Return to Virginia Business - July 2004

Wireless for Winnebagos?
Telecom survivors show staying power

by Randy Barrett
Virginia Business
July 2004

David Giannini launched a new telecom business in January 1999 — “at the apex of the frenzy,” he calls it now. Back then venture capitalists were throwing money at new tech ventures and Giannini’s idea of wiring hotel and resort conference centers with broadband access seemed like a good bet.

Then came 2001, and the collapse of the Internet investment bubble followed by the terrorist attacks on 9/11. Giannini’s company was left straddling two hard-hit industries, hospitality and telecom. “We all started as children during the salad days [of the late 90s],” says Giannini, who is also the company’s CEO. “In 2001, we all became adults.”

As hotels stood empty and phone companies large and small permanently disconnected, Giannini went to his backers at Core Capital Partners in Washington, D.C., and asked for help. Luckily, they took the long view and pumped $2 million more into Core in 2002 to help it survive while dozens of other companies sank into bankruptcy. “They got hit hard,” says Core Capital Managing Director Pascal Luck. “It’s a testament to what they do — they kept getting contracts and they had developed a good reputation.”

While the company may seem a unique survivor, there are a surprising number of startups — and even some established players — that weathered what one industry exec calls “telecom’s nuclear winter.” A sure sign of life is that venture funding has returned, albeit modestly. Investments in Virginia-based telecom companies are expected to reach $80 million this year, according to the National Venture Capital Association. In 2003, that figure was a paltry $7 million.

And, some surviving Virginia-based telecom companies are finding growth in offering Voice over Internet Protocol (VoIP), which lets telephone traffic be carried over the Internet instead of traditional voice networks. Jim Broder, a principal with ECentury Capital in McLean, says he’s seeing a resurgence in the sector: “People seem to be interested in funding companies they wouldn’t have a couple of years ago.”

One new company, Reston-based Linkspot Networks Inc., opened its doors during the industry’s darkest days in February 2002 with private financing. The company sets up and sells access to wireless “hot spots” at recreational-vehicle parks around the country. “For us the good news is that we’re in a new market,” says LinkSpot CEO Alan Kobran. “Our customers don’t have a lot of options.”

If the idea of offering wireless access to snow birds traveling cross-country in their Winnebagos seems nutty, Meritage Private Equity Funds doesn’t think so. So far, it has poured $2.3 million into the company. LinkSpot currently serves 60 RV parks under a system that charges hot spot users a daily rate of $5.95 and a pays a small monthly royalty to host parks.

So far, the idea is slow to catch on among RV users. Several participating parks report 2 to 3 percent usage by customers. Kobran isn’t worried. “You don’t expect a park to be profitable from the moment you open up,” he says.
Mike Gurevich, owner of Cherry Hill Campground in College Park, Md., says his customers like LinkSpot even if few regularly use it yet. Like cable TV and a swimming pool, RV parks strive to offer as many amenities as possible to attract customers. “If a campground can break even on it, they do it,” says Gurevich, who upon initially hearing about LinkSpot thought it was “the dumbest idea I ever heard.” Since then he’s had a change of heart and is now an investor in the company.

While the availability of venture capital is a good sign, the current funding market is nothing like it was a few years ago. In 2000 nationwide venture funding for telecom companies hit $6.6 billion, but by last year that dropped to $990 million, as venture capitalists continued to flee from any business plan with the temerity to mention digital communications.

The companies that survived had to find a way to deal with massive debt they’d taken on. McLean-based Primus Telecom, which offers voice and data services, found itself in 2000 with $1.2 billion in annual revenues but a heavy $1.3 billion slug of debt it had accumulated while trying to build out its network during the Internet boom.

By late in the year, Primus co-founder and Executive Vice President John DePodesta saw the beginnings of the telecom meltdown. Venture capitalists were pulling back, and the strategy to provide unlimited network capacity to a theoretically limitless number of companies was clearly unraveling. “To survive, we knew we had to do it on our own,” says DePodesta.

While other carriers quickly disintegrated, DePodesta ignored the advice of Wall Street experts and began using the last of Primus’ cash to retire debt. “With our precious cash we bought back our debt on the public market for pennies on the dollar,” DePodesta says.

With telecom valuations in the toilet and no daylight in sight, bondholders were more than happy to part with Primus debt at 22 cents on the dollar. DePodesta slashed the company’s debt by $600 million and deeply trimmed unprofitable divisions, which led to the layoff of about 1,000 employees. DePodesta says the exercise was painful but necessary to save the company and the 2,200 remaining jobs.

In 2002, Primus turned the corner, went cash-flow-positive and attracted the unthinkable: $42 million in investment from the insurance giant AIG. By the last quarter of 2003, the company finally entered the black with $18 million in earnings, or 18 cents per share.

Now Primus and many other carriers are looking to Voice over Internet Protocol services for the next burst of revenue growth. Instead of using traditional voice networks, VoIP traffic travels over the public Internet for 20 to 30 percent less than regular phone calls. It also helps that VoIP traffic is currently not taxed.

Long extolled by industry analysts as the Next Big Thing, VoIP seems to be finally arriving. In 2000, Primus carried 60,000 minutes of Internet phone calls. That number jumped to 1 billion last year, and the company expects to reach 2 billion minutes this year.

Most telecom users don’t realize that Northern Virginia is one of the largest hubs of Internet and telecom traffic in the world. The reasons why date back to the Defense Department’s early forays into packet networks, but also MCI’s longtime presence in the Washington area. Easy access to top-quality networks and the federal market continues to attract new companies to Virginia. California-based Tachyon Networks, for example, which offers satellite broadband services, moved its headquarters to Vienna in May 2003.
Just being in Virginia was a boon to Core Communications, even when times were at their worst. As providers like Winstar Communications collapsed, the market was flooded with veteran engineers. “We were able to grab incredible talent we couldn’t have otherwise,” says Giannini.

Today Core continues to focus on the hotel-meeting market. The hospitality industry started pulling out of its recession later in 2002, and with it Core’s fortunes improved. The privately held company does not disclose financial performance figures, but Giannini says Core went into the black to the tune of about $1 million last year and that 2004 looks strong. “We took a fairly disciplined approach, and that’s what got us through,” Giannini says. Given telecom’s wild ride in the past few years, a little discipline — and the backing of wiser venture capitalists — can go a long way.

Return to Virginia Business - July 2004