UUNET’s Sidgmore and BBN’s Conrades sold because the capital requirements to fund their Internet Backbones were daunting. Schrader bartered 20 percent of PSINet to secure bandwidth on Broadwing’s network. Yet constructing the fiber networks to support these Internet Backbones was even more capital intensive. Venture Capital, which was a tiny industry in the early 1990s compared with the 2020s, was in no position to fund the fiber build-out.
The source of the early funding came typically from a high-net-worth individual or family. These tycoons backed ambitious entrepreneurs to build out their fiber networks. Within a few years, the Internet Backbones were merged into larger fiber platforms, and when combined, a new industry—Bandwidth Infrastructure—would emerge.
The Cable TV titans, including the leading Cable TV Cowboy John Malone, partnered with Bob Annunziata to scale Teleport, which AT&T acquired to anchor its local fiber strategy.
Walter Scott, the CEO of the largest private construction firm Kiewit Corporation, backed Jim Crowe to launch MFS Communications. WorldCom’s acquisition of MFS was its entry into local fiber networks.
Philip Anschutz used his billions and his land alongside his railroads to give birth to SP Telecom, which became Qwest, and enticed Joe Nacchio from AT&T to accelerate Qwest’s growth. Qwest would be one of the two fiber titans acquired by Lumen.
Ralph Swett of Broadwing did not have deep pockets or a sugar daddy partner. After some bootstrapping, he turned to the public markets for funding but then hit a wall. Ownership dramatically changed a couple of times. Eventually, Broadwing also found its way to Lumen.
The Williams Companies of Tulsa, Oklahoma, led by division president Roy Wilkens, blew fiber through empty gas pipelines. Their company, WilTel, now sits inside Verizon.
Eccentric billionaire Craig McCaw, whose backstory has much in common with Anschutz, followed the lead of Teleport and MFS by creating XO Communications. It, too, now belongs to Verizon.
John Kluge, the megarich media mogul, sponsored the construction pioneer Steve Garofalo to fund AboveNet Communications.When Steve Garofalo started AboveNet, the company’s name was National Fiber Networks. The name was changed a few years later to Metromedia Fiber Network (MFN), reflecting the Metromedia brand that John Kluge used to brand many of the companies he controlled. The AboveNet name was adopted when the company emerged from bankruptcy, using the name of a data center company that was acquired by MFN. which today is part of Zayo.
Teleport—Bob Annunziata#
Ironically, Teleport, which would be acquired by AT&T, was built by a seventeen-year veteran of AT&T, Robert Annunziata, who resigned from Ma Bell after his lack of a college degree caused his career to stall.”Ma Bell” is a slang reference to AT&T as the mother of the Baby Bells.
The New York Times headline on October 17, 1982, read, “Staten Island Teleport Is Seen as a Link to the Future.” Merrill Lynch and Western Union announced a partnership to build a satellite farm—a facility that housed a collection of satellite receivers—to send and receive information via satellites.The Port Authority of New York and New Jersey was also involved in the partnership.
A fiber network would be constructed to connect New York City and New Jersey to the satellite farm. “New Jersey will be linked [to the Teleport] by a fiber-optic cable system that will begin at the World Trade Center, cross the Hudson River to Journal Square in Jersey City by way of the PATH tunnel and continue south through Bayonne to Staten Island,” the New York Times explained. It added, “The Teleport will relay information in the form of telephone conversations, data transmitted from one computer to another, television and so-called ‘facsimile’ transmission, in which a printed document is fed into a machine and then reproduced in a receiving machine.” We’ve come a long way since 1982.
A New Jersey commissioner stated, “The amount of data that will be flying around in space is just unbelievable.” A New York City representative added, “It’s like an airport. Every major city needs an airport. Well, this is an airport for communications.”
Merrill Lynch and Western Union invested $18 million to turn the project into a start-up business named Teleport Communications. Soon thereafter, Western Union then lost interest in the project and sold its 40 percent Teleport ownership stake to Merrill Lynch for $4.7 million.
