Qwest Communications International was founded in 1988 by Phil
Anschutz, owner of Southern Pacific railroad. In 1997 Joseph
Nacchio was appointed CEO. Since then the company has been
transformed into a leading global multimedia communications
company through a number of acquisitions and alliances. In
March 1998 Qwest acquired LCI, the fourth largest long-distance
company in the US. In April it bought EUnet International, an
ISP with branches in 14 European countries. In November Qwest
announced the formation of a joint venture with KPN, the
incumbent operator in the Netherlands.
It has also secured alliances with Microsoft to create a
seamless LAN/WAN network and stimulate IP-VPNs and E-commerce
and with Netscape to faciliate the provision of one-stop
shopping to consumers for telecoms and IP.
At the same time the operator has been building a nation-wide
fibre-optic network that will stretch for almost 19,000 miles.
In April 1999 the company sold a 10% stake to BellSouth for
Following the deal with BellSouth, it has been rumoured that
the RBOC could acquire Qwest. However, David Barden, a telecoms
equity analyst at JP Morgan, believes that this is unlikely to
happen soon: "I think that we are many steps away from a
potential acquisition and I think not least of which, Philip
Anschutz and the rest of the Qwest management team still hold a
very substantial stake in the company and are all very bullish
on the company's prospects. I think that the partnership with
BellSouth is advantageous for Qwest. Clearly Qwest has received
a healthy equity/capital injection. It is cash that will give
them substantial financial flexibility in the market. They
secure a partnership with one of the largest end-user
connectivity players in the US. I think that the benefits are
going to take some time to accrue financially. But it certainly
helps strategically with the company. It remains to be seen if
we are going to see an ownership situation involving
Barden believes that the JV with KPN was a very good move: "I
think that Qwest's partnership with KPN, a player which had
advanced plans in the facilities-based market, was a good one.
I think that eventually it will be possible to spin off the
company, which will be able to become an independent entity, if
that it is going to be the best way to realize value. I think
that it will certainly be in a position to do that. I think the
question for Qwest to become a global player is to knit the
pieces together into a unified strategy."
The management team led by Joe Nacchio, formerly of AT&T,
is one of the most respected in the business. Barden notes: "I
think that there is no doubt that the Qwest management team has
executed at and above expectations. The company was a pioneer
in this competitive backbone space. People looked at them as if
they were crazy when they were going around trying to tell
people that they were going to build two conduits and 96 fibres
in the US market. That was only four years ago. They have built
a substantial presence in the US."
He continues: "I think that their network build speaks for
itself in terms of the customer base and the partnerships which
they have secured. I think their business strategy is meant to
address the largest possible revenue base in the market today.
Other companies have taken different strategies and it is
perhaps too early to say whether other companies have chosen a
successful strategy, but I think it is clear that Qwest has to
this point demonstrated that at least it has a successful
In an interview with Global Telecoms Business, the chairman
and CEO of Qwest Joseph Nacchio talks about the deal with
BellSouth, the JV with KPN, the completion of its network build
in the US and its ambitions to become market leader.
What led to the sale of a 10% stake of Qwest to
BellSouth for $3.5 billion? Could this mark the first step
towards the acquisition of Qwest? Do you believe that the
company will still be independent in two-three years?
Nacchio: BellSouth bought a 10% stake in Qwest to
cement a strategic relationship with the company. In the US the
Bells are constrained, prior to achieving some regulatory
thresholds, about whether they can participate in long-distance
or wide-area data networking. We have a fairly comprehensive
marketing and sales agreement with BellSouth that has
constraints prior to regulatory relief and a more integrated
approach post that regulatory relief.
That was the essence, the real essence, of the deal to cement
the relationship, because BellSouth believed that Qwest was
both doing the right thing and wanted to participate in value
creation. They believed that the relationship with us would
accelerate value creation. They wanted to have a piece of our
equity, so that they could ride the appreciation. As the
current law in the US places a 10% limit, the purchase was
really made to cement the relationship and let them achieve
some value accretion based on what Qwest does.
I think that this has led to the question that you asked in
parts B and C which is: Wow, why would BellSouth spend $3.5
billion in cash in Qwest, if they did not have greater designs
on the company?
First of all, legally they could not have those designs today.
Secondly, Duane Ackerman, their chairman and CEO, has
repeatedly said that we should not read more into this than the
actual transaction. I don't mean to speak for Duane. So let me
come back and discuss the issue as to whether we will be
independent or not in three years. I think that this is going
to be decided, based on the choices that my board and I have
and - as those choices make themselves available - based on our
assessment as to how we can create better value for our
I think that the question of standing alone or being bought or
merged with another company ultimately has to be decided by
your judgement as to how you would create more value for your
shareholder base. So I think that it is problematic to try and
guess whether we would be independent or not in three years.
