Janzen: new network build is no pipe dream

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Williams Communications is once again building a fibre-optic network, as it aims to become a major player in the US wholesale long-distance market. It re-entered this market in January 1998 on the expiry of a three-year non-compete clause. The president & CEO Howard Janzen talks to Mark Holmes about the operator's plans.

Williams Communications is aggressively targeting the wholesale market in the US. It's nation-wide 32,000 mile Multi-Service Broadband Network is scheduled for completion in the year 2000. It will connect to over 125 cities. The company is also preparing for an IPO later in the year, where it hopes to raise between $500-750 million. The sales proceeds will be reinvested in the build-out of the network.

The company has a unique background. It is a subsidiary of Williams, one of America's largest transporters of natural gas. Williams Communications has been able to exploit the advantage of having rights of way on Williams nation-wide pipeline network to build out its fibre network. Williams first used decommissioned pipelines to house fibre optic cables in 1985, under its previous banner WilTel.

This made it one of the first players to deploy a nation-wide fibre- optic network. The original fibre-optic network was eventually sold to WorldCom in a $2.5 billion deal. Under the terms of the transaction, Williams retained ownership in a single strand of fibre covering 11,000 miles, maintained its video and complementary telecoms business.

There was also a three-year non-compete clause that dramatically scaled down Williams' ability to sell telecoms services. It re-entered the wholesale long-distance market, as soon as the non-compete clause ended in January 1998.

In an exclusive interview with Global Telecoms Business, president & CEO Howard Janzen describes this ambitious project and explains how the company aims to exploit the opportunities in the market.

How do you view demand for high-bandwidth data services in the US? What customers are you targeting with your services?

We see phenomenal demand for data services. If you look at the kinds of growth rates we are experiencing with the Internet, you see growth rates of 1,000% a year. We perceive tremendous demand in the data side of our business and can see no end in sight.

In terms of the customers that we are targeting, since we are a carrier-services only provider, we are very focused on people such as the long-distance players, the RBOCs, ISPs, CLECs and even utility companies. The same dynamics are also apparent in your country. A number of utility companies in the US are considering whether to leverage the benefits of their rights of way and their ownership of retail customers and are trying to move from energy and utility businesses into communications. This represents another group that we have targeted.

Who do you see as your main competitors in your target markets? What do you perceive to be your competitive advantages?

The competitors are largely the new entrants, companies such as Qwest, Level 3, IXC and Frontier. But you also have the players in that wholesale market space today. Obviously, MCI WorldCom is very big. So it really is a combination of legacy players and the new emerging carriers. I think that we have significant advantages. First of all, our company has a 90-year history of building and operating networks. A lot of our network businesses have for a number of years focused on the energy side of the business. We have focused for the past 15 years on the network. Our company understands how to operate and build networks better than anyone in the business. So we have a very large construction and operations advantage.

Our team was one of the very first players to deploy a fibre network nation-wide back in the mid-1980s. On the whole the same team exists today. They have got that experience. We have the advantage of having been there and done that. We have a technology advantage, since we are able to leverage the latest in technology with a team that really knows how to do that properly, because we are designing our own network. We are really not dependent on vendors designing it for us.

We have an unusual advantage in terms of our rights of way. We are the largest pipeline company in the US. So we have rights of way that go from coast-to-coast to border-to-border. We are using those rights of way everywhere to facilitate construction of our fibre network

Pipeline rights of way represent by far the cheapest right of way to build on. It is up to half to a third of the cost of railroad and highway. Once you are finished, you have a very big advantage, because people don't tend to dig around pipelines.

The warning signs that say "Danger - dig here and you are in trouble" stop people from digging. So we have a tremendous reliability advantage once the network is in place.

Why did Williams sell its all fibre-optic network to WorldCom in 1995? Under the conditions of the sale, you could not sell telecoms services for three years. How difficult was it to re-enter the wholesale long-distance market in 1998 and attract customers?