Merrill Lynch’s next step was to find experienced leadership, which led them to name Annunziata CEO in 1984. Under Annunziata’s supervision, network construction was completed in 1985.
Annunziata soon realized that the original intention of Teleport—to connect to the Staten Island satellite farm—was insufficient to support the cost of building the network. Teleport turned its focus to linking its customers to their long-distance providers in competition with New York Telephone, a subsidiary of Baby Bell NYNEX. Customers benefited from having a diverse second connection, which improved the resiliency of their corporate communications networks. Moreover, Teleport touted better service and more flexibility.
By 1990 Teleport added networks in Boston and San Francisco, and construction was underway in Chicago, Houston, and Los Angeles. In some of these expansions, Teleport partnered with local Cable TV companies. In exchange for use of its fiber, the Cable TV provider would receive a revenue share. These partnerships allowed Teleport to serve customers who otherwise would be outside the reach of Teleport’s fiber networks.
To support these capital-intensive buildouts, Merrill Lynch sought a financial partner. When Merrill opened its door, nearly the entire Cable TV industry marched through it. Atlanta Cable TV giant Cox Communications and its CEO, Jim Kennedy, led the charge.The origin story of Cox dates back to 1898, when James M. Cox purchased the Dayton Daily News. Cox later became the governor of Ohio and, in 1920, won the Democratic Party nomination for president of the United States. He lost despite having Franklin D. Roosevelt as his running mate.
His son, James M. Cox Jr., followed in his father’s footsteps by also acquiring media properties, including, in the early 1960s, Cable TV providers. In 1988 Jim Kennedy, the grandson of the founder, was named CEO. Kennedy led the investment in Teleport. By 2020 the Cox family was worth $34.5 billion. In 1991 Cox acquired a 12.5 percent ownership stake in Teleport, prompting an expansion to forty additional cities. In early 1992 Merrill Lynch sold the rest of its Teleport stake. Cox increased its ownership in Teleport to 50.1 percent, and its six board seats put Cox in control.
The other 49.9 percent was purchased by Cable TV provider TCI, which gained the right to name the remaining five board seats. TCI’s CEO was John Malone, the granddaddy of Cable TV. Malone joined Colorado-based Cable TV provider TCI in 1973, and over the next two decades, he spearheaded the consolidation of the industry. Malone was credited with developing innovative programming, including many new specialized channels, pay-per-view, and interactive services. By the early 1990s, TCI was the biggest Cable TV provider, and Malone was the industry’s gun-slinging leader.
With Malone as the industry’s champion, Cable TV companies were friendly rivals. Since their cable franchises served different geographies, they didn’t compete for subscribers. As such, they sought ways to collaborate on content (such as HBO and QVC), services (pay-per-view and broadband), and technology.
This collaborative industry culture led two more Cable TV leaders—Comcast Corporation and Continental Cablevision—to each purchase a 20 percent stake in Teleport. Comcast Corporation, which would eventually become the largest Cable TV provider, was led by Brian L. Roberts, the son of founder Ralph J. Roberts. The other, Amos Hostetter Jr.’s Continental Cablevision, was the nation’s third-largest Cable TV provider.
Teleport promised to solve a major challenge faced by the Cable TV industry. Each Cable TV operator served a mosaic of geographies. In New York one provider might serve lower Manhattan, another northern New Jersey, a third Long Island, and a fourth Brooklyn. A top five Cable TV operator might have a dominant presence in some cities, such as Boston and Philadelphia, but no operation in other markets, such as Connecticut and New Jersey.
To compete with the telephone companies for voice and Internet services, the Cable TV industry needed a more ubiquitous platform, which led Cox, TCI, Comcast, and Continental to become the owners of Teleport.
