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Scott: assessing the best way of delivering value
01 May 1999
IXC Communications is building a coast-to-coast fibre-optic network in the US. Following the announcement of the Frontier-Global Crossing deal in March 1999, the operator has been mentioned as a possible acquisition target by either a domestic or foreign telco. Chairman, CEO and president Ben Scott talks to Global Telecoms Business about the operator's plans.
IXC Communications creates network-based delivery solutions to
meet the requirements of the global communications market. It
is expanding its network from 9,300 miles today to over 16,000
by the end of 1999.
David Barden, a telecoms equity analyst at J. P. Morgan, notes:
"We have felt that IXC Communications is an undervalued asset
within the facilities-based long-distance industry for some
time. Where the company will end up in the industry is actually
a pretty good question, because I think that the market would
like to know that as well. After their announcement that they
are looking to realize the strategic value within the company,
the market perception is that this is tantamount to putting the
company up for sale. I think that people believe that IXC will
at the very least be part of a larger entity in the near future
as opposed to a stand-alone entity."
A wholesale provider, IXC Communications is also targeting
small and medium-sized businesses in retail and is increasing
revenues internationally, in particular from its joint
ventures, Storm, in Europe and Marcatel in Mexico.
In 1998 IXC Communications more than tripled operating cash
flow to $90.7 million, up from $23 million in 1997. However,
despite this success, the company is still under-valued,
compared to its peers. Doubts have been raised about its
ability to maintain growth, as the switched wholesale
long-distance business, one of the principal revenue generators
for IXC Communications, becomes increasingly competitive and
pricing/unit margins decline. A recent decision to employ the
services of Morgan Stanley Dean Witter to investigate different
ways of enhancing the company's value has been interpreted as a
sign that the company could be sold or be part of a large-scale
Barden can perceive a couple of reasons why the company would
appear to be an attractive acquisition target: "I think that
clearly one of its strengths has to be the fact that it has got
a nation-wide network build well under way and on target for
first stage completion at the end of 1999. Secondly, it has a
very strong presence and reputation within the Internet space.
They have been clearly focusing on the data/ISP niche."
A number of options are open to IXC Communications. The
operator could be bought by an operator such as Cable &
Wireless, which has acquired the MCI Internet business, but
still lacks a US presence. Or some of the operator's assets
could be divested to enhance shareholder value, as Barden
explains: "I do think number one that the management team wants
to deliver to shareholders a valuation on the company, which
reflects in their opinion the fundamentals. I think that the
company's management feels that the best way to achieve this
goal, in tandem with a lot of the companies on the market these
days, is to try and extract that value, either through some
sort of sale or through some sort of partitioning of assets or
carving out of assets. I think that it is clear that facilities
can have very strong valuations in the market."
Barden believes that a sale is the most likely option: "My
general overall opinion is that I believe that they will
execute a sale of the company and I think that management will
realize a higher value for shareholders than the IXC share
price. I believe that the company's core business is under
pressure and that there are companies out there which could
realize greater value from IXC's assets than IXC can by itself
In an exclusive interview, Ben Scott, the chairman, president
and CEO of IXC Communications talks about the company's
prospects and explains how he plans to boost shareholder value.
Could you give provide some details about IXC's
coast-to-coast fibre-optic network? How much is it costing to
Scott: Let me start at the beginning by telling you
about our network in general and then about Gemini2000. We
actually have a coast-to-coast fibre network that spans about
9,300 miles - from Washington to New York to Los Angeles and
San Francisco through Texas. We have a northern and southern
route in the east, one that goes to the mid-west and one that
goes down to Atlanta and Texas. We will be building additional
routes this year that will provide us with basic redundancy on
all our major routes.
Early in the second quarter we will light up 2,300 miles right
down into Florida. We will also light a route up the west
coast. At the end of the year we will have 16,000 miles
available to run traffic. Our fibre network is very robust - by
the end of the year it will be a complete nation-wide network.
On top of that fibre, we have both traditional
circuit-switching for our long-distance business, ATM and frame
relay for our VPN and high-speed transport businesses and then
finally our Gemini2000 network.
Gemini2000 is an IP network - IP that is mapped at the DWDM
level - actually carrying IP traffic without an overhead
routing system, such as ATM or frame. What we have done that is
really unique with Gemini2000 is to create a hierarchical
network that is not unlike the PSTN that has eight regional
networks. Those networks are routed within the region. We have
high-speed backbone service between the regions.
