Feb. 1, 1999


by Stephen Hardy

If anyone knows the difficulties of laying optical fiber, it`s the Garofalo family. The Garofalos spent about 25 years in the electrical contracting and services business, stringing various kinds of cable throughout Manhattan as the F. Garofalo Electric Co. Inc. They made a good living because laying cable, particularly underground, is a difficult and expensive task that not many companies want to do themselves. Eventually, the family added fiber cable to their repertoire and began working with the telephone companies that were beginning to install fiber on the island and in the surrounding boroughs.

Then, in the early `90s, the City of New York announced it would grant a limited number of construction franchises to communications companies looking to build fiber networks within Manhattan. Sensing an opportunity, the Garofalos successfully acquired a franchise in 1993, and Metromedia Fiber Network Inc. (MFN) was created. The new company, run by Stephen Garofalo, bet that emerging telecommunications companies and large corporations would jump at the opportunity to access a dark fiber network that touched the financial centers of the city. MFN has since extended its wager to include other top-tier cities across the United States. With the metropolitan area cited by many analysts as the next major market for fiber-optic technology, the Garofalo clan would appear to have rolled a seven by positioning themselves in what would appear to be a unique market niche. But is that position truly unique--and will Metromedia continue to remain free from competition?

New way of thinking

Stephen Garofalo started MFN after making a basic observation about telecommunications infrastructure in New York, says Howard Finkelstein, president and chief operating officer of the company. "He began looking at it and he realized that for the first time there was something in Manhattan that wasn`t available for lease. You could lease everything from a $50 rental car to a $200-million skyscraper, but you couldn`t lease dark fiber, in part because the incumbent RBOC obviously didn`t want to lease it," he relates.

MFN used its city franchise, plus other rights of way it painstakingly gathered over the course of many months, to create its Manhattan dark fiber network in late 1995. A metro New York network represented a logical expansion; eventually, similar dark fiber networks followed in Philadelphia, Washington, DC, and Chicago. (Work is either underway or announced to add Atlanta, Boston, Dallas, Houston, Los Angeles, San Francisco and the Silicon Valley, and Seattle to the MFN roster.) The result in each case is a dark fiber network for both local carriers and Internet service providers (ISPs) seeking their own infrastructure as well as large corporations who want to establish private networks.

Finkelstein says there is no minimum purchase ("It`s a private network. So if they want two or if they want 100, we`ll give them what they need," he says), which makes MFN`s dark fiber an attractive alternative even for smaller companies. But these firms should be aware that MFN prefers to provide the fiber, the whole fiber, and nothing but the fiber. "We`re basically in the dark fiber business," Finkelstein explains. "So the customer typically gets his own electronic equipment." MFN will help install this equipment in certain circumstances, such as its "Managed SONET Network" offering, which the company markets as its "complete turnkey network" solution.

The company feels it has established a new market niche. "There`s not a lot of availability for dark fiber networks. We think what we`re doing is unique," says Finkelstein. "There are certainly some carriers who typically construct. And to trade off some of their capital costs, they`ll sell off some fiber. But as far as being in the business of leasing dark fiber point-to-point, we don`t know of too many people doing that."

Competing alternatives

Because of the company`s unique position in its markets, Finkelstein sees MFN as competing against infrastructure alternatives, rather than other companies. Potential customers will find that even these alternatives are limited--and string the infrastructure themselves or lease metered bandwidth from existing carriers.

Against these options, MFN touts several advantages for leasing dark fiber, particularly in comparison to laying cable. "When you think about a typical CLEC [competitive local-exchange carrier] or telecom carrier, they built in part because there was no other alternative. There wasn`t fiber for them to go deploy. And we give them the opportunity to not focus on being in the construction business, which most of them, if you give them the choice, don`t really want to be in."

"What a company like MFN really allows, for example, an ISP to do is focus its own resources on delivering value-added capabilities, whether that`s Web hosting, VPN [virtual private network], electronic commerce, whatever they want to do," says Mike Smith, managing director of market-analysis firm Stratecast Partners (Mountain View, CA). "They can focus their resources on those things, and a company like MFN can really deploy all the fiber facilities that they`re going to need."

