market intelligence

Fiber is where you find it

by Stephen Hardy

Back in the Thirties and Forties, Hollywood churned out a series of musicals in which spunky teens—Mickey Rooney, Judy Garland, or other kids much like them—attacked their financial troubles or saved old Mr. MacGregor's farm with the exclamation, "I know—let's put on a show right here!" The Telecommunications Act of '96 appears to have created a similar scenario within the telecommunications industry, where upstart competitive local-exchange carriers (CLECs) across the United States have reached for their own pots of gold through the philosophy, "I know—let's build a network right here!"

The number of CLECs in the United States thus measures in the thousands, according to some estimates, which makes the challenge of service differentiation all the more difficult for companies just getting started. Yet, as they attempt to create a unique niche for themselves, CLEC startups across the country face the same requirement—assembling the infrastructure necessary to meet their customers' needs. To a large extent, this infrastructure includes fiber. However, while most forecasts of fiber consumption among CLECs continue to climb—Corning estimates CLEC investment in fiber grew 45% in 1998 and predicts similar growth this year—not every young carrier feels the need to haul out the backhoe right away. In fact, according to one fledgling CLEC in New England, there's plenty of fiber out there already, thank you very much.

Third tier, first rate

Lightship Telecom (Nashua, NH) began operations last November as a facilities-based carrier in Maine and New Hampshire. "We've decided that we wanted to go after the third-tier markets, that there's an awful lot of competition and a lot of other CLECs that have started up and are going after the major markets such as New York City, Boston, and Philadelphia," explains the company's executive vice president, sales and marketing, Rick Royer. "So we thought we would carve out a niche and spend more time trying to cater to the small to medium-sized businesses as a segment of the market that we think has been unfortunately ignored."

The Lightship management team has plenty of experience in telecommunications, so they felt that an outside consultant wasn't necessary to point them in the infrastructure direction they needed to go. Lightship's president, Kevin M. O'Hare, has 15 years of experience with such companies as US WATS, RCN Corp., and Frontier Corp. Royer spent the two years prior to joining Lightship as a telecommunications consultant. The chief operating officer, Jeff Koester, spent 10 years with Rochester Telephone, while Christopher Shannon, chief financial officer, has 16 years of experience with such firms as NET2000 Communications, US WATS, and Frontier Corp.

Lightship's management decided that the best way to establish a niche within their target market was to provide bundled dial tone, long-distance, and Internet/data services that could be presented to their customers on a single invoice, regardless of how many facilities the customers may have on the network. With this goal in mind, the company established switches in Portland, ME, and Manchester, NH. The next step involved linking these switches to customers, other carriers, and each other.

Lightship decided to run fiber between the switches and, where necessary, to the points-of-presence of other service providers. Obviously, the company had three options for these links: lay fiber, buy fiber, or lease it. The best course of action was readily apparent.

"We are not going to lay fiber," says Royer. "We will buy fiber from existing providers. There's enough fiber in the ground that we don't think it makes sense to lay fiber. So we are buying fiber from anyone who has got it in the ground and is going by the place that we need it."

Lightship spoke with three potential fiber providers. "When you're looking to buy fiber, there really aren't that many places to go," Royer says. "It depends on the area that you are in the United States as to who your providers are."

Ellen Deutsch, of counsel at Cole, Raywid & Braverman LLP (Washington, DC), a law firm that specializes in helping telecommunications companies get established, agrees that geography largely determines fiber availability for CLECs.

"If they're in a fairly major market it's very easy, because there's so much overbuild right now between all of the long-distance carriers," she explains. "There are, in certain markets, shortages, and in those markets, then it becomes very difficult. For instance, most of the major markets, and Tier I and Tier II markets at this point, have some fiber capacity. But if they're going to go into smaller towns, then it can be more difficult. There may not be a lot available or they may not be able to get a long-term lease."

Because the company targeted the well-served Northeast, Lightship could play potential suitors off each other to get the best deal. "There's always wheeling and dealing that is available," Royer confides. "Let's say I needed one strand of fiber today, but I knew that within the next 12 months I'm going to be up to like 10 strands of fiber. Well, there's flexibility in the packages by many carriers that they'll give you the 10-piece price today, with an expectation that within 12 months you'll be up to 10."

Lightship enjoyed further flexibility from the option to either buy or lease fiber capacity. "Both options are available from all of the providers, and in some cases, one might end up doing both," he explains. "Places where you know you're going to be there for the rest of your life, you buy. Places where you're not sure you're going to be there permanently, you would lease."

Deutsch points out that other issues can shape the build, buy, or lease decision for CLECs. "Do you have customers that have demand that if you can get [capacity] immediately, you'll be able to serve them? If you have a customer that's willing, you're probably going to lease," she says. "The cost/buy decision becomes [a matter of] time as well as simply what the economics of it are. There's no immediate answer; it really depends on the particular CLEC and its business plan."

After reviewing their options, management at Lightship decided to partner with NorthEast Optic Network Inc. (Waltham, MA), a carrier's carrier that had targeted "the road less traveled" when constructing its fiber-optic network throughout New England. While price and availability played a significant role in making Lightship's decision, the winning bidder's corporate culture appears to have been a factor as well. "They were a young startup company, as were we, and we felt the synergies between the two companies were just fantastic. And they were very flexible and accommodating to meet our needs," Royer says.

