Annunziata: crossing new frontiers?

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Founded in 1997, Global Crossing is building the world's first seamless fibre-optic network. The carrier also recently acquired Frontier, a leading provider of facilities-based integrated communications. By the end of 2000, it aims to serve customers in the world's top business centres. CEO Bob Annunziata talks to Global Telecoms Business about the operator's prospects.

Founded in March 1997, Global Crossing had already raised $4 billion by the end of 1998. Global Crossing announced its mission of developing, owning and operating the world's first independent integrated international network. The company is rapidly building major fibre-optic undersea cable systems and terrestrial facilities.

In May 1998 the operator launched the first of its undersea cable systems, Atlantic Crossing (AC-1), which links the US, the UK, the Netherlands and Germany. Pacific Crossing, a 21,000km, four fibre pair self-healing ring, connecting the US to Japan, should be ready for service in March 2000. Its South American Crossing is scheduled for service in early 2001. In September 1999 it announced plans to build an advance network in Asia, Asia Global Crossing, through a joint venture with Microsoft and Softbank.

Global Crossing aims to exploit increasing demand for high-speed broadband connections. The explosive growth of the Internet and the potential for E-commerce have intensified the need for an advanced global communications infrastructure that can support increasing capacity demands. Global Crossing aims to be the carrier's carrier for wholesale service. It is also entering the retail space on a world-wide basis.

In February 1999 Global Crossing attracted attention, when it appointed Bob Annunziata as the new CEO. Annunziata had earlier risen to prominence when he was the CEO of Teleport, one of the largest competitive local exchange carriers, which was acquired by AT&T for $12 billion in 1998. Annunziata, who had spent 17 years at AT&T prior to joining Teleport, had returned to AT&T to head the company's $22 billion business services group.

Annunziata quickly built on the carrier's global plans. In March 1999 Global Crossing announced a $11.2 billion merger with Frontier Corporation, a leading provider of facilities-based integrated communications and Internet services. The aim was to combine Global Crossing's IP-based fibre network, which is being built out in Europe, Japan, Mexico and central and south America, with Frontier's extensive US infrastructure.

Global Crossing subsequently announced a bid for US WEST in a bid to build a seamless end-to-end, local-global broadband network. However, the proposed merger fell through, when Qwest Communications International filed a counter-bid for both Frontier and US WEST. Eventually, Global Crossing relinquished its bid for US WEST, but retained its offer for Frontier. Global Crossing expects to close its merger with Frontier later this year.

By the end of 2000, the operator expects to have a fully integrated network that will reach 160 of the world's most important business centres and include access to 80% of world's major traffic routes. In an exclusive interview with Global Telecoms Business, the CEO of Global Crossing Bob Annunziata talks about the operator's unique vision and explains how it aims to be one of the top global providers of telecoms services.

How big a setback was the loss of US WEST to Qwest?

As you know, everything we do is based on what is in the best interests of our shareholders. Our strategy is fairly simple - to build a global network and add more products and services to that network over time. We saw US WEST as a positive opportunity to jump start that.

However, at the end of the day, we must look at what we pay for a business compared to the value that the business will bring us in executing our strategy. We thought that to match or exceed the increased premium that was offered by Qwest for US West was not in the best interests of Global Crossing shareholders. Secondly, we felt that Frontier clearly was the top priority to make our global network complete and, with Qwest withdrawing their bid, we did not have to increase our price for Frontier. So we thought that it was a win-win situation for our shareholders.

So you didn't see this as a setback?

No, I don't think that there was any setback. Our shareholders participated in the US WEST tender offer at a price of $62.75 a share, a big premium over our stock market price at the time. We received $420 million in break-up fees over a two-month period. Now we will continue to stick to our original plan. So there was no setback.

You said recently when discussing the rival bids: "The pieces simply fit together better. Our international network, Frontier's national network and US WEST's regional network provide a much stronger global footprint than what Qwest can offer." How will you now put the pieces back together?

Frontier was always the key piece of the puzzle. Global Crossing and Frontier are a perfect fit, as there is no overlap between our two companies. We were missing the US footprint and now we will have it. That is going to fit nicely. In addition, the US WEST regional network is in 14 Western states. We will have a presence that runs through those states with Frontier. We will just have to expand that a lot more quickly than we had initially planned. So Frontier's US national network is still a good fit with Global Crossing's international network. We will continue to build in the most attractive markets within US WEST territories.

