Pathnet Embarks on National-Scale Fiber Build with $2.1 Billion Lucent Blessing
By: Erik Kreifeldt
Out to capture the wholesale capacity business serving second and third tier cities with a "smart build" strategy, Pathnet Inc. has engaged Lucent Technologies for an initial $440 Million worth of fiber and financing and commitment for up to $2.1 billion over seven years. In addition to Lucent's bankroll, Pathnet will leverage relationships with right-of-way partners and the attractive features of its target market to initially sell dark fiber, then migrate to wholesale services, explains CEO Dick Jalkut.
The first installment of Lucent backing includes approximately $400 million in equipment financing for the first phase of construction and names Lucent Pathnet's exclusive fiber supplier. Lucent may fund future phases in $400 million chunks if Pathnet meets terms of the deal, for a total not to exceed $1.8 billion. The installments will finance as much as 90% of Pathnet's construction cost, Jalkut says.
Gearing up
The fiber supply deal consist of Lucent's flagship long distance fiber product, TrueWave RS, in 432-fiber count cable. "Most builders of new networks are putting in the maximum amount of fiber they can," notes Robert Mohalley, chief strategy officer for Lucent's network products group.
Despite the financial backing and exclusive fiber contract, Pathnet's network supply is not a turnkey deal. Most of the hardware decisions associated with Pathnet fiber will come from the carrier's carrier customers, at least in the early going. Pathnet will, however, install its own optical amplifiers, for which the supply contract is pending.
Pathnet is also not starting its network from scratch. It already serves second- and third-tier markets with wholesale services on a wireless network, using NEC gear to build a network with OC-24 capacity. It will continue to build out wireless facilities as it launches into its fiber build.
Although Lucent does not have a lock on the equipment choices of Pathnet customers, it will no doubt make a compelling case for how well its equipment performs with its fiber compared with rival products. "Lucent will have a strong marketing presence with Pathnet's customers," Mohalley says.
Like contemporaries IXC, Qwest, and Williams, Pathnet will initially leverage dark fiber sales toward the cost of network construction, then settle into its business plan. Although Pathnet's plan does not include retail services, "we are not a dark fiber company," Jalkut points out. "We're a lit fiber company."
Jalkut acknowledges that several years will pass before Pathnet can muster up the capital to assemble a network and sell wholesale services—not to mention leverage volume-purchase price advantages from more than one vendor. But when the time comes, the former NYNEX chief executive and believer in a multivendor strategy insists that Pathnet is not committed to using Lucent equipment.
When and where
Pathnet plans to install between 8,000 and 10,000 miles of fiber during a 30-month period in the first phase of its project. But it will only install fiber when and where compelling business cases present themselves, Jalkut says, as opposed to mapping out an end-to-end project.
Differentiating Pathnet's "smart build" strategy from the build-it-and-they-will-come projects of Qwest and IXC, Jalkut says "we're going to build a network from the center out to the edge, rather than from the edge to the center." Lucent's financial muscle notwithstanding, he argues that Pathnet does not have the wherewithal to support a speculative nationwide build. "We don't have deep pockets," he says.
In evaluating a build, Pathnet will look for at least enough bandwidth demand to pay for half of the construction cost up front, then look to break even in the third or fourth year of operation. Right out of the gate, Jalkut reports that Pathnet is evaluating approximately six potential fiber projects.
The first few builds will suit the needs of an anchor tenant like AT&T or Williams needing anywhere from 24 to 96 dark fibers on a route that it can't already get in the marketplace, Jalkut says. Each build will range in scope from 200- to 1,000-mile segments. Although its focus is on secondary cities, Patnet will enter into a big city-to-big city build if the demand is there.
Motivation to build
Both demand and supply conditions inspired Pathnet to launch into the fiber build, Jalkut explains. Pathnet has partnered with several right-of-way providers, such as utilities, pipeline operators, and railroads, to build its wireless network. "While we were building the wireless network, a lot of fiber opportunities came up," he says. "There was a lot of interest on the supply side to work with us on joint [fiber] projects."
"In many cases, partners are bringing us right-of-way, so we don't have to go knocking on doors [to initiate deals]," Jalkut continues. "That helps us achieve a lower cost position." Pathnet's relationships with right-of-way holders also give it a time-to-market advantage over would-be fiber builders that would have to establish deals from scratch, he adds.
On the demand side, Jalkut recalls reports from Pathnet's wireless sales force revealing significant demand for dark fiber—demand not being met by the likes of Qwest or Level 3 because of either timeliness or geography.
Wholesale market niche
The wholesale capacity business opportunity has shifted from primary to secondary markets, Jalkut observes. "It's a more friendly market." With IXC, Qwest, Level 3, and Williams clamoring for tier-one markets, competition is fiercer in that space than it is for tier-one and –two cities, rendering the smaller markets more attractive. The pricing also tends to be higher in the medium-sized markets, leaving room for higher profit margins.
Yet the growth factors for bandwidth demand in secondary cities are similar to large cities. Jalkut counts among Pathnet's potential customers "everybody looking for a way out of town other than the RBOC." Of course, the former NYNEX chief also welcomes RBOC business.