IXC Communications Inc. Walking the Talk

Posted: 04/1998

By Debera Bell-Beam

IXC Communications Inc. claims "Telecommunications has a new
highway," and that may well be true. One thing is certain, however: This Austin,
Texas-based provider is once again paving the way.

In less than six months on the job, telecom veteran and IXC President and CEO Benjamin
L. Scott has wrought changes that include an aggressive business reorganization teamed
with innovative strategies that target new technologies and sales channels while
supporting the old.

"IXC has been, for the last several years, a company with a very clear
mission," Scott says. "And that was to construct the next really high-capacity,
high-capability, high-technology network in this country. Now, we’re just on the verge of
actually delivering that asset. We needed to have a change in the structure of the
business to support the change in focus. There’s an old saying in business school that
structure follows strategy."

So anyone who asks Scott, "What’s new?" better be prepared to sit awhile.

It’s part of walking the talk, says Richard Stolp, IXC’s director of marketing
communications, who explains that going public–which IXC did in 1996–changes a company.

Among perhaps the greatest challenges, he says, is building an internal culture.

"You’ve got to have more than heroes," Stolp says. "There is a
difference between entrepreneuring your way through business and running a large company.
There is a definite change of attitude."

Scott was brought in to make that transition, and IXC has changed much more than its
attitude. From its pure wholesale background, the carrier supplies voice, data and
multimedia transmission services. Its offerings include private line, broadband and
switched and dedicated inbound and outbound calling products, as well as calling card and
debit card services. More are on the way, and in the meantime, a new retail division
reclassifies the carrier’s carrier.

IXC boasts a new fiber network near completion and the newest of technologies to face
the onslaught of new competitors it expects. IXC and its new chief are ready to tackle the
competition nationally through coast-to-coast wholesale, retail and merging markets
distribution channels, along with international strategies that include plans for a
European fiber network.

"We’re still a niche player. We’re not trying to be everything to everybody,"
says John Fleming, IXC’s president of emerging markets. "We’re not going to be
America’s next long distance company. IXC is not going to be a brand name that will bring
you the Hallmark Hall of Fame. The niche is going to be the network. The network asset is
what we’re going to use to drive our products and services."

History

Begun as a microwave technology company in 1992 from the amalgamation of cable service
providers, IXC’s first turn along the telecom highway was as a carrier’s carrier that sold
strictly wholesale capacity.

Network build out began in 1994, and IXC went public two years later. Along the way,
IXC has grown exponentially, with revenues increasing 106.5 percent to $420.7 million in
1997 from $203.8 million in 1996. Moreover, employee ranks have swelled from 505 at the
end of 1996 to an expected 850 by the end of this year.

Evolution is in the air once again as IXC adds retail and data services to its mix to
become an advanced data services carrier.

The early battles have helped shape a company that apparently embraces change.

Fleming has been with IXC since it was owned by cable company Times Mirror
Communications Inc. in 1986.

"Then a little company called MCI (Communications Corp.) came along, and we did
the first telephony agreements with MCI in the mid-70s and turned the system from a
one-way simplex system into a two-way telephony, duplex system," Fleming recalls.
"We fought for our frequency and our spectrum and were able to get that successfully
and tie the network together coast-to-coast."

Two other companies that predate IXC were part of the early days, cable service
providers Communication Transmission Inc. (CTI) and Communications Transmission Group
Inc., which was a combination of Times Mirror and CTI. IXC was formed out of
Communications Transmission Group Inc. in the summer of 1992. The people and assets then
became IXC.

The Great Capacity Shortage

"What we saw in 1992 was that we had a digital radio system and some limited fiber
optic networks, and a lot of leased fiber optic around the country," Fleming says.
"It was the beginning of what we term the Great Capacity Shortage, which we still
live in today. It progressively got worse until you couldn’t get circuits from anybody on
certain city pairs, no matter who you were.

"We knew we had to do something. We knew we weren’t going to build any more
digital radio, although we like it–it’s full and it’s a good backup system," he
says. "Spectrum was also in short supply."