That is a function of how well we do and the choices that are
presented to us.
In a recent interview with Global Telecoms Business,
James Crowe talked about the difficulties of incumbents with
70-80 year-old cultures based on outdated telephony models. Do
you believe that this opinion is fair?
Nacchio: Well, first of all, in highly competitive
markets that are being stimulated to change both by technology
and current global economic conditions, the issue of incumbency
and culture constitutes only one of the elements that will
ultimately either hold you back or determine whether you
So I think that Jim's answer is perhaps a bit narrow. There
are many things other than the fact that I am new and have new
technology which allows you to win. They are two important
components, but you also have to put down customer
relationships and these don't happen overnight. You have to put
down financial strength. You have to put down systems.
I think that it is too simple to say that the incumbents lose
and all the new guys win. I do think that there is clearly a
bias and advantage that newer companies have, but it is more
than a single dimension of technology or culture.
Where is Qwest in the build-out of its 18,500 mile
network? How much is the network costing to build? What do you
believe to be Qwest's competitive advantages?
Nacchio: I would just like to draw a distinction with
Level 3: our network is actually being completed in the US. We
will have the 18,500 miles finished and in service by June 30.
We are also constructing through a joint venture with KPN, the
Dutch telecoms company, a 9,100 mile fibre-optic network in
As a matter of fact, my European team is there today with the
bond agency guys in London, because we are going to raise the
necessary debt financing to complete the 9,000 miles. We have
already built about 2,100 miles. We are also building in
That network should probably be completed in the third or
fourth quarter of this year. We are part of the two undersea
consortia building new digital cables across the Atlantic,
TAT-14 and new digital cables across the Pacific, called the
US/Japan consortium. Both of those cables should be in service
by late 2000.
Level 3 Communications' network is based purely on
packet switching, whereas Qwest's network is based on packet
and circuit switching. What is the reasoning behind your
Nacchio: The demand for traditional transmission
technologies, such as circuit-switched, ATM and frame relay, is
still very high and is experiencing impressive market growth.
We can't ignore the tremendous amount of shareholder value that
these technologies provide. Internet Protocol-based
applications and services are emerging. They are expected to
become a very large market and Qwest is ready to take customers
into the new millennium with the newest and best technology
Can you describe your relationship with Cisco and
Nacchio: Cisco and Nortel are both important
technology partners for us. We have strong technology
partnerships with Microsoft and others besides Cisco and
Nortel. Our philosophy is always to be on the cutting edge of
technology. It is also to build flexible systems so that we can
integrate them, because technology lifecycle curves are a lot
shorter than they were five years ago. So we think of an 80/20,
70/30 relationship with multiple vendors, using the same
technology so that we can keep the flexibility in our design.
At this time Nortel is our principal supplier of optical
electronics, while Cisco is our principal supplier of backbone
routers. We also use other edge routers and we use ATM frame
technology that is now part of Lucent. With edge routers, we
are looking at several companies. We are also testing some of
the newest technologies, particularly in the data space that
basically come out of the upstart Silicon Valley firms.
Is it true that suppliers are failing to move as
rapidly as you would like in terms of management capabilities
that are independent of vendor-specific products? Which
suppliers are furthest ahead?
Nacchio: Yes. One of the things that I think we are
helping to drive in the industry is the pace of technological
innovation on the equipment side for two reasons.
Firstly, the amount of information capacity we can carry on
fibre is limited by the components of technology such as the
routers, servers and operating systems that are presently
Secondly, in the launch industry we believe that the balance
of capturing value has to be shifted more towards the service
providers and away from the equipment manufacturers that tend
to put their hardware operating systems and application
software in a very vertically integrated package or bundle. We
like to separate those layers, so that we can extract more
value back to our industry and can have open architectures that
enable us to accelerate the pace of innovation.
As to which suppliers are furthest ahead: it all depends.
There isn't really a clear leader or a clear laggard. It
depends. At any given moment in time, you have to try to figure
out which supplier has the manufacturing and delivery
capability to handle a large-scale job.
Yet at the same time, at the opposite end of the extreme, you
can consider which supplier has really got the cutting edge
technology. If you take one good example, Cisco is certainly
the industrial strength router company at present in the
industry. However, you can go to a lot of upstart companies and
find much higher speed routers with better network management
capabilities, but they can't handle an 18,500 mile network and
a large order in terms of manufacturing, installation and
support. So you have to trade off on those different criteria.