We sold that network, because we received an offer that was so good that we could not overlook it for the benefit of our shareholders. That was the sole reason. Williams did not want to get out of the telecoms business, but the offer was so attractive and became more attractive as we negotiated. That really was the sole reason. We intended to re-enter that business as soon as the non-compete clause would allow us. In January 1998 we were able to re-enter that business.

However, we never left the network business, because we retained one fibre everywhere the old WilTel network went. We kept the business called VYVX which we will talk about later. That allowed us to maintain a very strong network team to operate that business. As we were allowed to operate multimedia businesses on fibre, we could make a lot of headway up to January 5 last year, when we were able to re-enter the business.

As we are the only carrier focusing on wholesale, we have an attractive competitive advantage: our customers would prefer to do business with someone who is not going to directly compete with them for the retail business. That is a big advantage, because the big players that we are trying to target to use this network perceive a great advantage in not enabling a competitor.

Who is supplying dense wave division multiplexing technology for your ATM based fibre optic network?

The technology for WDM and really the technology that is lighting the network is being supplied by Nortel. We have a very deep relationship with Nortel. But we deploy whoever has the best technology. In terms of where we are today, Nortel definitely is the vendor of choice. We have a number of technology relationships. Our ATM platform represent the key ones on the optronics side. That is based on Ascend 550 switches.

We are evaluating all the time a lot of emerging players that are coming up with technology. We are assessing a number of people's technology moving forward to maintain our competitive advantage and low costs. We are currently working with Signal Networks to move to the next-generation switching technology. They were the original founders of what became Ascend's ATM technology.

When will the network be finished? How many cities will you cover?

Our plan is to finish the 32,000 mile long network by the end of the year 2000. It will cover 120 cities. The cost was originally estimated at about $3 billion, although at this point we are assessing very deeply a plan that could raise that cost to $4.7 billion, as we try and build more capacity and a bigger cross-section on the network.

Why did you decide to double your purchase of Nortel's equipment? In view of Nortel's participation in your solutions unit, how does this affect your relationship with other suppliers such as Cisco?

You are referring to our decision to enter the switched voice business, again on a wholesale basis. That decision was made along with the decision to use Nortel's voice switching equipment. Our solutions business was kept out of our sale to WorldCom. It is an interesting relationship, as we are vendor independent and yet we lead with Nortel, wherever that makes sense. For instance, we are a very large Cisco distributor. We were a large Bay Networks distributor, prior to the acquisition by Nortel. As we are the largest distributor of Octel voice mail equipment, we are also a big Lucent distributor too. That is an unusual relationship. We have worked very hard with the other vendors to maintain good relationships. They perceive a lot of value in our channel, because we have so many customers. We have 133,000 business customers in that business. We have 6,000 people located all over North America to help service those business customers.

With OC-192 capacity in each of 16 windows, one fibre can carry simultaneously two million voice conversations. Is there a risk that you will have too much capacity and a shortage of demand? Have you already signed contracts to sell this capacity?

We have entered into a number of contracts to sell capacity on our network. We have a number of major transactions that help consume that capacity, but we are extremely bullish on where demand is going. When we started building the network, we adopted a very cautious attitude. We felt that it was extremely important to build the most efficient network in case there was a mismatch between supply and demand. We have had the lowest cost point which we have been able to establish and intend to maintain. As we move forward, it has become much clearer that demand is continuing on this exponential growth that we have been experiencing. We just see phenomenal demand coming. It is really being enabled by advances in computing technology with Moores' Law at work.

The power of high capacity bandwidth and broadband capacity connecting all that computing power are really important. We are in the early stages of perceiving the impact. It was probably in 1995 that the average person first started hearing about the Internet. We are not very far into understanding where this is going. We perceive tremendous increases in demand. We are gearing up our network to exploit those increases.