IXC had limited capacity and no future growth, Fleming says. "We knew the market
was going to explode, certainly with every PC that was being sold, every modem that was
being put out. A lot of people didn’t see that coming. Then, we had that funny little
thing called the Internet. When it became private, providers had to buy DS-3s to transport
it."

So, IXC embarked on a campaign to expand its fiber network. But first, the company
needed money.

"We actually were the first to go out to the public market and raise our hand and
say, ‘There is a capacity shortage,’" says Fleming, who was involved in those early
road shows.

"We were laughed at. Laughed at," he says. "I’ve never been so
embarrassed in all my life. Wall Street thought fiber was infinite, and it really didn’t
cost much. We said no, it costs a whole bunch of money, and the other networks can’t
support America’s network needs. It was a very hard sell."

Ralph J. Swett was president and CEO in those days. Today, he remains chairman of the
board.

"Ralph and his team did a lot of the really hard work in terms of selling the
financial community on the need for fiber capacity," Scott says. "Today, when
you talk to Wall Street about the need for fiber capacity, and all the things IXC
represents, there’s already a ready market because they see it. Back then, they didn’t see
it. So it was a much tougher job. I constantly tell Ralph, ‘Thank you for doing a lot of
the heavy lifting in terms of getting us positioned.’ My job is to just come in and make
sure we take advantage of the tremendous opportunity."

New Leadership

Scott walked in with a wealth of experience. He served as president and CEO of PrimeCo
Personal Communications LP in Dallas, the personal communications services (PCS) joint
venture by Bell Atlantic Corp., NYNEX Corp., US WEST Corp. and AirTouch Communications
Inc. Prior to PrimeCo, Scott was president and CEO of Bell Atlantic International
Wireless. He also has more than 20 years with AT&T Corp., the last three as president
and CEO of AT&T Canada.

Fleming says Scott brings big company expertise to IXC at a time critical to the
company’s growth.

"You certainly can’t have the same organization at $50 million that you have at
$500 million," says Fleming. "The trick is to keep your entrepreneurial spirit,
because that drives the revenue. We’ve been very successful in doing that, and we don’t
want to become an AT&T. That’s not the model you want to emulate."

Scott says repeatable success is crucial as a company makes its way into maturity.

"One of the things about entrepreneurial companies is that you have very committed
people," Scott says. "You have a lot of personal initiative and personal
accountability and, frankly, a fair degree of personal heroics in accomplishing your
objectives.

"The difficulty is, as business grows, that is not a consistently repeatable
process. So what you have to do as you grow is put in the tools to allow repeatable
success on a much broader body of people," he says. "That’s what we’re about, to
take the best of IXC and preserve it, but as we grow–and we’re growing very fast now–to
put in place the infrastructure that allows the new people to quickly fit into the system
and produce successful results."

The business culture has undergone dramatic change, Scott says, but it has been
tempered to keep the best of entrepreneurial drive.

"We’ve spent as a senior team a lot of effort around our core purpose and the key
differentiators that will drive the business," he says. "We’ve literally
communicated that to every employee in the company. I personally talked to just about
every one of them about it."

Moreover, Scott says, employee involvement creates commitment, not just communication.

"Employees have a right to hear about the business from the CEO," he says.
"Then, regular communication about our progress and how we’re doing and our
strategies, so that they understand firsthand what we’re trying to do and where we’re
trying to go."

The intent, Scott says, is to involve employees in the process so they feel some
ownership and, therefore, commitment.

Network Build Out

Today, IXC offers commercial-grade OC (optical carrier)-192. IXC plans originally
called for one OC-48 for the existing traffic.

"We are now working on our ninth system," Fleming says. "The map always
changes. We’ll be putting in routes and new cities for some time to come."

The latest figure is more than 20,000 digital miles in service by the end of 1999,
which Fleming categorizes as a conservative estimate.

Mike Vent, executive vice president of network operations and engineering, says all
that remains of its Los Angeles build out is a 200-mile stretch. The company’s build out
in New York was set for activation by the end the March.

New York to Houston and Houston to Dallas is expected to by activated by the end of
July, with a Florida-into-New York route anticipated in the future.

