Great Expectations

The leaders of WinStar Communications have high aspirations. Moderate success is not enough for this company; it wants to get noticed.

With billions of dollars at stake, WinStar is ready to take on the Bells. But Chairman & CEO William J. Rouhana Jr. is not stopping at the local service market. He envisions broadband technology changing the world.

That may seem like quite a feat for a 6-year-old company that has been losing money since its inception. But to a man who has played a key role in 19 United Nations peacekeeping missions, been shot at during visits to Somalia and Rwanda amidst civil war, and crusaded Africa against land mines, anything is possible.

"(Bill) is why I'm here," said Nathan Kantor, president & COO. "He has passion, and he has a vision. He sees this as doing good for people. Changing lives through good communication. This (broadband) is a way to solve problems and issues."

Rouhana's vision extends beyond the 28GHz and 38GHz broadband licenses and point-to-multipoint technology. Rouhana sees WinStar touching people's lives, changing today's standard of living, creating better products and services, and, in turn, increasing productivity for people worldwide. More than business applications, his solutions include tools for distance learning, education for inner city schools and interactive video communications.

THE TEAMWinStar is off to a good start. True to its long-range goals, the one accomplishment it seems most proud of has more to do with people's lives than business or technology. On Veterans Day last year, WinStar launched The Virtual Wall (www.virtualwall.org), an interactive web site where friends and family can leave messages and graphics in tribute to Vietnam veterans. With recognition from Vice President Al Gore, WinStar is definitely getting noticed.

Rouhana and Kantor are relying on past experience to continue that trend. Kantor is no stranger to challenges. In 1972, he left a comfortable life with a blue-chip company to join a small fledgling 200-employee microwave-technology company called MCI. He joined Bill McGowan in the battle to compete against AT&T and bring competition to the long-distance monopoly.

Twenty-three years later, Kantor had once again settled into a comfortable life -- this time with a consulting practice -- when he got a call from another fledgling company. At the time, WinStar had around 200 employees, and Rouhana was positioning the company to take on the local monopolies. In the 1970s, he helped break up the long-distance market; now Kantor was preparing to break up the local market.

If history repeats itself, Rouhana has selected a second man who could help make WinStar the next MCI, something Rouhana has been thinking about since the 1980s. With a career spanning investments, law, film and cable, Rouhana wondered, "What (will be) the next technology to impact the way we get information?" Before Information Superhigh- way was even a term, Rouhana's mind was racing.

"In the late 1980s, I started trying to understand how all of this would come together. I thought it (would be) something important and started investing in telecom companies to understand its impact."

That's when the evolution to broadband became clear. By 1993 Rouhana was growing frustrated with the Bells' inability to implement advanced telecom solutions. So, he created WinStar Communications. With Kantor at his side, Rouhana assembled a team (now more than 2,600 employees) to make his goals "a reality, not a possibility."

AMBITIONAlthough Rouhana would like "to help solve problems worldwide," his first task is to stir up local competition. That has not been easy. With anything new comes skepticism, and broadband wireless has had its share.

Investors have taken a wait-and-see approach, and the telecom industry is watching with an eagle eye. Not everyone is convinced there is a true business case for microwave, point-to-multipoint services. After financial woes of C-block providers and the flood of telecom competition, investors are wary of backing more players. After all, investors want to know that broadband providers can do more than just offer services; they must be able to bring in revenue. And WinStar has not done much of the latter. But Rouhana is optimistic. Although the company still is losing money, he expects cash flow to break even in 2000.

"What we lose is investment spending," he said.

Still, it has taken several years of hard work to educate people on the opportunities of broadband services such as LMDS. According to Rouhana, WinStar had the curse of being first.

"They used to laugh at us," Rouhana said. "Now they get it."

In October, WinStar got the credibility it needed when Lucent Technologies announced a 5-year agreement to provide up to $2 billion in equipment financing. WinStar's shares rose $65/16 to $257/8 immediately following the announcement.

Rouhana believes that for the most part, the industry finally is ready to accept the opportunities. As proof, other providers have started to follow WinStar's lead. Rouhana is not modest about WinStar's role in that evolution.

"(They are) all trying to be like us," he said.

So what is the business case? What are "they" all trying to get at? It all comes down to capacity and lots of it, quickly and cheaply.

According to WinStar, it costs more than $300,000 to connect fiber to a building. The cost for connecting a microwave point-to-point system averages about $20,000 per building. With the latest advancement of point-to-multipoint technology, the cost can be as little as $4,500 a building.

Another attractive concept is pay as you grow. Instead of paying a flat rate for access, WinStar customers pay depending on how much broadband capacity they use. If they need more capacity one month, they can purchase what they need and then revert back. Or as a customer adds employees and tenants, it can increase capacity immediately. For additional fiber, it would take months.

The real difference between fiber and broadband wireless is construction vs. technology, Kantor said. Fiber is 20% technology and 80% construction. Wireless broadband is 80% technology and 20% construction.

Although broadband wireless providers don't have the construction issues of digging for installation, they do need access to rooftops for technology placement. Because point-to-multipoint systems rely on one hub site for microwave antenna and a fiber connection to reach surrounding buildings, rooftop access is crucial. But Kantor said working with landlords hasn't been an issue. In New York alone, WinStar has five working hub sites, two under construction, and is looking for more locations to meet increased demand.

CONFIDENCEThe real challenge is gaining recognition with customers. The technology is a "no-brainer," Kantor said. Testing has proved it viable. But the thousands of potential customers (schools and businesses) have never heard of WinStar or its technology. So WinStar is positioning its service as Wireless Fiber, a winning combination, according to Kantor, because wireless is a hot term and fiber conveys reliability and quality.