We handle routing, using Cisco's switched router technology
and tag switching. So we are able to express route
inter-regional traffic. This gives us very predictable
performance in terms of latency. So we can actually carry voice
and video traffic over this network, but without special
We offer faster service, just as you can do on an ATM network.
Now we have done that with the backbone. Our coast-to-coast
routing is OC48 - that is 2.5-gigabit channel. So we have very
high bandwidth which, as you know in the packet world, equates
to high quality.
In terms of the cost of the network build, obviously our
incremental costs are very modest, compared to someone building
from scratch. But we haven't released specific figures.
What was the significance of the recent technology and
market alliance that you signed with Cisco Systems? Why did you
select Alcatel, Nortel and Ciena for optronics?
Scott: When it comes to IP networking, there is no
question that Cisco is the pre-eminent technology company.
Obviously many other players are becoming very competitive in
that space. Nortel, with their acquisition of Bay Networks,
provides a good example.
But, in terms of expertise, Cisco is the company. I think that
they recognized our creativity in the use of their technology
in Gemini2000. We certainly recognize their value as a vendor.
We feel that it is a strategic relationship, where we could
support their products in terms of training and network design.
So the alliance was to our mutual advantage. Frankly, we were a
little flattered that they selected us as a technology partner
here, because they are clearly the big name.
To switch over to the optronics area, three players right now
are vying for price/performance leadership - Alcatel, Nortel
and Ciena. With Ciena we have a different architectural
approach to the other two. When we first lit our network, we
felt that the horse race was between Alcatel and Nortel.
We selected the two of them, because I believe very strongly
in a dual vendor strategy for any critical component on our
network. But Ciena has continued to push their technology. They
continue to be very aggressive in terms of price and
performance. We realized that they had closed the gap and had
some fairly exciting things going on in terms of their
technology, so we selected them for our latest route based on
price and performance.
We don't actually develop or build a lot of the technology
that we use. Therefore the vendors are very important to us. So
we pay real attention to who is leading in terms of pricing,
performance and innovation. That is what you see on our
network. Our selection of Ciena indicated that they had done
some creative things with their product line.
We continue to use Nortel, because we think that they have got
a terrific product and they have been a great partner in terms
of working with us and delivering on time, as we have built out
We were their first OC-192 customer to light for commercial
traffic. They worked with us to make sure that the technology
was stable and implemented on time. They also worked with us to
make sure that, as we expanded the number of laminas on our
network, the technology was manageable and stable as we were
really at the cutting edge. So they have been a great partner
Which markets have you been targeting? Who do you
consider to your main competitors? What do you perceive to be
your competitive advantages? How do you view demand for data
services in the US?
Scott: When you think about IXC, you have to realize
that we began working in the wholesale business before we even
got into the high-speed fibre business - back when we only had
a microwave network. So we have from the very outset
traditionally sold capacity into the carrier market.
When we began to construct our fibre network, we perceived an
opportunity to really expand that business. So we began to sell
capacity to all the major carriers in the US. Our capacity
customers number around 160. So the capacity business for us -
private line if you will - is a big business.
We have the following advantage: our network is available
today. In fact, we have more capacity lit on our network than
any of the new carriers. There are actually portions of our
network that are carrying eight windows of OC-192, up and
running. Our total OC-48 lit capacity is more than 86,000 miles
- almost double our closest competitor. So our competitive
advantages are that our network is up, is lit and available,
offers high capacity services and is extremely reliable.
Another big advantage for IXC is that our back office
capabilities are available today. As I mentioned, we have been
in the wholesale business for quite a while. We understand that
there are three key success factors: price, availability and
support. IXC excels at all three - we have very competitive
prices owing to our low-cost network, we have capacity that is
lit and we have an excellent back office offering that includes
The emerging carriers, the ones that have capacity to sell in
that market, would be our competitors - companies such as
Qwest. Frontier/Global Crossing would be another potential
competitor. At this point, we are well ahead of them in terms
of the build-out of our network and lit capacity. But I think
that the competition will become more intense over the next
Retail is the second market that IXC focuses on. We sell into
the retail market, targeting the small-to-medium business
customers. Our advantage is that we have a direct sales force,
as well as the solutions to satisfy the desires of that
particular market. We are selling back-end and integrated
access as the next evolutionary step from putting a packet
gateway into the customers' premises and offering them
LAN-to-LAN connectivity and Internet access at high speeds.
