Next up at Nextlink: finish build-out, roll new bundles

By Denise Pappalardo
Network World, 07/19/99

BELLEVUE, WASH. - Nextlink Communications will turn up service on the Texas portion of its nationwide fiber backbone in September, three months ahead of schedule. But even as it races to piece together its end-to-end network story, the company is hard at work concocting service options that will help set it apart in the crowded telecom field.

One likely approach: bundling services and giving away one or more elements - such as Internet access. Another: getting into the Web- and application-hosting game.

Of course the fundamental differentiator for Nextlink will be end-to-end control of a high-capacity net, says CEO Steven Hooper. The company is a competitive local exchange carrier that is breaking out of the CLEC mold by linking its 41 locations with a fiber backbone.

When Craig McCaw founded Nextlink in 1995, the goal was to offer small-to-midsize businesses voice services in competition with incumbent LECs. Never known for keeping a low profile, McCaw ultimately shifted focus. The company now aspires to become a national broadband carrier offering local and long-distance voice, data and Internet services, plus a range of application-hosting services, over its own facilities.

Owning the network is key because it means Nextlink can offer better service and higher levels of quality, says Michael McHale, chief marketing officer.

Local bulk

Nextlink is already offering local voice and data services in 41 cities, including New York, Philadelphia, Washington, D.C., and Los Angeles. By the end of 2000, the company's goal is to be up and running in 60 cities, including the top 30 metropolitan markets.

The preferred approach to building out a city is pulling 432 fibers. In areas where that will take too long or where permits are too hard to come by, Nextlink will use, in this order: wireless local multipoint distribution services (LMDS), digital subscriber line (DSL) and ILEC facilities.

Even though Nextlink is the largest single holder of LMDS fixed wireless licenses in the country and has 170 DSL Access Multiplexer colocation agreements in place for DSL, fiber is still the preferred approach, McHale says.

Ultimately, these metropolitan facilities will be interconnected via Internext, a $700 million nationwide fiber network that, by the end of 2001, will consist of 24 fibers spanning 16,000 route miles.

Nextlink will activate the first portion of the network in the Dallas/Fort Worth area by the end of September and turn up a handful of other metropolitan areas by year-end. Originally, Nextlink wasn't scheduled to come online until the end of the fourth quarter.

John Curran, vice president of Internet technology and formerly of GTE Internetworking, is heading up the long-haul infrastructure planning. "Initially the network will be a combination of ATM and IP," Curran says. Internext ultimately will be pure IP, the technology cannot support quality voice today, so the network will be a hybrid, Curran says.

While Nextlink's end-to-end network will be a sizable asset, Qwest, Level 3, AT&T and MCI WorldCom all have somewhat similar stories.

How can Nextlink compete with such formidable players? "Nextlink has deep pockets, and it has attracted strong people like John Curran that know how to build infrastructure," says Michael Smith, associate research analyst at Meta Group in Stamford, Conn.

And Nextlink has another factor on its side: It isn't the ILEC or one of the Big Three long-distance service providers. "There's something about having a monopoly for so long. You begin to gouge customers," says Wendy Mercer, head of telecommunications services at Hendrick Manufacturing. The Memphis maker of metal products switched to Nextlink's services last month and expects to save more than 50% on voice services. Hendrick was previously using BellSouth and AT&T. "They've lost our business forever," Mercer says.

Bundled pitch

To woo others that may be less inclined to swap carriers, Nextlink plans to offer service bundles that aren't readily available today, CEO Hooper says.

Nextlink will look at bundling everything from local and long-distance voice, to dedicated Internet access, to managed firewall and maybe even application-hosting services, says Daniel Kohn, director of strategy. "We'll look at radical stuff to see what happens."

Nextlink will also explore pricing incentives, all in the name of changing the game on the incumbents, Kohn says. Customers that use Nextlink application-hosting services for four programs, for example, might get voice for free, Kohn says.

"I believe, over time, different pieces of the communications value chain will be given away for free by different people," Hooper says. Data-centric service providers may offer free voice services, while voice-centric providers may offer free 'Net access, and so on, he says.

NASP

Although Nextlink doesn't offer application-hosting services today, Kohn says it plans to roll them out by year-end.

The company is trying to coin the term "network application service provider" (NASP) as a way to differentiate itself. Kohn says Nextlink's end-to-end control of the net, stretching from a customer's site to where applications are hosted in the Nextlink network, will let the company guarantee response times and eliminate finger pointing if problems arise.

But instead of focusing on high-end applications such as ERP and human resource programs, Nextlink plans to host lower-end applications such as messaging and calendaring.

While developing the network and rolling out new services are central to Nextlink's plans, last Friday Nextlink President and Chief Operating Officer George Tronsrue met with Hooper and other company executives to deliver a report on opportunities overseas.

When McCaw identified international as being key to Nextlink's future, Tronsrue, who has built nets for MCI, TCG, MFS and E.spire, set out to explore the options.

His findings: Opportunities abound in Europe, Latin America and Asia. Tronsrue says there are plenty of acquisition targets and chances to team with others. Although the international strategy is in flux, Hooper and company seem confident that over time Nextlink will be a player internationally.

How can a relatively new company think about overseas acquisitions? When you have McCaw backing you, the market listens. While Nextlink is $3 billion in debt, it has raised $2.5 billion in cash and its stock is going great guns.

In fact, Nextlink brought in Chief Business Development Officer Scott MacLeod from Merrill Lynch's Global Communications Group to look for acquisition targets. Besides strong hints that Nextlink will make acquisitions overseas, it could also make a domestic ISP or Web-hosting acquisition.

Nextlink resells PSInet's dedicated, dial-up and Web-hosting Internet access services today. While this relationship has worked well, Chief Marketing Officer McHale says Nextlink wants end-to-end control of the net. "Ultimately, we will build or buy our own. We've hired a lot of technical expertise, so we'll probably build it."

If all this seems overwhelming - the cities, the national backbone, the potential international push - keep in mind who is the mastermind: Craig McCaw. McCaw built McCaw Cellular from nothing to the country's largest provider of wireless services and then sold it to AT&T for $11.5 billion.

He has a history of building highly leveraged companies, founded on the tenet that owning the facilities is key. His formula has proven successful. o