What are the goals behind Williams entry into the IP market? Could you tell us about the launch of "Transit Services"? What new products do you hope to offer customers this year?

We continue to try and understand exactly what our carrier customers would like to see in a product sense. This drove our decision to enter the switched voice business. Our decision to enter this business does not mean that we are establishing a legacy circuit-switched voice network. We are actually deploying that voice traffic off the voice switches onto our ATM platform. So we continue to have a leading-edge approach on how to handle the voice traffic.

In terms of the IP market, we are trying to help ISPs meet their capacity needs and even offer to co-locate services for them and be able to design, install and even outsource the management of all their network needs. This is something that the ISP community wants. As we can offer them value-added services, that is behind our decision to enter transit services. We will continue trying to understand what our wholesale customers want and make the requisite moves to provide them with a full suite of products to help them do their business.

What levels of revenue growth do you project in 1999? What levels of growth did you attain in 1998?

There was some very impressive growth in 1998. The network side of our business recorded the highest growth. Revenues in 1997 totalled about $43 million and then almost $200 million in 1998. So we are achieving very large increases. I can't comment on forward-looking parts, in particular as we move into our IPO. So you will have to draw your own conclusions. But I can certainly look back. What you can see is phenomenal growth.

When do you think that you will become EBITDA positive?

I would prefer not to make a forward-looking projection. I am sorry to beat around the bush, but again if you look at our growth rates, I can see some really positive signs for this year.

When do you expect a minority interest of Williams Communications to be sold to the public? What percentage is likely to be sold? How much money would an IPO raise? How would the proceeds be re-invested?

We expect to make a filing for the IPO by the end of the first quarter or early second quarter, and then move into the road show and all the processes that go with that and the approval process that immediately follows. The IPO is likely to occur in mid-year.

We are not focusing on a percentage. We are focusing on the amount to be raised: we intend to raise $500-$750 million in the public market. You can look at comments by analysts on the value of Williams Communications. Goldman Sachs recently put our value at $6.2 billion. I have seen another analyst put it at $7 billion. Analysts believe that we are worth somewhere in that range. So you can do the maths. We are trying to focus on the dollar amount, rather than the percentage. The proceeds will all be re-invested into building the network.

Do you believe that the company will have to undergo any significant restructuring over the next few years?

This is an interesting question. In view of the dynamic industry that we are in and all the changes that we are going through, any answer that says "nothing will change" and "we will stay the way we are" is just not realistic. I don't perceive any need for restructuring as we move forward. At the same time our company is a very opportunistic company. We fully intend to build a business that will last over the long haul and a business that we plan to operate. I am sure that this will lead to opportunities in the future.

Why did you decide to only sell capacity to wholesale customers?

We deployed the wholesale customer approach very successfully in our first life as WilTel. If you understand the economics of the network, it was absolutely critical to load up capacity on this network and thereby drive down costs. There is an exponential relationship between capacity and cost: so it is very critical to load capacity quickly. The fastest way to do that is to sign up large peak or tenant customers. That is the premise for our carrier-services only approach.

We think that we can load capacity on the network much more rapidly than going out and attacking retail customers, which is a more of one-step, two-step approach. We have great appeal since we are the only player that had a pure wholesale-only approach in the network business domestically. So, that plays very well with our customers. In our opinion, this provides us with a big advantage. That is why we have been on that track.

What was the significance of a recent agreement with WinStar? How does this agreement accelerate your overall objectives?

WinStar provides a great example of another customer with large network needs. The transaction provides us immediately with a network service opportunity, as we will loading WinStar's capacity on our network today. In the future, it provides another opportunity, because we can help them light that fibre. We can maintain that fibre for WinStar. This implies constant business with them and enables us to continue to bring them network services that they will in our opinion require in addition to that dark fibre. So this is a great transaction. We are repaid in one way with some of WinStar's wireless capacity. Again we lease that on a wholesale basis to bring to our carrier customers and allow them to have a more complete product set to go further into the last mile, enabling them to solve the last mile problem, as well as the long haul problem.