How do you view Level 3 Communications? Is there not a
danger that both operators could be upstaged in a couple of
years by an upstart telco which can build a faster network at a
lower cost? How will Qwest maintain a technological advantage
over other new operators?
Nacchio: I think that you have to be very articulate
in separating the layers of the technology value chain. If you
look at our network, we have two conduits with 48 fibres. But
with today's technology, whether it is optical electronics,
router or wave division multiplexing, we are using on the
existing fibres less than 1% of the capacity. So if there was a
breakthrough on optical electronics or there was a breakthrough
combining the office and the router layer, we would simply
light up another window on our capacity. Therefore we would be
able to roll to whatever the new price performance level is.
So you have to come back and ask: what is the common element?
It is easy to move between electronics. It is very hard to dig
up the ground and go through the Rocky Mountains. We have got
in place what I would call the foundation of the home with
enormous expandable capacity. We can pull another thousand
fibres in our conduits. With WDM we can already handle on our
network all the traffic in the world, if you could route it on
But with the way WDM is going, we can expand that by a factor
of four or five. So we own what I like to refer to as the
physical layer. I think that we are dominant there. As we have
so much of it, we can move very quickly on the new components,
so that if there are significant price performance gains to be
had, we can switch very rapidly to that new architecture. We
can move a lot more quickly, from one router to the next, one
operating system to the next, than you can by digging up the US
to put in new fundamental transport capability.
At the Merrill Lynch CEO conference in March, Global
Crossing and Frontier referred to their new venture as Qwest
senior. Similarly, Bob Annunziata claimed in a subsequent
interview that the new venture was addressing the $450 billlion
telecom market world-wide, adding: "So, we actually have a
little bigger reach, I think, than Joe is looking at." How do
you react to these statements?
Nacchio: The only thing that Global Crossing has more
than us is the number of vice-chairmen in the firm. I grant
that they will have a higher SG&A. I think that he was
taking enormous liberties. When you get back down to it, Global
Crossing has a couple of cables under the ocean at much lower
capacity than we have.
Secondly, even the piece of the US terrestrial network that
they are purchasing through the acquisition of Frontier is less
than a third to a quarter of the size of my own network.
Finally, most of what they bought with Frontier is a local
telephone company in upstate New York.
So when they talk about global reach, maybe they can go from
Rochester to Schenectady better than we can, but I think they
are really extrapolating that they have a much stronger reach
than we do. Let us look at the facts in Europe again.
We have already built more physical route miles in Europe than
anyone, I think, even including MCI WorldCom, much less Global
Crossing. In the US we are certainly the grandfather in terms
of sizeable networks. Frontier - which was one of our original
clients for dark fibre - has a relatively small piece of our
total network capability.
To Bob's credit, he was marketing to the investment community,
but I don't believe that he was factually accurate. But I would
grant that they have more vice-chairmen than we have.
Why do you think that Europe has so far failed to
create new entrants such as Qwest and Level 3 Communications?
Would you attribute this situation to a lack of entrepreneurial
flair in European incumbents or an inability to access capital
markets in Europe?
Nacchio: You know, I think that you are on a much
bigger question that deals with the philosophy of business
development in the US compared to Europe. I think that Europe
has come along enormously over the past 7-8 years.
But at the end of the day pure unbridled innovation and
capitalism is the lifeblood of the US economy, which is very
different even from Europe as a collective entity, much less
some of its individual countries.
So I think that you are seeing a manifestation of that very
different macro-economic philosophy. That is why you see
entrepreneurial companies such as Qwest, which were essentially
nowhere and nothing two years ago, become companies with a
market capitalization of $35 billion and a global player in
less than two years. You don't see that type of speed. It isn't
dependent on capital markets, because you have to remember that
capital markets are global.
If you are a European firm, you are going to borrow through
the New York Stock Exchange or Nasdaq as well as the London
exchange. If you look at what we are doing on a high-yield
offering right now, we are doing a week in Europe and a week in
the US. I think that we could sell all the equity and debt we
ever needed for KPN/Qwest in either market.
So it is really not a question of capital flows. I think that
it is more a question of long-term differences in the business
and political climate and the embrace of what I would call free
market capitalism. Make no mistake, I think that Europe is
moving in the right direction. This is why we entered the
market. But I do think that the US has a head start and spawns
more companies like Qwest than you would see spawned out of
We recently spoke to Wim Dik of KPN about the JV
between the two companies. From your perspective, what made KPN
such an attractive partner to attack the European market?
Nacchio: I think that it is the same answer for both
questions. Firstly KPN in particular, as the domestic telephone
company in the Netherlands, realized that they were an
incumbent that could probably not play in the global game
without expanding beyond their borders. They were
internationalist in perspective.
