Time Warner Telecom was spun off from Time Warner in July 1998.
A national local competitive exchange carrier, it is building
dense regional fibre-optic networks in the US, as it bids to
become one of the leading providers of telecoms services to
businesses. The operator currently offers services to 20 cities
in the US. F. Drake Johnstone, a telecoms equity analyst at
Davenport, talks about the operator's competitive advantages:
"I would point out what I consider to be unique about them: if
for example you look at the local North Carolina network, they
have a very extensive local build for their fibre networks.
They just don't slap a ring in the city. If you look at the
North Carolina map, you see figure ends of fibre in all the
surrounding communities. In my view that is positive, as it
enables them to capture a high proportion of the business
market within a certain area, and not just the big businesses
that are right in the middle of the city."
The operator has over 300 route miles of fibre in each city,
which is substantially more than double the CLEC average.
Johnstone notes: "I think that this factor is extremely
important, when you are talking about a company such as Time
Warner Telecom, which has the potential to offer a superior
service to other carriers. You can't be just another vanilla
telco, enter this market and succeed. If you can offer services
better than other carriers, I think you are in a better
position. In addition, the CLEC market, a competitive exchange
market, is about building out local fibre. It is interesting to
look at the difference between what TWT and other CLECs are
building. They are deploying a lot more local fibre than most
of their peer group."
Time Warner Telecom recently went EBITDA positive. In May 1999
the company raised about $290 million in an IPO. These funds
will be used to repay debt to its owners. The company has been
able to leverage its relationship with Time Warner. Above all
it can use a nationally respected brand name. In addition, the
operator has benefit from Time Warner Cable's rights of way,
gaining access to these cities.
Bill Garrahan, a telecoms equity analyst at Lehman Brothers,
talks about the challenges that lie ahead for Time Warner
Telecom: "I think that the main challenge will be to expand the
business model from their traditional strengths. They derive
most of their revenue and growth from selling dedicated private
line capacity services on their fibre network. Secondly, they
offer local voice services and are expanding into providing
Internet services/packet-switched data services and long
distance. So I think that the challenge is to continue to be
able to grow the top and bottom line, while undertaking all
that expansion activity."
He adds: "I think that over time it will become more important
to build towards a more national network from the markets they
are in today. Building towards a more national footprint will
make their company better able to serve their customers and
will make them more valuable strategically. This is important
going forward. I think that they also need to grow their scale
to help them compete with the larger players in the market.
Again that adds strategic value. The bigger you get and the
bigger your footprint, the better you are going forward."
As many businesses move out of big cites or expand into
smaller towns and cities, demand for high-bandwidth services
from this sector is growing. In an exclusive interview, the
president and CEO of Time Warner Telecom Larissa Herda talks
about the company's strategy going forward and explains how it
plans to sustain its impressive growth.
How much is your SONET-based network costing to build?
When will the network be complete? How many cities do you offer
service to? How many customers do you have? What do you
perceive to be the technological advantages of your
Herda: We have spent about $740 million on the
construction of our fibre, facilities-based SONET networks in
21 metropolitan areas of the United States. That amount also
includes building our back office support systems and network
operations control centre.
We have just announced plans to enter our 22nd area - Los
Angeles/Orange County, California. This network will be
complete by the middle of next year. We are fortunate that 19
of our networks were built in conjunction with Time Warner
Cable, so that our costs to build those networks are
significantly lower than those of our competitors. Some of the
new cities we are entering are Time Warner Cable cities.
However, we are also expanding into other cities without Time
Warner Cable presence. The costs are different. It really
depends on the rights of way that we negotiate. The right of
way is a big factor in building networks.
Under our current business plan we will add five new cities
over the next year. We are not a company that will tell you
that we are going into 40 cities. We are going to tell you that
we will launch five cities, then another five, then another
five. We would rather set the proper expectations and execute
on those expectations. We sell only to medium and large
business customers. Currently about 3,000 business customers
buy services from us.
