Time Warner Telecom SVP: Extending Fiber Footprint is Key

Time Warner Telecom Inc. announced it late July its intention to snap up Xspedius Communications LLC, a privately held CLEC based in Missouri, for $531.5 million.

About a month after the deal was announced, PHONE+ Editor Khali Henderson spoke to Time Warner Telecoms Michael Rouleau, senior vice president of business development and strategy, about the acquisition, the need for fiber-diverse competitive networks and the impact of the megamergers on the competitive market. What follows is an edited transcript of that interview.

What was the primary motivation for this acquisition?

It was really about going into some new markets for our existing enterprise customer base. Enterprise customers make up almost 60 percent of our revenue. Delivering a broad fiber footprint in those markets — thats key to our strategy. That local fiber infrastructure that allows us to connect end-user buildings. We think its a pretty unique position to be in if you look at who has access to these capabilities. In a lot of instances, it comes down to us and the incumbent. Extending it to an additional 31 markets with a broad fiber footprint that density of fiber that goes to or near end-user buildings — thats key for us.

Is there going to be an ongoing strategy wherein the company is looking to grow by acquisition?

[W]e have only done a few deals frankly over the course of our life at Time Warner Telecom. We acquired a regional ISP back in 1998- 99. That jump-started our position in the IP business. We have since expanded it and grown it. In 2001, we acquired the assets of GST Communications, which got us into 15 markets, predominantly West Coast and Rocky Mountains.

As we have looked at assets and opportunities, we now have the recent addition with the Xspedius acquisition. But in between, we have done a number of network expansions into adjacent markets, like Pasadena from L.A., St. Paula from Minneapolis. We have acquired over the course of the years, fiber infrastructure that allows us to reach farther into nearby markets and extend our market. So, we have acquired assets all the way along.

You built those?

We have acquired some assets and we have built others. Our focus is on how we deliver a broad fiber footprint in local markets. So, we have had 30 network expansions over the past three or four years.

Will we see Time Warner Telecom employ a continued strategy of acquiring assets?

At this point we are focused on completing this acquisition and integrating this company. We havent really said too much about what we see going on down the road. It is a meaningful acquisition that allows us to get a very expanded footprint to grow our customer base and continue to extend products and services across that national footprint.

You mentioned you are in 75 markets, which puts you on par with XO. It puts you in the top tier of CLECs if you measure by markets served. Do you have a goal beyond that?

I would caution you that when someone says they have a market, what does that mean? What we have found when we have looked at other companies data around markets and how they count them, sometimes its different than the way we count ours. In central Florida, we are in St. Petersburg and Tampa, Clearwater, though Central Florida, Orlando. We go to the East Coast where we are in Melbourne and Daytona Beach. Many people would count those as separate. We only count those as two. Our focus is on buildings and getting access to the end users.

What is your building count?

Just with Time Warner Telecom, we are 6,433 buildings connected with our fiber. Those are buildings with end-user traffic. If you look back over the past four or five years, we have fiber into more buildings than that, but we only count the ones that have active customer service. With Xspedius, that will increase by another 800 buildings. So we will have a footprint of about 7,200 buildings around 75 markets.

Are you expanding your market target with this merger?

Where we have been successful is with our data and IP strategy serving medium and larger enterprises. What we found with the Xspedius customer base, they do have a number of customers similar to ours and they have a number of customers — probably the majority — that tend to be one to three T1s of capacity. We also service those customers, so I would say our opportunity is to promote that fiber footprint and serve some of the larger customers in those newer markets and bring our customers connectivity in those markets that they happen to have a footprint in. We are still selling to the same kinds of customers. And we will be in a position to move up-market a little to the medium and large enterprises more so in these newer markets.

If we could look at the landscape, can you reflect on what might be going on with the mergers and how it impacts the market?

I actually spend a lot of time with customers around the country. They are concerned about these megamergers and where they fit into the overall scheme of things. What customers concerns are is how they can have a bit of choice. They need some competition. Their needs for bandwidth and applications continue to rise. They are looking for someone who can manage the applications for them, deliver alternative solutions in the market. They want somebody who is in a position to build out a network for them and who has scalability to do it, that allows them to build applications like business continuity and disaster recovery. Its important for them to have somebody who is not just reselling the incumbent infrastructure but rather can build their own fiber network that allows customer to run these applications, consolidated data centers, to scale up their bandwidth requirements.

On reselling the incumbent, do you mean UNE-L?

MR: Its not just UNEs, its special access. So a provider who does not have physical infrastructure; they dont have their own fiber, they are duplicating what the incumbent has and for the customer — medium and large enterprise — thats not good enough. They want somebody else who can build a separate fiber infrastructure along a different right of way. They are not in the same cable shape, the same path. They want dual entrances. They want that level of diversity that you can only have when youve got your own infrastructure.

Whether its UNEs or special access, if thats all thats available, the customer really doesnt have choice. Thats where we fit a pretty unique position in this industry. We have our own fiber infrastructure to build it how the customer wants it and we can deliver the products and services on a scale to support their business.

Xspedius has the same model, meaning they are not reselling special access?

They had been selling a fair amount of special access, but they have an underdeveloped asset in this fiber infrastructure in these markets that really is meaningful to us. They have 3,000 route miles of fiber that allows us to go our to end-user buildings.

The other thing customers are concerned about is what happens when you dont have choice. What level of service are you going to get? What about pricing increases? What about level of innovation they are going to see from incumbents? Thats really top of mind for the enterprise customers we talk to.

It sounds like this might be a pivotal time for the competitive marketplace — Time Warner Telecom included — to experience a resurgence in growth if there is this level of concern. Is it pervasive or among larger customers?

We see it down-market as well. What we have also seen is when the supermergers first happened, some customers thought it wasnt such a bad thing. They have done a 180 on their reaction.

What were they thinking that made it good?

They were thinking that its one less vendor to manage. They felt like they would have additional flexibility with those vendors. What they are finding is that changes to accounting get made, they move down a tier in the level of service they get.

There are a number of different things that have caused people to change their minds. We are still early, frankly, in these big mergers. Customers keep telling us they want choice, they want someone with their own fiber infrastructure; they want some of the products that we have been innovative in delivering.

Do you anticipate seeing more consolidation among CLECs?

I am not sure my crystal ball is any clearer than yours. Well just have to see what happens.