Secondly, from my point of view, at the end of the day, people
believe that Qwest is an American company, while KPN is a
European company. If you want to be successful in Europe, I
think you need to be a European company.
So we wanted a European company which understood the culture,
politics and business relationships better than we could learn,
because you need to respect that to play into that environment.
They threw at us both an attitude and a recognition that they
needed to grow outside their borders.
They tended historically to be very international in their
perspective as a country and as a trading nation state so to
speak. They were European and they had a good influence, but
they weren't one of the big players, such as Deutsche Telekom
or British Telecom. Therefore, they tended to be more of an
honest broker - if I could use that term in an assessment of
all the other players of Europe - which was important as we
Finally, and this is probably what puts it over the top, at
the end of the day the two companies have to be able to work
together. As I worked with senior officers from KPN, such as
Joop Dreschel and then Wim Dik, I was delighted to discover
that, while we were culturally different, we were like-minded,
could collaborate, work together and compromise. In the
pre-deal making phase, building that relationship was
Which operators do you perceive to be your main
competitors in Europe? What will be the JV's competitive
advantages? Which technologies will you deploy?
Nacchio: I think that KPN would tell you that we are
patenting this JV to follow the Qwest model. So what is our
competitive advantage? We are going to put in place enormous
broadband capacity and the latest technology. We are going to
focus very much on IP and Internet technologies. That is why we
purchased EUnet a year ago and rolled it into the venture.
We are very much going to play the change agent role, where
technology enables us to create capabilities that the incumbent
does not have and where technology enables us to achieve
significantly better price performance capability than the
We are very much going to have an Internet/multimedia
orientation as compared to a telephony orientation. In addition
we are entrepreneurial in terms of culture and the way in which
we drive shareholder value. Of course we have experience doing
that, so that also gives us a leg up.
Now when it comes to technology, we will use the latest kind
of fibre. We will use WDM. We use IP routers. We will probably
put some ATM in there for customers that have legacy systems
and need to carry out the transition.
Ultimately, we will probably build our hosting centres much
like we are doing in the US. We will create open architectures,
all the same things. If you look at the Qwest playbook, we will
probably just pretty much replicate it.
What is the significance of your agreements with
Rhythm NetConnections and Covad Communications? Why have you
decided to accelerate your entrance into the DSL market?
Nacchio: Anything that creates broadband local
connectivity is good for our company, the network and
shareholders. The last mile must not be a bottleneck. A good
example is that AT&T cut that big deal today (Microsoft
invested $5 billion). Our stock has gone up $5. Most people
would ask: why did that happen? Well that happens, because any
time broadband connectivity is pushed into the local loop, it
is good to create the primary demand that utilizes the
capabilities of Qwest's technology and network.
We may invest in Rhythm NetConnections and Covad
Communications, as we think that DSL is an important
technology, as it is readily adaptable to the existing physical
plant of local loop and twisted wire pair. A twisted pair of
even 144kts to 5-10 Mbts - that is enormous capacity which
allows our network to move information end-to-end much more
So we are going to do whatever we can to stimulate local loop
development. In the US we are building in cities now with fibre
and we will go with fibre right to buildings, because fibre
wins on any other choice of technology when you can get right
to the premise.
In April Qwest obtained a $1 billion syndicated line
of credit from Bank of America, First Union Bank of New York
and Citibank. How do you plan to invest these funds?
Nacchio: It is interesting, as we were looking for
that bank line of credit basically for working capital. We were
negotiating with BellSouth at the same time. Of course we
secured the line of credit before we announced the BellSouth
deal. When the BellSouth deal consummates itself over the next
40-45 days, we will pick up another $2 billion in cash.
So I am not sure that we will use that much of the bank
facility, because we will have enough cash on hand. But the
basic answer is that the cash at our disposal will be used to
further develop our network infrastructure, particularly
pushing it out to the local loop, as I mentioned a moment ago.
Could you describe the new venture with Microsoft
announced in December 1998? What benefits do you derive from
this venture? Similarly, what are the advantages of your
partnership with Netscape?
Nacchio: The Microsoft venture - where they invested
$200 million in Qwest - was principally set up to generate web
hosting services and a seamless LAN/WAN network, using NT as an
operating system on both sides, to stimulate the deployment of
IP - Virtual Private Networks, as well as E-commerce. We are
well along that path. The first products will be coming out
shortly this summer.
Also we gained the benefit through that venture of having
access to the Microsoft value-added resellers, the VAR channels
which are 88,000 strong, so that we can move Qwest products
through that VAR channel. The Netscape deal was to address
consumers and provide them with one-stop shopping for telecoms
and IP all through a browser, portal - point of reference.
