The Best Next Thing

Why shouldn't Dan Akerson and Nextlink take on the likes of an AT&T? After all, he's done it before.

Dan Akerson didn't get where he is today by thinking small. Just five months into his job as Nextlink CEO, he's not focused on tackling the other CLECs. Instead, he plans to be a "full-fledged, toe-to-toe competitor with an AT&T or a WorldCom."

And Akerson appears to be on the fast track. He listed the high points since he took over at Nextlink: "We launched ISP service in six cities; acquired one of the three largest independent ISPs (Concentric); raised $850 million in private equity and a $1 billion revolving line of credit; and consolidated the Internext asset (fiber-optic backbone) where we owned 50% and bought the other 50%."

There's more.

"We reorganized the company and launched commercial fixed-wireless-broadband service in Los Angeles and Dallas," he said, adding that Nextlink, bidding as Wispra, also obtained the six largest LMCS (Canadian LMDS) markets in Canada: Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver.

Nextlink probably is best known today as a Craig McCaw brainchild. Formed in 1994, the year McCaw sold McCaw Cellular to AT&T, Nextlink started out as a CLEC delivering service to small- and medium-size businesses via fiber optics. It got into wireless broadband in a big way by acquiring LMDS spectrum in a joint venture with Nextel and then by purchasing WPN Communications, the largest auction winner of LMDS licenses.

Like many top Nextlink officials, Akerson arrived with a McCaw pedigree. Prior to a short stint as co-chairman of Eagle River, McCaw's holding company, Akerson was chairman & CEO at Nextel, the national wireless-service provider also founded by McCaw. In fact he's still Nextel chairman.

"I took (Nextel) as far as I wanted, but not as far as I could," Akerson said. But he admits he was hesitant at first to take on Nextlink.

"Nextlink was at a similar stage of development as Nextel was in '95 and '96 with fewer intrinsic problems, but just as many challenges," Akerson said.

"The company lacked a strategic focus at the time, and Craig and the board felt there was a need for a change," Akerson said. "I grew up in the long-distance industry at MCI (1983 to 1993), and (they) wanted someone who had been there and done that — someone who could clearly set a direction for what the company needs to accomplish in the United States in order to be a full-fledged integrated communications provider."

Concentric Fills Gap
A giant step toward this goal was the Concentric deal announced in January. Concentric provides Internet business solutions — DSL access, Web hosting and e-commerce — to small- and medium-size companies.

Michael Smith, Stratecast Partners managing director, said Nextlink had been well behind the curve in developing and deploying advanced data and Internet services.

"They had a forecast that in 1999 they would start a roll-out of these services, but achieved little," Smith said. Nextlink realized that acquisition was a better route to take than developing these services on its own, he said.

"The Concentric purchase puts Nextlink into a tremendous position," said Peter Jarich, Strategis Group analyst. "A lot of other CLECs are getting into applications hosting, and Nextlink was outside that fray because it didn't have (Internet) services."

Akerson said the Concentric deal signaled Nextlink's intent to compete with the likes of AT&T and WorldCom.

"Now that's a pretty bold statement for a company with less than $1 billion in sales," Akerson admitted. "But we made that statement at MCI when we were $500 million in sales."

Akerson launched into a favorite story from his days as MCI CFO, before becoming president: "We were actually sued at one point in time — a shareholders' suit — which said we perpetrated a fraud on the investing public by asserting that we could even remotely compete effectively with AT&T. Now looking back 10 to 15 years, people say if there was a winner in the long-distance wars, it was MCI, but at the time, before divestiture, AT&T was the single largest company in the world in terms of assets, cash flow and profits. There's nobody like that in the world today. Nobody. Including Microsoft."

Not a Dwarf
Akerson believes Nextlink already is different from its CLEC competitors because of its assets. He noted that the company will have fiber builds in the top 60 cities by year-end and will build out 25 of those cities with LMDS to complement its fiber rings. Then it has Internext, long-haul fiber that will interconnect all of the switches and fiber rings. In July 1998, Internext entered into a cost-sharing agreement with Level 3 Communications to build a 16,000-mile inter-city national fiber-optic network connecting nearly every major city in the United States and Canada. Internext received 24 fibers, one 1.25-inch empty conduit and rights to 25% of any fibers in any conduits over five for the entire length of the Level 3 network.

"That's going to differentiate us," Akerson said. "Not from the dwarfs of the industry, the other little CLECs, because we've evolved well beyond that.

"Think if something magic happened, and RBOCs were allowed in long distance — let's say BellSouth," he speculated. "If you had to make a call from Atlanta, where we have operations, to Seattle, where we have operations, we can originate and terminate that call from Atlanta and haul it all the way to Seattle. How's BellSouth going to do that? They don't have anything in Seattle," he said, then citing other cities such as Boston; Chicago; Los Angeles; New Orleans; Portland, OR; San Diego and San Francisco where Nextlink has operations.