Using that facility for software hosting and co-location
services, IXC truly offers a high-value network.
We believe that we are providing with our network and
high-speed access services - long-distance to VPN to Internet
connectivity and hosted applications - a broad range of
services to these customers. In short, our network availability
and distribution are major advantages for the small-to-medium
International is the third target market for us. Our network
enables us to offer high-speed transit and termination services
for both voice and Internet traffic. This positions us to
become a viable option for international carriers that have
requirements in the US. Again, our network availability,
pricing and support, and back office are our key selling
Significant capacity is coming on-line. Is the demand
for this capacity there? How do you view companies such as
Level 3 and Qwest?
Scott: We are witnessing a significant increase in
demand for capacity. And as packet, routing and switching
technologies advance, such as Cisco's NGSR that can handle
OC-48 capacity, demand will grow even more.
What we have seen over the past 12-18 months is that the
requirements for the back office service have moved from PS3 to
OC3 type capacities all the way to OC48. That is because
typically the constraint on bandwidth utilization is based on
the switching and routing technologies - they come on-line and
utilize these five bandwidth channels. Particularly in the
Internet arena, this equates to quality. Where you can utilize
capacity efficiently, you immediately adopt it because the
traffic is there to support it.
We believe that this growth is actually in advance of where
the real explosion will occur - in access technologies. DSL
(Digital Subscriber Line Services), cable modems and, in the
business market, increased availability of dedicated access
facilities right on to high-speed networks, will open up that
last mile bottleneck. As a result, we expect real acceleration
Bandwidth is similar to any other high-technology resource,
whether it is memory, disk space or processor speed. So far no
one has ever complained that processors are too fast or that
disks are too big. So I think that the applications are
definitely there to take up the bandwidth.
And if the bandwidth revolution is going to happen, it will
require more than just IXC to meet demand. We are very proud of
our network and capabilities, but we certainly realize that
this is an industry-wide phenomenon. So I think that there is a
significant market for companies such as Qwest and Level 3 to
Level 3, in particular, has been very supportive of industry
initiatives around IP standards and other developments. I think
that competition is part of what makes our market so vibrant.
In my opinion, it is actually good news that other carriers are
helping to expand this market space.
What was the significance of a recent agreement with
Telenor? How does that boost your pan-European ambitions? What
percentage of revenues would you expect to come from
Scott: The agreement with Telenor was very
significant, because it enabled us to enter the European market
with an important PTT. The agreement led to the launch of our
joint venture, Storm Telecommunications. Storm is concentrating
on the international resale business. So they are selling and
terminating minutes to carriers in the European market.
With Telenor's significant international terminating network,
plus IXC's terminating advantages in the US, we felt that this
was a great place to start and begin leveraging a position with
carriers in Europe. The good news is that we only started in
September and have already achieved great success. In fact
Storm's biggest problem has been related to the need to
increase capacity to keep up with the business.
We are now working on a more facilities-based strategy and
hope to agree on a business plan for implementing it soon. We
believe that Telenor, in particular with its merger with Telia,
is an excellent partner. Our European strategy is up and
In terms of revenues, our international traffic probably
accounts for 5-7% of overall revenues - that does not include
the subsidiary revenues, as we do not consolidate those
results. Our joint venture in Mexico, Marcatel, Storm and our
own international business have been yielding revenues.
Were you disappointed that the company posted 1998
fourth quarter net losses of $26.8 million? Were these results
expected? You said that these results do not reflect the
company's true value. Why?
Scott: In this business you look first of all at cash
flow, earnings before income tax and interest, depreciation and
amortizations. The reason is that we have built out a very
large network, which is part of an advanced business. Early on,
as you are growing into that asset, depreciation is very high
compared to the business. That is very normal for wireless
carriers and others that you may be familiar with. We tend to
look at our progress at this point.
I think that investors measure us more on our operating cash
flow. Our operating cash flow grew from $23 million in 1997 to
$90.7 million in 1998. By any measure, the tripling of cash
flow in a single year indicates pretty spectacular growth. So
we think at this point that the investment community sees the
positive financial trends here and is more focused on our
ability to increase cash flow, rather than earnings/share. We
think that 1998 was a good year for that.
There is no question that the fourth quarter of 1998 was a
difficult time. Switched wholesale in the US is a difficult
market today. Per minute rates have come down dramatically,
much more rapidly than cost. Resellers are being squeezed in
terms of liquidity and cash flow.