If your bid for US WEST had been successful, you and Sol Trujillo would have become joint CEOs of the new company. Surely, having two CEOs would have created problems? Would you adopt the same approach again?

Quite frankly, if you saw the great synergy and relationship between Sol Trujillo and me, you could see why I didn't anticipate that we would have had any problems. We were acting as partners. We believed in doing this thing as a partnership. I believe that we would have complemented each other well going forward. The co-CEO role is controversial. But you know, as we told everyone, if we had run into any problems and it hadn't worked, then we would have changed things. And one thing you have to learn in this world is that you have to be ready to change, because the world is definitely changing rapidly.

Could you tell us about the purchase of Global Marine? How has this accelerated your competitive position?

Our purchase of Global Marine - the world's largest and most experienced submarine cable maintenance and installation company - from Cable & Wireless was an outstanding acquisition for Global Crossing. Not only does it give us control over the installation and maintenance of our own cables, but we will also participate in the huge market for the maintenance and construction of new cables world-wide, which is a billion dollar business. I see this business growing to about $10 billion a year. So I think that it is a great acquisition and fits nicely with Global Crossing.

Following the recent acquisitions of Frontier and Global Marine, will you need to have recourse to more debt funding or potential share issues?

Currently we will not need to do this, as we just undertook a new $3 billion corporate credit facility that was led by Chase Manhattan and Goldman Sachs. All the networks that we have talked about building are already financed. We are in a good position today, with a substantial source of funds to rapidly complete our core network and fund future growth flexibly and efficiently.

What are the specific terms of that deal?

The senior secured credit facility consists of a $1 billion five-year revolving credit facility, a $1 billion five-year multi-draw term loan, and a $1 billion eight-year term loan. Again it was put together and over-subscribed by many of the banks.

How much is your global network costing to build? Where are you in the network build?

I am very excited about where we are in the build of our global network. Atlantic Crossing (AC-1) is already up and running across the Atlantic Ocean. Pacific Crossing (PC-1), connecting the US with Japan, will be up by the end of this year, as will Mid-Atlantic Crossing (MAC). Also by the end of 1999, 13 cities in Europe will be connected to our network through our terrestrial Pan-European Crossing (PEC), rising to 24 cities by mid-2000. Next year we will light up our terrestrial network in Japan, segments of our South American Crossing (SAC), Pan-American Crossing (PAC), the Irish Ring and backhaul systems in the US and Mexico. When our announced network is complete, connecting about 160 cities in 19 countries by the year 2001, we will have invested about $5 billion. So these are real assets that are no longer just sub-sea to sub-sea, but city to city, and soon building to building as we continue to reach out.

Which suppliers have been working on the project? How many cities do you currently connect to?

Well we use multiple suppliers, Lucent, Nortel, Cisco and Alcatel. So we have a multi-vendor environment, linking up the 160 cities world-wide in 19 countries.

What benefits do you derive from the recent technology agreement signed with Lucent Technologies?

We think that it is good to be close to our suppliers. In the case of Lucent, we gain access to Bell Labs and their latest optical technology. We get preferred access to new technology and support in rolling out new products. We will also work with them to plan the technology for the global network of the future, which is what we are building.

Do you think that suppliers are falling behind operator demands in terms of management capabilities?

It has taken us quite some time in this industry to get these bandwidth managers and equipment management systems up to speed. The suppliers have listened. They have come up with some new capabilities. That is why it is a give-and-take operation, where they tell us what they design and we tell them what we need. Together we devise solutions to cater for market requirements, in other words, the needs of our customers.

In March, you announced plans for the development of South American Crossing. What do you perceive to be the opportunity for Global Crossing in Latin America?

It is a phenomenal opportunity. When you look at international traffic, Latin America is growing rapidly. We have our South America Crossing and Mid-Atlantic Crossing, all linking up to serve Latin America. So we can offer any of our clients a link from, say, Rio or any South American city to Europe, Japan and the US. South American Crossing alone brings a ten-fold capacity increase to South America-North America connectivity. So it is very supportive.

How many cities will you be connected to in Latin America?

Initially we will connect a dozen or so cities in Latin America to our global network.

Can you explain why you opted for Africa ONE? How do they fit in with your global ambitions?

