, it will set itself apart from other managed VPN services by expanding its product line with managed quality of service, voice over IP and collaboration features.

But will service providers willingly hand their enterprise customers over to SmartPipes' care? "ISPs can build their own high-touch, low-volume VPN managed services, or they can come to us for high volume and very low touch," Bell says. "We're confident that we can work with them without becoming a threat."

Phat-wiring high-rise 'hoods

In hip-hop culture, "phat" is shorthand for "pretty hot and tempting." In commercial real estate, phat is when a telecom firm wants to give you 60% to 65% of the revenues it collects from selling broadband services to your tenants as opposed to the 5% or 7% BLECs usually offer. In telecom, the company offering that deal is Phatpipe.

Phatpipe is no bane to BLECs, though. The year-old start-up is focusing exclusively on industrial office parks, many of whose tenants fall outside the reach of DSL but don't need enough bandwidth to justify the expense of a full T-1. The market is pretty hot and tempting, too. According to Torto Wheaton Research, industrial parks comprise 192,696 buildings nationwide. Phatpipe estimates the market to be worth $11 billion a year.

Phatpipe has tailored its approach to suit these office parks, the tenants of which are generally arrayed horizontally with a lot of grass and fountain ponds in between. "These parks have five to 25 buildings," says Phatpipe CEO Don Ankeny. "They almost function as little cities unto themselves." Phatpipe strings T-1s from the local carrier to a POP within the park, where it distributes bandwidth to the various buildings via fixed wireless technology from Breezecom. Once inside the buildings, Phatpipe uses DSL from RC Networks to wire each customer.

Phatpipe sells the infrastructure to the land-owner, which is why it can afford to give away most of the service revenues. "Because we don't have the assets on our balance sheet, we're a very high-margin business," says Ankeny. And because the land-owner has such a high stake in the relationship, his or her loyalties remain with Phatpipe. Open access regulations may grant other service providers entry into these buildings, says Ankeny, but Phatpipe's landlords "are not going to encourage others to come in, and they're not going to make it easy for them."

With such a strong lock on the customers, Phatpipe plans to broaden its offerings, stretching the definition of an MTU provider. It already offers voice service from MCI WorldCom, but eventually customers will even be able to buy office furniture and janitorial supplies through Phatpipe. Ankeny (whose background is in real estate and whose speech contains no trace of hip-hop argot) has already converted about a dozen of the country's largest industrial property owners into Phatpipe customers. The largest of them, Prologis, gives Phatpipe access to 1300 facilities and 3300 customers. Phatpipe forecasts the potential revenues from its existing customers alone at nearly $300 million. Now that ain't phat; that's straight-up obese.

Way 2 go

What immediately sets Go2Call apart is its geography - located in Evanston, Ill., it's the Midwest's lone Internet telephony company. Co-founder John Nix cites a higher profile and lower operating costs as the primary benefits of setting up shop so far removed from Silicon Valley: "We can really stand out, draw attention to ourselves and hire top-notch individuals - we don't have to fight through the noise of the competition."

Locale is hardly Go2Call's sole mark of distinction, however. Along with free PC-to-phone calling to the U.S., Canada and much of Europe, Go2Call's services also include LiveCalling (a free voice-enabling technology allowing small and mid-sized online businesses to interact live with their customers) and CallFinder (touted as the first Internet calling search engine, it offers comparisons of more than 25,000 global PC-to-phone options).

On top of all that, Nix says that among voice-over-IP carriers, only Go2Call and Dialpad offer users a Web-based platform, a more practical and convenient approach than requiring customers to install software. "It makes it as easy to use for the end customer as loading a Web page," he says. "A client-side download is pretty tricky for a lot of customers and small businesses."

Web-based technology allows Go2Call to maintain much of the intelligence on its servers and makes improvements a snap. Nix: "As we upgrade our services and systems, it's transparent to the consumer." The company's advantage over Dialpad, furthermore, is that while Dialpad offers termination only into the U.S., Go2Call boasts termination in eight countries including the U.K., Germany and Sweden, additionally maintaining its own proprietary network of call servers and gateways.

Nix and partner Larry Spear founded the company in September 1998, and in December 1999 Go2Call completed its initial round of funding to the tune of $3 million, with a Web site launch a month later. Throughout 2000, the company consistently expanded its international service reach, going from zero to 300,000 customers in 170 countries within just months. Although advertising has been the primary source of revenue in the past, recent strategic partnerships with iWon.com and ZDNet U.K. will help fund projected entries into call waiting, online faxing and voice messaging services.

Nix says Go2Call's appeal is simple: "We're offering an easy-to-use, low-cost service that provides calls that are as good as you can get over the Internet."

Zapped

When the free-space optics format came into techno-vogue recently, scores of bandwagon-jumping service providers began talking about how they were already considering using it in their networks. Tellaire, meanwhile, was busy building a business around it.

Optical laser technology wasn't new to Tellaire. Two of the company's technology architects, Peter Rustan and Stuart Nozette, had been involved in laser R&D as part of the U.S. government's Strategic Defense Initiative, which Rustan says spawned the current commercial optical laser development frenzy (not to mention countless plots for post-Cold War action flicks).

