Frontier Reinventing Itself ... AgainFrontier Reinventing Itself ... Again

FRONTIER AT A GLANCE

Headquarters
Rochester, N.Y.

Business
Local and long distance telecommunications, data services, calling card,
toll-free service, equipment and installation, professional services, Internet access and
web hosting.

Executives
CEO: Joe Clayton

Revenue
Quarter ending June 30, 1998: $648 million, up 10 percent year-over-year.

Profits
Net Income: $46 million, up 17 percent year-over-year.

Integrated services (essentially, everything but the local telephone operations) income
for quarter ending June 30, 1998: $465 million, up 13 percent year-over-year.

Local telephone services revenue: $175 million, up 5 percent over second quarter 1997.

Info
www.frontiercorp.com

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.