| Rising
from the ashes
Telecommunications
leaders have high ambitions but are more pragmatic
by
Brett Lieberman
Virginia Business
November
2004
In
its heyday, Teligent Inc. employed 3,400 people and
was valued at $4 billion even though it never turned
a profit. That was the 1990s, when telecommunications
firms were going to revolutionize the world. Back then
every company had visions of becoming the next Verizon
or AT&T. That was before the telecom sector flameout.
The hallways and cubicles at Teligent’s former
headquarters in Herndon are still cluttered as Dean
Johnson — CEO of First Avenue Networks, Teligent’s
new owner — takes a visitor on a tour. Instead
of people, piles of telephones fill cubicles, boxes
labeled with the names of struggling equipment suppliers
are stacked all around, and parts of $30,000 radio transmitters
— once touted as the future of communications
— sit on the floor.
“There’s
still a lot of stuff going on, but you notice the spirit
sort of fell out when the IT employee of the month stopped,”
Johnson says. A plaque recognizing employees stopped
being updated around the time Teligent filed for bankruptcy
protection in 2001. Today, only about 20 employees remain.
Three of its workers monitor traffic on the screens
at the network operations center. Teligent’s most
valuable commodity is a wireless spectrum in the top
50 U.S. metropolitan markets. In First Avenue’s
Charlottesville headquarters, just three employees manage
a company that controls one of the largest holdings
of wireless spectrum spanning the country.
Welcome to the new, toned-down world of telecom. Though
ambitions remain high, telecommunications leaders are
more pragmatic, less boastful and much more reserved
than they were four years ago at the industry’s
peak.
“They wanted to be essentially all things to all
people,” says Johnson, whose company recently
acquired Teligent for nearly $100 million in stock.
“You want local? We’ll give it to you. You
want long-distance services? We’ll give it to
you. You want ISP services? We’ll give it to you.
Come to us,” he mocks.
Today, there’s less talk of “conquer the
world” strategies and more emphasis on conquering
small niches. Companies resurrected from bankruptcy
are more reserved as they plot their rebounds. “Instead
of going after grandiose dreams, they’re going
after meat-and-potato applications,” Johnson says.
That is First Avenue’s strategy. “We’re
going to go after certain niches where wireless has
a sustainable competitive advantage.”
So far, it’s a work in progress. First Avenue
had revenue of $140,000 last year, down from $295,000
in 2002. Company officials say the revenue is “run
off” from Advanced Radio Telecom Corp., the bankrupt
predecessor to First Avenue. Revenue is declining because
the business and customer base that First Avenue acquired
is not central to its new strategy, and it has not added
customers as others have disconnected. First Avenue
has about $6.9 million in usable cash, which it said
is enough to cover operations through 2005.
The Teligent acquisition will mean another $800,000
in revenue, and Johnson is optimistic that new opportunities
will prove profitable.
Perhaps one of the largest telecoms that continues to
struggle after emerging from bankruptcy court is MCI
Inc. The Ashburn-based phone company has seen its margins
sag as regional Baby Bells, such as Verizon Communications,
snag long-distance and wireless customers by offering
flat rates and packages for combined services.
MCI has been viewed as a likely takeover target. Besides
its vast network, the company has more than $4 billion
in cash on its books.
Even companies that have avoided bankruptcy frequently
find themselves struggling against tough competition.
McLean-based Primus Telecommunications Group Inc., a
large long-distance provider in overseas markets, is
facing strong pressure as competitors bundle local,
long-distance, Internet and wireless services.
The company has responded with its own bundled service
packages. It also has launched Lingo, a new voice-over
Internet phone service that offers unlimited domestic
calling for $19.95 per month. The company’s second
quarter net revenue rose 4 percent over the previous
year to $332 million. But it lags behind industry leader
Vonage Inc. and AT&T Corp., which is promoting its
CallVantage broadband phone service after abandoning
the residential phone market.
One telecom that has consistently fared well is Reston-based
Nextel Communications, which saw revenue increase 24
percent to $10.8 billion last year. A key to Nextel’s
success has been a strategy of staying focused on a
profitable business user niche instead of trying to
be everybody’s mobile phone provider.
Beginning with trade industry users such as plumbers
and electricians, Nextel promoted its “push-to-talk”
technology that combines a phone and walkie-talkie as
a cheap and easy means of staying in contact with workers,
says spokeswoman Audrey Schaefer. As its market expanded
to include more upscale business and government users,
Nextel’s core base of business customers changed
their focus, adding phones to stay in touch with family
and others.
Nextel’s results have been enviable. It has the
lowest customer turnover rates — 1.6 percent —
in the mobile phone market and one of the highest industry
averages for revenue per phone — $69. Though Nextel
is more expensive than other carriers, customers find
the “push-to-talk” service saves them money
by eliminating the need to carry a cell phone, pager
and walkie-talkie, Schaefer says.
Many of the reborn telecoms are taking an approach similar
to Nextel. In essence, they’re trying to do one
thing and do it right. “It’s a more pragmatic
approach than a few years ago. Then you saw [companies]
that were going to blanket the world,” says Carl
Grivner, CEO of Reston-based XO Communications, which
filed for Chapter 11 bankruptcy court protection in
2002.
XO, which employs 450 people in Virginia and 5,300 nationally,
lost $102.5 million on revenue of more than $1.1 billion
last year. Yet Grivner thinks the recent acquisition
of Allegiance Telecom for $513 million will provide
the scale it needs to turn a profit.
He compares the telecommunications industry’s
rocky path since the Telecommunica-tions Act of 1996
to the experience of the airline industry after deregulation
in 1977. “A lot of startups came out, a lot of
startups went under, a lot of startups came out of bankruptcy,
struggled for a while and then came back into bankruptcy,
and there’s consolidation along the way,”
he says.
While XO has remained independent thanks in part to
a bailout from billionaire financier Carl Icahn, Grivner
and others throughout the industry expect further consolidation.
“This whole industry is in transition,”
says Jeff Kagan, a widely quoted telecom analyst. He
believes the industry is somewhere in the middle of
a 10-year shakeout.
What the industry will look like in a few years is anybody’s
guess. Deep pocketed companies like Verizon will probably
still be around, analysts say, but acquisitions and
additional bankruptcies probably will thin the field.
Analysts say it’s too soon to say who will emerge
stronger. “Telecom is a game of scale,”
says analyst Vik Grover of Needham & Co. Companies
such as XO and First Avenue are trying to stay focused
on a core market while growing large enough to dominate
that market.
For XO, that means focusing on what Grivner calls the
NFL cities. The company offers a combination of wireless
and fiber network options to businesses in large cities,
pledging better service and rates than competitors.
Key to that strategy, however, is bypassing the local
telephone companies, which frequently control “the
last mile” of copper wire to customers’
sites.
XO is testing a wireless service that is capable of
reaching up to eight miles in Orange County, Calif.;
San Diego; New York City and Dallas. The company hopes
to deploy the service nationally by late next year with
receivers capable of handling as much as 10 megabits
of information mounted on the side of buildings. The
service could give XO an edge by eliminating the need
for costly connections between its national fiber network
and local phone companies.
First Avenue plans to remain focused on leasing spectrum
to wireless companies, wireless Internet providers and
other telecom firms for as little as $500 per link annually.
Johnson won’t rule out become an operating company
some day, but for now, he says, “we’re not
going to be all things to all people.” With no
operations and low overhead, such modest ambitions give
First Avenue better odds for being around a few years
from now. Or at least, as several analysts note, a good
takeover target.
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