We offer significant technological advantages to our
customers. All our networks are very large. On average, each
one is between 300 to 400 route miles, so that we can bring our
fibre directly into many buildings. We have over 2,000
buildings that are directly served with our fibre. The networks
are entirely built on SONET technology. As they are ring
networks, we have diversity and redundancy in those networks.
As we co-locate in most Bell central offices in the cities that
we enter, we can provide the same diversity to our customers.
We have entrance facilities into all major carrier
points-of-presence (POPS), as well as Internet Service Provider
POPS. In general we provide very reliable networks to our
customers. As we have the fibre, we can put any product or
service that we want over that network.
What packages are you devising to attract
small-to-medium sized businesses? Will most of your revenues
come from value-added services? What do you believe to be your
Herda: Most of our customers are medium and large
enterprises. We began as a competitive access provider, which
was by definition a company that built fibre facilities and
sold private line services over those facilities. We typically
sold to larger customers that qualified for private lines. We
built our reputation on selling those services. Then we
deployed Lucent's 5ESS switches on our networks and started
selling switched voice services.
We developed a new product this year that we call the
Integrated Business Line or IBL. This product combines both
voice and data on a T1. Customers that would not normally have
qualified for a T1 can buy the Integrated Business Line and
combine their long-distance, local voice and Internet access
services over a Time Warner Telecom T1. Now they have the
diversity and redundancy that they could not obtain from anyone
else. More of our smaller-sized customers will benefit from our
services, as we have deployed Internet access and IBL.
Value-added services will supplement current revenue streams in
our various product lines. They are all very strong. We see
value-added services as another good opportunity to build
Why did you decide to deploy Lucent Technologies
ConnectReach Plus integrated access solution? Which other
suppliers are you working with to build the network? Could you
tell us about your relationship with Vina Technologies?
Herda: ConnectReach is part of our Integrated
Business Line product. ConnectReach allows us to effectively
provide integrated solutions to smaller customers. We work with
many quality suppliers. As far as switching goes, we use Lucent
switches. We use Lucent and Alcatel equipment for our SONET
technology. We have routers from Cisco. We use Vina
Technologies for our Integrated Business Line. In general we
use a wide variety of vendors to build our networks.
Do you believe that your local networks are more
extensive than those of your competitors?
Herda: Absolutely. Very few players out there have
networks as extensive as ours. We have built them into the
downtown business areas and the suburban tech centres and
office parks. Our 400-mile network in a city such as Raleigh,
North Carolina, is quite an extensive network that reaches into
most offices of medium and large business customers.
As many US businesses have moved into suburbs, a considerable
amount of business is located there. Many customers have told
us that building networks to reach them constitutes a very
significant advantage for us. As we have built these networks
with Time Warner Cable, we have obtained rights of way to just
about anywhere in the cities where we do business.
One of the other competitive advantages we have is that we
sell the vast majority of our services 100% on our fibre
networks. We sell 100% of our voice services on our switches.
We don't offer any total services resale or LEC services. If
you look at all our other services, 80% of them are provided
100% on our fibre networks. We think that this is very
important. This allows us to control the quality of service to
our customers. As a result our mean time to repair is much
shorter than that of our competitors. We can install services
on the same day if we need to. So our installation intervals
are very short compared to those of our competitors.
What was the significance of Time Warner Telecom's
acquisition of MetroComm? Will you make further strategic
acquisitions to boost your competitive position? You also
acquired Internet Connect recently. Are ISPs your main
acquisition targets? Will you acquire other facilities-based
CLECs to expand coverage?
Herda: MetroComm was a joint venture that we had with
other business partners for a transport network. By acquiring
the remaining interest in MetroComm, we consolidated our
position in the city as both the transport provider and also
the provider of switched voice and data services. This allowed
us to be the single owner of that network. We are open-minded
with respect to strategic acquisitions to boost our competitive
position. We have grown organically, as we have been expanding
our national footprint.
