Telecom venture dulls goliaths

Feb. 1, 1995

Telecom venture dulls goliaths

Paul Palumbo

Long established as the leading entertainment and business hub, southern California contains some of the most hotly contested alternative access markets in the country.

To that end, San Diego-based newcomers Linkatel Communications Inc. and The Copley Press Inc. have formed a joint venture, known as Linkatel of California, to develop a high-speed, digital, fiber-optic telecommunications network that will unite San Diego and its surrounding areas. According to plans, the network should be operational by this summer.

But this lucrative business region has already been invaded by leading telephone and cable companies. Consequently, the ambitious duo?s blueprint will compete directly against Pacific Bell, AT&T and local cable companies, among others, in seeking to win the preferences and pocketbooks of businesses that use and rely on customized voice, data and video services. For added incentives, the partnership proposes to deliver high-capacity telecommunications services and, ultimately, electronically distributed news and business information throughout the country.

States Hal Fuson, vice president at Copley Press, OThe company is interested in fiber-optic networks for future electronic distribution of news, access to extensive databases of news and information, and voice, data and video transmissions.O

David Olstad, vice president for corporate planning at Linkatel Communications, claims that the company holds competitive advantages over other access providers. The joint alliance is affiliated with Tacan Corp. in Carlsbad, CA, a prominent fiber-optic technology and systems engineering company. He expects the venture to provide enhanced interactive services, such as video conferencing, remote education, telemedicine, supercomputer connections and information delivery.

Linkatel?s services will initially target high-end business users such as long-distance carriers, health-care facilities and universities, in addition to government agencies and real-time information consumers. Initial services will cover downtown San Diego, Hillcrest, Kearny Mesa, Sorrento Valley, Sorrento Mesa, Torrey Pines and University City.

To ensure system protection and reliability, the venture?s backbone networks are based on a series of interlocking fiber-optic rings that extend 80 route miles, approximately 3700 fiber miles, throughout San Diego County. These self-healing rings will be able to detect fiber breaks and automatically reroute service traffic through an alternate path.

The venture estimates that network build costs will approach $18 million. This price tag equates to approximately $4864 per effective fiber mile. To meet this expense, The Copley Press will infuse partial financing of a $3 million up-front investment.

Other ventures

Seeking other market opportunities, Linkatel has also partnered with Colony Communications Inc. and Fibrcom Inc. to form a new subsidiary, Linkatel Pacific, which intends to construct fiber-optic networks in Orange and Los Angeles counties. Colony Communications Inc. is a cable-TV subsidiary of Providence Journal Co. in Rhode Island. Fibrcom is a business unit of Houston Power & Light Co.

Building the proposed 300-route-mile network is estimated to cost $42 million. This network will provide services to customers throughout the Los Angeles Basin, including El Segundo, Hawthorne, Torrance, Long Beach, Anaheim, Orange, Santa Ana, Irvine and Newport Beach.

The operational backbone of both ventures? fiber networks involves synchronous optical networks comprising OC-48 rings. These rings are scheduled to operate at rates to 2.5 gigabits per second and can handle massive loads of voice, data and video traffic. Linkatel chose Sonet technology because of its proven architecture, robust data transport performance and fiber plant durability.

Linkatel has signed a $25 million long-term contract with Northern Telecom Inc. for transmission equipment and fiber-optic cables. The Linkatel network plant consists of fiber cables that contain 12 to 144 strands, each of which is capable of providing multiple telecommunications circuits.

Linkatel?s business model revolves around providing dedicated access and private-line circuits for a fixed fee per month based on the quantity of circuits, capacity, connection mileage, features and contract terms. The basic unit of network capacity used will be DS-1 (1.544-megabit-per-second) circuits, equivalent to 24 traditional telephone lines. Large customers may opt for one or more DS-3 circuits (44.736 Mbits/sec), equivalent to 28 DS-1 circuits or 672 traditional telephone lines.

Delivery strategy

Whereas many network providers are proposing to weave some type of fiber-rich architecture into embedded broadband plant, telephone and cable companies are contemplating the use of different travel routes. Factors influencing their decisions include the availability of upgrade capital and the forecasted payback horizons. Telcos have the advantage here: They have been functioning at least 80 years longer than cable companies, and they generate approximately four times more revenues from local access services alone. In addition, their asset base and balance sheet can support larger up-front outlays with longer payback schedules.

Unlike their competition, however, Linkatel has chosen to install fiber all the way to the premises. Because the majority of its users are businesses, the company believes that these customers will pay a premium for enhanced telephony services derived by taking fiber from the curb to the building.

According to Linkatel officials, companies are apt to be less sensitive to increased monthly charges if employee productivity is increased.

In contrast, the giant cable-TV company, Tele-Communications Inc., is firmly committed to households for its core customers. Chief Executive John Malone stated at the Western Cable Show last December that most cable-TV consumers were willing to pay a premium for near video-on-demand services. The company has therefore opted to take a fiber-to-the-node approach, which generally feeds approximately 600 households and costs almost $500 per passed home.

The node method appears financially attractive for a cable provider that hopes to expand channel (upstream and downstream) capacity while angling for a piece of the $84 billion, nationwide local access business. But, that type of network architecture will not allow discrete, switched, bidirectional video or true video-on-demand. Despite those architectural shortcomings, Malone does not believe that the extra investment in taking fiber to the curb is warranted for residential customers.

Other regional Bell operating companies, such as US West and SBC Communications (formerly Southwestern Bell), prefer the fiber-to-the-curb approach. Studies indicate that the curb approach costs approximately 27% more per passed household, but permits bidirectional, real-time video transmissions and lays the groundwork for true video-on-demand applications.

As for Linkatel, a synergistic upside in its venture with The Copley Press is the potential to fuse content and delivery (transport) and augment the value of its networks. In an era of deregulation and competitive invasion, telephony service is quickly becoming a commodity item, with customers less interested in brands than price and convenience.

Linkatel is hedging its bets that as customers demand more than the transport of voice, data and video, value-added services such as online networks, are potentially revenue enhancing market vehicles. It considers that the bundling of convenience services, whether from established online providers or strategic startups formed by content providers, might be crucial to attracting user critical mass.

That is where Copley Press plays a key role: Its immense holdings comprise 10 daily and 35 weekly newspapers throughout the country, Copley News Service (a supplemental news source delivered to 1300 newspapers and 800 radio stations across the world), Copley/Colony, a cable-TV operator in Costa Mesa, CA, and an equity position in Ponderay Newsprint Co.

Based on the joint venture?s impressive assets, Linkatel is willing to step forward and pay the price to roll out networks that are not expected to return its investment for several years. q

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