MFN building on first-to-market advantage

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Metromedia Fiber Network is building next generation broadband optical networks in 67 metropolitan areas world-wide. MFN aims to be the leading provider of private fibre-optic networks. In October 1999 Bell Atlantic acquired a 19% stake in the company. Chairman and CEO Stephen Garofalo talks to Global Telecoms Business about this acquisition and MFN's plans.

Metromedia Fiber Network (MFN), established in 1993, is building fibre-optic networks in 67 metropolitan areas world-wide. The company aims to lease the fibre on a fibre/mile monthly basis to telcos, companies and government users, seeking to establish secure communications networks for the transport of large amounts of voice, data and video.

The world-wide network will cost about $3-4 billion and cover 3.6 million miles. The company has targeted high usage business markets and major economic centres in the US and Europe. MFN will be able to maintain a low-cost base, by laying up to 864 fibres/trunk in these metropolitan areas, which should dramatically reduce the company's cost/fibre mile.

The company has funded the cost of the network build in different ways. In October 1999, MFN announced that Bell Atlantic had bought a 19% stake in the company and agreed to buy dark fibre infrastructure from MFN in a transaction worth $2.2 billion. Under the terms of the deal, MFN will provide dark fibre infrastructure to Bell Atlantic over a 20-year period. Bell Atlantic is also investing $700 million to buy about 9.9% of the equity of MFN through the purchase of newly issued shares at $28 a share. As part of the deal Bell Atlantic will buy $975 million in debt securities, convertible into common stock at a conversion price of $34 a share.

In November 1999 MFN announced that it was extending its reach to 16 major metropolitan areas in Europe, by adding a further 11 markets. These include Paris, Brussels, Hamburg, Dusseldorf, Munich, Berlin, Hanover, Vienna, Zurich, Geneva and Milan. The company is already operating in London, Amsterdam, Frankfurt, Stuttgart and Cologne.

MFN is building a national ring in Germany, which links the country's most important business and financial centres. Once the pan-European network has been built, MFN will link its European and US networks to create cross-border optical connections.

In an interview with Global Telecoms Business, the chairman and CEO of MFN Stephen Garofalo talks about the company's plans to become one of the leading providers of fibre in the world's major economic centres.

How far have you advanced with the build-out of metropolitan networks in Stuttgart and Cologne? Which opportunities do you perceive for MFN in the German market?

Our builds in both Stuttgart and Cologne are on target with the announcement we made in June this year. When complete, our Stuttgart network will encompass up to 32,400 fibre kilometres and cover more than 75 route kilometres. In Cologne, the completed network will cover up to 34,560 fibre kilometres along 80 route kilometres.

The opportunity in Europe, and especially Germany, is significant. Currently Europe as a whole represents the second largest economy in the world. It is estimated to account for more than $300 billion in telecoms services and equipment.

Germany is central to this community and is leading the way in its deregulation drive and promotion of alternative network infrastructures. Again we believe that there is a significant opportunity for Metromedia Fibre Network.

Would you be interested in increasing your presence in other European metropolitan areas? Are you targeting any other European markets? Why did you initially decide to target the German market?

Definitely. In fact we announced recently continued expansion in Europe, naming our next eleven markets. This brings our total planned European infrastructure to 16 markets. Pursuant to that announcement, we plan to deploy local fibre-optic networks throughout the metropolitan areas of Paris, Brussels, Hamburg, Dusseldorf, Munich, Berlin, Hanover, Vienna, Zurich, Geneva and Milan, in addition to those currently under construction in Stuttgart, Cologne, Frankfurt, London and Amsterdam. We started our European expansion in Germany, as we believe that the region is central to the European community and currently represents the best opportunity.

Who do you perceive to be your main competitors in Europe? What do you believe to be your competitive advantage over other operators in Europe? How do you view the regulatory environment in Europe?

We do not believe that there are any other communications companies doing what we do. While many new carriers are entering the market, nobody is following the same business model as Metromedia Fibre Network. We see many emerging US and European operators build long-haul and downtown-centric networks with limited capacity.

MFN is building high-bandwidth, high-capacity communications networks throughout major metropolitan areas in the US and abroad and is leasing the fibre strands to all carriers and enterprise users.

Our infrastructure utilizes a "meshed network" architecture, containing up to 864 strands of fibre, that not only rings the downtown areas, but also extends to the surrounding suburbs, where many back office operation and technology centres are located.

What was the significance of your set of agreements with BCT.TELUS?

Our agreements with BCT.TELUS, announced in May 1999, enable MFN to extend our North American reach through a Canadian subsidiary into Toronto, Canada, mirroring the intra-city fibre strategy that is being deployed throughout the US and Europe.

