Carrier Channel: CLECs Move in Force to Buy Wholesale Fiber

Posted: 05/2000

CLECs Move in Force
to Buy Wholesale Fiber
By Ken Branson

Everyone has a plan of attack to connect the dots, and how many dots to connect and how they connect them,” says Jeff Miller, vice president of business development at Adelphia Business Solutions Inc.
(www.adelphia.com). “Do they construct themselves a network? Or do they buy one?”

Miller’s reference is to LECs trying to extend their national reach, and trying to lay their hands on enough optical fiber to do the job. His own company recently announced it would spend $100 million to buy 8,200 route miles of dark optical fiber from a number of providers.

The build-or-buy decision seems to be an easy one for most CLECs. Most, like Adelphia, are buying. The questions that remain are what, where and how are they buying.

A CLEC can buy dark or lighted fiber. It can lease, buy or swap, and it can buy other companies that already have bought fiber.

“A lot depends on how big you are, how much money you’ve got and what expertise you’ve got,” says Bill
Garrahan, vice president of equities research, Lehman Bros. (www.lehman.com).

Fiber providers do not discuss their prices with reporters. However, Todd Morgan, vice president of fixed telecommunications high yield research at Credit Suisse First Boston
(www.csfb.com) suggests that $1,200 to $1,500 per fiber mile is not a bad benchmark. A fiber mile is one strand of fiber one mile long. Deals are usually in multiples of two, most often for four or 12 strands, Morgan says.

A lease is a short-term, speed-to-market option for a carrier that isn’t very big or doesn’t have much money or expertise. Leasing continuously is taking place, but it’s tactical. Recent deals make leasing strategic.

To buy fiber really means to obtain what is called an indefeasible right of use (IRU). All the recent strategic deals are IRUs.

A lease usually lasts about five years and involves a specific strand of fiber and maybe a specific wavelength on that strand. An
IRU, meanwhile, gives the buyer absolute control over several fibers for a long time. For example, Adelphia’s deal with Williams Communications Inc.
(www.williamscommunications.com)
is for 25 years.

A carrier that obtains an IRU can call it an asset, and that makes Wall Street happy, Garrahan says.

“There’s a value in asset ownership,” he explains. “There’s certainly been a view that there’s value in it, and that [view] was perpetuated by early [CLEC] valuation metrics that included looking at how much asset you owned.”

Adelphia’s deal breaks down this way: 4,500 miles from Williams; 3,100 miles from Level 3 Communications Inc.
(www.level3.com); 600 miles from Worldwide Fiber Inc.
(www.worldwidefiber.com); and an arrangement with Metromedia Fiber Network Inc.
(www.mmfn.com) that allows Adelphia to acquire fiber in any of MFN’s North American markets.

The latest buy is part of a long-term plan to stretch the CLEC’s offerings nationally and to enter new local markets it might take years to get into otherwise, notes Miller. Adelphia has bought fiber from Williams before, as well as from CapRock Communications Corp.
(www.caprock.com), NorthEast Optic Network Inc.
(www.neoninc.com), Digital Teleport Inc. (www.digitalteleport.com), and other fiber providers.

Dark fiber is optical fiber that has no optoelectronics on either end. Adelphia bought dark fiber in all its recent deals because it provides control, Miller says.

“We hope that through DWDM, we’ll control our own destiny and it will be scalable to support our needs, not only in the short term, but in the long term as well,” he says.

Lighted fiber has someone else’s optoelectronics on either end of it. A CLEC that buys fiber really is purchasing capacity rather than mere glass. No doubt Williams is happy enough to sell dark fiber to Adelphia, but company officials say they would just as soon sell a CLEC lighted fiber.

“Williams is a wholesale provider of network services, of which dark fiber is one and only one,” says Todd Steele, director of business development and planning at Williams. “We believe we can provide long-haul connectivity for CLECs and other customers in a variety of ways. Lit capacity is really what we’re in business to do, and we can make the argument pretty powerful. As capabilities of equipment arise, we can do it better.”

Essentially, Steele’s argument is that a CLEC should
let Williams worry about upgrading equipment and save itself the capital cost.

Chart:Recent Fiber Deals

Melodie Reagan, senior vice president of global transmission services at Level 3, advises lighted fiber is probably the best choice for most customers.

“If you just get the conduit with dark fiber, you have to worry about the transmission equipment, the network management systems and so on,” she says. “On the other hand, you may already have those, and then it becomes less of an issue.”

MFN sells only dark fiber and only metropolitan fiber. MFN has built local fiber rings in 17 North American markets and expects to be in 51 markets by the end of next year. It recently announced that it has passed the $2 billion mark in fiber lease agreements.

“You have SBC [Communications Inc.,
www.sbc.com] coming into 30 markets, Bell Atlantic [Corp.,
www.bell-atl.com] has yet to state an out-of-region expansion plan; BellSouth [Corp.,
www.bellsouth.com] hasn’t stated a strategy,” says Nick
Tanzi, MFN president and COO. "Interexchange carriers want to reduce reliance on LECs for the last mile, and at the end of the day everybody needs fiber in the last mile.”

Level 3 and Williams also provide local fiber, but local, dark fiber is MFN’s stock
in trade.

“Not many companies are sitting on such an asset,” Tanzi says. “We have just negotiated with Bell Atlantic the ability to bring our backbone into the vault of every CO, and the right to distribute within the CO to any collocation. We think we’ll be successful in negotiating similar deals with the other RBOCs.”

Analysts say the clear beneficiaries of this push to buy bandwidth are the companies that have spent the last several years acquiring it–Level 3,
MFN, Williams, Qwest Communications International Inc. (www.qwest.com), and a host of regional companies like Worldwide Fiber and NEON.

Also in line to benefit are CLECs that have created a regional long-distance capacity, including GST Telecommunications Inc.
(www.gstcorp.com), CapRock and ITC^Delta Com Inc.
(www.itcdeltacom.com), and that are in the position to resell extra fiber on those links.

Credit Suisse First Boston’s Morgan suggests a CLEC buying fiber might want to look at who else has bought from a particular provider. The fact that a competitor might be in the next conduit may not suggest a CLEC go elsewhere, but it might suggest buys from several providers–as has happened with Adelphia. That way, even if a competitor’s service gets knocked out by a fiber cut or other outage, the CLEC has another route for its traffic.

Ken Branson is business and financial editor
for PHONE+.