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WinStar gains access through broadband wireless

01 July 1999

WinStar Communications, founded in 1993, has already deployed 400,000 lines in the US. As the first operator to deploy broadband wireless technology, it has a head start on competitors and is luring customers away from the RBOCs, with various offerings and pricing plans. Chairman and CEO William Rouhana talks to Global Telecoms Business about the operator's strategy.

WinStar Communications, formed in 1993, has been aggressively building its broadband wireless network. The operator is already recognized as a leading player in broadband wireless. In the first quarter of 1999 the operator had revenues of $88 million. In 2000 it has predicted total revenues of $600 million. The operator also plans to go EBITDA positive by 2001. It is targeting 110 markets, both domestically and internationally. David Barden, a telecoms analyst at JP Morgan, believes that the operator is well-positioned: "We think that they are a leader in the broadband wireless space. We view broadband wireless as a very powerful economic solution, delivering broadband solutions to a certain section of the market - buildings which currently don't have fibre and which would support less than OC-12 demand on aggregate in terms of capacity. We think that there is a big segment in the market which falls within the economics of broadband wireless. We think that there are very few players that can take advantage of that business today."
According to Barden, only four companies are successfully targeting this sector at present: "We put those players as Winstar, Teligent, NextLink and perhaps ART. So only four players are able to exploit the market opportunity in this particular economic segment, compared to the large number of players trying to exploit the economic opportunities in other spaces, such as fibre or DSL. We think that these players in the broadband wireless space will acquire a dis-proportionate share of the market over time and that WinStar is a leader here."
In an interview with Global Telecoms Business, the chairman and CEO of Winstar Communications William Rouhana explains the operator's strategy and plans. He believes that the RBOCs will continue to be his main competitors in the near future, rather than fixed wireless players such as Teligent and NextLink. Rouhana comments: "Let me set the stage by saying that we consider our main competitors today to be the RBOCs, which have 99% of the customers. So when we take customers away from somebody, we usually take them from the RBOCs. We really don't see Teligent, NextLink and others in this industry as our competitors. I understand that others see them as imitating our business plan and consider that they are our ultimate competitors. If you think back to the early days of long-distance, MCI and Sprint never really viewed each other as competitors."
Rouhana believes that the situation may change, as was the case with Sprint and MCI: "They viewed AT&T as their competitor. Over time, as each of them began to grow and take a meaningful amount of market share, they started to notice each other. Obviously, I think that it is fair to believe that the same thing will happen in the future, assuming that WinStar, Teligent and NextLink manage to obtain a meaningful amount of market share. We will certainly see more of each other over time. They would be our main competitors in the broadband wireless space. But as I said, today we think of the RBOCs as our competitors."
Rouhana believes that they can all benefit from the limited competition they currently face: "Looking at Nextlink and Teligent, I think about the large market opportunity that we have among such a small number of us. I see the market opportunity as follows - and analysts have supported us - about 60% of the commercial market is best served by fixed wireless broadband as the last or first mile connection, whichever way you want to look at it. That is an awfully large market to be addressed by only three companies. The fact that you need licences to do what we do, and the fact that there really isn't any more spectrum available, would seem to imply that all three of us have a pretty big opportunity."
WinStar's competitive advantages
Rouhana talks about WinStar's competitive advantages over other fixed wireless broadband providers: "In my opinion WinStar has some competitive advantages. We have been around the longest. As we are the oldest of the group, we have more trained people, more developed systems, a larger number of building access rights, a more expanded network and the inherent advantages of being first to market. We also have a spectrum position which we were able to accumulate at less expense and with a balance between breadth and depth.
"We cover all the top 60 US markets. We have more spectrum where there are more people and more demand for broadband services. For example, in New York, San Francisco and the Silicon Valley area, which comprise a significant percentage of the US telecoms business today, we have at least four times as much spectrum as either Teligent and NextLink. That is because we were able to amalgamate both 38 and 28 GHz in those areas before either of them came along as a company. We are able to match our capacity with demand, which is a pretty big advantage. We will be much more widely available in those high demand areas than they will. They simply don't have enough spectrum."
