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May 1, 1999

28 Min Read
Business News

Posted: 05/1999

Global Crossing Comes Ashore, Snatches Frontier in
Integrated Services Play
By Ken Branson

Most telecommunications companies start out on dry land. Eventually, they get to the
water’s edge and have to get across the pond somehow. As often as not, they buy capacity
on a transoceanic cable owned and operated by Global Crossing Ltd., Hamilton, Bermuda.

Global Crossing has turned this evolution on its head. The company started out four
years ago in the vast deep and has only recently crawled up on the beach. Its strategy:
Lay the cables in the water first, then sell capacity strictly wholesale. Eventually,
Global Crossing intends to build a 35,000-mile fiber optic network linking the Americas,
Asia and Europe. Oh, yes … and Bermuda.

In March, Global Crossing came up on the beach, slithered up South Clinton Avenue in
Rochester, N.Y., and seized Frontier Corp. by its pincers in a deal worth $11.2 billion.
If the merger goes through, the combined companies, which will use the Global Crossing
moniker, will have gained a dry-land fiber optic pipe, an Internet service provider (ISP)
that hosts some of the premiere sites on the World Wide Web, a North American competitive
local exchange carrier (CLEC) and rural incumbent LEC (ILEC) operations in 13 states.

That Global Crossing has made such an acquisition is no surprise to analysts and
competitors. "Basically, what they’ve done has reaffirmed what we’ve always
known," says Glenn Davidson, vice president of corporate communications and external
affairs at Viatel Inc., New York, which is building a Pan-European fiber optic network and
leases capacity on Global Crossing’s AC-1 trans-Atlantic cable. "That is, the real
business is in being an integrated service provider, and not just a carrier’s carrier.
That’s where the revenue is."

"When Bob Annunziata arrived, it clearly signaled that Global Crossing had pretty
broad ambitions and intended to be more than just a bandwidth purveyor," says Mike
Smith, managing director of Stratecast Partners, Mountain View, Calif.

Robert Annunziata, former CEO of Teleport Communications Group Inc., Staten Island,
N.Y., and former head of the business services unit of AT&T Corp., joined Global
Crossing in January. Some analysts believe the decision to turn Global Crossing into a
service provider was made by Global Crossing’s board and management long before he
arrived.

Whenever the decision was made to be more than just a pipe, the hard part may lie ahead
for Global Crossing. Frontier, while of modest size when compared to its rivals in any one
line of business, is a lot to swallow.

Frontier, for a century as plain a plain old telephone company as it could be, has been
on a buying and restructuring binge in the last two years under the leadership of its CEO,
Joseph Clayton.

Clayton has shaken up the top management, spurred the company into CLEC competition,
acquired Global Center Inc. to give Frontier an Internet presence and focused the
company’s target for all its lines of business: business customers who spend between
$5,000 and $100,000 (revised upward from $50,000 in the last six months) a month on
communications.

Under Clayton, Frontier has moved aggressively to put as much of its customer interface
as possible on the web, and given its customers considerable control over ordering and
provisioning through its uCommand online account management software. Frontier employs
under Clayton more than 8,000 people, who have managed to integrate most of what they know
how to do best across all of their lines of business. In 1998, Frontier Corp. made $2.6
billion in revenues, an increase of 9 percent over 1997. Frontier’s stock was trading at
about $52 per share in the weeks after the merger announcement, up from $34 at the end of
1998.

While analysts are optimistic about the ability of Global Crossing’s management team to
integrate Frontier into its operations, they expect some bumps in the road. Stratecast’s
Smith sees a number of large decisions looming.

"Just for starters, what does Global Crossing want to do with Frontier’s ILEC
business?" Smith asks. "And how about [its] traditional long distance business,
particularly residential customers? Is that a business they really want to maintain? Does
Frontier have the salespeople to sell Internet and data services, or will Global Crossing
have to augment that sales force? Then there is the question of OSSs (operations support
systems). One of the reasons Global Crossing wanted to acquire Frontier was for their
OSSs. But are those OSSs really capable of supporting next-generation data and Internet
services?"

The answers to these questions aren’t here yet, but there are very broad hints at
answers in Frontier’s history, if not in Global Crossing’s. Clayton is the key to those
hints, which he has dropped liberally over the past several months.