The Teleport platform opened two opportunities for the Cable TV industry. One was to use Teleport’s fiber networks to reach enterprise customers. The second was to leverage Teleport’s voice and Internet access to offer a bundled package of Cable TV, voice, and Internet services to both their consumer and enterprise customers.
In 1996 the Cable TV Cowboys—Malone, Roberts, Kennedy, and Hostetter—turned to the public markets to fund their prized Teleport, raising $400 million in the IPO that valued Teleport’s equity at $2.8 billion. The 15 percent of Teleport that was sold to the public came with only 3 percent of the voting rights, leaving the Cable TV owners in firm control.
Teleport used the IPO proceeds to fund a nationwide expansion, including multiple acquisitions of smaller fiber providers. By 1998 Teleport served sixty-five US markets.
On paper the ownership of Teleport by the largest Cable TV operators made strategic sense. Teleport’s network reach was extended by aligning with the properties operated by its Cable TV owners. Teleport-enabled voice and Internet services were offered to Cable TV customers. Cable TV services were added to the services offered by Teleport to its enterprise customers.
In practice, execution was enormously difficult. Each cable property operated with fierce independence. Local general managers (GMs) controlled investments, product offerings, and strategic alliances. TCI, Cablevision, Cox, and Comcast thrived by holding their GMs accountable for their financial performance. Cash flow mattered, so capital spending was tightly constrained by the GM. Implementing top-down initiatives was hard, as buy-in was required from each GM. Doing so with consistency across geographies was impossible.
Malone and crew turned what could have been a disastrous and costly mistake into a great financial outcome. On January 8, 1998, Teleport announced its sale to AT&T for $11.3 billion.
Strategically, it was logical for AT&T to acquire Teleport. However, AT&T fell into a honeypot from which it would fail to escape.
MFS (Chicago Fiber Optics)—Jim Crowe and Royce Holland#
Teleport’s archrival was my second employer, MFS. Just as Teleport is now embedded into AT&T, MFS is now buried in Verizon. Crowe, the founder of MFS, whom we first met through his landmark Internet presentation to my colleagues and me at MFS, will be a main character throughout Bandwidth, as will his financial sponsor, Kiewit Corporation of Omaha, led by CEO Walter Scott.Kiewit Corporation was founded in 1924 as Peter Kiewit Sons’ Company by Peter and Andrew Kiewit. It was led by Peter Kiewit Jr. until 1979 and became the largest private construction company in the nation and iconic to its hometown of Omaha, Nebraska.
When Kiewit Jr. passed away in 1979, and his successor died soon thereafter, Walter Scott Jr. was named CEO. Scott was consistently cited as one of the wealthiest Americans. When Scott died in 2021, his net worth was estimated at $4.2 billion. Warren Buffett was a childhood and lifelong friend of Scott, a connection that would prove critical when the industry was in shambles.Walter Scott sat on the board of Warren Buffett’s Berkshire Hathaway, and Buffett’s office was located in Kiewit Plaza in Omaha.
In 1986 the start-up Chicago Fiber Optics acquired the rights to deploy fiber cable in the freight tunnels that ran underneath the financial district of downtown Chicago. The fiber was used to connect financial trading firms directly to their long-distance carriers, bypassing Illinois Bell, and thereby reducing the cost and accelerating the speed of stock transactions. Chicago Mercantile Exchange, the Chicago Board of Trade, industrialist Amoco Corporation, and retailer Marshall Field’s were among the first customers.
The Chicago start-up hired Kiewit to construct its fiber network. Crowe, a division president at Kiewit, was assigned to lead the project.Before Kiewit, Jim Crowe was an executive at the construction and engineering firm Morrison–Knudsen Corporation, where he gained experience overseeing the construction of portions of Sprint’s intercity fiber network. When the start-up ran out of money in 1987, Crowe convinced Kiewit to buy a controlling investment.
