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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.
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 merger.


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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."
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 today."
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 build?
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 considerations.
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 our network.
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 as well.
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 on-line support.
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 12-18 months.
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 business market.
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 points.
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 in demand.
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 address.
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 international operations?
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 running.
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 business?
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 point.
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 days.
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 independent?
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 this process?
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 service offerings?
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 organization.
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 commercial customers.
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 and Sprint.
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 end-to-end.
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 is possible.
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 things.
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 IXC.
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 market?
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 IXC.
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 expenditure?
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 communications revolution.
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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