"What our business proposition is, whether it is to a carrier customer or a corporate customer, is private, unmetered networks," Finkelstein adds. "It`s not just from a street to a street or from a PoP [point of presence] to a PoP; if you`re a carrier, we`ll bring it from your switch on this side to the central office on the other, or from your switch on this side to a building on the other side. Or if you`re a corporate or governmental user, it will be right to the rack of your data center or right to the wall of your conference room for video."

By already having fiber in place, MFN believes it can offer not only attractive rates for a ready-made infrastructure, but also a quicker time to market and a capacity potential bounded only by the electronics the customer chooses to attach to the fiber. Just how attractive those rates appear depends on how much fiber the customer requires, how long the company intends to keep it, and where it is located.

The network location may be the biggest wild card as far as price is concerned. "The costs to construct vary in different regions," explains Finkelstein. "Obviously, digging up a congested downtown street is different than digging out in the suburbs. Right-of-way costs are different in different places. Franchise fees are different in different places. How many bridge crossings you have and tunnel crossings and things like that--there`s a whole slew of different elements."

Of course, one of the biggest factors potential customers must consider is their bandwidth requirement. According to Fink el stein, "typically, a couple of DS-3s" represents an adequate capacity demand, although he notes that this threshold can vary according to the pricing factors mentioned previously. At relatively low capacity levels, leasing metered bandwidth becomes an economically attractive alternative to MFN`s offering, particularly for corporate customers in the market for a private network.

But MFN counters the pricing issue with the claim that dark fiber holds a number of advantages over metered bandwidth. The first is the fact that the dark fiber option is bandwidth-independent. This allows economical network scaling as capacity demands increase; it also promises significant savings for customers whose bandwidth demands are already heavy.

Dark fiber also provides customers with more network management and control than a metered option, says MFN, because this capacity scaling can occur whenever the customer wishes. In addition, the fact that the customer does not share the communications pipe with others increases network security, the company says.

So far, these arguments have proved convincing to carriers and corporate users alike. Carrier customers include nextlink Communications Inc. (which leases fiber in metro New York/New Jersey, Phil adelphia, and Washington, DC, and inter-city between New York and Washington, DC), PSINet Inc. (for fiber in metro New York and Washington, DC, as well as a route linking the two), Intermedia Communications Inc. (for rings in New York, Philadelphia, Chicago, and Washington, DC), WinStar Communications Inc. (for fiber in New York, Philadelphia, Chicago, San Francisco, and Washington, DC, as well as a run between New York and Washington, DC), and e.spire Communications Inc. (which uses fiber in New York and Philadelphia, as well as an inter-city corridor from New York to Baltimore). The lengths of these agreements vary from 15 to 25 years at values from $29 million to $92 million.

The company is rather closed-mouthed concerning its corporate customers. However, it is known that the New York Public Library system has leased four strands of singlemode fiber from MFN in Manhattan for a private SONET network that links six research centers scattered around the island from mid-town to Harlem. The library paid $2 million for a 10-year lease.

Dark fiber, bright future

MFN`s continued success will depend principally on three factors: the ongoing demand for wholesale fiber in the metropolitan market, maintenance of the company`s unique market position, and its ability to take advantage of new opportunities. The first of these factors appears assured, at least in the short term. As discussed elsewhere in this issue of Fiber Exchange (see page 2), metro and access deployment of fiber is expected to increase significantly in the near term, which bespeaks a bull market for the kind of services MFN offers.

The continued emergence of CLECs and other alternative local carriers plays into MFN`s strengths, says Smith. "If you talk to a number of CLECs, lots of them have very, very interesting stories to tell about how they are going to market their services, but many of them really don`t have the ability to deploy the infrastructure and manage that infrastructure in order to deliver those services. And that`s why we think companies like MFN actually have a pretty compelling value proposition," he says.

Yet, how long will it be before other companies or entrepreneurs recognize this proposition and act on it themselves? Smith reports that only one other company, ACSI Network Technology (a subsidiary of e.spire) may be installing fiber in local areas for other carriers. But the very factors that make MFN`s dark fiber so appealing--the difficulty and expense of gathering rights of way and digging up streets to lay cable--potentially protect it from competition.