First, while Annunziata denies point-blank that Global Crossing intends to get rid of
the ILECs, it’s good to remember the consumer business never has been Clayton’s favorite.
"High cost, bad debt, lots of churn," is the way Clayton described the consumer
business to PHONE+ late last year. The ILEC properties long have presented Clayton with a
dilemma. On the one hand, he always has made it clear that he wanted to separate
Frontier’s telephonic past from its integrated future–"to be more like Sunnyvale
[Calif.] (Global Center’s headquarters city) and less like Rochester." Asked recently
whether he might consider spinning off the ILECs, he replied, "It’s a distinct
possibility." But the ILECs provide Frontier with steady revenue–about $700 million
per year, Clayton says–and also with a pool of local telecommunications expertise.

As for the OSSs, Clayton thinks Frontier is almost there, after a long struggle. The
billing systems, numbering six when Clayton arrived in 1997, are nearly down to one.
"We’re gonna force-feed this thing," he says. "We’re gonna push this
bowling ball through that garden hose."

However, given that Frontier and Global Crossing have completely different businesses,
there are observers who believe integration may not be that difficult.

"If you look at Global Crossing, it’s just a big pipe," says John S. Baring,
managing director and co-head of the communications and media investment banking group at
PricewaterhouseCoopers LLC, New York. "Maybe what’s happened here is that Frontier
has just bought itself an international pipe."

Analysts believe Frontier won’t be the last acquisition Global Crossing makes in the
United States. If Global Crossing wants more capacity on dry land in North America, there
are interexchange carriers (IXCs) such as IXC Communications Inc., Austin, Texas, that
might be available. IXC issued a formal statement after Global Crossing’s announcement
saying its management thought its stock was undervalued and would consider various ways to
raise it, including "sales, swaps of fiber, joint ventures and the combination of the
company with another company."

Star Forms Retail Subsidiary
By Khali Henderson

Separating its wholesale and retail operations in the United States, STAR
Telecommunications Inc., Santa Barbara, Calif., announced the launch of ALLSTAR Telecom, a
subsidiary offering local, long distance, toll-free and calling card services to
multinational corporations. The parent company will offer only wholesale global
telecommunications services.

STAR’s overseas operations will continue to offer both wholesale and retail services.

"We have been building the pieces for some time and are now becoming an active
player in the commercial long distance business," says Ken Hilden, chief operating
officer of the new division. Hilden also will retain responsibilities with STAR as its
senior vice president of client services.

ALLSTAR combines STAR’s organic business-to-business group as well as its acquisition
of United Digital Network, which began in November 1997 and closed March 25, says Ben
Helvey, STAR’s director of investor relations.

STAR also acquired two other retail telecommunications companies, including PT-1
Communications Inc., which was finalized Feb. 4, and L.D. Services Inc., which marked the
company’s entrance into the retail telecom business in September 1997. Neither company
will be folded into the ALLSTAR subsidiary, Helvey says. L.D. Services, now called CEO
Telecom, offers residential long distance services to ethnic communities, and PT-1 offers
residential prepaid calling cards.

ALLSTAR has a sales force of 105 account executives as well as offices in Atlanta;
Dallas; Flushing, N.Y.; Fort Lauderdale, Fla.; Houston; Los Angeles; Miami; New York;
Phoenix; Seattle; Washington; and Woodbridge, N.J.

Delta Three Launches Web-based Agent Program

New York-based Delta Three Inc., a wholly owned subsidiary of Hamilton, Bermuda-based
RSL Communications Ltd., introduced in March a real-time automated web-based program for
agents selling its personal computer (PC)-to-phone and phone-to-phone Internet protocol
(IP) telephony services.

"No other affiliate program offers real-time commission reports and click-through
tracking. We took a simple web concept, proven through our Online Interactive Center, and
used it to create the industry’s first real-time, web-based agent reporting system,"
says CEO Elie Wurtman.

Delta Three’s Online Interactive Center allows the company’s retail customers to access
their own account information via the web. This technology has been extended to agents,
enabling them to download prepared web advertisements, choose pricing plans, track results
and monitor commissions.

Agents can sign up at http://agent.deltathree.com.
Once on board, each agent is issued a unique tracking code, which makes it possible to
check commissions and click through rates online at the Agent Interactive Center, <ahref="http://www.deltathree.com/agentic/">www.deltathree.com/agentic/

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