We will consider acquisitions or mergers, if they make
strategic sense and complement our business plan. We decided to
acquire Internet Connect, as we wanted to expand our Internet
and data capabilities. Internet Connect was a regional Internet
provider with substantial capabilities: it had a number of
products that we wanted to roll out on a national basis. So
that acquisition immediately threw us into the Internet world.
As we had the local connections and they had the peering
relationships required to provide a Tier One Internet service,
it was a good strategic fit.
If we find a CLEC that has a similar strategy to ours - one
that is asset rich, focused on high-margin services, and with
complimentary cities to ours - then we would consider them as a
potential acquisition. However, we don't need to acquire
companies to meet our business objectives and plans.
The data/business markets are some of the most
competitive markets in the US. How does a new player such as
Time Warner Telecom compete against bigger more established
players with greater financial leverage?
Herda: We have found that many players are building
large national networks. They face the following disadvantage:
they have a difficult time getting local capacity. Our
ownership of the local loop allows us to sell data services
more efficiently. The hardest part of data is getting the
network operational and acquiring local connections.
We are selling transparent LAN services, which represent
essentially an extension of our private line services. We sell
private ATM networks both regionally and within the cities
where we do business. We currently sell Internet access and
will roll out web hosting, service level agreements (SLAs),
E-mail and VPNs by mid-2000.
We have started to connect our regional networks with fibre.
We have done this in Charlotte, Raleigh, Durham and Greensboro,
North Carolina. We also connected Tampa and Orlando, Florida
and plan to connect San Antonio, Dallas, Houston and Austin,
Texas. Next year we will connect San Diego and Los Angeles with
fibre. We will provide complete and total end-to-end solutions
over our fibre network for customers, which have synergies
between those cities. That offers us a considerable advantage.
Who do you perceive to be your main competitors? How
do you view operators such as Qwest and Level 3? What are your
target markets? Could you tell us about your recent agreement,
which saw Level 3 provide Time Warner Telecom with access to
their conduits in the greater Dallas area?
Herda: The local exchange carriers are our main
competitors. There are many CLECs. Each one has a different
strategy. Our long-term strategy is focused on medium-and-large
customers, whereas many other CLECs seem to go after smaller
customers. Only a few providers have the advantage of fibre
networks in their cities. So we find ourselves competing
predominantly against and taking business away from the LECs.
Qwest and Level 3 are very good customers. We are also a
customer of Level 3. We chose to use their conduit in Dallas.
We were driven to Dallas by our customers, as we were already
in three other major Texas cities and many decision-makers were
either in those cities or Dallas. When we looked at the market
and at the right of way options, Level 3 was building a conduit
system at a very attractive rate. This agreement allowed us to
put our own fibre in the conduit system and launch our own
network quickly. This was a good economic decision and Level 3
was a good vendor.
How do you view the potential for voice over IP? How
important is it for Time Warner Telecom to be a one-stop shop
Herda: The potential for voice over IP is tremendous.
Clearly the industry is going in that direction. The
technology, however, is still not there to deploy on a mass
scale. We are testing it in our labs and work with all the key
vendors on this particular technology. As we have fibre
networks, it is rather simple for us to deploy almost any
technology over our networks. We believe that we have an
inherent advantage when deploying voice over IP, as we own our
local fibre networks.
One-stop shopping becomes important when you are selling to
smaller customers and bundling your products. This is one
reason why we launched our Integrated Business Line. Smaller
customers can bundle their local voice, Internet access and
long distance into one package that offers excellent
reliability and value.
The vast majority of our customers - medium and large
enterprises - like to buy the best value service from the best
quality provider. If this means that they have to use multiple
providers to do that, then that is what they will do. More
often than not, those customers are looking for a diversity of
carriers to enhance their network reliability. If there is a
risk of failure, they may have several carriers, which provide
Do you believe that number portability is a key issue
for business users? In your opinion which applications will
prove the most attractive to business users?
