Frontier Reinventing Itself … Again

Posted: 11/1998

Frontier Reinventing Itself … Again

By Ken Branson

"We’re a 100-year-old telecommunications company celebrating its first
anniversary," says Joesph P. Clayton, the new president and CEO of Rochester,
N.Y.-based Frontier Corp.

Frontier, which sprang from the venerable Rochester Telephone Company, is in the midst
of a transition, which began roughly at the time of Clayton’s accession a year ago.
Clayton came to Frontier as chief operating officer in the spring of 1997, then took over
as CEO when illness forced the retirement of his predecessor, the late Ron Bittner.
Clayton doesn’t want Frontier to be all things to all people, but he does want Frontier to
be all things to all people in some carefully chosen markets.

Joesph P. Clayton

Under Clayton, the company has shaken up its senior management, laid off 8 percent of
its workforce and refocused its efforts on wholesale and business customers. Frontier also
has bid to become a player on the Internet, having acquired Internet service provider
(ISP) Global Internet Inc., Sunnyvale, Calif.

The acquisition of Global also has made Frontier the web host of such high-profile home
pages as Yahoo! Inc. and Motley Fool, the online stock watcher.

Frontier owns 34 local operating telephone companies, but Clayton expects its revenues
to come mainly from two sources in the future: other carriers and business customers. He
expects each large block to contribute from 40 percent to 45 percent of Frontier’s
revenues.

As for the carrier side, business is booming, according to Tony Cassara, president of
carrier services. In fact, it’s growing more than two times as fast as its retail
business, Cassara believes. "The regional (long distance) carriers and the resellers
are taking market share from AT&T (Corp.) and MCI (WorldCom Inc.)," he says.
"So we view this as a strong market, a great distribution channel for Frontier."

Long distance companies often look askance at wholesaling, because they believe success
in wholesaling can come only by cannibalizing their retail base. Cassara has said in the
past that this difficulty didn’t arise with Frontier, because Frontier, unlike AT&T or
MCI, didn’t have a national consumer footprint.

And, he says, there were parts of the wholesale game Frontier couldn’t play.

"There are people who just want to buy network capacity from us," Cassara
says. "Frontier was never in that game, because we didn’t have a national network.
Now we do."

Actually, Frontier’s network, which the company calls Optronics, consists of capacity
purchased under indefeasible right of use (IRU) agreements with Qwest Communications
International Inc., Denver, and Williams Companies Inc., Tulsa, Okla., and a capacity swap
with Englewood, Colo.-based Western Tele-Communications Inc., a subsidiary of
Tele-Communications Inc. Under the IRUs, Frontier owns capacity–24 strands, up to 96
fibers, for 50 years in Qwest’s case–without owning the right-of-way, the conduit or the
ditch it lies in. The network is Internet protocol (IP)-capable, and its biggest piece,
Qwest’s 13,000-mile, $500 million buildout, is scheduled for completion by the end of the
first quarter 1999.

Frontier recently closed some fairly big deals with other carriers to use the Optronics
network. Level 3 Communications Inc., Omaha, Neb., recently agreed to pay Frontier $165
million for capacity on its network; Teligent Inc., Vienna, Va., and Rocky Mountain
Internet Inc., Denver, have concluded wholesale agreements with Frontier.

"If you’re a pure reseller, you’re working on very tight margins," says
Sanjay Mewada, senior analyst at The Yankee Group, Boston. "And there are about 800
resellers of long distance in the United States. If you want to be a real player in
telecom, you want to own your network. But this owning business is very capital-intensive,
very expensive. So Frontier has taken the middle way, buying capacity under IRUs from
facilities-based carriers."

Clayton believes there is no such thing as too much capacity. "Capacity is in
short supply right now, let me tell you," he says. "One thing I’m not worried
about is waking up one morning, coming into the office and saying, ‘Damn! What am I gonna
do with all this capacity?’"

The decision to become a nationwide, facilities-based carrier dates to the fall of
1996, according to Russell Shipley, Frontier’s vice president of network operations. The
network was designed as a dense wavelength division multiplexing (DWDM) network from the
beginning.