What are your views on the potential of E-commerce?
Could you tell us about your E-commerce offerings? A recent
report by Forrester Research predicted that E-commerce sales
would grow from $7.8 billion in 1998 to $108 billion by 2003.
What percentage of this market would you hope to have in
Nacchio: Well we don't have very specific market
share objectives other than we intend to be the largest player.
I think that we have a significant head start in both owing to
our enormous broadband network capabilities.
We are also constructing very large cyber centres in the US
which will be the centres where we put the servers to host the
applications on E-commerce. In our opinion, this is principally
the area of growth that transforms Qwest from an interesting
growing new company into the market leader.
Now those E-commerce numbers that you quoted are probably
somewhat conservative. We have seen other numbers that suggest
that the E-commerce market could range anywhere from $300
billion to a trillion dollars in that time frame.
Could you tell us about your involvement in the
Nacchio: Qwest is the backbone provider for the
Abilene project, which is the farthest reaching Internet2
project in the US. The Abilene network is essentially a
test-bed for the brightest minds in academia and education to
develop and test the high-speed networking applications of the
Just as technology from the original Internet evolved from the
education/research field to the commercial space, it is
inevitable that what is developed through Abilene will be
passed on to everyone's benefit.
Huge amounts of bandwidth are coming on-line. Is the
demand there from customers? In your opinion which applications
will prove especially popular in the corporate sector?
Nacchio: There is definitely a huge demand for
high-speed, reliable, scalable, high-capacity bandwidth today.
We will continue to see that demand well into the future. This
demand is fuelled by the popularity of high bandwidth
applications, such as real-time video, video conferencing and
large volumes of data.
What is the take-up for your data hosting, VPN,
dial-up Internet access and other data services? What
percentage of the US corporate market use your services? Which
additional benefits do you offer corporate users that provide
Qwest with a competitive advantage?
Nacchio: I won't get into the specific market share
and marketing strategies for obvious competitive reasons. But
we are penetrating right now across our general service line:
48 of the top 50 Fortune companies are customers of Qwest.
We have put proposals to 250-300 other firms. The benefits for
these companies can be split into two categories. Firstly, we
are the only ones with these enormous backbone web hosting
capabilities which gives them flexible design capital avenues
designing an enterprise network when they have some stuff on
the premise, some stuff embedded in the network. Secondly,
owing to our new technology and low-cost position, they get
enormous price performance gains if they use Qwest rather than
one of the largest incumbents.
When we spoke last year, you said: 'I think that Qwest
will end up in 5-10 years time as one of the major players in
the US, if not globally." Is it fair to say that even in five
years' time Qwest is unlikely to be an independent
Nacchio: I think that it is unfair to draw that
conclusion, if we come back to the earlier answer to the
question that I gave you about where I thought that we would be
in two or three years. Let me point out that when we spoke a
year ago, Qwest as a corporate entity was valued at about $8
billion in terms of market capitalization. One year later we
are valued at about $34 billion.
My prediction that we could be market leader in ten years may
have sounded extraordinary a year ago. Well if you look at the
increase in value in one year, our revenues went from $700
million to $3 billion. Our market capitalization went from $8
billion to $34 billion. I had an annual shareholder meeting in
I pointed out to the shareholders that if they had invested
$100 in Qwest at the time of our IPO in June 1997, it was now
worth $800. If they had invested in the S and P, it was worth
$150. So you should look at that growth rate and the distance
that we have covered over the past 12 months.
Twelve months ago, we had nothing in Europe. We didn't have
undersea cables. We didn't have the Microsoft alliance. We
didn't have the Netscape alliance. We had not bought four of
the companies that we have acquired. Certainly, we didn't have
the relationship with BellSouth. This has all happened over the
past 12 months. If you take nine more years of that, I will bet
you that the big companies that you know will be thinking twice
about who their principal competitor is.
So what is going to happen over the next 12
Nacchio: An equally profound change is going to
happen over the next 12 months. There is one thing that I would
add. It relates to a person I just hired away from British
Telecom that you know.
I think one of the things that makes Qwest go is that we have
a very strong, smart, aggressive and relatively young senior
management team. This week we announced that Afshin Mohebbi,
the managing director of the UK markets for BT, had joined us
as President and COO which further strengthens our team.
So I would tell you that at the end of the day it is about
technology. But it is also about great people and aggressive
leadership of a company in an industry. So we are very pleased
that we have found a formula that seems to have worked so far.
Hopefully I am not too bold, when I suggest that the formula
will continue to work for us going forward.