Crowe was tall and had pronounced facial features that made him stand out with presence in a room full of suits. Crowe spoke not as a corporate leader drone but as a compelling intellectual, connecting the worlds of engineering and business and captivating his audience. Crowe enjoyed framing and sharing his futurist visions. He carved out a reputation for making bold strategic investment decisions well in advance of other business leaders. Crowe would describe the future of the Internet, fiber, and regulatory disruption in the same tone and manner as President Obama articulated his Audacity of Hope. As Barack Obama became “Obama,” Jim Crowe in his world became “Crowe,” and he could hold and mesmerize his audiences with his compelling and hope-inspiring messages.
However, as an operator, Crowe’s record was mixed. He aced corporate strategy, fundraising, and M&A, but he wasn’t an operator. He did not like details and was annoyed by facts that contradicted his far-reaching conclusions. And perhaps he was better at talking than he was at listening.
Crowe needed a partner who would complement his strengths and cover for his weaknesses. For this, Crowe turned to one of his former executives, Royce J. Holland Jr. In the first several years of MFS, Holland became Crowe’s perfect wingman.
Regulatory strategy was a primary focus for Holland. The Bell System had a one-hundred-year monopoly, owned a cash flow machine, and was a regulatory powerhouse. Sure, the Baby Bells were open to competition, so long as the Bells were permitted to write the rules. Armed with endless resources to spend on lobbyists, the Bells were arrogant, hidebound competitors certain of controlling outcomes and their destinies. The Bells would let what they viewed as lesser competition nibble around the edges while they gained the pricing and regulatory freedom to have the times of their lives.
In comparison their upstart rivals had almost no money and practically no political or market influence. Building networks was expensive. Convincing customers to replace their trusted local phone company was difficult. The dependency on the monopoly competitor for access to conduit and telephone pole infrastructure could be massively problematic. The competitive carriers’ budgets for lobbying were miniscule compared with the incumbent, established Bells.
The fiber start-ups needed a showman, and MFS’s Royce Holland played it to perfection. Holland was fun-loving and humorous, a personality accentuated by his constantly messy white hair and wrinkled white collared shirts, which more often than not had brown stains at the armpits. The larger-than-life Holland was the megaphone that undressed the Baby Bells.
Whereas Crowe was introverted and intellectual, Holland was gregarious and freewheeling. He was featured in the publications of every trade rag spouting off on the Bells, repeating his greatest hits: “Their prices are too high; their service horrible. The Bell Heads refuse to innovate, and they toy with the regulators. They are fat, dumb and happy monopolists living off of ratepayers’ utility bills, while they play country club golf near their big homes in the nicest suburbs.”
Holland shamed the regulators into pushing forward with the changes that enabled competition. He made MFS appear as if it was a gigantic company with the resources to take on all the Baby Bells. It worked.
Holland caught my attention. Not only was he bold and charismatic, but he also sounded right. Holland inspired me to believe it was my moral, ethical, and spiritual obligation to take down the evil monopoly, notwithstanding the fact that they launched my career and paid for my expensive MBA.
Working under Holland, I learned the power of being a vocal industry leader, of establishing a brand with little to no marketing budget and thereby setting the course of an industry. This would come into play when, fifteen years later, I launched Zayo. Holland remains one of my iconic heroes.Following MFS, Holland remained an important telecom executive for years to follow. He founded Allegiance Telecom, eventually selling it to Carl Icahn. Holland became CEO of McLeodUSA after its second bankruptcy, and was later chairman of data service provider Masergy. He passed away at the age of seventy-five in March 2024, when I was finishing the first draft of this book.
With Crowe and Holland at the helm, MFS was ready to grow its fiber network beyond the means of construction. On the East Coast, in Washington, DC, a 1987 start-up was also constructing a local fiber network to bypass the Baby Bells. When the start-up ran into financial challenges, ownership passed onto its creditors, who sold it to MFS in 1991. Their CEO, Ron Beaumont, joined MFS as president of the business unit that provided dedicated connections to its customers. Beaumont would remain important throughout MFS and during the WorldCom saga, where he was briefly my boss.