We believe our move with Africa ONE was strategically smart. We were hired as a contractor by a consortium to build the cable there. We do not own the cable. So we get two benefits. Firstly, we will derive a profit from installing and maintaining that cable. Secondly, we will receive capacity to all the different markets that it terminates in. So we will earn fees without investing our own capital and have a presence in the African market as it develops.

Global Crossing's first quarter revenues were $178 million. What are your projected second quarter revenues?

We have just released figures for the second quarter. Revenues were $190 million, reflecting continuing strong sales and circuit activation on our Atlantic Crossing cable. We were very pleased with these results, which exceeded analyst expectations. Global Crossing has established a great track record of meeting and beating expectations, as we continue to grow our sales and customer base world-wide.

What do you see as Global Crossing's main revenue drivers over the next two years?

When we were strictly a sub-sea to sub-sea business, our revenue drivers were primarily in the wholesale carrier's carrier market. Now we are evolving to serve not only the carrier's carrier market, but also corporate customers on a retail basis. With the acquisition of Frontier, we are looking at a company with $4 billion in revenue. About 25% of that will come from the traditional sub-sea systems. The rest will come from the retail business. As we go forward, we will be looking to expand many of Frontier's existing products, such as the GlobalCenter web hosting business, onto the world-wide stage through our network. We will also develop new products and services that take advantage of our network's architecture.

Do you believe that Global Crossing's success is dependent on its ability to break into the retail market? Do you believe that Global Crossing has to become more than just a carrier's carrier?

As I just mentioned, and as everyone recognizes in this business, you have to grow from a wholesale business to a carrier's carrier and up the value chain into the retail market. Since we have a fixed cost network, this makes it very important, and very easy, for us to put more products and services on that network.

How do you view companies such as Qwest and Level 3? Who do you view as your main competitors?

Qwest, Level 3 and other emerging companies are participating in what I view as a trillion dollar market world-wide. So it is a very big market, which offers a lot of opportunity for everybody. The only difference is that our focus at Global Crossing is clearly global in nature. The other companies are really more US-centric in their approach. Our real competitors are the world-wide companies that aim to provide wholesale, as well as retail services. We can offer a global approach instead of a US-centric approach in addressing the global market. I think that makes us different.

What do you perceive to be your competitive advantages over other operators which aim to have world-wide reach?

Again we are building our own network. As we own our network, with links to all parts of the world, we will have more capacity than other networks. We will be able to control quality and service end-to-end for our customers - and that is what they demand in the new world of data products.

Why do you think that Europe has failed to spawn operators such as Global Crossing, Level 3 and Qwest? Would you ascribe this development to a lack of entrepreneurs?

I really think that the delay in Europe - and it is only a delay - is due to the fact that the telecoms market has not opened up in Europe as rapidly as in the US. As we deregulated in the US, Europe started to address those kinds of issues, breaking down the borders. This is clearly creating a great opportunity in Europe. We are excited about being one of the early participants in the European market. Right now one-third of all world traffic is in Europe, while another one-third is in north America. So our goal is to own and operate those networks.

How do you view the regulatory differences between Europe and the US?

Well I think that they are evolving, as the US has more experience. There are different types of companies. We have RBOCs and long-distance carriers, while you had national companies in Europe. As the boundaries come down, we have to deal with these regulatory cross-border issues, which are unique in Europe. But we are encouraged, as the more we talk to the different regulatory agencies, the more they recognize the need for competition. Competition has certainly proved to be best for our society. So it takes some time and doesn't happen overnight. But the world will become very competitive in the future and Global Crossing is very well positioned to capitalize on that.

Do you think that there is room for a Global Crossing mark two? Or do you believe that the window of opportunity for new start-ups is now closing?

We do have a two to three year advantage on new entrants, given the time that it takes to build, obtain your operating rights and rights of way. There has been some talk from other companies about building competitive global submarine systems world-wide. For example, there was a company out there called Project Oxygen that still hasn't received its funding. I believe, if I am not mistaken, that they have been talking about doing this for four years now.

I think that our approach is a little bit more pragmatic. You get one link in, you sell it, you go to another link and sell it. It shows people that you are a real company, as you move forward. So we have a definite advantage in the market. One thing you can count on: we are never going to stop growing. So that advantage will always be in our favour.

What is your EBITDA target for 1999?