Together with a collection of antsy and entrepreneurial people with telecom, consulting and commercial real estate breeding, Rustan and Nozette helped hammer out a strategy for linking buildings with the now-commercialized optical laser approach.

"Telecom is a great space, but I didn't like the regulation much," says Tellaire President and CEO Leah Bailey, a former GTE marketing exec.

Lack of regulatory checks, it turns out, accounts for a lot of the appeal of optical lasers. For one thing, no expensive operating licenses are required. "So far, no one has tried to license the laser space," Rustan says.

Laying a mesh of laser links on top of Internet data centers, carrier hotels and commercial buildings lets Tellaire shirk regulation-heavy incumbent facilities and avoid the CLEC caging problem. "Because we bypass the central office, we will have total control over the level of service we can deliver," Bailey says.

Tellaire raised $3.3 million in its first round of venture funding and is now shopping around a $25 million offering. Meanwhile, the company is pursuing a plan to fire its lasers on - er, connect - 9000 buildings by the end of 2005.

One more thing: The mesh play is a critical detail in Tellaire's strategy. A mesh architecture, it turns out, is the only way to stave off some of the environmental effects that could upset laser transmission.

"You never know what could happen," says Andrew Obst, Tellaire's COO. "A window washer could hang his coat on the thing, and it could take down one of the links. So you have to have redundancy."

Black hole hunters

While most start-ups looking for under-served markets have burrowed into increasingly smaller towns, Dallas-based broadband provider Airband Communications is finding data-starved pockets in the nation's NFL cities. It plans to roll out in 50 top markets over the next 18 months. To find some breathing room in these crowded climes, Airband CEO Andrew Lombard says he hunts for "DSL black holes" - areas that fall outside the 17,000-foot limit of DSL. "We don't focus on downtown," he says. "We focus on the unbelievable demand that rings around cities."

To reach small and medium-sized businesses there, Airband uses the unlicensed national information infrastructure (U-NII), a stretch of airborne bandwidth between 5.2 and 5.8 GHz available for free on a first-come, first-served basis. With U-NII, Airband can deliver more bandwidth than DSL (between 512 kb/s and 10 Mb/s, compared with DSL's 384 kb/s) and theoretically provision it faster. Airband can currently turn up service in 14 days, but Lombard says, "We want that to be five days." And: "We give estimated provisioning times we think we can beat."

Using unregulated frequencies also frees Airband from the expense and delay that LMDS and MMDS purveyors face in buying spectrum segments. "That price tag is far too great to make a business plan," says Lombard. "Owning the frequency itself is less important than time to market."

U-NII can span a three-mile radius, but its weakness lies in its susceptibility to interruption from other radio waves. Such interruptions in voice service are intolerable, so for the time being, Airband won't offer voice. Lombard makes no apologies. "We don't want to be your next phone company," he says. "We want to be your data network service provider."

Lombard's hope is to "design around interference," and although we're not sure what that means, it's a safe bet his team does. Airband's founders hail from Covad, McCaw Cellular, Winstar, Motorola and Adaptive Broadband, a leader in wireless technology.

This pedigree has given Airband's investors an anachronistic confidence. In a dry year for telecom funding, Airband collected $46 million in its first round from Battery Ventures, Crescendo and Sevin Rosen Funds.

For a company promising to navigate "black holes," Airband couldn't ask for a more convincing demonstration than that.

Entry level

It's safe to say that Wired Business will never be accused of cream skimming. While other start-up service providers - especially the ones pursuing the multi-tenant unit markets - are eyeing big-bandwidth businesses and high-flying residential consumers, Wired Business is going after customers that are... well, kind of behind the times.

"We're very much based in reality," says Jeff Fisher, director of business development for Wired Business. The company's idea is to take the arms of small businesses that are not yet hip to the broadband scene and - by giving them high-speed access, e-mail and maybe a little Web hosting - lead them into the present. Maybe even the future.

"These people are just getting always-on, dedicated Internet access for the first time," Fisher says. "We'll provide those services, but at the same time we'll build a pipeline of value-added services that will drive revenue much higher."

The uniqueness, as Wired Business sees it, is the economy. Fisher: "We're the low-cost provider in the space."

That status is achieved in part through the company's delivery medium of choice: copper. And Wired Business will thank you not to criticize. "There's been a lot of copper bashing," Fisher says. "It's completely untrue. We've picked a single technology, and we're committed to it."

Actually, the company is leasing T-1s into target buildings and modifying the lines with DSLAMs, then connecting customers via Ethernet. No new wiring, but enough available bandwidth to grow. "On the in-building side, the network is completely scalable," Fisher says.

Another source of economy for Wired Business is its sales approach: some direct sales, but mostly a lot of phone calling. "We're going to reduce the cost of customer acquisition," Fisher says. "Other providers position sales teams to baby-sit the building. The challenge is to do something that generates a return, and we'll do that through tele-sales and other low-cost methods."