Herda: Number portability is critical. Fortunately,
we have number portability in all our markets. It was more
difficult to sell services prior to full number portability.
But that is no longer an issue.
Web hosting and E-commerce are two applications that our
Internet division offers on a regional basis that we will roll
out to all our cities. One of the advantages of acquiring
Internet Connect was that they already had those capabilities
in place and were very successful selling those services.
How much did you raise through your IPO, managed by
Bear Stearns, Lehman Brothers and Morgan Stanley Dean Witter?
How are the proceeds being used? Do you plan to return to the
financial markets to raise additional funds after 2001?
Herda: We raised $289.8 million before underwriting
fees and expenses. We used $180 million to pay back the debt to
our owners. The balance is being used to run and continue
expanding our business. We are currently EBITDA positive.
Combined with our current funding position, our business plan
is fully funded. However, if we plan to accelerate our business
plan, we would expect to go to the financial markets at some
point in the future.
How do you view the regulatory environment in the US?
If as many suspect, RBOCs gain approval to offer long-distance
services before the end of the year, how would this affect your
Herda: The regulatory environment in the US is
generally pro-competitive. If there is a problem with the 1996
Telecom Act, it is that it tries, perhaps too hard, to
accommodate competitive entry through a variety of means,
including the resale of finished services, resale of ILEC
network elements and of course fibre facilities-based
competition. In the long run, the true competitive choice for
business and residential customers can only be achieved, if
companies like ours continue to invest in facilities.
Unfortunately, the policies and prices associated with resale
are sometimes inconsistent with polices that would encourage
investment in facilities. If regulators keep an eye on the
policy requirements for achieving long-term fibre,
facilities-based competition, as they deal with the ILECs/IXC
efforts to remain revenue neutral and reduce access charges,
then we can succeed in the current regulatory framework.
Assuming this "if", such an observation would be correct, even
if the RBOCs secure their Section 271 approvals.
What are your views on DSL technology? How do you view
DSL providers such as Covad, Rhythm NetConnections and
Northpoint? How big a technological advantage is the ability to
offer remote provisioning to customers?
Herda: There is a substantial opportunity for DSL
services. It is a very high-growth area. I believe that DSL is
geared primarily towards small business and work-at-home
environments. Typically, the customers we sell to are looking
for fibre. So it is really a different competitive market. The
biggest obstacle faced by DSL providers is no different than
the largest obstacle faced by the CLEC industry: that is, they
need to be able to scale the back office to support and deploy
the volume of services that they are projecting to meet their
business plans. This, combined with the price depression that
the LECs are putting on DSL services, will be the primary
challenge for DSL providers. I think that it is difficult, when
the success of your business plan depends on a vendor that is
also your biggest competitor.
We provide remote provisioning today. I don't know many of our
competitors that actually do this as well. It is a significant
advantage for us. It allows us to respond to customer troubles
without rolling a truck. It allows us to turn up new services
without putting a technician on site.
We had a situation about 18 months ago in one of our cities,
where we had a customer on an emergency E911 centre trying out
a digital PBX trunk from us. Several months after the service
was active, the Bell central office in that city had a power
failure and the rest of their DS-3 service went down. The
customer contacted us and asked if we could help them. As we
had the electronics at that location and had remote
provisioning from Denver, we were able to turn up their entire
DS-3 facilities within 45 minutes, which was simply incredible.
We have many, many stories like that. You can only deliver this
level of service if you have the fibre network in place with
Will your future success be dependent on building a
national footprint? Would you expand beyond your targeted
amount of cities if revenues continue to grow above
Herda: I am not a big believer in the precept that
bigger means better. Our success is based on providing quality
local service. The addition of new cities that are individually
successful adds to our growth as a company. We are a local
company that provides the local communications backbone for
local businesses. We build our business by being successful in
each market that we enter. We build one city at a time.