As a result there are significant bad debt problems in that
market. The bad debt problem of a single large customer caused
our problems in the fourth quarter. This was a one-time event.
We have done a lot of things to address and reduce our risk in
that market, so that we don't have a repeat performance. I
believe that this particular problem will have no significant
bearing on the company's long-term value.
In view of these results, do you believe that the
company has under-performed? Do you believe that the company
needs to be more aggressive in the acquisition of new
Scott: I think that the company definitely needs to
be very aggressive in the acquisition of new business. We need
to grow our distribution channels: the growth of our retail
business, Eclipse, will play a key role here. When we acquired
Eclipse Communications, which was a direct sales organization,
it employed between 180-190 sales people. The organization is
now up to 300, so we have grown the sales force significantly.
We have also grown the value of a sale from $200 when the
company was acquired to almost $1,000 a sale now. We expect to
double that again by the end of this year.
Growing our distribution is very important. In addition, we
have made no secret of our desire to continue to acquire
Internet assets. We made several acquisitions last year to
expand our Internet offerings to grow our distribution channel.
We effected an acquisition of Coastal Communications that we
will close by mid-year. That deal will double our customers and
revenue in the retail space and provide us with a telemarketing
channel. We want to continue to grow in the international space
as well. So I think that we definitely need to be very
aggressive. We have been aggressively building our network: now
we need to build the distribution, products and traffic on that
network to make the asset pay off.
In terms of performance, our biggest difficulty has been in
dealing with Wall Street. Young companies such as IXC - even
though we have been around for a while, we are a case of a
"start-over" rather than a start up, as we have completely
changed our business - have had difficulties. These businesses
are volatile: one of our difficulties relates to our inability
to be predictable for Wall Street in terms of our financial
performance. I think that is why we are undervalued at this
In terms of our absolute performance, I think that anybody on
Wall Street would tell you that going from $23 million to $90
million on EBITDA in a single year is a pretty good
performance. The problem is, we didn't provide such a
prediction. So we need to reduce the volatility of our
business, while improving our predictability. I think that we
will get a much better valuation when that happens. We are
attempting to do that this year.
Why are you employing the services of Morgan Stanley
Dean Witter? Do you plan to sell the company? When would you
expect to make an announcement about a possible sale?
Scott: We made it very clear when we announced the
arrangement with Morgan Stanley that we would explore
alternatives to improve the valuation of the company. That
included every strategic alternative from making acquisitions
to forming strategic relationships to our potential
acquisition. We haven't ruled out any options and we haven't
committed to any option.
We are looking at all the different ways in which we could
improve the company's valuation. We clearly perceived when we
made the announcement that the company was badly undervalued.
Those discussions are going very well. Obviously, I cannot say
anything specific about them at this point. But we are
committed to an aggressive course of action to increase the
value for our shareholders.
If it transpires that the best way to achieve that goal is to
become part of a larger entity, we would be happy to do that,
as long as we feel that it is a fair value for the company. If
a more aggressive acquisition strategy is the better solution,
then we will pursue that path. I anticipate that this process
is well advanced and that we will be able to provide some
clarity in terms of where we are sometime over the next 60
Following the announcement of a merger between
Frontier and Global Crossing at the Merrill Lynch CEO telecoms
conference, held in March 1999 in New York, you said: "The
announcement isn't just good news for Frontier. It is good for
us." Do you think that IXC could be an acquisition target for
one of the Bells or MCI WorldCom? Or would you prefer to remain
Scott: My single goal is value creation for the
shareholders. If becoming part of a larger organization is the
best way to achieve this goal, then I will be delighted to take
such a step. I do believe, however, that we can create value
independently, so I don't believe that we have to take that
step at this point.
I said that the Frontier acquisition was good news for IXC,
because any company out there today, who feels a strong need
for a US facilities-based network talks about two companies,
IXC and Frontier. I believe in the "art dealer" phrase that we
are now the last Rembrandt. So to the extent that supply and
demand affect price, we believe that makes us a much more
valuable entity, either as a stand-alone entity or as part of a
larger organization. It validated our valuation owing to the
limited number of solutions providers.
At the conference you said that you viewed the
Internet backbone as the "public network of the 21st century."