Wired Business has POPs installed, T-1 orders in place and a plan to get into buildings in Philadelphia, New York, Miami and Washington D.C. by forging deals with real estate developers. Financially, the company is backed by undisclosed funding from VCs Dolphin Communications Partners and Norwest Venture Partners.

The endgame for Wired Business is beating the competition by being not just cheaper, but more economical all the way around.

Fisher: "We're providing the same services our competitors can, but at one-fifth to one-half the cost. So our break-even per building is about a year on average."

Quick on the draw

Aside from climbing aboard a Brahman bull named "Widowmaker," one of the gutsiest things you can do in the Lone Star State is to sell a bundle of voice, video and high-speed data services in a showdown with SBC Communications subsidiary Southwestern Bell and Time Warner - two very ornery competitors. But that's what cable overbuilder Grande Communications has decided to do, and the carrier thinks it can stand up to both of them in its Texas markets.

"We're not going to put them out of business," says Tipton Ross, Grande's VP of strategy and corporate communications. "There's plenty of room for a third player. If we can sell our bundle to 20% to 25% of the opportunity passed, we'll feel successful. That is by no stretch of the imagination going to hurt these incumbents. If that's all the market share they lose, they can feel that they have survived a storm."

Other folks have similar confidence in Grande's prospects: The company raised $233 million in its seed round of financing in February and earned another $25 million in follow-on funds from Houston utility Reliant Energy in September - with a promise of $25 million more in the next round if enough of the original investors also take an extra helping.

Two keys to Grande's charm are its management team and its careful market selection, Ross says. CEO Bill Morrow headed Georgia-based overbuilder Knology for three years, while President Jerry James spent 32 years in telecom with Southwestern Bell, MCI WorldCom and Texas-based national CLEC Thrifty Call, which Grande purchased in July. Chief Operating Officer Scott Ferguson brings the cable network construction experience he acquired with Prime Cable Systems and SNET.

Grande was able to begin actual construction of its network in May, only three months after getting its start-up money together. The first market targeted is an 80-mile corridor between Austin and San Antonio, including Grande's home base of San Marcos, Texas. "The density is good, so we have lots of opportunities per mile," says Ross. "And the types of business here - medical institutions, high-tech companies and universities - translate into a lot of users." Grande is targeting residential and small business users, primarily telecommuters who want high-speed access. Ross cites figures that rank Austin as third in the nation for online PC ownership, with 53% of all devices linked to the Internet; San Antonio comes in at 36%. Combining the two gives you an artificial Tier 1 market with a million homes to pass, all reachable from one centrally located, switch-equipped head end.

The Austin-San Antonio network will take five years to complete. Grande will add test customers at the end of November and will convert those to paying customers in January, offering them local and long-distance voice, analog or digital video with video-on-demand, and broadband access.

Thrifty Call brought eight Nortel switches (four in Texas), a robust business in both long-haul voice and Internet termination, and a skill set in billing and back-room operations that will serve both the retail and wholesale lines. Those new assets led Grande to apply for a cable franchise in Houston, which was granted. The company will begin construction before year's end. Reliant saw that push and decided that it wanted into the broadband business, hence its investment.

"Southwestern Bell and Time Warner have some issues that come from monopoly incumbency," Ross says. "We'll have a state-of-the-art network with clear pictures, crisp sound, high bandwidth allocation and a lot of glass. That's going to be a great competitive advantage." In other words, there's a new gun in town.

A wonderful life!

There was a time when ideals came before EBITDA, before ambition, before board meetings - Zuzu's petals stuffed in a pocket to remind you of what's important. But they never seem to work in today's real world.

That is, until do-gooder types like Ntegrity go out and build businesses based on those silly notions. The company is piping broadband and content into middle- and low-income apartment complexes, and - get this - it plans on making money doing it, right after it changes the world.

The epiphany came to Dwayne Goldsmith, president and CEO of Ntegrity, when he was working at Ameritech, where he became the youngest president in the history of the company. "I saw a way to change society by changing the lives of middle-income and lower-income Americans in apartment complexes," he says.

The idea is to create communities - something that has been lost in this country - in apartment complexes throughout urban and suburban areas, says Goldsmith. By making people feel like they are a part of something larger, the company will gain value.

Here's more idealism: "I think businesses should be about more than making money. If you create value for your customers, you create companies that have staying power," says Goldsmith. "We change our customers' lives and ultimately we change the lives of the people around them." (If all this community talk isn't enough to make you feel like a sellout, he also talks about health and education more frequently than a presidential candidate.)

And as far as making money goes, Goldsmith says that the middle-income multidwelling unit market alone comprises more than 14 million people. He claims that he can bring DSL into a 200-unit building for between $20,000 and $30,000, so if he gets 27 customers in any one building, he's breaking even.

And the people in those buildings are ready and willing to spend: "It's a fallacy that people who make less money spend less on telecom services. And the other piece of the equation is that those customers haven't consumed high-speed access because they haven't been offered it," Goldsmith says.

Currently the company is offering service in three cities: Detroit, Baltimore and NYC. Eventually it plans to work its way into 35 cities, but it's not in a hurry - changing the world takes time.