"Having access and rights of way and things like that--a lot of times those are not really thought of when you look at a company like MFN; you almost take those sorts of things for granted. But those are often very, very difficult to obtain, or there will be lengthy processes associated with gaining access to rights of way," explains Smith. "So because of that, the fact that MFN is already penetrating a number of major markets certainly would put other companies that attempted to start a similar plan at a disadvantage if they do not already have the rights of way in place."

So that would leave companies that already have rights of way as the most likely sources of market encroachment. Smith says that while their local plans are unannounced, emerging carriers such as Level 3 or Qwest loom as potential competitors. Of course, the incumbent local-exchange carriers remain a constant threat as well.

However, Finkelstein appears unconcerned about the RBOCs as competitors in the dark fiber arena. "Just look at the FCC deployment reports. They don`t have a lot of fiber in general," he says. "I mean, they could do it. But whether they want to change their focus to provide dark fiber private networks--I suspect not, because their orientation is toward a broader user. Then they`d also be offering to their largest customers the dark fiber solution as well."

Meanwhile, changing focus is one thing MFN won`t do to expand in the future, says Finkelstein. The company expects to continue to concentrate on intra-city services, which means adding new cities as demands warrant. The company currently covers major metropolitan areas on both coasts as well as Texas. That said, "We`re always looking to leverage the assets that we put in place," Finkelstein hints. This has led the company to branch out from its intra-city niche. For example, the desire to adequately cover the New York metropolitan service area led to a 110-mi backbone link from New York to Pennsylvania. Similar desires led to a link from Baltimore to Washington, DC. Connecting the two together to create an East Coast corridor link seemed a logical follow -up. The West Coast may present similar opportunities.

Meanwhile, the company noticed that its New York network passed near several transatlantic cable drops. Thus, the company formed a joint venture with Racal International of the United Kingdom, purchased capacity on AC-1 and Gemini, and created a transatlantic dark fiber network that includes back-haul facilities. The venture also includes infrastructure in Germany.

Finkelstein says the company has no desire to connect all its network dots. Smith agrees that MFN is unlikely to create its own coast-to-coast network. There is more than one way to create a national web, however. "What would seem more likely to me," he speculates, "would be a partnership with a company like, just as an example, Williams that has a wholesale-oriented approach to the long-haul marketplace and then could, in theory, combine with MFN, who obviously has more of a local focus. The idea of combining their two operations at any level might be pretty compelling."

Regardless of how the company plans to expand, raising capital shouldn`t be a problem. A recent private placement of notes netted $650 million--$300 million more than MFN had anticipated. "They`ve been phenomenally well received on Wall Street, and nothing fuels a business`s expansion like that," concludes Smith. "MFN`s market cap already exceeds many of the CLECs that have been in business for three to five years. So from that standpoint, they are well positioned to continue their growth."

A rich niche?

So far, MFN`s success derives from often being the only game in town for carriers, ISPs, and private companies that can`t afford to build their own networks and don`t want (or can`t get) what the incumbent carriers are offering. As long as carriers with excess fiber capacity don`t try to turn it loose on the local market, this lone-wolf status should remain secure.

Meanwhile, Smith believes that the general mindset in the communications market concerning wholesale services versus retail offerings helps to ensure a continued market for MFN`s dark fiber offerings and protects its position at the same time. "We think that over the past 12 to 18 months, the industry as a whole has sort of categorized that discussion in the wrong way," he explains. "Anyone doing something retail-oriented is viewed as providing value-added; anyone providing wholesale services is sort of viewed as almost providing a commodity--something that`s low profit margin, basically unsophisticated." Thus, most operators will want to position themselves in the perceived value-added service provision space instead of getting down in the trenches with MFN--while creating a demand for MFN`s dark fiber because they don`t have the Layer 1 infrastructure necessary to provide those value-added services.

Those who continue to classify wholesale in general as a "commodity" market are not paying attention, Smith believes. But the Garofalo family has been paying attention, and seems to be all the better for it.£

Metromedia Fiber Network`s success began with the acquisition of a construction franchise granted by the City of New York for the borough of Manhattan.

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