Why and when will this shift occur? What will your role be in
Scott: IP is clearly the way of the future. When you
look at IP, it is the only protocol that supports connectivity
from desktop to desktop and carries all types of traffic -
voice, data, video and Internet. I think that everybody has
recognized that this is basically the common language of
communications for the future. People who have expertise in
managing that kind of communications network have a real
advantage. The problem with the Internet is that the existing
public network is unreliable in terms of performance. This is
due to routing and backbone issues. In addition, it is not
really scalable to the traffic that we see coming.
What we have introduced with Gemini2000 is a unique
architecture, that solves both of those problems: we have filed
a patent for this architecture. It ensures very predictable
routing performance, particularly on long-haul traffic, so that
it delivers consistent performance. It is also a technology
that can scale up owing to its hierarchical design.
We have seen traffic double every three months, so a scalable
network is going to be an absolute necessity. Predictable
performance is the only way that you are going to see true
mission-critical traffic over a public IP network.
By the way, IXC didn't proclaim that it was the network of the
21st century. This statement was made by a number of industry
experts, who saw the architecture at our announcement and
commented on it.
So I really do believe that this is the way that public IP
networks will be designed in the future. IXC has demonstrated
its real expertise in managing what I believe is to become the
protocol of the future.
You have talked about the move to new applications,
such as tele-medicine and electronic distribution. How much
business is provided by such applications? Which future
applications will be most attractive to customers?
Scott: A lot of applications such as distance
learning, tele-medicine and others are early in their growth
curve. Incidentally we have just signed an agreement with
VidiMedix, a tele-medicine company that will represent
significant traffic growth for us, probably beginning in the
second half of this year.
These applications are also very early in their adoption
curve. The major applications driving Internet traffic are
e-mail, to some degree E-commerce and web access. As you begin
to see E-commerce become a more robust solution, they will be
the drivers of more traffic.
You will also begin to see the implementation of what I see as
the new application architecture that is currently emerging -
these applications are partially on the client and partially
hosted. Personal financial software is a great example.
It is very hard today to ascertain when you are actually on a
hosted server on the net and when you are just using local
software on your machine, because it is a seamless application.
This is the source of the growth for all these different types
of applications - in hosted/client integration with high-speed
access to those hosted servers.
Literally, you can provide customers with real-time
information in a way that looks like it is running on their PC.
That is where things such as enterprise software solutions
become available to small and medium-sized businesses.
That is when E-commerce really becomes something that works in
terms of the sales and support systems. I think that we are
really at the first major reflection point in terms of traffic
growth for all of these new things and most of it is still
ahead of us.
How important is management to IXC? Have you managed
to find sufficiently skilled staff to provide integration
Scott: When you are in the carrier business, a lot of
your most important assets go home every night. People are the
differentiation, because our business is about how to
innovatively use the technology that is commercially available.
We don't bend any iron and don't manufacture any integrated
circuits, so the real secret of a carrier's success is the
ability to utilize the technology to do creative and innovative
things, such as our Gemini2000 network.
As a result, the people resource is critical. They are a
competitive differentiation at the end of the day. We have been
very lucky in recruiting a management team that has strong
experience with strong reputations in the industry as
professionals and respected leaders.
We have also been smart in our acquisitions, particularly in
the Internet space, because we added top-notch IP engineering
talent. Today IXC has a very strong technical and marketing
How is the company marketing services? Do you believe
that you have to make fundamental changes in this area to boost
revenues? How are you branding IXC?
Scott: Right now IXC is predominantly known as a
wholesale player. This is due to our heritage. We actually
market our business-to-business services under Eclipse as a
commercial brand within IXC.
Now we are in the end user business. Branding is much more
important than it is, when you are a wholesale carrier. We
initiated a branding study in the first half of this year. As a
result, I am confident that you will see a more aggressive
approach on IXC's part in terms of branding and service to
Which billing systems do you use? How have you been
making things easier for the customer in this area?
Scott: We actually have a billing system for our
Internet services, retail long-distance business and our
wholesale business. We are trying to design a single billing
platform for all those services. We have just entered into a
new billing system for our private line services. That is based
on Kenan Systems. We are hopeful that we can expand that
platform into more of our markets. We have more billing systems
than we would like to have at this point.
How are you targeting the long-distance market? Do you
have any plans for the residential market?