Barden also cites the first-to-market advantage, as well as the technical expertise and credibility that Winstar has accrued: "I think that WinStar benefits from its presence in the market. They have deployed almost 400,000 lines. They have been operating in the broadband wireless space for over three years now. The WinStar organization employs the engineers that developed and invented the LMDS (local multipoint distribution service) technology. They have an enormous head start relative to their competitors in terms of establishing credibility in broadband wireless. We feel that the combination of technological expertise, a head start and the credibility that we feel that they have established, is giving them an accelerating advantage in bringing on customers and taking the low-hanging fruit in the industry."
Construction and financing of the broadband network
WinStar aims to provide customers with a full range of services, including local, long-distance, high-speed data, Internet access and information services. Lucent Technologies is an important supplier for its broadband network. As Rouhana explains, the manufacturer is also providing vendor financing: "Under the arrangement with Lucent, they are providing us with not only network equipment, but also with the expertise and help to build the network globally. We also have a $2 billion financing arrangement with them. Our network is both a voice and data network. So it has a unified backbone which is based on fibre. It has what we call wireless fibre: fixed wireless extensions of that fibre backbone to buildings. Of course we have switches, which are both packet and circuit.
"Lucent provides us with the lion's share of the equipment that we use to light the fibre, build our central offices and connect to customers. But there are many items that they can't provide. We have a right under our agreement with them - which is a best of breed contract - to choose the company that we consider to be the best supplier of that equipment. Then Lucent has to finance and integrate it into our network, even though it is not their equipment.
"We have just completed a $300 million convertible preferred offering. We really have no other capital needs for the foreseeable future, as a combination of sources are funding our network build. The combination comprises more than $600 million of cash that we have on hand, our $2 billion Lucent arrangement, from which we have drawn only $350 million as of this date, and our arrangement with Williams Communications, which is buying 2% of our network for $400 million.
"They have already paid about $125 million. Another $275 million will come in over the next 18 months to two years. Between that $275 million, the $650 million cash on hand and the $1.65 billion from Lucent, our infrastructure costs are well financed for the 110 market build that we have planned. To date, our network has cost us about $500 million to build, which is considerably less than if you were doing the same thing with fibre. So we have a very big advantage. Our cost structure is much lower. Our speed to market is enhanced by the fact that we use fixed wireless and don't break up streets, dig trenches and the like. With our costs as low as they are, we are able to build a fair amount of the network at a reasonable price. We are well capitalized for that effort."
Customer acquisition strategy
Winstar has two sales forces that are in direct contact with customers. The first group focuses on small and medium-sized businesses, while the second handles large corporate accounts. This strategy seems to be working. Rouhana notes that the operator expects to virtually double its client base by the end of 1999: "At the end of the first quarter we had more than 18,000 customers. The figure has grown considerably since then. The vast majority of these are in the small-to-medium range. We have about 100 of the Fortune's top 1,000 as customers on the large account side. We also have a number of institutional customers, including colleges, universities, hospitals, hotels and a fair number of government contracts. One of the most notable is with the Federal Aviation Authority. We are providing service as part of the air traffic control network in a number of airports around the country. We expect to have close to 30,000 customers by the end of this year. This would be about twice as many as we had at the end of last year."
Project Millennium programme
Winstar has introduced some innovative promotions to attract new customers. It recently launched the second stage of a programme called "Project Millenium". In the first stage it offered free local calls for up to a year for customers that signed up for three years of local telephone service. In the second stage of this programme it has been offering a long-distance package. Rouhana talks about the goals behind the programme: "Project Millennium is really about three things. We are trying to get customer mind share. It is a very noisy world out there. To capture people's attention, we believe that you need to devise an innovative way of packaging what you sell. Free seems to do that. Free is a word that people like. It is a word that attracts their attention. Secondly we are trying to build through the millennium projects long-term relationships with customers. You know, customer relationships are very often fleeting in our industry. We wanted to find a way to build the longer-term relationships with customers right now, because we realize that customers are now making the transition from a voice-only world to a voice and data world. We want them to be thinking about us as they make these changes. We felt that if we could establish a long-term relationship on voice services with customers, we would have a good shot at being their provider for new data services as well. Finally, we had a special opportunity. As I mentioned earlier, we have an overwhelming cost advantage over other carriers, since our network is so much less costly to build. We feel that we can share this cost advantage with customers in a way that creates mind share and leads to long-term relationships."