But more than understanding technology, small- and medium-size businesses (the majority of WinStar's customers) want customer service.

"They have been ignored and abused," Kantor said.

Surveys indicate that office managers claim the worst thing to do in a day is to call a LEC for anything, he said. WinStar is using that as ammunition. Building customer relationships is its competitive weapon. It wants to change the existing paradigm that telephone companies don't need to worry about customer service.

"It's simple; just talk to the customer," Kantor said.

WinStar has created a company philosophy around this concept. It opened a National Customer Satisfaction Center in Dublin, OH, and has trained salespeople to help customers analyze bills and even help them set up web sites.

Establishing relationships with businesses, building owners and companies such as Devnet, which controls physical access rights to more than 400 office buildings, are critical to its business.

The company's strategy is a building-centric approach. WinStar has access rights to 3,500 buildings across the country. Only two other companies have more, and WinStar plans to change that. It expects to have access rights to 8,000 buildings by year-end 1999. WinStar's strategy is to first target buildings with more than 100,000 square feet, build out equipment and then sell to the businesses in those buildings. With the Lucent deal under its belt, the company now expects to exceed its original plan of a 40-city launch by year-end 1999.

That won't be easy. WinStar may be "The New Phone Company," but, it's not the only new phone company. There are many other CLECs, including LMDS and PCS companies, also wanting a piece of the local market. Teligent is the one competitor that frequents media and analyst comparisons. One futurist even expects Teligent to leapfrog WinStar.

"Teligent really impresses me ... They seem to have their act together better than WinStar ... WinStar is doing too many things, so it can't focus on the huge opportunity in wireless data to business residences ... Teligent is going to burst ahead of them," said George Gilder, Gilder Technology Group president.

Rouhana and Kantor aren't concerned.

"He is absolutely wrong ... I don't worry about Teligent," Kantor said.

According to Kantor, Teligent has no funding, no access and is two years behind WinStar. WinStar has more spectrum and licenses than anybody else and is in more places than anyone else (averaging more than 700MHz per market). Teligent's heavyweight, former AT&T President Alex Mandl, doesn't intimidate either.

"Bill invented the industry, not Alex," Kantor said.

Although Rouhana won't credit Teligent as a direct competitor, he does consider its presence a compliment.

"Teligent existing is the ultimate flattery," Rouhana said. "It adds credibility to the market because it is copying what WinStar is doing."

In fact, WinStar seems to think it's in a class of its own.

"The LEC is my competitor," Kantor said. "Not the CLECs."

If that is the case, how can WinStar expect to become the leader in a field of local incumbents? It's simple, Rouhana said: "We've got a better mousetrap."

VISIONS OF SUCCESSPart of that mousetrap lies in WinStar's marketing campaigns, which include direct mailings to target buildings, and personal delivery gimmicks such as a baseball promotion box with a Louisville slugger and an invitation to meet with WinStar. If the recipient agrees to the meeting, he receives tickets to the baseball game.

Other personal deliveries include WinStar breakfast bags with coffee and bagels.

Lobby programs also are a strategic marketing tool. The company often holds events in building lobbies and serves treats such as ice cream in the afternoon.

The company is testing another value-added feature in its own buildings. The multimedia Kiosk Network features live AP news headline tickers, forecasts, an interactive building directory for tenant listings, area restaurants and city maps. These programs are key in getting the company's name circulated. They leave the perception that WinStar owns the building.

"We want people to ask 'Why don't we have WinStar in our building?'" Kantor said.

These tools also increase value for the tenants. They will make businesses look at broadband like they do air conditioners, Kantor said.

"They will realize they can't do business without broadband capacity," he said.

Late last year, the company also launched its nationwide marketing campaign, Project Millennium. WinStar is picking up local phone service (up to $1,000 per month) until 2000 for first-time customers that sign a 3-year contract between Oct. 31, 1998 and Jan. 31, 1999.

The offer extends to more than 1,000 newly connected commercial buildings in 13 markets including Atlanta, Dallas, Denver, Los Angeles and New York.

To generate revenue, WinStar will use this promotion as a hook and then go back and sell more services. But WinStar is not stopping there.

Despite analyst predictions that broadband services such as LMDS will be limited mostly to the business market, Rouhana plans to go further. After WinStar builds out the top 50 markets for commercial services, it will progress to the residential segment.

"Toward the end of 2000, we will have the ability to serve a significant (portion of the) residential market from a network perspective," Rouhana said. "We will try to do that. The broadband network will go to the home."

He believes that video conferencing and Internet usage will drive the demand for broadband capacity to homes. If it succeeds, WinStar will be one step closer to reaching Rouhana's high expectations -- changing the way people across the world communicate.

Pioneer Consulting predicts global LMDS business will grow from $157 million in 1998 to more than $11.5 billion by 2007. WinStar plans to own a piece of that business. The company's recent agreement with Lucent has created the resources to build globally.

"(Lucent and WinStar) are a perfect fit for international goals," Kantor said.

WinStar has identified 50 cities (25 in Europe) around the world as targets for broadband expansion. Part of WinStar's strategy in 1999 will be to help countries leapfrog landline and go directly to broadband wireless.

Pioneer's recent report agreed that in Asia LMDS will be a viable solution where building fiber networks in underdeveloped countries is too costly. Pioneer also said that by 2000, Asia-Pacific and Latin America markets will be adopting fixed-wireless applications, and in Europe the demand for alternate local-access services will drive LMDS. If that prediction holds true, WinStar may be on easy street to global success.