A $4.4 billion Qwest for LCI

By David Rohde
Network World, 3/16/98

Washington, D.C. - Say the word "Qwest" and notions of cheap IP telephony may start dancing in your head, what with all the publicity former AT&T executive Joe Nacchio has garnered for his explosively popular start-up.

But managers of traditional, nonconverged networks who are nevertheless hungering for economical broadband data capacity may have the most to like in last week's announcement that Qwest Communications International, Inc. will acquire long-distance carrier LCI International, Inc.

Qwest, which is building a colossal 16,285-mile national OC-192 Synchronous Optical Network (SONET), chose as its partner a fast-growing but surprisingly traditional retail carrier whose service offerings map closely to the categories established by AT&T, MCI Communications Corp. and Sprint Corp.

LCI gives Qwest an installed base of mostly small- and medium-sized customers that have been sold on the carrier's outbound and inbound toll services plus its FramePlus frame relay service running over Newbridge Networks Corp.'s 36170 multiservice fast-packet switches. Many of those customers now also buy LCI's plain-vanilla Internet access service, offering dial-up and dedicated access options.

But perhaps most significantly, LCI is the only long-distance carrier other than the Big Three that offers a traditional circuit-switched virtual private network (VPN) service. LCI's Integrity Virtual Network Service competes with such stalwarts as AT&T's Software Defined Network for discounted corporate voice minutes.

Excited LCI officials last week said the upshot could be that the Qwest/LCI combo will be the first in the industry to bring out an IP-based VPN for data traffic that incorporates classic voice VPN features.

Neither Qwest nor LCI offers an IP-based VPN yet. But when complete, the Qwest network is designed to be able to carve out gigantic lanes for priority IP traffic using the Cisco 12000 Gigabit Switch Router from Cisco Systems, Inc. For its part, LCI offers online reconfiguration of transport circuits from customer locations via its Authority Network Management System, which moved last year from a Sun Microsystems, Inc. SPARC-Station platform to a PC version.

Authority currently is used for LCI FramePlus permanent virtual circuits. But a top LCI official said the new Qwest IP network capacity will accelerate LCI's plans to diversify the services that Authority supports.

"Later this year, for an IP VPN I could give you reconfiguration on the fly, [call detail reporting] records and trouble-ticketing, all online," said Ian Dix, LCI's vice president of large account marketing.

In a little-noticed extra fillip, LCI also brings to the table a marketing agreement with newly aggressive international carrier Equant Services Corp. LCI is promoting frame relay and other services under its own brand on Equant's 220-node global net based on Nortel's Magellan Passport multiservice ATM switches.

While the large carriers' alliances must rely on feature-robbing links between multiple carrier platforms, the Equant deal lets Qwest and LCI offer standard service-level agreements in 56 of the 89 countries served by Equant's network.

Observers said the merger is likely to close quickly. Although Qwest's stock is publicly traded, the company is majority-owned by Philip Anschutz, a railroad tycoon who retained valuable rights of way for Qwest when he sold Southern Pacific Co. in 1996 and who reportedly pushed for the LCI deal. Likewise, LCI's stock also includes large shareholdings by investment bankers who financed its turnaround in the early 1990s and who are considered eager for a final payoff.

In addition, antitrust regulators are unlikely to get involved because LCI's market share is small and Qwest's practically nonexistent. Instead, regulators now have their sights trained on WorldCom, Inc.'s buyout of MCI, ending the possibility that those carriers megadeal will be a cakewalk for their lawyers.

All those factors led Qwest President and CEO Nacchio and LCI Chairman and CEO H. Brian Thompson last week to say that theirs was a marriage made in heaven. But some big holes remain in the merged company's collection of network assets before it can make a play for huge contracts with most enterprise networks, particularly those outside LCI's traditional midwestern and mid-Atlantic customer bases.

The most notable is the company's lack of local facilities. Unlike some other new carriers, Qwest's network buildout plan does not include fiber rings in city centers. And although LCI owns 18 long-distance switches from Nortel and others, it owns only one local telephone switch, in San Antonio, Texas, obtained in a recent acquisition.

Instead, LCI has attempted to resell local lines from regional Bell operating companies. It has waged an extremely aggressive legal fight against the RBOCs led by Anne Bingaman, the former U.S. assistant attorney general and current president of LCI's local division.