Rouhana describes the initial stage of the programme: "Phase one of millennium was an experiment to try and accomplish all three of these goals. We chose 1,000 networked buildings that we had not been in before. We offered customers in those buildings up to one year of free local service, if they were ready to sign up for three years of local telephone service. Customers were required to buy intra-lata toll service and pay normal installation charges. In years two and three, they would obtain a 10% discount off the price offered by ILECs for services. If you look at the entire package, we re-allocated our normal discounts in a way that receives more attention owing to the free aspect. This gave people real incentives to switch to us and stay with us over a long period of time."
The programme proved very successful: "We were able to move 14% of the customers in those 1,000 buildings in about four months from the incumbent local exchange carrier to WinStar. That is a sizeable market share. It really astonished us. Sixty percent of the customers chose our three-year package, which was also a really pleasant result. On top of that - and this was the most interesting part to me - 60% of the customers voluntarily took long distance from us, even though that was not required. These results made millennium a very profitable programme that accomplished exactly what we had hoped for - mind share and long-term relationships."
Rouhana explains how WinStar is expanding its service offerings in the second stage of this programme: "It was so successful that we decided to see what would happen if we turned this a slightly different way and offered a long-distance package as the lead to attract the people in the buildings that didn't move to us the first time. We also expanded the programme to all our networked buildings. In phase II, a customer can sign up for one, two or three year contracts and get four months, eight months, or a year free of long distance. They can receive up to $750 of long distance a month free. We started this at the beginning of June. The initial response has been very positive.
"We have done one other thing with phase II of millennium. We are revisiting the customers who had signed up for local and long distance in the first stage to see if we can interest them in moving into the data space. We offered free Web hosting if they committed to 18 months of dedicated Internet access. All these offers reflect the fact that we are in a unique position at WinStar: we have our own broadband network which reaches more places than anyone else and we offer a complete set of services for the use of that network, from local and long distance to Internet, frame relay, ATM, Web hosting and Web design to LAN/WAN services."
Key acquisitions
WinStar has become a full service provider within a relatively short space of time. This position was partly accelerated by the acquisitions of LANSystems and Midcom Communications. Rouhana comments: "1998 was the year where we focused on enhancing our broadband network with data services. We needed to be able to provide all types of transport, such as Internet, frame relay and ATM, as well as a series of enhanced services, including Web design, Web hosting, systems and network integration, and building LANs and WANs. We went about systematically piecing together those competencies during 1998. Midcom owned PacNet, one of the country's largest frame relay companies. That was the reason why we bought Midcom. Along the way we managed to pick up about $50 million in long-distance revenue. Now that we have migrated it to our own network and built it out in all our markets, we are yielding some very significant EBITDA returns.
"But that was incidental to the purchase. Another acquisition, LANSystems, was of particular interest to us owing to its expertise in building LANs and WANs, facilities that we need to be able to create for our customers. In addition, LANSystems was deployed in many cities where we have our own networking infrastructure. It was a nice geographic match and a good fit in terms of expertise. That is why we bought LANSystems. Both of these purchases accelerated our competitive positioning, as they gave us a jump-start in providing data-related services. By the end of last year, we were able to put together the rest of the pieces in that puzzle. Now we are a national tier one ISP as well as a national frame relay provider and ATM provider."
Rouhana goes on to make a comparison with MCI WorldCom: "Revenue that flows over the network generates a significant return. Generating more revenue over the same amount of network is the way in which Bernie Ebbers built MCI WorldCom. Naturally that is a model that many people think is very good. We don't feel a lot of pressure to buy companies. We are very good at acquiring customers through our 500 or so sales people. Our growth rate is the top among the competitive carriers.
Rouhana outlines some of the parameters for acquisitions: "The right kind of acquisitions are clearly accretive to shareholders, create near-term EBITDA enhancement and are strategically sensible. In the past, whenever we have acquired things, it has worked out reasonably well, but we have been very selective."