"With completion of our network into Los Angeles and New York–and the launch of
our new OC-X high-speed and high-capacity of products–we are well-positioned as the
first-to-market provider of the nationwide network services required for advanced,
high-bandwidth-intensive products and services," Scott says.

The Network Strategy

Redefining the company has included planning for the future, which Scott says will be
defined in part by packetized services.

"There’s been a lot of discussion recently of voice over IP (Internet protocol) as
an exciting new application," Scott says. "We believe that the future is
absolutely based on packetized services, and that’s true not just for voice, but fax, data
and video." Scott adds that IXC also intends to address "huge data
opportunities."

He developed a three-stage network strategy toward that end:

1. Core transport or architecture, used to transport information along the fiber
network. "Basically, our strategy is one of an optical network," Scott says.
"WDM (wave division multiplexing) and DWDM (dense WDM) technologies are being
deployed to maximize transport capability over this fiber network. We utilize a SONET
(synchronous optical network) standard on our basic network, and we are implementing
packet over SONET as our basic transport mechanism or our backbone network."

2. Access or edge technologies, used to accumulate and place traffic on the network
from the outside world. "Access technology today is probably the most challenging
aspect of network architecture," Scott says. "We believe that ATM (asynchronous
transfer mode)/frame relay present very promising technologies for access. We look at the
major ISPs (Internet service providers) today, and virtually 100 percent of them use frame
relay as their access technology to manage traffic between their subscribers and their
backbone network. In addition, we intend to support cable modems, different digital
subscriber line implementations, software-defined network (SDN) and last but certainly not
least, existing PSTN (public switched telephone network) interfaces. At this point, we’re
managing over a half billion minutes a month on our network. Clearly, the existing PSTN
access technology needs to be supported and migrated to the packetized future."

3. Network management process, used to ensure reliability of the total network
solution. "We just implemented a new network management center in Austin that uses
the state-of-the-art in network surveillance and management technologies," Scott
says. "We have the ability to manage traffic and routing here at our center. This is
what allows you to provide reliable provisioning of services to your customers; to assure
efficiency in your operation and, therefore, low cost; to assure maintainability of your
solution to your customers; to assure survivability. Clearly, in this day and age,
survivability for mission-critical applications is critical to customers. We not only have
SONET routing technologies at our fingertips, but we have routing technologies and
services that allow us to route for service outages over networks."

Scott says, "Ultimately, our backbone network is going to be a packetized network.
IP will be an important protocol, but it’s not going to be the only one."

So, he has restructured IXC to take advantage of basic and emerging network
architecture and IXC’s approach to the marketplace by creating three sales divisions:
wholesale or carrier services, retail and emerging markets.

Setting Sales

Wholesale or carrier services offer continued support for carriers and resellers with
emerging opportunities in cable companies, ISPs, utilities, competitive local exchange
carriers (CLECs) and others as additional sources of traffic. It continues to be the bread
and butter for IXC.

"Wholesale will continue to grow," Fleming says. "It’s brought us this
far, and we think we can bring a lot more revenue out of it. It also gives us the volumes
of business that we need to get the economies of scale to keep our network costs
down."

Dave Thomas, president of IXC’s retail business division, says the move to offer retail
services, "shouldn’t really be a surprise to anyone." He likens pure wholesale
as playing on only half the field.

"It is in our minds a natural part of the company’s evolution moving
forward," Thomas says. "No one can predict what changes are going to take place
in this industry. You have to be able to take advantage of the opportunities to move into
new markets as they present themselves."

The target market is small- to medium-sized business customers. A series of joint
ventures and acquisitions have jump-started the division, including the acquisitions of
Telecom One Inc. and Network Long Distance Inc. and IXC’s joint venture with UniDial
Communications Services LLC.

"This is where we’re able to utilize our architectural structure to its best
advantage," Scott says. "Dedicated access for these customers onto our network
in packet format allows them to have integrated, low-cost and highly reliable
services."

Scott says IXC also has considered the consumer market and dial-around service.
However, the company says the technology is not scaleable, and the increased seven digits
has a potential impact on consumer use, but the application is interesting and one IXC has
tested and will continue to watch.

Finally, emerging markets will focus on partnerships with international communications
providers and others.