"We've all of a sudden morphed ourselves from a CLEC providing a simple 1-dimensional, 1-city fiber ring into an interactive national network," he said.

"We can determine best-class, last-mile economics," Akerson said. "And at the end of the day, low cost wins in this industry. If I can say, I think I can beat BellSouth, why shouldn't I turn my attention to AT&T and WorldCom? I don't think they're really focused on the last mile, and the last mile is the lynchpin here."

He was quick to say, however, that any competition for residential customers will be in the SOHO arena.

"I don't want to compete with AT&T for 5 cent Sunday." Akerson said. "That's a flawed model anymore. We're talking about the SOHO market, a robust and growing part of the small- and medium-enterprise market."

If Nextlink wants to serve a building, it can choose last-mile access via wireless broadband (LMDS), fiber, DSL or copper access. It initially tests various LMDS vendor products in its Plano, TX, lab. Among the LMDS products field-tested in Los Angeles were those from Digital Microwave, Ericsson, SpectraPoint and Wavtrace. Nextlink CTO Doug Carter — who calls Nextlink "technology-ecumenical" — appeared pleased with the initial results and said testing continues on second-generation products.

By the Numbers
On the financial front, Nextlink's ability to raise money is well demonstrated. Its ability to make money will be judged somewhere down the road.

Akerson said that Nextlink has been delivering numbers all along, but they've been relatively small.

"But we should exit this year at a $1 billion run rate, and then you start to take on some scale, and people start to stand up and take notice," he said. "We're in such heavy investment mode today, there's no way we can be profitable. If we pushed the company to profitability today, we would severely truncate the potential that we hope to achieve, because we'd be managing for nickels and dimes, and we're going for the jackpot here." He anticipates being cash-flow break-even in 2002 or 2003.

Recent financial news was good as Nextlink beat expectations in line count, revenue and EBITDA loss (operating loss before depreciation, amortization and deferred compensation expense) in 4Q99. A 2-for-1 stock split was announced in February.

Name Recognition?
Although Nextlink — along with McCaw and Akerson — is a known entity in the telecommunications and financial worlds, what about the world of small- and medium-size businesses? There it may be perceived as just one of many new telecom companies.

Akerson said Nextlink has to revolutionize the industry and the way telecommunications is perceived.

"That's a function of the integration of the local and long-distance networks, the bundling of both voice and data services, and some pricing algorithms that hopefully will drive our competition nuts," he said.

"People talk about branding, and their first assumption is all about $100-million-a-year advertising campaigns," said Todd Wolfenbarger, Nextlink vice president of corporate communications. But Akerson told his general managers that the fastest way to a brand is something that makes you different in the market, Wolfenbarger said, something that he demonstrated at both Nextel and MCI.

"I've been at Nextlink for two years, and in four months I've heard more from Dan pushing people to say how we are different in the eyes of the customers than any other place where I've worked," Wolfenbarger said. That's what makes you a brand, he said. The advertising just complements it.

You have to be patient and not advertise something you can't deliver, Akerson said.

"Some of our competition, Level 3 and Quest, are off shooting bullets now saying they're everywhere," he said. "They're not. Level 3's nowhere that we're not. Quite frankly, we're a lot further along than Level 3 is. But Level 3 advertises, and it has a certain cachet. It has sort of a cool-sounding name, too."

But then, some would say Nextlink and Nextel are pretty cool names. Akerson said the use of "next" was a coincidence when these companies were formed, but subsequent names such as Internext and Nextband, which was used in the LMDS auction, were a purposeful play on words, consolidating on a concept that says it's anticipatory, forward learning, the next thing.

Acquisition Choice?
Strategis Group's Jarich said Nextlink's name is probably not up there on the radar screen of most small- and medium-size businesses. In fact, most CLECs aren't that well known. But he's pretty sure that Nextlink could pop up on the radar screens of some ILECs seeking to break into new markets.

"If you're an ILEC and want to get into other markets, you can build it out or buy it," he said. Nextlink not only has tangible assets in its network, but has human assets as well.

"We've heard time and time again that carriers are not worried about the ILECs competing in new markets because the ILECs don't know competition," Jarich said. "Well, if I was looking to get someone who knows competition ..."

However, the prospect of being bought out isn't one of the things that keep Akerson awake at night. There are others.

"Did we write the contract right with Concentric? Are we protected? Do we have (the right people) in the right slots? Are they properly incented and motivated? Am I approachable? Am I intimidating people so much, for example, that they're unwilling to approach me on certain subjects?" he said.

