The media tends to portray the CLEC strategy as monolithic, each player has a certain amount of fiber and leases the rest via special access from the ILEC. But it is quite interesting just how wide ranging the various strategies out there are.
For instance, Cogent (CCOI) has metro fiber IRUs connecting up some 1100 buildings. They very publicly state that their main desire is to sell deeper into that footprint, discouraging their own salesforce from spending much time off-net. But they sell only IP access to these customers, no phone services of any sort, not even VoIP. This strategy leaves them less vulnerable to ILEC pricing, but on the other hand it leaves their revenues much smaller, being somewhat of a one-trick unmanaged IP pony.
On the other end of the spectrum is Paetec (PAET), which until its recent acquisition of McLeodUSA controlled basically no fiber at all, leasing everything from others. But they sell everything to them, which means they have lots of revenue (great!) of which nearly all is vulnerable to ILEC special access pricing changes (hmmm).
In the middle you have TW Telecom (TWTC), which starts serving new buildings with special access and only brings them on-net later as the traffic justifies doing so. This seems like a smart approach, and TWTC is often thought of as the gold standard in this sector. Their focus is the SME, so of course they still use lots of special access even though they have 8,355 buildings on-net.
Then you have players like Level 3 (LVLT), which seems schizophrenic in the business market sometimes. They want to serve only high margin on-net opportunities, but not the small ones, and not the ones needing managed services, and not this and not that. If you limit yourself to on-net buildings and sell deep into them (e.g. CCOI) or if you limit your target customers but sell anywhere (PAET) then ok that makes some sense, but if you limit your target customers *and* the buildings you will sell to, you seem to limit your growth potential and your depth per on-net building can never get very high. Just how many perfect customers are there per building?
XO is another hard one to figure out. XO has 3000 on-net buildings, but seems to have little interest in adding more. They don’t seem to focus on this footprint at all, and depend heavily on special access while complaining loudly to the FCC about it. But then their strategy has been inscrutable (or perhaps inexplicable) for years.
Zayo, one of the newer entries into this market, is employing a brand new strategy – fully separating the entity (Zayo Bandwidth) that lights new buildings from the entity that sells anything other than basic access to the SME (Zayo Managed Services). This is attempt at a ‘best-of-both-worlds’ solution, where both entities maintain a tight focus on their target markets but sit on a common physical infrastructure, with the tradeoff perhaps of some overlapping costs. Zayo’s progress should be interesting to watch.
There are others of course, but my point is that these companies may seem similar and it is easy to lump them together – but they are really very different. But in this buzzword-laden sector it is often quite hard to see the differences.
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Categories: CLEC · Metro fiber
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Rob,
Another “old” but new entrant into this market you may want to check out is Yipes!
They have been acquired by Reliance Globalcom and now have their own backbone.
Reliance also has gobs of cash and I suspect they may be looking for another few US based assets to take out before they are done spending.
I think this market will get a wake up call and begin shifting when if 2 things happen
1.) A player like TW Telecom or PAETEC were to acquire someone like XO that gives them their own backbone
2.) If the sprint/clwr deal really bears fruit.
On a side note did you know that Royce Holland is now Chariman of Masergy?
maybe another entrant here…one cannot discount companies that Royce lands at 😉
Abovenet is another company worth classification.
Abovenet is hard to classify, as their strategy seems to be some form of self preservation in hopes of a sale one day.
highwayman, I don’t know much about Masergy, do they have their own fiber into buildings or are they the next layer up in the pancake?
This is what I look for and Wall Street is just starting to take notice. It’s all about the sustainable quality of margin growth, especially EBITDA margin … those living (or dying) on special access, UNE-L or T1 will never achieve the margins and growth that fiber provides to those that built a long term company and business model on fiber ownership.
By definition, when you wholesale from an ILEC, they in fact control your costs … you do not. They also control your ability to innovate as you are always subject to ILEC network reindeer games. They also control your brand and reputation … who gets the black eye when the ILEC misses your delivery date? When the ILEC installs the wrong circuit? When the ILEC circuit bounces up and down like a yo yo? When the ILEC prioritizes it circuits over yours in an outage? When your customer discovers that the ILEC they were trying to get away from is still in the loop (pardon my pun)?
What puzzles me the most – which is why I say Wall Street is just starting to understand — how can they value TWTC the Gold Standard of fiber competitors at 10x EV/EBITDA and Cogent at 15X EV/EBITDA.
My point is fiber is quickly becoming a barrier of entry to others who don’t have it and rely on Ma Bell. Take AT&Ts U-Verse announcement this week targeted to SMB’s — starts at 20 meg. Pretty much outstrips the copper rental crowd, yet we see multiples for some non-asset rich CLECs equal to if not greater than those that have fiber sustainability and a competitive advantage as bandwidth demand fundamentally out strips copper physics.
Revenue volume at thinning margins is not a long term investment …
Cogent at 15x is the low water mark … they leave lots of money on the table given real broadband is embryonic.
Several fiber based companies that I am familiar with which are private have been recently acquired above 15x and some at 20x EV/EBITDA. In all honesty, a few that went for 20x, (with little EBITDA or negative) well, beauty is in the eye of the beholder.
Bottom line: It is hard to knock out someone who has built a business on fiber-based margins. The longevity and competitive advantage are enormous.
One thing is for certain, bandwidth demand continues to grow and as soon as the United States gets competitive globally, at a minimum a 100 meg pipe becomes entry table stakes — just check out the top 3 countries. DSL, T1, UNE-L, special access are not globally competitive platforms.
Wall Street moves like lemmings, but eventually a few analysts will announce the pivot point whereby multiples for renting are not as attractive as multiples for being independent of Ma Bell and regulatory matters.
It’s all about quality margin growth and sustainability!