Bundling of services and the RBOCs
WinStar is moving rapidly in all areas to exploit its position and be able to bundle services. So far the RBOCs have not been allowed to offer long-distance services. This naturally prevents them from becoming full service providers. Rouhana had previously referred to this period as a "brief window of opportunity". Many believe that the RBOCs will soon be allowed to offer long-distance services. Once this happens, clearly the RBOCs will be able to bundle services more effectively. Rouhana notes: "While I think that the window is going to close over the next couple of years, it has become less important to us every day, as we provide a complete set of services today that goes well beyond local and long distance. We offer a wide range of data services and applications which provide customers with value that they cannot obtain from other carriers. Regulation becomes less and less of a factor every day. In fact, when our corporate profile was written, we were nowhere near where we are today. We have eclipsed that moment in time, run right past it and taken advantage of the window."
Rouhana does not believe that the RBOCs' entry into long-distance will have a critical impact on WinStar's operations: "I think that is going to be a problem for people who have residential customers, but I doubt whether it will be much of a problem for us, because we are focused on business customers. Local exchange carriers that have been allowed into the long-distance business have taken a fair amount of residential long distance very quickly. But they don't have the sales force in place to service small and medium-sized businesses like we do. No one is trying to get more long-distance business from large accounts, as that is such a commoditized business today. There isn't a significant margin. We are certainly not focused on selling long-distance service to large accounts. We are focused on selling them data services and taking advantage of our bandwidth flexibility that other carriers don't have. I don't see the RBOCs as a threat in that regard, when they get into long distance, but they are our competitors in the local market."
A number of regulatory issues need to be resolved. Winstar has filed a petition with the Federal Communications Commission (FCC) to gain easier access to buildings. Barden notes: "I think another issue for WinStar is the issue of building access and riser rights and the recent FCC NPRM and notice for enquiry into the topic of how can the FCC play a role in levelling the playing field for building access for competitive players. That is clearly an important issue for WinStar, as most of their inter-action with the Bell occurs within buildings as opposed to between the central offices, in which most fibre and DSL (digital subscriber line) companies inter-act with the Bells. They are in a unique position. Specific action and regulation is required for that particular piece of the local loop."
Rouhana notes: "I think the issue of building access is a tricky issue. It has a lot of parts to it. We believe that in a world where 80% of the commercial business, and one-third of individuals in the US live in multiple dwellings or occupy multiple tenant buildings, we can't let the monopoly move from the incumbent local exchange carriers to building owners. That would not be a good outcome of the Telecoms Act. But I don't think that it is entirely clear who has jurisdiction over the issues associated with that. I think Commissioner Powell was fairly expressing his concern over whether or not the FCC is the appropriate party to deal with the issue of building access. I think that the FCC does have the ability, based on the ancillary jurisdiction that they have under the Telecoms Act. It is pretty sophisticated and an important legal question that deserves reflection. It is not something that should be glibly touched upon.
"There is the issue of private property rights, which are very important. You don't want to limit those rights, without careful thought and reflection. On the other hand, there is a really compelling need to come up with an appropriate mechanism to allow competitive carriers to gain access to the people in multiple tenant buildings. There is, of course, the imperative of equal access or non-discrimination between incumbent carriers and new carriers. which is underpinning the Telecoms Act as well. You have a number of very important principles that are at stake. I think that it is fair for people to say that they have to look at these things carefully before they make decisions."
Rouhana goes on to describe the steps that WinStar has taken: "We have proposed a framework at the FCC to resolve this issue. We feel that they are giving it a very fair hearing. We have also proposed that, to the extent that they don't believe they have jurisdiction over this issue - and we understand why they might come to that conclusion, even though we don't agree with them - the legislature should act. So we have asked both the House of Representatives and the Senate to consider legislation. This is a much broader issue. All the fibre carriers are confronted by the same issues as the fixed wireless carriers, such as WinStar, Teligent, NextLink, when building out facilities. So we have proposed legislation and we have had a hearing in the House of Representatives, which I think went reasonably well when the issues were fleshed out. I expect that there will be hearings in the Senate and that there will be serious consideration on this issue as well."