Scott: Traditionally we have gone to the residential
market through resellers. Excel was a very important customer
for us, when we entered the business. A large part of their
business was consumer driven. I think that we will continue to
go to the consumer market through resellers and agents, rather
than direct. It is a very high-cost marketing environment right
now in terms of competing with brands, such as AT&T, MCI
Our strategy is to utilize other people's brands to address
that market and only go directly to the small and medium
business market. But we do anticipate that with the growth in
our Internet and communications offerings, we will able to
offer full lines to small-to-medium businesses and
long-distance will be a part of that.
An alternative approach to selling long distance is through
dedicated and integrated access, where we actually pick up the
customers' traffic right on to our high-speed facility and
bypass the local exchange facilities.
This means that we are bringing in high-value traffic, whether
it is long-distance or data or Internet services right on to
our network, and we are managing it for the customer
We recently conducted an interview with James Crowe
who was saying that monopolies were hampered by their cultures
and their legacy. How do you view the RBOCs?
Scott: That is a really great question, when you look
at big discontinuities in industries - and there is no bigger
discontinuity in any industry than in telecoms right now. We
are witnessing major deregulation in Europe and the US, which
changes all the rules in terms of how business is done and what
At the same time, there is a technology discontinuity. Before
we launched our coast-to-coast network in April 1998, industry
prices actually went up 10% over a 12-month period. Since that
time we have seen prices decline significantly owing to the
availability, finally, of good low-cost, high-performance
bandwidth. So you see major discontinuities in technology.
You see the Internet as another major discontinuity and
deregulation as another. So all the rules are new and
different. There has never been an incident in other
industries, whether it was the PC or the mainframe computer
before that. Whenever there has been a major discontinuity, it
has not favoured the incumbents.
The reason is that everything in your management system
reinforces the wrong kinds of behaviour. Not because the
incumbents are not smarter or adaptable. It is because
everything about your business model tells you to do the wrong
When you go to your customers, they tell you what to do to
improve the products that you have. With IBM, the customers
told them everything that they should do to improve the
mainframe business. They didn't talk to them about PCs.
You have to give Microsoft credit. They almost got caught up
with the emergence of the World Wide Web. It was only because
of some tremendous intervention by Gates that they were able to
re-direct the company.
So I think that history would tell you that the incumbents are
going to have a hard time. I don't think that it is because the
new competitors are so brilliant and they are not. I think that
it is because their business models give them trouble adapting
to this great pace of change.
Carriers like us are likely to be some of the big winners in
this discontinuity. I am not predicting that British Telecom or
AT&T are not going to do a lot of business. I just think
that this is going to be a difficult change for them and that
it is liable to favour the emergence of some new players like
What was the importance of the recent acquisition of
Coastal Telephone Company? How does this acquisition accelerate
your competitive position? What are the benefits of your
acquisition of Eclipse?
Scott: We believe that with our network, we should be
marketing real state-of-the-art solutions. That is why we have
put the Gemini2000 network up. That is why we have built the
co-locations base that we have for posted applications, hosting
servers, co-location. That is why we are pushing so hard into
areas such as integrated access. All of these new cutting edge
technologies are not sold first to wholesale. They are actually
sold first through a direct sales force.
So as we move into these new higher margins, high technology
solutions, we need a direct sales force to market those
solutions early on. That is where the Eclipse acquisition comes
in. We did Coastal because we want to continue to grow that
channel. We also want to introduce some more efficiency in our
distribution. Coastal had a large telemarketing operation
targeted at small office/home office users. Now we don't just
have direct sales, but a very sophisticated telemarketing
organization for small-to-medium business. That was important
for our distribution efficiency. Coastal and Eclipse are
clearly a big part of our strategy. We are going to continue to
grow them, but we are also looking for additional acquisitions
in that area to build up our distribution.
How do you view the difference between the wholesale
and the retail markets in the US? Do you see an increasing
percentage of your overall revenues coming from the retail
Scott: When you look at wholesale, you have to split
it into two pieces. Wholesale in the US is a minutes business
and a capacity business. In the minutes business, the market is
becoming very difficult. Prices are declining faster than cost.
I believe that most carriers in the wholesale minutes business,
if they were stand-alone businesses, would not be making money
in that market. The minutes market is not a terribly attractive
market to us and it is a market that we are de-emphasizing.
The capacity market, and on the other side, the value-added
services market, is very attractive. Our private line sales are
very profitable for us right now. EBITDA margins are in the 40%
plus range, which is an exceptionally profitable business and
growing very quickly.