IXC has entered a joint venture with Telnor AS, Norway’s national telephone company, to
provide local services to 11 European companies. IXC also is in the process of putting in
a switching facility in London and working on its second one in Frankfurt.

"We’re leasing circuits from various carriers in Europe, and we’re going to resell
the capacity," Fleming says. "Much like IXC had been the carrier’s carrier, we
envision a similar role in Europe."

But IXC also is contemplating a European fiber optic network. The company is likewise
interested in Canadian and Far Eastern operations.

"You have to do that just to go forward, because international is just part and
parcel now of the communications business," Fleming says. "You’ve got to be
there, because it drives your domestic products."

IXC will, however, limit further investment in Mexico in the short term, with the
expectation that conditions will improve in the long term. MarcaTel is the company’s joint
venture there. The move is similar to one made recently by MCI Communications Corp.

"We continue to believe that Mexico is a very good long-term opportunity. The
issue is the regulatory environment down there right now is one that does not offer
significant opportunities for any of the carriers," Scott says.

So, Fleming says, instead of direct sales, IXC will use agents, a strategy that has
been successful for other carriers in Mexico in the past.

Other emerging relationships include the cable industry, which for IXC is like coming
full circle. "We’ve taken advantage of that and met some old friends," Fleming
says. "The cable guys have realized they can be a switchless reseller, too. And, they
don’t have to invest a whole lot of money."

IXC has signed some major cable contracts that will develop into some very healthy
revenue streams, says Fleming, citing relationships with cable service providers Adelphia,
Hyperion and Ashley.

Two New Business Units

Scott also has added two business units that focus on product definition, development,
management and marketing with the intent to improve its customer divisions.

Carriers will have access to OC-3 (155.52 megabits per second–mbps) service–about 100
times more capacity than a T1/DS-1 connection and 3.5 times T3/DS-3–in major cities along
IXC’s nationwide fiber optic network. The OC-X private line service also offers OC-12
(622.08 mbps) and OC-12c access on customer request, as well as turnkey local
distribution, installation and scaleable collocation.

Valerie Walden, senior vice president of switched and private lines, says ISPs are the
primary target market.

"Instead of just putting the pipe in the ground and saying there’s availability,
we’ve put together a pretty tight business plan that addresses customer applications,
translating that to access onto the network and provisioning, and monitoring that product
for the customer," Walden says. "So isn’t just, ‘OK, here’s another OC-7 or
OC-12, and you figure out how to get to it.’ We do end-to-end provisioning. You have
to."

Mergers and Acquisitions

With all the talk of growth, questions arise about IXC’s future and its potential to be
acquired as well as to be on the buying end, as the company recently has demonstrated.

IXC, however, considers innovative partnering agreements as central to its strategy.
For example, IXC negotiated with ISP PSINet Inc. to swap stock for capacity. IXC has
committed to provide OC-48 transmission capacity for 20 years in exchange for 20 percent
of PSINet’s common stock, with a minimum value guarantee of $240 million. PSINet brings to
the table managed connectivity services, including LAN (local area network)-on-demand and
such value-added services as website hosting. IXC also will package and brand PSINet’s
dial and dedicated Internet services.

Interestingly–and this is where innovation ruled the day–Scott says IXC opted against
outright purchase to preserve PSINet’s greatest asset, its management team.

"The real value in PSINet is its experienced management team and its technical
talent," he says. "We wanted to build a partnership with that value. If,
instead, you go the acquisition or buyout route, you end up losing a lot of the value of
the company along the way."

Whether IXC could find itself at the end of another provider’s sight remains to be
seen–or contemplated openly and in detail.

"We’re a public company," says Fleming, who adds little more. "Let’s
just say we’ve had discussions with everybody. We have talked to some very major senior
players, global players."

There is likely to be more merger and acquisition activity ahead regardless of the
direction it takes. But, management can’t manage based on what may lie down the road,
Scott says.

"If MCI can be acquired, then it’s certainly possible for IXC to be
acquired," he notes. "But you can’t manage based on that. What you have to
manage is based on creating value for your customers, value for your employees and value
for your shareholders. And if you do that well, regardless of what happens to your
ownership over time, you’ve done your job."