Will we expand beyond our targeted number of cities if
revenues continue to grow? Absolutely. We have a successful
strategy and stringent disciplined business plans that maintain
our focus on being EBITDA positive with strong revenue growth.
Which efficiency benchmarks do you use?
Herda: We measure our progress by our revenue growth
and the margins that we can obtain from our various product
lines. We have a very strict internal rate-of-return model.
Most of our capital expenditures are success-based. This is a
very aggressive growth model. We have achieved positive cash
flow in some of our cities within as little as 11 months. On
average we plan to achieve positive cash flow in about 20
months in each city. That is much more aggressive than most of
our fibre-based competitors.
Is there not a possibility that if you try to
accelerate growth, you could reduce operating cash flow growth?
How do you think that the market would respond to such a
strategy? Are your SG&A expenses likely to increase
significantly over the next two-three years?
Herda: We continually assess different growth
strategies for our business. We maintain a very stringent
financial model. If we were to accelerate our growth, these
strong financial models would allow us to maintain a good
return on that growth. The market would respond very favourably
to such returns. Our history has proved that we have met or
exceeded all our financial objectives since becoming a public
company in July 1998, following our public debt offering. Our
plan is to continue in that direction.
I would expect our SG&A expenses to grow at a reasonable
rate over the next several years. Obviously, as we continue to
add new cities, we would increase our SG&A. You add more
people; you add more expenses. We have a very disciplined
approach towards expense and capital spending that has allowed
us to become EBITDA positive.
Our back office provides a good example. As the systems have
not developed as rapidly as the industry, many CLECs have
struggled adding more and more people to accomplish their
revenue objectives. The problem is that it negatively affects
What we have done in our national operations centre (NOC) in
Denver is to evolve our back office to increase our
efficiencies, so that we add people in a very controlled
manner. As our systems have become more efficient, we can
process more orders than we could two years ago without using
as many people.
Do you think that you will derive most of your
revenues from data and Internet services in two-three years? Do
you believe that revenue from local voice services will decline
significantly? How do you view the long-distance voice market
for Time Warner Telecom?
Herda: The total telecoms market is growing. The
CLECs have a very small portion of voice services, which will
expand considerably over the next few years. Both data and the
Internet are growing by leaps and bounds and are competing for
a significant piece of the pie. As we own our fibre networks,
we can offer special access private line services and a wide
array of services to meet an incredible bandwidth explosion in
the local loop. It is difficult to predict which robust product
lines will take over and account for most of our revenues. I
predict that they will all do very well.
The company has traditionally served large corporate
customers. In the future do you believe that the
small-to-medium sized business market will be the place where
you will make its biggest impact?
Herda: Our big customers are making a huge impact. We
have decided to go after smaller customers, as many customers
in the nearly 2,000 buildings are directly served by our fibre
networks, that are not large or medium-sized customers. We want
to leverage our networks and product offerings into those
Until this year we did not have a product line for smaller
customers. With our Integrated Business Line, we have a bundled
offering that will meet their needs. As we expand and reach
smaller customers, it will have a very positive impact on our
business. Will they represent a significant part of our
business? They could, but medium-and-large customers are such a
vital part of our business that we expect to see tremendous
growth in all areas.
What is Time Warner Telecom's relationship with Time
Warner? How important is it for you to have a recognized brand
name? What role do Time Warner and MediaONE (AT&T) play in
the development of Time Warner Telecom?