We reported about $114 million in EBITDA for the second quarter - so you can extrapolate that figure out for 1999. We are doing very well. In fact we are beating analyst expectations. When we put Global Crossing and Frontier together, we will have $4 billion of annualized revenues and over $1 billion in EBITDA. And we expect EBITDA to grow by over 30% a year.

What is your projected capital expenditure for 1999?

All our announced cables are fully financed. As I mentioned, once our announced network is complete, it will represent a $5 billion investment. You also have to consider Frontier - as we will be combined with Frontier before the end of the year - they are spending about $800 million a year. I would expect this figure to rise this year, as we want to build out more CLEC opportunities and webhosting opportunities. So their capex will probably amount to over $900 million in 1999.

You took over as CEO of Global Crossing in February. In such a short space of time you tried to cut two of the biggest deals at lightning speed. Will you continue to build Global Crossing at such a pace?

I guess you could say that the only way we know how to move is fast. So the answer is yes. As we continue to build organically, we will also look at other companies that fit our needs and that we can integrate at the right price. At Global Crossing we are blessed with a very experienced management team to make that happen. Gary Winnick, the founder, and the other executives here are very talented. So we can move rapidly to achieve our goals.

How do you view the era of consolidation in the US? Do you believe that the creation of these big global service providers benefits customers?

We have been talking about the global mega-merger service providers for quite some time. I think that it is starting to materialize. When you look at the RBOCs, which need to expand beyond their borders, and the PTTs implying that they plan to expand beyond their borders, I think that there is nothing like Global Crossing sitting there with the infrastructure in place to help them reach the four corners of the world. So it is starting to happen. I think that it is going to happen and it is accelerating faster than we ever anticipated in our history. The good news is that you are going to find Global Crossing right in the middle.

In a recent interview we conducted with James Crowe of Level 3, he spoke about the problems that traditional telcos, such as a RBOC based on old telephony models, would have in competing in a new IP, borderless world. What are your views on this subject?

I agree with Jim that the established companies today are using the old technology and have to quickly roll out the new technology. Many of them are trying to do that. But again it is very hard for them to go forward and accomplish this. I think that the newer companies have an advantage of competing more rapidly. But they also need to build. And it is very important to build out to reach the customers. So there is somewhat of a balance there. But it gives us an opportunity to have the best cost structure as we go forward. And there is a lot of opportunity, as it is a big market. I think that we will do nothing but bring benefit to users through the new technologies. And the new companies can do that, as they can provide the responsiveness that customers need.

How do you view the prospects for IP voice telephony?

That actually blends in with your last question. To be more cost effective, we all aim to reduce network costs. The way to do that is of course voice over IP. So we are very aggressive with the Frontier unit that has looked at this and is beginning to deploy it next year and will probably have the whole network done by the year 2002. Every company needs to go that way, especially to take out the expense. As long as the quality is there and the features are there, everyone will deploy this technology. And you can count on Global Crossing to embrace this technology as well.

In a recent interview in Global Telecoms Business, Robert Knowling the CEO of Covad Communications noted that voice over ATM "is going to be a huge play". He also added that voice over IP also had good potential. What do you think about voice over ATM and over IP?

It is the same issue. Voice over ATM, as well as voice over IP, is all about taking out the cost. I think that any company which is forward thinking, deploys an IP network, ATM network and TDMA network, because you are always in a state of evolution - meeting the needs of your customers today and evolving to a lower cost structure. So you have to be expert and proficient in each one of those technologies going forward. Global Crossing is employing all three.

As the company grows, how will the structure change? Will you place more emphasis on marketing? How are you benchmarking progress for investors?

Clearly I think you have seen that Global Crossing has constructed the infrastructure that allows us to go from no longer just sub-sea to sub-sea, but city to city and soon building to building. But as that is going up - and it will be up by the end of the year in different parts of the world - we are aggressively unleashing our sales people, products and services, so that we can fill this fixed cost network.

Benchmarking relates to success in meeting that plan and bringing more customers on the network. That is what the business is about: bringing more products and services on the network, as a carrier's carrier in the wholesale market and then through the business-to-business service that we have brought on with Frontier. Frontier brings us that quality immediately.

In terms of data, which applications will prove most essential to businesses in the future?

Data is growing rapidly. The key issue on the data market is that we are digitizing a lot of the voice, so that it becomes a data application, as well as the IP telephony and IP services. Data is growing rapidly, as all the ISPs require so much more capacity than anyone ever thought they would in our industry. And that is where we need the capacity to be built world-wide.

