article

The Companies that Helped Blaze the Path to Telecom Competition AreBack for a Second Try

Posted: 03/1998

Return of the Titans

The Companies that Helped Blaze the Path to Telecom Competition Are
Back for a Second Try

By Paula Bernier

The warriors of the early telecommunications wars have returned to the battlefield.

Resurgens Communications Group Inc., Kiewit Diversified Group Inc. and Williams are
back, and they’re building up new network arsenals for the next fight.

These companies, which had a huge impact on the evolution of public network
competition, in recent years sold their network assets to what is now WorldCom Inc. and of
late have come out from under their non-compete agreements.

Resurgens, which was merged with Metromedia Communications Corp. and LDDS
Communications Inc. into what was later renamed WorldCom, has resurfaced with its former
leader, John D. Phillips, leading the charge–and readying to merge the new Resurgens with
World Access Inc.

Kiewit Diversified Group’s parent company, Peter Kiewit Sons’ Inc., in 1989 provided
the initial $500 million to help launch MFS Communications Co. Inc. (WorldCom last year
bought MFS). Kiewit last month resurfaced as Level 3 Communications Inc. with MFS founder
James Crowe at the helm.

"All of us have built companies, sold large companies, and
made huge amounts of money for our companies and ourselves. We’re too young to paddle in
and retire."

— John Phillips

And Williams, which in 1995 sold all but one strand of its 11,000-mile fiber optic
network to WorldCom, has come out fighting following three years of relative inaction.

"The titans in returning are not doing the same thing, they’re doing slightly
different things. The reason they’re coming back is they had a lot of fun the first time,
and they want to come back and make more money," says Richard Tomlinson, president of
consultancy Connecticut Research Inc.

Wholesaling telecommunications services is a key piece of each of the companies’
strategies. But each of the three companies has a unique plan. And each believes it has a
distinct advantage in the marketplace because of the know-ledge it built up during the
1980s.

"A lot of us have been out there," says Phillips. "I’m only 55 years
old, so using the word ‘graybeard’ bothers me a little. But we were around for Judge
Greene. All of us have built companies, sold large companies, and made huge amounts of
money for our companies and ourselves. We’re too young to paddle in and retire."

Following the three-way merger of the original Resurgens with Metromedia and LLDS in
1993, which left Bernie Ebbers as president and CEO of the new company (later named
WorldCom), Phillips joined diversified company Fuqua Industries Inc. as president and CEO
and continued in his role as matchmaker. He merged Fuqua with Metromedia International to
form Metromedia International Group, a combination of 31 operating companies in Eastern
and Central Europe that sell cellular, paging, local loop and FM radio services, as well
as own and operate a handful of major motion picture companies. When his contract expired
with Metromedia International Group in December 1996, Phillips started looking for
opportunities to build a $1 billion company through mergers and acquisitions. He
considered merging long distance switchless and switched long distance resellers to create
a new entity, but decided that the shrinking margins for long distance telecommunications
services makes it near impossible for non-facilities-based carriers to make a profit.

Then, with his non-compete agreement set to expire in September 1997, Phillips started
to look at an international play.

"The more I looked at it the more I understood it was a blueprint of what I had
done in the ’80s," says Phillips. "It’s a horse race to establish direct
connections with these countries and to have switching environments. In three to five
years only a few companies will survive."

He was contacted about the possibility of taking over Cherry Communications Inc. of
Chicago, an international carriers carrier doing $600 million in business per year in
international long distance, which was having financial difficulties. In October 1997,
Resurgens, whose name means "to undergo a resurgence, or rising again into life,
activity and prominence," commenced, operating as Resurgens Communi-cations Group
with Phillips at the helm.

"Resurgens belonged to WorldCom and because WorldCom was the largest creditor of
Cherry, it allowed me to take that name back because it was very apropos," says
Phillips. "Cherry was a large company that basically did a lot of business, but never
made any money. I wanted to lose the name Cherry as soon as possible."

Phillips put the company in bankruptcy and began its reorganization. (WorldCom is
providing the new Resurgens with $28 million in credits and cash for its reorganization.)

In early February, a company called World Access Inc. announced it had signed a letter
of intent to acquire Cherry/Resurgens for an undisclosed sum. World Access develops,
installs and manages switching and transport equipment for carriers around the world. The
deal will open the door for Resurgens to partner with competitive carriers abroad for
which World Access manages facilities, says Phillips. That will give it access to local
facilities in other countries on which to terminate traffic.

"We will be a total network solutions company to the telecom industry
abroad," says Phillips, who adds the company expects to have 70 to 80 switches placed
around the world over the next couple of years.

"Resurgens’ business plan is not different than our original business plan, which
is to create $1 billion in revenue," says Phillips. "This new company over the
next 12 months will create $1 billion of combined revenue."

WorldCom will be the largest shareholder of the new company.

Telecommunications carriers need to build up to that size to get economies of scale in
equipment deals and transoceanic cable capacity buys.

"If you buy capacity of 1 million minutes that’s one thing, but if you buy
capacity for a billion that’s another thing," says Phillips.

