Cash in hand, Yipes strikes back

Yipes making comeback bid in metro Ethernet

Yipes Enterprise Services is an Ethernet service provider looking to make the most of a second chance.

The original Yipes was a poster child for the telecom meltdown, burning through about $300 million in funding between its founding in 1999 and its Chapter 11 bankruptcy filing in March 2002.

The new Yipes, which announced its rebirth last July, added $9.5 million in funding last week to complete a first-round investment totaling $63.5 million. Investors include Norwest Venture Partners and Sprout Group/CSFB.

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Yipes re-emerged last year when a group initially calling itself PHX Communications – PHX, as in a phoenix rising from the ashes – acquired the network operations and assets of the old Yipes for pennies on the dollar under approval of the U.S. bankruptcy court in San Francisco.

Like its earlier incarnation, the new Yipes offers scalable (1M bit/sec to 1G bit/sec) Ethernet services via metropolitan and long-haul connections. The bulk of the privately held company’s undisclosed revenue comes from its Internet-access offering, although its fastest-growing service is a city-to-city connectivity service.

The San Francisco carrier now zeroes in on 10 markets, including New York, Philadelphia and San Francisco, after selling off its networks in Boston, Pittsburgh and South Florida. Its new funding is dedicated exclusively toward these 10 markets, where Yipes plans to become cash-flow-positive by next June.

Yipes aims to raise a second round of financing between December and March. On the technology front, the carrier is testing 10G bit/sec Ethernet and is interested in layering new applications, such as voice over IP, on its network. While focused on 10 markets now, Yipes officials are eyeing 34 key U.S. markets, plus a handful in Canada and Europe.

Things will be different

Company executives say things will be different for Yipes this time around for several reasons. For one, the company renegotiated its contracts with suppliers – contracts that initially were written during the height of the Internet bubble, says CEO Dennis Muse, a 25-year telecom industry veteran who has worked for WorldCom and MFS.

“The restructuring enables the business to have its costs in line with today’s economy, not with the old economy,” says Muse, whose team is a mix of new and original Yipes employees, including the company’s original network architect.

Yipes also is only extending its network – currently at 21,000 fiber route miles – where it has contracts to cover the costs. That differs from the original Yipes, which operated in a period during which it was fashionable to build out networks as fast as possible and hope the business would follow.

Despite a more modest approach, Yipes still can offer the sort of “disruptive” pricing that originally captured customers’ attention, Muse says. Yipes charges on a megabit basis, touting that its customers can buy a 100M bit/sec pipe between buildings in a metropolitan area for the same it would cost for a DS-3 (45M bit/sec) link from another provider. Yipes says it serves 90 more buildings now than a year ago, bringing total buildings served to 474.

Gauging from industry watchers’ predictions, the timing for Yipes and other Ethernet service providers might be better now than it was a few years back, when such services were only starting to roll out. Vertical Systems Group last week promoted a new survey that projects the Ethernet services market in the U.S. will explode from $300 million this year to $1.3 billion by 2007, good for a 35% compound annual growth rate.

Among those organizations exploiting Ethernet services is Community Medical Centers in Fresno, Calif., which recently awarded a three-year contract to one of its current providers, Time Warner Telecom. George Vasquez, director of technology services at the healthcare organization, says the Ethernet services he has reviewed are extremely reliable, so bidding largely comes down to price. His organization is upgrading its Ethernet services by making changes such as boosting 10M bit/sec links to 100M bit/sec and 100M bit/sec links to 1G bit/sec to handle heavy-duty applications, such as medical imaging.

The fact that price continues to be such a major factor in Ethernet service selections doesn’t bode well for Ethernet service specialists, says Daniel Briere, CEO of TeleChoice, a telecom consulting group.

“There continues to be a glut in metro fiber. As long as there is a glut, there will be price wars,” he says, noting the smaller companies can’t afford a protracted price war with well-heeled rivals such as the Bells.

Metropolitan Ethernet providers also face the challenge of getting their fiber into buildings, an often painful process. Time Warner, a metropolitan Ethernet provider that concentrates on Tier 2 and 3 cities, in July said it was whacking $50 million from its planned $200 million in capital spending this year, primarily because of logistical issues with getting its network into buildings.