Under the additional agreements, Metromedia Fibre Network will lease dark fibre to BCT.TELUS on a transcontinental route that it has received under a previously announced swap agreement. BCT.TELUS will light and operate fibre and provide Metromedia Fibre Network with the capacity to extend seamless connectivity between customer locations in the US and Canada.

Why did you recently issue bonds through lead underwriter, Salomon Smith & Barney?

Solomon Smith Barney had been our lead underwriter since day one. These bonds, as well as the recent equity investment by Bell Atlantic, will enable us to fully fund our $3 billion expansion to 67 new markets. In addition, this world-wide expansion will encompass more than 3.6 million fibre miles covering both North America and Europe.

Why did you decide to acquire AboveNet Communications? How does this acquisition accelerate your competitive position?

We viewed AboveNet as one of the leading providers of data services in the IP business and to the World Wide Web. As the architect of the global one-hop network, AboveNet focused on facilitating the explosive growth of E-commerce and media applications, by enabling service and content providers to deliver mission-critical applications with their one-hop global Internet Service Exchange.

With some very proprietary software and links to 100% of the IP data world, we believed that the combination of our virtually unlimited, pure photonic fibre networks and AboveNet's high performance connectivity solutions would enable Internet traffic to flow more predictably, reliably and at a far lower cost for customers.

Together, the combined company is facilitating the explosive growth of E-commerce and advanced Internet applications by delivering secure, reliable and scalable optical networks to Internet content and service providers, carriers and enterprise users.

Surely there is a risk of a conflict of interest following Bell Atlantic's acquisition of a 19% stake in MFN in October 1999 for $2.2 billion? What benefits do you derive from having Bell Atlantic as a shareholder? How will the money be used?

There is absolutely no risk or conflict. As a dark fibre customer, Bell Atlantic is a client like everyone else. On the investment side, they have simply decided to become a shareholder to take advantage of our success in the stock market. Bell Atlantic has no representation other than their equity position. This, in turn, allows us to continue running our business in the most efficient and effective manner and provide fibre-optic infrastructure through an open and carrier-neutral platform.

In other words, there is nothing in our agreement with Bell Atlantic that restricts MFN from offering our dark fibre infrastructure to other carriers, including RBOCs, CLECs, ILECs and Internet service providers. This agreement enables Bell Atlantic, to position themselves better as one of the top power houses in the communications world, by entering new markets and providing services outside their franchised territory.

Bell Atlantic has accepted our paradigm and plans to attack the world-wide data business using our fibre. This money will be channelled into the deployment of our metropolitan area networks world-wide and the build-out of the 3.6 million fibre miles in 67 cities that MFN had announced.

You claim to offer unlimited, unmetered bandwidth at a fixed cost. How will these pricing plans provide you with a competitive advantage over other high-tech operators in the US, which are also targeting tier-one markets?

We feel that we are the only company to offer the fundamental core of communications - the strand of cable between two points. In our case that cable is no longer copper: it is a strand of fibre. So in essence MFN has eliminated the tariff structure within the local metropolitan areas that companies have been charged for the past 125 years and provided them with virtually unlimited bandwidth for less money, enabling enterprises to transmit gigabits and terabits of information at a fixed cost.

Who do you perceive to be your main competitors in the US and Canada?

We do not see anybody in exactly the same business that we are in. As a carrier, it is difficult to be in both the retail and wholesale markets simultaneously. Indirectly the retail sellers of large bandwidth would be in our space.

What was the significance of the recent agreement with Williams Communications in the US? How does this agreement accelerate your competitive position in the US?

Williams enabled us to gain a national coast-to-coast network overnight, thereby connecting our current and future markets. Through this agreement Williams can access dozens of cities with our fibre in our local loop, taking our photonic distribution, not only in the backbone, but right up into the buildings that connect to their clients.

Our alliance with Williams enables us to provide seamlessly secure, reliable and fast building-to-building connections to customers with multiple locations, irrespective of whether those buildings are across the street or the country.

How much are you spending on network build? How have you been funding this build? Will have you to return to the financial markets soon to increase network funding?

To date our network builds have been funded predominately through our IPO and the private placement of notes completed in November 1998. In addition, a tremendous amount of the build-out has been financed by pre-paid contracts with customers.

Moving forward, future builds will be funded through our recent deal with Bell Atlantic, as well as the recent high-yield offering that we have just completed. We anticipate our current planned expansion to range between $3.5-4.0 billion, which should enable us to finish the 3.6 million fibre miles and 67 cities, including data centres for AboveNet.

Do you think that it is possible to be only a builder of operating fibre or is there a need to focus more on higher telecoms traffic and become a carrier? In other words, can you survive on the single sale of bandwidth?