At the same time, we are starting to see the emergence of data
and Internet applications in the wholesale business. They will
have good margins and be very profitable. We see the capacity
and the value-added side of wholesale as the attractive part of
the business. The minutes are not the attractive part and are
not likely to become attractive. As it is likely to remain a
very low-margin, commodity business, our focus is on the
capacity and high-value side of wholesale.
I think that retail is going to grow tremendously and
small-to-medium businesses will account for the most dramatic
growth. That is where the fastest growth is. That is where the
highest margins are, because that is where this technology
revolution is having the biggest impact. Certainly, as a
small-to-medium business customer, I can actually aspire to run
something like Oracle financials as my financial solution,
because I can buy it on a hosted server from a carrier such as
Someone will be able to run and administer the service and
software, so that I don't have to invest in all that expertise.
Suddenly the world changes for me as a small-to-medium business
customer. I can actually implement a sophisticated solution
that 12 months ago was only possible for a Fortune 500 company.
You are going to see a huge change in the small-to-medium
business market. That is where the growth is going to be. And
that is why it is our target market.
What steps are you taking to reduce SG&A
Scott: We are really not taking any steps to reduce
SG&A expenditure. What we are doing is taking steps to
ensure that our SG&A is invested wisely. We are growing
retail distribution and we are growing Internet offerings. Both
of these are seeing increases in SG&A expense. We are
investing SG&A there, as these areas offer the highest
margins. By investing in our capabilities there in the short
term, we drive higher-margin business for the long-term. You
will witness growth in SG&A expenditures.
We are very much a high growth business and we look at our
SG&A expenditures from an investment perspective. That
doesn't mean that we don't watch the nickels and dimes in terms
of being sure that we spend the money wisely. We are actually
expanding rather than reducing SG&A. You will see large
carriers in the SG&A reduction business. We are actually a
high-growth company, so we are in the investment business.
How have you used your experiences at AT&T Canada,
Bell Atlantic Mobile and International Wireless and PrimeCo to
shape your vision for IXC Communications?
Scott: I tell people that I have had a chequered
past. I have worked in the computer business. I have worked in
the communications business. I have worked in wireless
internationally and domestically. So all of those things give
you different glimpses of the possibilities for the
When I looked at the opportunity with IXC, I saw a company
with a unique asset at the perfect time in the evolution of the
industry. There were so many things we could do with that asset
in terms of building the applications for the future that I
understood that this was too good an opportunity to miss. It is
exciting in terms of what we are doing with products like
Gemini2000. It is exciting with some of the things we are
experimenting with like fixed wireless and point-to-point laser
technologies and things like that for the last mile.
IXC has the ability to really change the nature of
communications: that is exciting. I guess that all those
experiences over the years go into developing that vision. I
think that all my time in wireless makes me believe that
wireless is going to be a much more important last mile
technology than people have talked about so far.
All the excitement has been provided by DSL and cable modems.
I think that they are promising technologies, but I think that
wireless is going to be a big part of high-speed solutions for
the last mile owing to the things that you can do with spread
spectrum. All of it kind of feeds a part of the vision.
What are your hopes and ambitions for the company over
the next 2-3 years? What trends do you see emerging in the
world of telecoms over that period?
Scott: I think that you are going to see a continuing
dramatic change in price performance. If you look at what it
cost us to light an OC-192 when we turned up our first channel
in our network, compared to what it cost us on the last channel
we turned up, it has declined by a factor of 10 over the past
24 months. There is no other technology in the world with that
kind of price performance improvement curve. It makes Moore's
Law for integrated circuits look like a piker.
So you are going to see a huge increase in demand and
capabilities because, as any technology declines, you can use
it for a lot more things in terms of cost. You can look and see
software distribution, music and video distribution, in a
payment, in high-speed access for services, e-commerce and
tele-medicine. You can see all of those things coming and the
huge changes that they will make. I mean actually having the
bandwidth available to operate remotely and the reliability to
do that, to connect remote surgery if you will. You can see all
those things. But I have got to tell you that you can't even
see the most important changes yet. Nobody predicted what the
major technology discontinuities would do to the PC.
When they launched the first cellular property in the US,
AT&T ascribed to the view that this was not a very
important technology, because there would only be a million
cell phones in use by the end of the millennium. Usually, the
things that happen with technology that you predict early on
are not the important things that happen. So I can predict a
lot of things. But I would say that when you look at major
discontinuities, the biggest prediction I could give is: you
haven't seen anything yet.
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