The Remaking Of MCI

The Remaking Of MCI

Carol Wilson

XO Communications is just $2 billion shy of finishing the network that could make it what MCI Communications once hoped it would be: a global communications operation that masters data as well as voice traffic at any distance. That’s no coincidence. MCI is the alma mater of Dan Akerson, XO’s chairman and CEO.

Having substantially reshaped XO internally, Akerson must now sell that message to a newly cautious and somewhat skeptical investment community. Many investors still see XO as NextLink Communications, the competitive local exchange carrier founded as part of Craig McCaw’s second telecommunications empire, along with Nextel and Teledesic. As a result, the stock market has beaten XO down like any other CLEC.

Akerson can point to hard evidence that XO is something a lot more than your average CLEC. The company is creating a seamless long-distance and local network, using wireless and fiber-optic technologies, to take on the entire carrier world. XO has a 16,000-mile fiber network that is the backbone of the company’s U.S. operations. With last year’s purchase of Concentric Network, XO has moved into data services to fuel most of its growth.

But what to XO are its crown jewels — the 60 metropolitan networks it is building with fiber, wireless and copper connections — look to others like a financial albatross.

“They started with an asset-intensive approach, and where I get concerned is whether they can drive the scale and utilization of their network themselves to where it’s cheap enough for them to compete and be profitable,” says Russell McGuire, VP and chief strategist at TeleChoice.

At a time when capital is tight, the CLEC industry is leaning toward “smart builds” — leasing capacity on multiple existing networks and focusing on what services customers want, rather than on managing a physical network.

It’s an approach that Akerson openly derides. “If you want to be a strategic competitor, you need to own the strategic assets,” he says. “The backbone network is an enabler, but it’s the local networks that are our crown jewels. That’s what sets us apart from everyone else, because we can control the network from customer location to customer location.”

Pick up the Pieces

Most of the strategy’s pieces were in place when Akerson arrived at what was then Nextlink in 1999. Nextlink, as launched by McCaw, was building fiber metropolitan networks in the largest 60 U.S. markets. It had already acquired WNP Communications, which held the rights to deliver fixed wireless service via LMDS (local multipoint distribution system) licenses auctioned off by the FCC.

Akerson is credited internally with setting XO on its current services course. On his arrival, he decided the company needed an immediate infusion of data communications expertise, so he bought Concentric a year ago for $2.9 billion.

He also reached out to two former MCI colleagues. Nate Davis is now XO’s president and COO. Nancy Gofus, who formerly ran Concert, is executive VP of marketing and customer care. She’s responsible for building XO’s services portfolio and its new brand.

“This company was very much a CLEC, with local voice services and no data,” recalls Gofus. “Dan’s challenge to us was to build a portfolio of services in a short period of time.”

Last April, the company unveiled a broader voice services portfolio and its initial data offerings, including Internet access and hosting services. In September, when Nextlink changed its name to XO, it launched XO Options, a major new initiative in bundling local and long-distance calls with Internet access and shared hosting at a flat-rate price, with 11 pricing packages.

“The concept is one of simplicity and predictability,” says Gofus, who oversaw a $20 million print and radio ad campaign stressing XO’s move away from metered minutes on long-distance service, made possible by its end-to-end network. “On our network, there is no difference between local and long-distance voice. Flat-rate pricing lets businesses know their costs. It’s not the idea of bundled services that makes the difference, but what’s in the bundle.”

Shifting fortunes

The impact of the services shift already is showing up in XO’s financial results. The company finished 2000 with stronger-than-expected revenues overall, based on a 17% increase in data services, according to market watchers at Merrill Lynch. That money more than offset a shortfall in voice service revenues, which, at $113 million, were $6 million below expectations.

But Akerson, who had entered the McCaw fold by running Nextel for three years, makes clear this is just the beginning. The competitors in his sights are not just the incumbent telephone companies or other CLECs, but the major global players. In fact, in the 18 months since Akerson replaced longtime McCaw cronies Steve Hooper and Wayne Perry, XO has been a hive of activity.