As Rouhana points out, other utilities have overcome this problem in the past: "This is not the first time that someone has had to enter a multiple tenant building to provide a utility-type service. There are obviously water and electrical utilities, as well as other phone and cable companies. There are ways that you can construct the rules, so that building owners do not suffer damage and are properly compensated for any costs that they incur. There are definitely ways to do this. We are not inventing a new idea here. In the end reasonable people will come up with a construct that encourages competition and gives tenants access to choice, but also protects building owners. I think that this issue needs to be addressed, as it is an impediment to facilities-based competition and one that needs to be overcome."
At the same time Rouhana believes that Winstar's success is not dependent on the regulatory outcome: "I don't think that the FCC is going to make or break WinStar. I think the thing that will make WinStar will be our ability to continue to build out the network, make it widely available, add services to it and continue to create value for customers. I think that we distinguish ourselves from our competitors and the RBOCs every day, by the way in which we treat our customers, by the services we offer and by the fact that we bundle on our own broadband network."
International aspirations
WinStar Communications is not just focusing its operations domestically. It is targeting 50 of the top international markets, as it aims to extend its reach. The operator recently became the first US operator to offer broadband wireless services in Europe. He says: "We have a strategy of going to the top 50 markets internationally: about half of them are in Europe. We have identified the markets, by looking at a combination of population, telecoms usage and data usage. We are going to inter-connect these 50 markets to our network with fibre as we did in the US, so that we have a world-wide broadband end-to-end network. I think that the potential for fixed wireless or LMDS in Europe is just as great as in the US. In fact, it may be even better in Europe owing to the scarcity of bandwidth."
WinStar has formed a JV with KDD and Sumitomo in Japan to offer local telecoms services. Rouhana explains why WinStar chose the two companies: "I was convinced that we would be more likely to obtain a licence if we did. I think that turned out to be true. We received a substantial grant. I think that the Japanese government is open to foreign companies to some extent today, but I also believe it is clear that they still prefer to have foreign companies partner with local companies to enable them to understand the market. We found two very good partners in KDD and Sumitomo. They understand their market and provide us with an ability to move more rapidly than we might have otherwise. We are already serving customers in Japan on our network. I expect that the Japanese market will be a good market for WinStar. We are primarily trying to service data needs internationally. Our very strong focus is on multi-national companies that can use our network from end-to-end. Quite a few American companies have significant operations or relationships in Japan, that need the kind of services that we are providing."
Key challenges
Barden comments on the challenges facing Winstar: "It has to continue to keep pace with the technological evolution of competing access technologies, such as DSL, satellite, fibre and MMDS (multichannel multipoint distribution service). It also has to continue to sell the economics of its proposition to landlords, building owners and management companies to acquire roof rights and building riser rights to service their customers. I think thirdly that they need to continue to effectively demonstrate the superior economics of the broadband wireless approach, so that success begets success. There are barriers in the minds of some customers in terms of how much they are willing to rely on a wireless connection for mission-critical data. I think that only a strong track record of reliable service over time will eventually convince the market or a particular set of customers that this is an effective solution for them."
Rouhana sums up Winstar's ambitions: "The opportunity to be the first company to build a widely available broadband network across the top 110 markets in the world - the top 60 in the US and the top 50 internationally - is really unprecedented. Ninety-five percent of the world's Internet activity takes place in those markets. We all know how the Internet is growing. Simultaneously, there is an enormous existing business market that uses voice services. The market share for these services is moving from the incumbents to companies like us. As a result we have two very large trends working in our favour - the first is the market share movement of voice traffic and the second relates to the incredible growth of the data business. We are perfectly positioned in both of these world-wide trends. We will be the first company to build a widely available broadband network that is end-to-end around the globe. I am really looking forward to the next couple of years as we finish this build-out.
"Our hopes and ambitions are to achieve that build-out goal. We will build this network in those markets and it will be done more quickly than anyone really imagines. As that happens, our broadband network will actually deliver the benefits of the information superhighway to our customers. This will allow them to be more productive and efficient. That really excites me."