Global Crossing has a premier position because of our state-of-the-art global network. No one in the past would ever have thought that customers would ask for a transmission speed of OC-12, 48 and now 192. It is a dynamic market. The world needs more capacity as we need more graphics, and we need them faster. Soon video will start becoming commonplace on desktop to desktop or PC to PC transmissions. That requires quite a bit more bandwidth. So I think that we are very well positioned to handle that.

In terms of overall revenues, how much will data account for in a couple of year's time?

Today most revenues come from voice in the industry, but data traffic and revenues are growing much faster. But as you begin to digitize voice, it becomes data traffic as well. We are probably very high in the data space today, where it is very difficult to identify how much of it is voice, as we are today a carrier's carrier. As we go forward, all the plans are leading towards putting more focus on ATM, Frame Relay and IP data services. We will derive most of our revenues from these areas.

If we look at the business market in the US, what percentage share do you expect to obtain in 1999-2000?

Clearly in the 1999 time frame we have very little market share in the business market, as we are a carrier's carrier and are just now converting into the retail side. People used to ask me: "How much market share do you want?" I would say that I didn't want it all, just half. Obviously that is a joke. But we know how to grow the business and we will continue to grow the business as we build out our network.

Frontier clearly gives us a jump start in the medium to small business sector, as that is what they serve. So working together with Frontier, you will see us growing revenues and market share very aggressively, as that is all we know how to do. As the market keeps growing, it is difficult to put a market percentage. Ask me again in a year's time.

How important is a wireless base in today's telecoms field?

It is all a matter of the life cycle of a company here, if you are talking about a wireless acquisition in the future. I assume that you are not talking about fixed wireless, which is a way to access customer premises into the network, but rather mobile. It is not as necessary to grow the business as rapidly as you want. But once you reach a certain level, all companies start thinking: do we need wireless to provide the total package of products and services for our customers? It is not as though you need it when you start out. But as companies grow, it doesn't hurt to have the full breadth of services.

Who are your main competitors globally? Which companies pose the biggest threat?

When it comes down to addressing the global market, we have very little competition. No single company is building all the fibre sub-sea systems and terrestrial networks that are being linked world-wide by Global Crossing. So I think that we do occupy a unique position.

When you are vying for businesses in each continent, you need to address the PTTs, the RBOCs, as well as the international carriers that are offering service as your competitors. But you need to look at what we bring differently.

Clearly the bandwidth that we have available to offer customers, not only to certain parts of the world, but also world-wide, will give us that unique position. Not to mention the responsiveness in providing services and employing the latest technologies. We think that we will have a jump start here, as we go forward. One day your competitor is your supplier, the next day they are competitors. So I think that our formula will be a win-win proposition: as a carrier's carrier for wholesale service, as well as a new entrant in the retail space on a world-wide basis.

How has your experience at Teleport and AT&T shaped your vision? Why did you take up the challenge of becoming the CEO at Global Crossing?

Everyone asks me this question. I saw Global Crossing as a significant opportunity and, quite frankly, as a world-wide Teleport. Teleport filled a niche in the US market. And that was fairly visionary, as people didn't think that it could be done at the time. Similarly, I think that Gary Winnick and his team identified another niche in the global market, which they were addressing through Global Crossing. So when they asked me to join them, I was just excited. I see Global Crossing becoming a global player owing to our acquisitions and organic growth. So I perceived a tremendous opportunity to address the world, and not just the country.

What trends do you see emerging in telecommunications over the next three years?

I think the trend will be for more businesses to want to deal with a single company that can provide them with a broad reach around the world, without having to rely on third party providers to actually turn up those services. We will already have the city-city network, but we will soon be building out the local network as well, so that we can get away from third party provisioning. This will ensure better responsiveness and better quality for customers. Again, Global Crossing will be well positioned to do that.

Finally, what are your hopes and ambitions for Global Crossing over the next two-three years?

One thing is certain. We are going to grow and grow and grow. As we build our culture, products and services and networks around the world, you will see Global Crossing continually perform as one of the highest growth companies in the telecoms sector. Our people here know how to do that. I know how to do that. And that is reflected in the modification of our strategy to go from sub-sea to sub-sea, city to city and now building to building. So clearly I think that makes us a breed apart from all other companies world-wide.