King of Qwest holds court

With its grand plan to build an 18,500-mile fiber-optic network and its $4.4 billion acquisition of LCI International earlier this year, Qwest Communications has become one of the network industry's most talked about players. The buzz surrounding the Denver carrier has largely been generated by Joe Nacchio, the ebullient ex-AT&T official who is now trying to swipe customers from his former employer and other established carriers. Nacchio spoke with Network World News Director Bob Brown last week.

When will Qwest start focusing more on supplying core network services to big business customers?

We're only 20 months old, and every month we're changing radically. We started first by selling dark fiber, then we moved into wholesale, basically for other carriers. Now with the acquisition of LCI we have very broad-based services that are attractive to low-end businesses and consumers. And with our new Web hosting strategy [bolstered by Qwest's recent acquisition of Icon CMT] and the creation of a national accounts division, we clearly are moving upscale. We'll have 300 to 400 quota-bearing account representatives in the market by the end of the first quarter. I expect your readers will hear from our sales people quite forcefully in the next six months.

What kinds of services will you be offering to business customers?

We have big business customer contracts just starting up that involve everything from traditional long-distance 800 calling cards to private line, ATM, frame relay, IP virtual private networks and service-level agreements. We're just signing up corporate customers now on native IP interconnection at speeds up to OC-48. For example, we just announced a multimillion-dollar contract with the Great Plains Network consortium of universities.

How are you describing Qwest these days?

We never describe ourselves as some people do, as the fourth largest long-distance carrier. We talk about building an IP convergent network that will essentially help companies move to a broadband-enabled world. We do frame relay, ATM and circuit switching, but we are really pushing hard on this IP server-based hosting capability.

I know you are appealing the decision, but how big a blow was it to Qwest when the Federal Communications Commission recently shot down your plan to have Ameritech and US WEST market your long-distance services?

It's just another example of all the b.s. the new guys have to put up with and of the barriers that the big guys can create. The FCC never would have looked at that issue unless MCI and AT&T raised it. It's typical of what slows things down, and it's just annoying because we're not competing on the merits of anything; we're competing on who's got the most political and regulatory clout.

I imagine the last thing you want is to get tied up in the courts.

Well, if we've got to we've got to.

Do you consider yourself a modern day Bill McGowan?

I never look at myself as being McGowan, but I think there are some dramatic similarities, even 15 years after [the AT&T breakup]. The notion of us having to fight the big guys' legal-but-dirty tricks is something we just have to deal with. I'm not worried at all about fighting the AT&Ts and MCIs. In a certain regard it isn't like fighting them, it's more like ignoring them. I don't think they get it. Now I'm not trying to do the difficult thing they are trying to do, which is taking a 747 and turning it into a Ferrari in real time. What I'm doing is creating a Ferrari from new parts and building it from spec.

Make no mistake. Our principal competitors are AT&T and MCI WorldCom.

Only by Level 3, I never mention them. [Level 3 CEO] Jim Crowe is a smart guy, but Jim is five years away from having a network. Five years in our world and you might as well be selling pretzels today. It's going to be a different market in five years. We've got a real IP network up, 3.5 million customers, $3 billion in revenue and we're already operating internationally. Unless we just go to sleep, he's got to run very fast with some very intractable barriers in front of him. They've really got to dig up the ground. Jim is patterning a lot of what he says based on what Qwest has done. His company will do well and be reputable, but I don't see Level 3 as a competitor.

Can businesses really expect to be running all their applications over IP anytime soon?

It's very much for real. This is what we're using our capital for. You're hearing talk now about the slowdown in the circuit-switched equipment world. Part of that is circuit-switched equipment companies starting to get bitten by this new technology.

Then why has Qwest built its network on packet and circuit-switching technologies?

You've got an $80 billion circuit-switched market out there, and you've got a $5 billion ATM and frame relay market. Why am I going to pass that by? I tell people if you're on the way to the bank to get some money and you pass all these $100 bills on the street, the rational person stops and picks some of them up. You don't bypass the bills on the ground and keep walking to the bank just because there is more money there. From the customers' point of view, they aren't going to flip the switch overnight to IP. So we've got to have some services that help them in today's world.

Most industry observers would probably say that Qwest has been overhyped. What do you think?

I think we've been underhyped. Just the fact that you would have somebody think that Qwest and Level 3 are comparable companies demonstrates that they don't know what we have. We're going to have $3 billion in revenue this year and $400 million in free cash flow. Do you know how many companies do that in 20 months? There may be a lot written about us, but most of it's a partial picture.

How big a deal is the Icon CMT purchase for Qwest in the grand scheme of things?

It cost $185 million. Not that that's little, but we're a $14 billion market cap company roughly. It'll bring on about 300 IP technical engineers and sales people, which is important. It's an important foothold in three of the four or five industry sectors we're going to concentrate on. They're already into financial services, they're into high tech, they're into pharmaceuticals. Media is the fourth area we want to do more in. Healthcare is a fifth one.

What's Qwest's acquisition strategy?

In the last 12 months we've bought five companies, LCI being the biggest. Our strategy will continue to press ahead on three fronts. We'll make acquisitions to get us into a geographical market where we don't have a presence, our EUnet acquisition was an example of this. Two, we'll buy companies that consolidate or grow our market position in the very critical IP hosting space. Three, we'll pick up companies that let us get the cash flows and organic growth a lot faster than we could organically grow. By acquiring LCI we get $1.2 billion of synergy over four years by routing all their traffic over our network. That's just a smart financial move.

There has been speculation that you might look at snapping up some competitive local exchange carriers. Anything we should expect there?

CLECs are low on our priority list. We don't really believe it's necessary for us to have a CLEC. We think the market for business customers is going to open up fairly quickly, I don't have a problem getting to customers' buildings on DS-3s up to OC-48s. I'm not convinced yet that the economic model for the CLECs as it is currently constructed is sustainable, particularly since the Bells haven't declared what their cost structures will be going forward. So I'm holding back.

Qwest has been racking up losses. What's the latest on the company's financial situation?

We're close to a quarter, so I've got to be careful. If you look at the street estimates, they've got us turning on a quarterly basis earnings positive in the fourth quarter. We're already got a positive operating cash flow. We have a very big year next year in terms of operating cash flow because we do the integration with LCI, so we roll all of the leased facilities onto our network. The street has us going from $400 million this year to $800 million next year and most of that is driven by cost savings by rolling traffic onto our own network that's completed. We've got all the financial things lining up right.

So you have plenty of money for acquisitions?

I've only bought companies using equity. That's like free. I just create new shares. It's almost unbelievable how this works. LCI cost us $4.4 billion at the time and they were about 10 times our size on a revenue basis and five or six times our size on an employee basis. I printed 130 million new shares and gave them to LCI, and our stock price stayed in exactly the same zone. By magic we created more than $4 billion in market capitalization. I keep looking for what's wrong with that but I can't find it.

FCC kills Qwest's RBOC deals
Network World, 9/29/98.

Qwest to acquire 'Net company, plans new network
Network World Fusion, 9/15/98.

A $4.4 billion Qwest for LCI
Network World, 3/16/98.

Qwest financial and stock info