The Williams Multi-Service Broadband Network won the top award at SuperComm 98 for innovative network design. Were you surprised to win this award?

I'm not surprised, since our team is so strong in the network. Again that experience is derived from having done it before. Our technical network team has the engineer's dream of having all the knowledge of previously building a big network, without facing any legacy problems. They had a clean sheet of paper to go and do it again, deploying the latest technology.

I wasn't surprised when they won that award, because I truly believe - and this is confirmed every time customers come through and visit with our technical team, when I see their reaction after the visit - that we have the best technical team in the business. So this specific award was due to the way we are lighting our network. We have come up with a design that allows us to deploy fewer boxes and less optronics to light our network for the amount of capacity that you receive. In other words, we drive to a much lower cost point by refraining from putting additional optronics on the network. The award focused specifically on this inter-weaving technology or putting ATM essentially in the base between channels, allowing us to move more capacity down our network. So between SONET channels we are inter-weaving ATM directly on the fibre. It is an extremely interesting concept, which allows us to put more capacity down the network.

What is your ultimate goal? Do you want Williams to become a facilities-based provider of voice, video and data in all markets? Will you stay in the carrier's carrier market? Do you have a business plan to move into the retail market?

In the network side of our business, we will clearly stay in the carrier's carrier market. That is our intention. However, we do have opportunities to play in the retail space as well, but not in competition with our customers. That is through our solutions channel. We have a very large customer base. We have a big business there, that is achieving in rough round numbers $1.5 billion in revenue today. That business has the ability to bring network services to those enterprise customers.

We would do that by providing network services that our customers are branding on a retail basis. UniDial provides a good example. UniDial is one of our network customers. We provide UniDial network capacity, but at the same time our solutions business unit can go and sell UniDial products to their enterprise customers. This helps UniDial, but also loads up our network. So that is our opportunity to play in the retail space. I think that it is a big opportunity and does not compete with our customers.

How do you view consolidation in the US telecoms market?

We believe in a deconstruction model when you look at developments in our market. Even though you see big consolidation, deconstruction is still at work. The computing industry may offer the best example. If you move from the mid-1980s up to the present day - in the mid 1980s the computing industry was dominated by three big players: IBM, DEC and Data General. Then the whole industry deconstructed. Focused players carved out pieces of that value chain and companies such as Intel started building micro-processors. Microsoft built operating systems and software, while Dell and Compaq packaged computers and retailed them. Even retail companies, such as BestBuy, Circuit City and CompUSA emerged with a focus on retail. Huge value was unleashed by this deconstruction.

We see the same thing happening in telecoms. If you look at the data, it is happening. The category called others is growing far faster than all the big players. Even after they consolidate, their market share continues to drop. Deconstruction will become more apparent in any business, where technology is a factor and technology is moving as quickly as in our business. There is a real role for a focused player that is the best-in-class builder and operator of a network that can bring players, whose real strength is to work and own retail customers and bring them that best of class network service. This is the kind of opportunity we see. We think that it is very real, when we talk with big customers.

Could you tell us about "ChoiceSeat"? When will the service be offered commercially? It made its market debut at the Super Bowl XXXII? How does your participation at one of America's biggest sports events work? What does this service offer sports fans?

It is an interesting opportunity and is one that we have been doing for almost three years now. It began in 1996. When you talk about commercial deployment, we have just done the San Diego Padres for two baseball seasons. We have done the Tampa Bay Devil Rays, which are a new team and did their stadium last season. We did the Super Bowl for the past two years. We have already had a commercial product out there. Frankly, we are still in the applied research stage. We are learning more about the technology and marketing aspects of this business.

This service really brings the best of the PC and television rights to the seat in the stadium. So there is a small flat screen display - touch screen - and it allows the fan in the stadium to pull up multiple camera angles. In this game, there was a camera full time on the quarterback. There was a camera from the Blimp. There was a camera from different positions on the field, like goal line stances, so you could pull up your own camera angle. In fact you could pull up the Fox network.