Herda: Time Warner Telecom has a very good
relationship with Time Warner. Time Warner Cable is our right
of way provider and we have the ability through our fibre lease
agreement to expand into our current cities and other Time
Warner Cable cities. It is an excellent strategic relationship,
as we don't face the problem of "right of way", which is
probably the biggest barrier to entry for a fibre
Time Warner is a recognized brand name and has been a very
positive aspect of our business. It enables us to get our foot
in the door with customers and explain our story. Once
customers see what we have and perceive the value that we
provide, they are very impressed. It has been a significant
advantage to be Time Warner Telecom, as it is a very strong
brand name with a very good reputation. Time Warner, Advanced
Newhouse and AT&T/MediaONE are very supportive investors in
our company, but we run our own business.
Do you believe that your revenue margins could be
squeezed, as competitors offer widespread discounts to business
accounts? Will you be able to grow volume significantly to
offset decline in prices?
Herda: The pie is getting larger. Demand for telecoms
services will only continue to grow over the next few years.
Many companies end up missing the mark, when they solely depend
on discounts and are the least expensive game in town. That has
not been our strategy.
Our strategy is to provide value to our customers. We have
built fibre networks and developed a very stable sales and
technical organization to sell value and relationships. We
provide solutions to our customers. We listen to them. The
products we offer are products that have evolved, by sitting
down with customers and asking them what they needed. If a
company goes in and offers a 10% discount over another company,
then somebody is going to come in right behind and offer
another 10% off and take that business away.
But if you are providing a high-quality service: reliable,
fibre facilities-based networks; customer care and
responsiveness - which is really the name of the game in this
business - then at the end of the day you will win and retain
the customer. If customers get to know your sales organization
and your technicians on a first name basis, it is a very
powerful approach. Customers won't leave you, because somebody
gives them a 10% discount.
We have customers who have told us that they would pay 25%
more for our services, as we were that much better than our
competition. That says a lot about customer requirements. I
know this personally: I don't try to buy the cheapest product
when I shop. I don't buy the cheapest car. I don't buy the
cheapest clothes. I buy the things that will in my opinion
provide me with the best value. I shop at the places where
people are personable and responsive. I think that a lot of
sales organizations lose sight of the fact that their customers
are people too and that they want to be treated in the same
way. We focus on that type of a sales approach. We find that it
has been very effective for us.
When do you plan to offer services such as
web-hosting, E-mail hosting and network security services? Are
you planning to launch any other new services this year?
Herda: We are actually providing these services in
our mid-west region right now through our Internet & Data
Division. Our goal is to start the roll-out of these services
towards the end of the year and through the course of 2000 in
our new cities. We are always assessing new products. We will
always have new products on the drawing board. This year we
have released Dedicated Internet Services and Integrated
Do you plan to build new fibre networks in Time Warner
cable territories to lower costs?
Herda: Yes. We will continue assessing Time Warner
Cable cities as great opportunities to build networks. We also
assess other markets that would fit our business model.
Finally, what are your hopes and ambitions for the
company over the next two-three years? Where do you hope to
position Time Warner Telecom in that time frame? Which trends
do you see emerging in the world of telecoms?
Herda: My goal is to position Time Warner Telecom as
the premier, fibre, facilities-based provider of integrated
telecoms services and solutions and offer the industry's best
value to our shareholders and customers.
The market is expanding and technology is changing more
rapidly than ever before. The bandwidth explosion is
tremendous. We have seen companies build fibre between major
cities. We have seen CLECs put switches in cities, but not
fibre networks. We have seen DSL providers put their D-SLAM
equipment in LSOs, but they need capacity to get from the LSOs
to their points-of-presence. There is an insatiable demand and
explosion of bandwidth in the local loop. I feel the following
trend in the industry right now: there is a lack of supply to
meet the incredible demand for local fibre capacity. But Time
Warner Telecom is there now!
We are very well positioned to capitalize on that continued
bandwidth explosion, as we have the fibre networks in place. As
the technology changes, it is easy for us to put any technology
over our fibre networks. As the world changes and industry
trends evolve, we are very well positioned. Our goal is to stay
very customer-focused, expand into new markets, provide
solutions to meet customer needs and continue to provide rapid,
reliable services at a good value for all our customers.