Carriers also need to become big so they can pump up their stock values high enough to
create a currency they can use to buy other companies as needed, he adds.

Resurgens provides raw international long distance traffic to other carriers. The
company can terminate traffic in 290 countries and is a signatory of several transoceanic
fiber cable consortiums. It has contracts to provide international long distance capacity
to 98 carrier customers, including WorldCom. It has switches in Chicago; Dallas; Los
Angeles; Newark, N.J.; Orlando, Fla.; and San Francisco, and has a "megaswitch"
in London.

"We take all our traffic to the United Kingdom, and from the United Kingdom we
then disseminate it worldwide," explains Phillips.

Resurgens is installing switches and aggressively pursuing fiber and cable
relationships with local carriers in foreign countries worldwide.

The Next Level

Crowe’s Level 3, meanwhile, plans to build an end-to-end Internet protocol (IP)-based
fiber optic network to offer local and long distance services on a wholesale basis to
other carriers as well as to the small and medium business markets, initially in the
United States. That will include IP-based fax, data and, when the IP network can
effectively handle real-time communications, voice and video. (Level 3, which owns half of
residential service provider RCN, Cable Michigan and Commonwealth Telephone among other
interests, could leverage those relationships to tap the residential market, Crowe says.)

"We want to be a phone company, we just happen to want to use IP," says
Crowe.

As with Phillips and Resurgens, Crowe says the strategy of his new company closely
mirrors that of his old company.

"Our goal is to go to a business customer and say, ‘We offer everything you use
today. Let us worry about whether it flows over IP over circuit switching. And we’ll offer
guaranteed quality at a lower cost than you’re used to paying.’ That’s pretty much what
MFS did."

Crowe says it’s a "travesty" that customers need to worry about getting the
benefits of IP.

"A customer shouldn’t have to arrange the way they have to buy and use
communications," he says. "Today the people with the capital don’t get it. The
people that get it don’t have the money. We hope to bridge that gap."

Within three years, Crowe expects to have a 15,000- to 20,000-mile network in place,
offering services in 60 U.S. cities.

The company also expects to offer international services to Europe and Asia at some
point in the future, says Crowe, noting the timing of the plans abroad depend on when they
can find the right people.

Crowe already has found many of the key people to form the foundation of Level 3. He
has brought along to Level 3 several executives from MFS including former MFS CFO Doug
Bradbury, General Counsel Terry Ferguson and former MFS Global Networks President Kevin
O’Hara.

The former MFS executive and WorldCom chair says he was organizing plans for a new
venture last year when Kiewit came to him and said he could use Kiewit Diversified Group
as a launching pad.

Level 3 expects to fold together the telecom assets of Kiewit Diversified Group and the
assets of its subsidiary PKS Information Services, which offers outsourcing and other
computer services. Peter Kiewit Sons’ has asked the Internal Revenue Services for a
tax-free separation of its Kiewit Construction Group and Kiewit Diversified Group
businesses.

A Telling Tale

Williams, meanwhile, has come back to the telecom world as a wholesale services
specialist.

The gas pipeline and communications company this year began peddling domestic local and
long distance capacity (but not switched voice services), and frame relay and asynchronous
transfer mode (ATM) switched services solely on a wholesale basis to other carriers. And
it plans to eventually wholesale gas and electrical services to communications carriers,
which in some cases are branching out to offer energy services.

Williams is uniquely positioned to build telecommunications networks because its energy
pipeline business gives it existing rights-of-way on which it can lay fiber.

The company already has finalized several deals with carrier customers. Concentric
Network, Intermedia Communications Inc. and US WEST Communications Corp. have each
contracted Williams to provide them with network capacity and related services. The three
deals represent a minimum of $1 billion in business for Williams.

In addition to wholesaling network services, Williams also will offer carrier
co-location, network engineering and management, and professional services.

"If you’re a CLEC (competitive local exchange carrier) looking for market entry in
a city, we can design, install and maintain your switching and infrastructure and do
back-office (handling network management, for instance)," says Gordon Martin, vice
president of sales and marketing with Williams Network, Williams’ wholesaling business
unit.

Williams currently has a coast-to-coast, 11,000 route-mile fiber optic network based on
OC-48 (2.4 gigabits per second-gbps). By the end of this year it expects to add 7,000
route miles operating at the OC-192 (10 gbps) rate. And 25,000 route miles are expected to
be in place by the end of 1999, says Martin.

Between Resurgens, Level 3, Williams and all the other communications companies
offering wholesale capacity to the carrier market, it’s logical to question whether there
will be a capacity market glut.

No chance, says Martin.

"There may be excess minutes of capacity, but not bulk capacity," he says.
"MCI Communications Corp. has been pulling out the of wholesale market because it’s
having trouble meeting its own bandwidth needs. WorldCom, too, is stretched on bandwidth,
especially for its Internet service provider business UUNet Technologies Inc."

And so the increasing need for capacity due to more bandwidth-intensive applications on
the network and general growth, the move from circuit-switched to packet-switched networks
and the deregulation of markets abroad has awakened the sleeping giants.


Leave a comment

Your email address will not be published. Required fields are marked *

The ID is: 67817