"We look at the network holistically," Shipley says. "The heart of it is
DWDM, which creates business opportunities because we can architect the network by
wavelength and be less dependent on platforms layering on top of each other."

Capacity haunts Shipley, as well.

"I think we have planned appropriately," he says. "But bandwidth demand
is exploding. We have 16- to 128-channel WDM; we have SONET (synchronous optical
networking) OC-48 to OC-192, and there are plans for OC-768. How do we deliver it and
manage it? We get so absorbed in architecture and systems that we can lose sight of the
customer. Our challenge is not becoming so focused on technology that we lose sight of our
customers."

Clayton, who spent 24 years in the consumer electronics business, takes it as his
responsibility not to lose sight of the customers, and tries to pass that attitude down
the line. He has emphasized sales training and centralized the company’s marketing
function. "I want our people living with the customer–womb to tomb," he says.
"But all customers are not created equal."

This deliberate inequality is clear on the retail side of the house, where Clayton and
his colleagues made a conscious decision not to go after new consumer business. They
believed Frontier would have to work too hard and endure too much aggravation for too
little money. "High cost, bad debt, lots of churn," is the way Clayton describes
the consumer market.

Instead, Clayton and his colleagues targeted medium-sized businesses, organizations
that spend between $5,000 and $50,000 per year on telecommunications. He knows exactly
what kind of retail customers he wants: finance, professional services, manufacturing,
retailing, transportation and real estate. For each of these vertical markets, Frontier
has worked out a careful market plan, developed product packages and assigned a marketing
team.

Frontier also has retail customers in government, health care and education, but the
company isn’t designing vertical market strategies for those markets. "Too crowded,
not enough margin," Clayton says.

The bottom line, Clayton thinks, is that Frontier has what everyone in its target
markets wants when they want it most, at a competitive price and with as little hassle as
possible. "Very few companies do long distance, local, data, calling card, Internet,
wireless and international service," he says. "Very few do them all, and even
fewer do them all on one bill. We do all that."

Clayton describes Frontier as an integrated communications provider–an ICP, the
letters that seem to trip off the tongue of every CEO in the industry.

Eric Paulak, an analyst with Gartner Group Inc., Stamford, Conn., thinks Frontier is
not quite in the league of the "next-gen telco, cyber providers, like Qwest."
However, he thinks Clayton is right to position the company that way.

"Clayton has caught a wave here," Paulak says. "If he can get included
among the next-gen companies, he can gain a lot of brand-name recognition, and right now,
Frontier has none. If you say Frontier to people, most will think of the software
company."

The antidote for that, Paulak says, is for Frontier to do what it is doing: Get the
company thought of and talked about, buy market share and be the low-cost provider. Paulak
adds that positioning Frontier among the next-generation telcos and integrated service
providers gives the company a data image. And, although the recent acquisition of
GlobalCenter helps flesh out that image, Paulak says, Frontier "is still mainly about
voice."

GlobalCenter recently signed a $20 million pact with Cisco Systems Inc., San Jose,
Calif., to supply gear for a coast-to-coast OC-48c IP backbone. The buildout, which will
become part of Frontier’s Optronics network, will transport data at 2.4 gigabits per
second (gbps) on a single DWDM channel. Frontier’s OC-48c IP backbone will be able to
scale to more than 38.4gbps on a single strand of fiber, while the top speed of most
current IP networks is only between OC-3 (155 megabits per second, or mbps) and OC-12
(622mbps), according to the company.

There also is a delicate balance, Paulak says, between being perceived as the low-cost
provider and being perceived as cheap, since "low-cost" and
"low-quality" often spring to the same minds at the same time. But he thinks
Clayton will manage the balance.

"Clayton has it exactly right," Paulak says. "He has a better picture of
all this stuff than Bernie Ebbers of WorldCom (Inc.) does. It wasn’t until Clayton came
along that [Frontier] got it together and came up with a single vision."

Ken Branson is East Coast Bureau Chief for PHONE+ magazine.