"You worry about the minute things, you worry about the people issues, you worry about the strategic things.

"You know we've got to continue to move," he continued. "We're like a shark. If we don't move, we die. Someone said to me the other day, 'We've got it all buttoned down now with Concentric.' No. Concentric is one more block in the foundation before we start to build."

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The McCaw Magic

For a man who stays out of the public eye, Craig McCaw certainly makes his presence felt.

"Merely his name in terms of selling Nextlink to investors has meant a hell of a lot," said Michael Smith, Stratecast Partners managing director.

He doubts that McCaw, Nextlink founder, has much influence in the day-to-day operations at Nextlink, but said that if you have the right leaders, you don't have to have that involvement.

"Clearly he believes (Dan) Akerson can implement and deliver the vision at Nextlink that is going to make them successful, and that will be in accordance with what McCaw will desire," he said.

"McCaw's association imbues any company with a sense of purpose," said Peter Jarich, Strategis Group analyst. Whenever he talks to people at Nextlink, Jarich hears: "Craig has this view of the market. When Craig set up the company, he wanted to do the following. Craig believes that this is the way to go."

A major stumbling block for a lot of companies is a lack of vision, and that's not a stumbling block for Nextlink, he said.

Although Jarich actually has never seen McCaw, "even if he didn't exist, he manages to give the idea of Craig McCaw, so it doesn't matter. It's the faith in (McCaw) that draws people together," he said.

Gerry Salemme, Nextlink senior vice president of regulatory and external affairs, uses a different analogy when describing McCaw.

"He's kind of like Dumbledore, the headmaster (of Hogwart's School of Witchcraft and Wizardry) in the Harry Potter books," Salemme said. "He's not around much, but he knows when it's time to step in and make things right."

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Liking Their LMDS

Keith Waggoner, McFarlan Real Estate Services COO, admits he was a little apprehensive when he signed up for voice and data service from Nextlink. Waggoner is located in Dallas, one of the first cities where Nextlink launched service using LMDS for the last-mile connection.

"I was skeptical maybe of the idea of having a wireless piece of my voice and data transmissions," Waggoner said. "My previous experience between wireless and wired technology was basically your home phone and a cellular phone. I knew they weren't equal in quality, but this is."

Since he started service in December 1999, Waggoner said neither rain, nor snow nor cloudy days have affected his service. Nextlink costs less, and it takes a week or less to get service as opposed to waiting 60 days for Southwestern Bell to connect a T1, he said.

Mike Hennefer heads another Dallas real estate company, Corporate USA, and has been a Nextlink customer for about four months. He wasn't concerned about the fixed-wireless aspect of the service, but said he switched to Nextlink because of its people.

He already was getting many solicitations to switch telephone service, but got coaxed to a meeting by Nextlink employee Chris Miller.

"They were so energetic," said Hennefer. "All these guys were with it. That's why we switched."

Hennefer said there have been a few glitches in service, but the company is so responsive in making sure that problems are resolved, he has added Nextlink service to two more buildings.

"The level of their service is better than I've ever seen," Hennefer said.

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Standards Update
By Betsy Harter

The IEEE standards board recently approved two fixed-wireless supplements to ANSI/IEEE standard 802.11. IEEE 802.11a and 802.11b will create higher-speed wireless-access technology suitable for data, voice and image information services, said Karen McCabe, IEEE standards activities manager of marketing.

The 802.11a standard was initiated to develop a higher speed physical layer (PHY) for use in fixed, moving or portable wireless LANs (WLANs).

"The PHY will be used in conjunction with the 802.11 medium access control (MAC) protocol, which will be reviewed to assure its ability to operate at the speeds targeted," McCabe said.

The 802.11b standard will extend the performance and application range of 802.11-compatible networks in the 2.4GHz band by increasing the data-rate devices can achieve.

"This technology will be beneficial for improved access to fixed network LAN and internetwork infrastructure (including access to other WLANs) via a network of access points and creation of high-performance ad-hoc networks," McCabe said.

The 802.11a standard's goal also is higher data rates; however, that project is for operation in the 5GHz band, she added.

The 802.11b standard also will evaluate the possibility of taking advantage of the rate expansion provisions that are in place on current standard PHYs.

McCabe explained that the 802.11 MAC protocol defines a mechanism for operating stations to support different data rates in the same area.

"The proposed project authorization request targets further developing the provisions for enhanced data-rate capability of 802.11 networks," McCabe said. "The 802.11 MAC incorporates already the interpretation of this information and the computation of expected packet duration, even if the specific station does not support the rate at which the packet was sent."

Harter (betsyharter@aol.com) is a freelance writer based in Athens, GA.