By 1993 MFS had fiber networks in fourteen major markets, including New York City, Los Angeles, San Francisco, and Dallas. These NFL markets were seen as a starting point for a far more grandiose expansion.
With MFS established as the leading competitive fiber company, Crowe and Scott decided it was time to monetize MFS’s investment through a public offering. The first sentence in the business overview of the 1993 IPO prospectus described MFS as “the largest provider of local competitive access telecommunications services in the United States, based on an analysis of total fiber miles, buildings served, customer locations and total number of employees.”
MFS went public in May 1993, achieving a Market Value of $1.4 billion. The public markets loved MFS, and its valuation rapidly soared to multiple billions.
With the success of the IPO, MFS continued to develop its internal talent. Kevin O’Hara was MFS’s rising young executive. He began his career at Kiewit and moved to MFS. O’Hara was a hockey-playing fighter from Philadelphia with a chip on his shoulder. He chose construction management as a career and Kiewit as his first employer. A particularly loyal guy, O’Hara worked for Kiewit and its portfolio companies, MFS and its successor Level 3, until he almost turned fifty. By then O’Hara had become a son to Crowe and a feisty elder brother to me.
In 1991 O’Hara was named president of MFS Development, the group that led expansions into new markets. During the transition O’Hara’s predecessor handed him my résumé, along with the comment, “The last thing MFS needs is a Bell head.”Rick Kozak was the executive who was replaced by Crowe. Kozak later partnered with Tony Pompliano, the founder of Chicago Fiber Optics, to create MFS’s rival, American Communications Services Inc. (“ACSI”), which later was renamed e.spire Communications.
But e.spire ran into problems and went bankrupt in 2001. The company’s assets changed hands a few times before eventually ending up within Lumen. The subsection on tw telecom, in Chapter VI, provides additional detail on e.spire. O’Hara ignored the advice and hired me to lead the metro network expansions. If not for O’Hara, I probably would still be living in the south suburbs of Chicago.
O’Hara was my boss on and off again for the next fifteen years. He fired me at least once, sort of. I’m sure he considered firing me multiple times. I would have if I were him—I wasn’t the easiest guy to manage.
The group at MFS Development was raw, with blue-collar talent, absurd naivety, and unfettered enthusiasm. Our energy came from Holland. We were told to open up new markets. Through brute force and youthful ignorance, we overcame the obstacles the Baby Bells and local regulators placed in our way. I was reminded of my days at Ameritech Development when I toiled as the square peg in a round hole. Then I was Gulliver, abandoned on the shores of Brobdingnag. Not so at MFS Development. I was the opposite—a round peg in a square hole, a Gulliver in the land of Lilliput. In an ironic twist, I was viewed as the sophisticated and educated outlier in a blue-collar, construction-driven group of misfits. They were entrepreneurial. They got shit done. It was such fun!
I was proud of the reference in MFS’s 1994 annual report, which highlighted that MFS had expanded from fourteen networks at the end of 1993 to forty-two US markets. Why? I drove most of this expansion.
I remember with fondness the group that was there when I arrived. One team member claimed to have a side job as a male stripper. Once when he joined me on a business trip, he noticed our plane was light on passengers. As we boarded my colleague told me to follow his lead. He plopped down in first class and motioned me to sit next to him. He whispered, “If we act like we belong, they will let us sit here.” The flight attendant came by, papers in hand, asking for our names and seat assignments. My coworker played dumb and turned up his charm. It didn’t work. After a few minutes, we got up and went to our coach seats. Such was MFS Development’s early culture.
While I was at MFS Development, we expanded the team—most of whom were hired by me. The majority of my MFS Development colleagues became part of Level 3 and Zayo. Others joined our rivals.
