Global Crossing ropes US WEST

Can $37 billion deal boost upstart carrier's status?

By Tim Greene AND David Rohde
Network World, 05/24/99

HAMILTON, BERMUDA - Global Crossing wants to make the hyperspace leap from relative obscurity up to the ranks of MCI WorldCom and AT&T - but the company may be playing out of its league.

With its recent transactions - including last week's $37 billion deal to merge with US WEST and the proposed $11.2 billion merger with Frontier Communications in March - Global Crossing is looking to graduate from being a simple wholesaler of international bandwidth to becoming a broadband retail telecom carrier.

If these proposed deals go through, Global Crossing will be able to offer its wholesale bandwidth to other carriers, sell long-distance voice and data services over Frontier's backbone, and expand the market for US WEST's network-based services.

That potential clout intrigues some users. Global Crossing could possibly provide voice and data services internationally without the hassle of dealing with multiple foreign carriers, says Thomas Magee, network operations manager for Mentor Graphics in Wilsonville, Ore., which has sites in the U.S., Europe and Asia.

Dealing with multiple local carriers in the U.S. and overseas is complicated. And giving all the company's business to one carrier could reap volume discounts, he says.

Indeed, Magee's ideas play into US WEST's vision of future public nets. Carriers will need a complete set of broadband access, high-capacity fiber core networks, international offerings and a set of services that goes beyond simple network transport, according to Joe Zell, president of US WEST's data network division, !nterprise.

None of the major carriers - WorldCom, Level 3, Qwest and AT&T - has all those elements today, but Global Crossing will have the potential to offer them, Zell says. And Global Crossing could acquire even more networks.

"I think we have a tremendous scope, but if we see something along the way that makes sense, I wouldn't rule out us doing another acquisition," says Global Crossing CEO Robert Annunziata.

However, standing in the way of that rhetoric is the fact that Global Crossing's own net is still under construction, and the absorption of US WEST and Frontier won't be complete until sometime toward the end of 2000. Those factors make Global Crossing's claim to membership in the carrier elite a bit premature, analysts say.

"I think it's ludicrous for Global Crossing to claim they will be able to compete with AT&T and MCI WorldCom," says J.B. Haller, director of network and Internet research for Current Analysis in Sterling, Va. "AT&T and MCI WorldCom have existing infrastructure and customers in far-away places." Even when Global Crossing's network is complete, the company will still have an uphill battle, according to Robert Rosenberg, president of Insight Re-search in Parsippany, N.J "You're fighting in a sandbox with AT&T, British Telecom and an awful lot of very experienced providers," he says.

Global Crossing says it will sell US WEST digital subscriber lines for broadband local access services as well as frame relay and ATM packages in other regions. Global Crossing executives say they will use the company's national and international fiber nets to deliver Web hosting services and network-based application services developed by USWEST's !nterprise. "What my team has built for our region becomes widely extensible," Zell says.

Despite its self-portrayal as a data carrier, US WEST still gets 90% of its income from voice customers, Haller notes.

But that doesn't mean the merger can't be successful, according to Berge Ayvazian, senior vice president of The Yankee Group.

For example, Frontier has built up a healthy business by taking over local and long-distance operations for retail chains. Key to those deals: Unlike many other competitive local exchange carriers, Frontier has no reluctance to simply resell regional Bell operating company lines in areas where it doesn't have its own local nets.

That makes Frontier a single national contact for companies that want to buy local phone service in more than one RBOC region. While Frontier slightly undercuts RBOC prices, that can add up to substantial customer savings over thousands of locations.

One sticking point is that even though US WEST brings 16 million customers to Global Crossing, Global Crossing would not be able to sell long-distance services in the US WEST region - which includes 14 Western states. Before that can happen, US WEST needs permission from the Federal Communications Commission, and it has not even asked for permission yet.

Global Crossing can find plenty of other customers outside US WEST territory even if the FCC doesn't grant long-distance permission, according to analyst Ayvazian. "Who cares?" he says. "How many multinational companies are located in the US WEST region?"

But current Frontier customers worry that the merger could affect current service.

"Our concern [with the merger] is going to be continuity," says Enrique Arrata, senior vice president of MIS for Sunglass Hut International in Coral Gables, Fla.

Frontier does a more effective job of hustling to install lines than the biggest local and long-distance carriers, he says. That's important to Arrata because Sunglass Hut's business plan includes rapid expansion to new sites. o