We are absolutely convinced that we can survive. We have been extremely successful, as the markets indicate, at executing this business plan. We are a carrier-neutral and open access provider of facilities-based fibre-optic communications infrastructure. This is our only business. We do not intend to go into the services business.

Would it be true to say that your network is indicative of current theories about the convergence of different technologies and changes to industry structures?

We believe that all convergence will be eventually linked to a photonic convergence. Everything will travel on light as opposed to electricity, and all copper lines will be replaced world-wide by fibre-optic lines.

How does your network facilitate the offering of the latest data, video, Internet and multi-media applications? What is unique about the MFN vision?

We are unique in that our infrastructure facilitates competition, which in turn, allows providers to deliver competitively priced services and applications to their customers. The fibre enables the delivery of these advanced services. For example, let us say that you represented a full motion video reference company and had newsreels of information that investment bankers wanted to download.

With our network, your company can take advantage of pure fibre connectivity to transmit that information at terabits or gigabits from your location to an investment banker in downtown London.

You would connect to our co-location data centre, which will either house the service or connect you to our world-wide fibre network and then to a server location, where you will then download again at a terabit and gigabit level.

Through a seamless and point-to-point fibre network you can download gigabits of full motion video for the first time ever into a storage facility at your site and then play it back in real time.

As so many new operators come on-line, surely there is a danger that the amounts of bandwidth will not match demand?

There is no glut in bandwidth. Newer and more advanced applications are coming to market daily. The fibre infrastructure and photonic distribution of that fibre have to move from the long-haul to the metro market to every floor in a building.

We believe that, unlike the long-haul networks that are built in just a few years, the photonic infrastructure that controls 80% of the data market world-wide is within the local loop. Many of these metropolitan areas of major cities will take 15-20 years to build out by the time it is completed.

In your opinion which applications will drive this demand? How do you view the potential for E-commerce?

We believe that the Internet will not be the Internet, as you know it today. Eventually the Internet will be a full motion video Internet, where you will hold a video conference in a chat room and actually look at the person you are dealing with, instead of holding a memo conference in a chat room. There will be dating services that will comprise a full motion video of the person that you are interested in dating.

There will be newsreel services from places such as CNN, where you can download and carry out research on companies that you would like to know about on a full motion basis off the Internet. We just see it as a much larger experience than it currently is.

You have claimed that you are laying 864 fibres per trunk in each metropolitan area, while RBOCs typically lay on average only 48 fibres. How will you maintain this low-cost position? Is there not a danger that you could be overtaken by a new start-up operator in a couple of years that can undercut your low-cost position in these metropolitan areas?

This is the only business that we are in. MFN leases fibre and breaks it up into increments. Therefore we need to deploy more than 48 fibres. Our business model is predicated on delivering at least 50 times the bandwidth at a fixed cost over private dedicated fibre networks.

It is a free world and anybody can enter the business. But we have a clear advantage, as we have spent years in pre-planning and clearing easements. We have spent years on the build in these cities. There is a significant advantage to where we are today.

In a recent edition of Global Telecoms Business, we conducted an interview with the CEO of Covad Commuinications, Robert Knowling, who spoke about the importance of first mover to market advantage? Do you believe that you are in a similar position to Covad?

I would say that we are the first mover in our market: to the best of our knowledge, no other communications company in the world is in the business of building high-capacity, high-density networks and leasing the individual strands of fibre.

How do you view the market opportunity for MFN in Europe? From a regulatory standpoint, what are the differences between the US and Europe?

I do not think that anybody can stop the future from happening. In my opinion the regulatory situation in Europe has in some cases been as good as in the US, if not better. In some cases there will be difficulties.

However, I think that we will witness a move to a world-wide photonic network on a global scale. We believe that the tariff structure as we know it will be broken down and charges, such as they are today, will not exist in the future

Do you think that the FCC is doing a good job facilitating widespread competition in telecoms markets? How do you view the era of consolidation in the US?

I think that the FCC is doing a fantastic job. There is always consolidation in the communications business. I think that history speaks for itself there.

How many employees do you have? Are you expecting to increase employee numbers significantly over the next two years as revenues grow? Which efficiency benchmarks do you use?

We have about 529 employees. We expect a significant increase owing to our growth. Our plan is to continue to run a very low SG&A.

Where do you hope to position the company in two-three years? What trends do you see emerging in telecoms over the next five years?

Our immediate objective is to build out fibre in the 67 metropolitan areas that we have announced so far. We believe that there will be tremendous demand for applications and that our fibre infrastructure will play a key role in helping providers deliver these advanced applications.

We aim to be the leading provider of private fibre-optic networks on a world-wide basis and that is our business. We lease fibre out on a fibre/mile, monthly basis and plan to create a purely photonic network world-wide.