Royer declined to reveal how much fiber will be involved in the deal or how long his leases run, for competitive reasons. "Typically, when you buy fiber, it starts at an OC-3 level; that's the smallest you buy," he says. "Then it just goes up from there."

Lightship plans to augment its long-haul transmission system with Asynchronous Transfer Mode (ATM) technology. "I think everybody in the world is pretty convinced that the way that networks are going to shape up over the next two years is going to be very different than it is today, and that both voice and data will be riding down the same paths. So all of us need to be building our networks to take on those efficiencies, and ATM is a significant part of that, of how calls will be carried."

Lightship plans to award a contract for ATM equipment this month, and have the network up and running by Christmas.

Ringing the bell

Lightship also will use fiber from the local regional Bell operating company (RBOC), Bell Atlantic, in its network. But the carrier will rely on Bell Atlantic primarily for connections within the local loop, and will collocate equipment within Bell Atlantic central offices to ride the RBOC's copper lines to its clients. Royer believes this infrastructure will prove adequate for the foreseeable future. "The hardware required at the end is becoming so good that you can get a tremendous amount of capacity going down a copper line, so you don't need fiber," he says.

While some have suggested that technologies such as digital subscriber line are mere "band-aid" solutions to the problem of increased bandwidth demand, Royer thinks the local loop won't need fiber for a long time. "Today, roughly speaking, a fiber strand can handle somewhere around 40,000 telephone conversations at one time. So when you think about that capacity, why would you need that at your house?" he asks. "Fiber has just such a large capacity that it will never be required at the house in the foreseeable future." The same goes for businesses as well, he adds.

As other CLECs report, working with the local RBOC occasionally has proven a challenge. But Royer takes a philosophical view of Lightship's relationship with Bell Atlantic. "Parts of it are very easy; parts of it are difficult—and I think that Bell Atlantic is working very hard to make life easier in those areas that are difficult," he says. "We don't find Bell Atlantic to be our enemy at all. Certainly, there's frustration in certain areas to get things done in a quicker fashion, and I think a lot of the challenges sometimes are that Bell Atlantic hasn't had to, being a monopoly, necessarily move as quickly as competitive providers are wanting to move. But each day things get a little bit better."

Other CLECs should anticipate long lead times when dealing with the local RBOC. "I would say that an advice to anybody trying to get into this business would be to anticipate working earlier in the process with the local Bell operating company than you might think," Royer states. "Their processes and their lead times and their requirements are longer than what one would normally think. And there's no way to move those processes faster. So what you think might only take a week or two, so 'I'll go to Bell Atlantic a week or two before I need it'—you need to go there like a couple of months before and start those processes."

Despite the combined experience of the Lightship team, the process of putting the carrier's network in place with Bell Atlantic has proven educational. "There's an awful lot to learn," Royer admits. "If you're going to interface with the Bell Atlantic network, there's a lot of systems and processes and training that you have to get if you're going to interface correctly to move customers from one network to the other. And they've done a nice job of putting those training programs together. But there's a lot more to learn than we thought."

Moving out

By the beginning of next year, Lightship should have most of its infrastructure established and will be ready to provide a full slate of services to its target market. The company has already attracted customers to the infrastructure it has in place and has been carrying live traffic since this past March.

Meanwhile, Royer beats the bandwidth drum throughout New England for his company to potential clients. "Some of them are a little hesitant, but that's to be expected in a new market endeavor," he comments.

As the ATM network comes on line and business improves, Lightship plans to expand into other New England states. With a properly chosen infrastructure, including long-haul fiber optics, Lightship expects to meet its customers needs now and in the future.

It's not always a buyer's market

Not every CLEC finds itself awash in fiber-optic capacity. Before she joined Cole, Raywid & Braverman, Ellen Deutsch served with Electric Lightwave, a CLEC based in Vancouver, WA. She recalls that fiber strands in the Pacific Northwest, particularly between San Francisco and Seattle, were few and far between. "Everybody was struggling, including the big guys like AT&T; nobody had it," she relates. "That was 18 months ago. Since that time, there's been a lot of building going on and so there's a lot more coming on line. But that was a serious problem; for a while there, you couldn't even get a T1 on that route."

Deutsch expects that carriers attempting to break new ground in other suddenly hot markets in the southeast or in areas such as Salt Lake City, UT, may be experiencing similar problems. For some of these carriers, the lack of available fiber leaves only one option—building a network themselves.

Deutsch points out that building a network has advantages. While the cost in terms of capital and time can be significant, those costs remain fairly stable and the fiber remains in your inventory.

"When you lease, you're always subject to the vagaries of the person that you're going to lease it from, because virtually all of these lease agreements have termination provisions. Particularly if you're leasing from a utility company—they always have the ability, if they need it for their own customers, to come in an take some away," she points out.

Ensuring adequate capacity for future needs shouldn't be a problem, she points out, because once you commit to breaking ground, adding lots of fiber strands represents a comparatively small part of the total cost. Excess strands can be leased or sold to others to help defray the cost of the construction, she explains.

Still, even fiber builds can experience a few unexpected hurdles. "The biggest surprises if you are going to do your own build can be the right-of-way acquisition part. That tends to be the part you have least control over," Deutsch says. "I mean, I can give you hundreds of horror stories about trying to build fiber across the desert in Arizona where we ran into an environmental problem because of snail darters or some kind of desert creature."

Deutsch emphasizes that each CLEC should examine its options carefully in light of its goals. "It's simply a cost/benefit analysis," she concludes. "What's your business plan, essentially?"