If you have a ChoiceSeat, you can actually watch the commercials if the game is on. If it is a slow game, as this one turned into in the second half, there are a whole series of videos like "Road to the Super Bowl" and "Best bloopers in Football". NFL Films do really good production. There is the opportunity to order souvenirs and other merchandise from your seat. You can actually order concessions too. There are statistics. There are instant replays, which get hit on real heavy for big plays. It enables the fan to be a director in their own seat. As the technology progresses, it will allow that to be moved into the home, which would be a big user of the network. It would allow a person in their home to have a capability that is very unique.

Could you describe your applications business?

Our applications businesses include Vyvx and GlobalAccess. We actually have operations in the UK, in both of those businesses. I think we are very leading edge in our approach. Vyvx primarily transports video content. In video we are the leaders in the world in moving video and are connected to the majority in big sports venues. For instance, more than 80% of professional sports move on our network in the US. At the Super Bowl, not only did we have "ChoiceSeat" which is part of Vyvx: Vyvx also handled the transmissions out of the Super Bowl. We had about 600 hours of transmissions coming out of the Super Bowl. Obviously when they are playing those $1.8 million dollars a second of commercials, you cannot afford to have any downtime. We have been doing this for ten years at the Super Bowl.

What is the significance of your partnership with NCR? What does Williams bring to this partnership? Can you describe briefly your relationships with US WEST and Concentric?

We are providing for their business television needs. So it is not a partnership, but they are a customer and we are bringing them that service. Our events group is one of the most capable groups in the world in handling large events that involve a number of sites for video and audio clips. We do a lot of business with big global players, such as Oracle, BMW, Daimler-Chrysler. At Nortel, I obtain unique views, as I talk to a lot of the highest level people in Nortel. When they make high level announcements, they use us. They think what we do is really good. IBM is another big customer. So that is what the relationship is like with NCR.

Our relationships with US WEST and Concentric are very deep - they go beyond the standard customer relationship. In both cases we play a strategic role in meeting their network needs. For example, US WEST announced on the day that we came out of our non-compete clause that they would use us for their data network for out of region data needs. We value highly this relationship. US WEST understands what the opportunities are in the data world. I think they are really on top of that area.

We are Concentric's network too. That drives a lot of the network business. One form of payment for that network capacity involved equity in Concentric, which has turned out to be a very good investment. Here too we have a serious working relationship. In fact, we outsource Concentric's network operations. Our team designed their network for them.

What are your hopes and ambitions for the company over the next few years? Where do you hope to position Williams on the US telecoms landscape?

My ambition is for our company to be the leading edge network provider for carriers of any description, whether they are carriers that you think of today, ISPs or utilities. If we do that in a world class way, we are going to bring our customers great value and we will be a critical part of their business moving forward. We are going to build a very large book of business if we are successful at achieving that goal.

How do you see developments of the data markets. What do you perceive as the opportunities for new carriers to make a mark?

The real opportunity is to bring much higher capacity service to the market, adopting the most efficient operation. That really is our opportunity, since we can build a network from the ground up. It is designed to be one network that can handle all traffic. So you have the most efficient operation for data. I think there is also an opportunity to continue looking for leading edge services and applications that you can layer on to that efficient capacity. If you look back in time, we were the first company to offer a commercial Frame Relay product. So that was very value-added, when it first came out. This is what we have to continue doing.

In view of the interfaces that the customers have with us, our systems have to be absolutely leading edge, so that when customers do business with us, it is so much more capable and flexible. Their control on our network is different than what they would get with other customers, so it actually has to feel like their network. It feels as if they are actually controlling this network. They have windows into our network to see what the operation is and we have gone much further than other industry players in the design of our systems to make sure that happens and adds greater value.