In December 1999, the company negotiated a deal with Level 3 Communications that gives XO 24 fibers on a 16,000-mile intercity network, along with a 1.25-inch empty conduit and rights to 25% of the fiber installed by Level 3 in any conduit beyond its first five. “We will wind up with a lower cost basis on that network than Level 3 does,” says Doug Carter, senior VP and CTO and one of the few McCaw-era holdovers at XO.

A month later came the Concentric deal, and the beginnings of a rapid services rollout. Last November, when most CLECs were contracting to conserve precious capital, XO announced its European network buildout, also based on buying capacity on a Level 3 fiber network. Also last year, XO began turning up service using the broadband wireless spectrum it had acquired with WNP. That acquisition had seemed to cast Nextlink into the same category as Teligent and Winstar, both fixed wireless CLECs.

But XO’s use of its wireless spectrum is fundamentally different, Carter claims. For starters, the company was not interested in pioneering the point-to-multipoint technology that fixed wireless companies are using to connect multiple sites within a metro area. “I was more than willing to let Teligent burn through the first two generations of equipment for me,” says Carter, with a grin. “Not getting out there first doesn’t slow you down if the goal of your buildout is to have happy customers.”

In addition, XO is more focused on doing broadband services, up to 1 Gbps, over its wireless links. That means staying with a point-to-point approach that supports higher bandwidth. “There are trade-offs between point-to-point and point-to-multipoint systems,” says Carter. “With point to multipoint, you increase your reach, but you sacrifice speed.” XO instead will sometimes use a point-to-consecutive-point approach that links buildings almost like a fiber ring. Current-generation consecutive-point wireless gear operates at OC-3 (155 Mbps).

The wireless spectrum lets the company get service up and running quickly to potential customers, long before it could get fiber in place. Under a year-old initiative, XO is also reselling digital subscriber line services over leased copper connections — although Carter makes it clear that this is a short-term option. “We want to provide broadband connections, and when I use the term ‘broadband’ I mean more bandwidth than you can provide on a copper pair,” he says.

To dig or not to dig

The challenge for Carter and XO is to determine, almost on a case-by-case basis, when and where to build out the fiber network to reach a customer. “In theory, it’s a simple cost-optimization problem, a simultaneous equation considering the bandwidth you need and the relative costs of fiber vs. wireless,” Carter says. “But it does get complicated — the devil is in the details, as they say. We have to calculate the future of a building, beyond the prospect of the immediate customer. Are there other customers in the building? If this is big customer, what happens if they move?”

XO exercises “good fiscal discipline” before digging a trench to connect any customer, Carter insists. Today, about 35% of XO’s customers are totally “on-net” using either XO’s wireless or fiber connections, and that percentage is going up as the company continues building out its local networks, he says.

Driving up that percentage is the company’s prime focus, echoes Davis, who worked with Akerson at MCI and then at Nextel. “We don’t want to rely on the Bell companies,” he says. “Any time you are still relying on your competitors, it gets ugly. We see ourselves as connecting one customer premise all the way to the other customer premise.”

The Bells still represent a considerable threat to the long-term health of any competitor, Davis admits. “We believe they will play a game with [federal regulators] until they get long-distance relief,” he says. “Then they will come back and squash the competition. That’s why it’s so critical to have the business plan we have, because you can’t be dependent on getting connections to your customers from the companies that will be your biggest competitors.”

The next step in XO’s services plan is to continue moving up the value chain with offerings such as virtual private networks and managed firewall services, says Gofus. XO believes it can persuade its target market of small and midsized businesses to give up their aging frame relay, ATM and dedicated line connections if it can show them reliable service for fixed rates that are competitive, she adds.

Fancier offerings such as voice over IP and unified messaging are also on the drawing board, and could become part of the XO Options package by year’s end, says Gofus. XO is using a softswitch from Sonus Networks for basic offloading of IP traffic but believes the technology is not mature enough to be a services platform today.

For the same reason, XO is not rushing to use newer technologies such as free-space optics, although the company did a rough trial of such a system from its McLean, Va., headquarters to a supplier in a nearby building. The trial came to a halt when the line of sight for the optical laser was disrupted by construction of a parking deck.

In fact, Akerson is not terribly interested in being a pioneer of anything other than hardball competition. “I think this all comes down to having the right business model, the right people and talent, and the right execution,” he says. “We have all three, and right now, I don’t see anyone else who does.”

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.