Fiber networks regain black-gold footing
Monday, March 7, 2011
Posted by: Su Hawk
Fiber networks regain black-gold footing
Zayo Group is riding a post-glut optic wave fueled by Net video and mobile-broadband needs.
By Andy Vuong , The Denver Post
Posted: 03/06/2011 01:00:00 AM MST
(CSIA Note: Glenn Russo, President of Zayo Networks for the Zayo Group, is one of the more than 65 C-Level "celebrities" who will be attending the March 10 C-Level @ A Mile High event. CSIA's C-Level @ A Mile High event is the organization's largest fundraiser and business networking event of the year for the technology industry in Colorado, with an anticipated 1,000 attendees this year.)
LOUISVILLE — Zayo Group co-founder and chief executive Dan Caruso compares his company's primary assets — fiber-optic networks that provide high-speed Internet connections — to oil reserves.
"There's only so many of them that are out there," Caruso said in a recent interview from the company's headquarters here. "If you don't own one, you're out of luck, you don't get to produce oil. ... Or in our case, we're developing fiber into bandwidth."
Demand for bandwidth, or Internet capacity, is booming at an opportune time for Zayo, which launched in 2007 with $220 million in venture capital and has rolled up more than a dozen geographically "orphaned" network operators.
The privately held company's early backers are "midterm investors" that look to cash out every few years. To appease their requests to exit in the next year, Caruso will have to take Zayo public as early as this summer, secure more investments or sell to private equity firms or a larger operator.
"We are doing everything to get ready so that if we wanted to go public, we'd be ready to do so in the middle of this year," Caruso said. "But that doesn't mean that that's going to be the right thing to do."
Eight Colorado companies have had initial public offerings since 2008. A Zayo IPO would mark a turnaround of sorts for the fiber industry.
From 1996 to 2000, telecom companies spent billions digging up roads and laying high-capacity fiber-optic cables to serve an expected surge in Internet activity.
But demand fell far short of supply, creating the "fiber glut" that contributed to the telecom bust in the early 2000s. From 2000 to 2003, 23 of 37 public companies that were in the fiber business filed for bankruptcy, according to investment bank Cowen & Co.
"The networks that were built back in the late 1990s or early 2000 wasn't a bad idea," said Glenn Russo, a Zayo division president. "They were just premature."
Growth in online video consumption and mobile broadband usage is driving the fiber resurgence.
Estimates show that by year's end, half of all cellphones in the U.S. will be bandwidth-hogging smartphones such as Apple's iPhone. To support that growth, wireless carriers such as AT&T and T-Mobile are replacing old copper connections at cellular towers with high-capacity fiber connections from Zayo and others.
At the same time, high-flying Internet content providers such as Netflix need high-speed fiber links to send their data to residential Internet service providers such as Comcast and into homes.
Health care providers are increasingly leaning on broadband connections to access digital files stored at off-site data centers. Universities need the connections to offer remote learning services.
"It's that widespread resurgence in demand that supports that view that there's a secular tailwind occurring where all these providers are kind of benefitting," said Colby Synesael, an analyst with Cowen & Co.
Colorado is home to several network operators, including TW Telecom, Level 3 Communications and Qwest.
"People here who are outside of the industry don't realize how important the Front Range is in the telecom-Internet world," said Caruso, 47.
The telecom veteran's career started with traditional phone operators Illinois Bell and Ameritech. In the early 1990s, he joined Jim Crowe, now Level 3's chief executive, at upstart Internet backbone provider MFS Communications.
"I decided I would rather be on the attacking side of the competition as opposed to the defending side," Caruso said.
After WorldCom acquired MFS in 1996, Crowe formed Level 3 with the financial backing of construction giant Kiewit. Caruso, considered a founding member, initially headed Level 3's network operations. He left Level 3 in 2003.
"There's many good stories as to why — some involve me leaving on my own, some involve them helping me out the door," Caruso said. "We just kind of grew apart."
In 2004, he led a buyout of Arapahoe County-based ICG Communications, one of the network operators that collapsed into bankruptcy amid the tech bust, for $8.7 million. Caruso narrowed the company's focus and shed noncore businesses, such as a wholesale dial-up service.
Two years later, he sold ICG to, ironically, Level 3 for about $225 million.
Shortly thereafter, Caruso formed Zayo by acquiring four regional network operators with financial backing from investors that also were involved with ICG. Zayo has made 16 acquisitions since inception, including three last year.
Taking a page from his success with ICG, Caruso said he's focused on keeping Zayo a "plain old vanilla" infrastructure provider.
"Having fiber networks is really valuable, so long as you're focused on selling bandwidth and not focused on selling a bunch of fancy services on top of it," he said.
Network operators such as TW Telecom and Level 3 have offerings, such as special content delivery services, beyond Internet backbone access.
Zayo employs 430 people, including 120 in Colorado, many of whom worked with Caruso at ICG and Level 3. Zayo generates about $78 million in annualized revenue and has network operations in 31 states and Washington, D.C. Nearly half of its business comes from wireless carriers, and fiber-to-the-tower projects are the fastest growing segment.
Analysts say an IPO may be difficult in current market conditions. Recent private equity buyouts of similar network operators place more value on the companies than their publicly traded counterparts.
"The biggest concern for Zayo owners . . . is, if we were to go public, could we get the proper value? Right now, that's to be debated," Synesael said.
Masergy, a Texas-based network-services provider, recently canceled plans to go public because of market conditions.
D.A. Davidson & Co. telecom analyst Donna Jaegers said a more likely scenario for Zayo would be a buyout from private equity firm or a merger with a company such as AboveNet Communications, a publicly traded network operator.
Last year, at least eight fiber companies were acquired for more than $2 billion, according to Cowen & Co.
"Three years from now, will Zayo be the kind of entity it is today, in terms of geography? Unlikely," Caruso said. "It's more likely that we will acquire other properties or combine with something bigger."
Andy Vuong: 303-954-1209, firstname.lastname@example.org or twitter.com/andyvuong