As MFS grew, expanding our product offering to include voice services became a priority. In the early years, Baby Bell competitors offered direct connections, called private lines, between a corporate customer’s private network and the network of their long-distance provider.
Private lines were a great initial product to attack the local phone monopoly. The technical requirements were straightforward. The only necessary coordination with the Baby Bell competitors was shared infrastructure, such as conduits and poles.
Unfortunately, private lines were a tiny portion of the Baby Bells’ market. The big bucks were in voice-switched services. How could competitors penetrate the gigantic market for carrying local phone calls? MFS had a regulatory team that was grappling with this question.
In 1994 I received a shoulder tap from O’Hara that led to a make-or-break assignment from Holland. “We need you to be the business leader to spearhead the initiative opening up local competition for voice traffic.” The combination of my Bell company experience, business development background, and financial acumen made me uniquely qualified. However, my tenacious reputation for execution to drive outcomes was perhaps the most important factor.
The technical name of the pursuit was co-carrier, meaning that competitors and Baby Bells would be equal providers of voice traffic. Today, we take interoperability for granted. Whether dialing from an office phone, iPhone, or computer; whether using T-Mobile, Comcast, or Verizon; and whether calling someone in your building, your home city, or the other side of the world, you dial the number, and the call goes through.
In 1994 no one knew how this would work in a post monopoly environment. If a customer wanted to switch to a new carrier, could they keep their phone number? How does the company that completes the call get paid? Who sets the per-minute charge?
Does the originator of the call cover all the costs? If so, how will they know what they will be charged? What if the call traverses through a network that is owned by a third party? Does this provider also get paid? How much? By whom? How and where would the competitors interconnect their network to the phone companies, and who would pay for the costs of these interconnections?
How do 911 calls get completed in this environment? What about 411 directory assistance calls, especially considering that these platforms were owned by the Baby Bells? If a customer switches to a Baby Bell competitor, will their number get delisted from the Yellow Pages, which also were owned by the Baby Bells? If so, why would any business shift providers and lose their primary advertising platform?
The United States was the first to go through this quagmire. No precedent or guidelines existed. The path was littered with business, regulatory, and technical hurdles.
Luckily for me, I didn’t understand what I was signing up for when I said yes. We pursued co-carrier with a vengeance.
I was able to bring along a few members of my prior team alongside several technical employees who were already engaged in the regulatory effort. With the heavy involvement of MFS’s regulatory team, my team negotiated the nation’s first-ever co-carrier agreement with Ameritech as the counterparty. Numerous agreements with the other incumbents followed. We implemented all the interconnections, ancillary services, and financial arrangements to be a local telephone company.
The Telecommunications Act of 1996, which had a stated intention to “to let any communications business compete in any market against any other,” was signed into law by President Clinton on February 26. In May, with the heavy involvement of MFS’s regulatory team, my team negotiated a comprehensive agreement with Ameritech and MFS became perhaps the first competitive local exchange carrier in the United States.Andy Lipman was the regulatory pioneer who spearheaded this effort both as senior vice president of regulatory for MFS and in his overlapping role as a partner in the Washington, DC, telecommunications law firm, Swidler & Berlin. Lipman and his right-hand person, Alex Harris, were instrumental in the co-carrier effort. The Wall Street Journal summarized as follows:
MFS will be able to lease Ameritech’s copper phone lines to reach prospective customers without also having to lease other facilities owned by the Bell, including expensive switching centers. Ameritech customers who choose to use MFS’s service will be able to retain their phone numbers. The two carriers also agreed on rate parity: Ameritech and MFS will pay each other the same amount for local calls made on one company’s network but ending in the other’s.
Numerous agreements with the other incumbents followed. We implemented all the interconnections, ancillary services, and financial arrangements to be a local telephone company.
Despite our success in pioneering competitive local voice services, the experience taught me that providing voice services was enormously complicated, with the need for lots of disparate systems and a vulnerable dependency on regulation. Customers, reluctant to leave their trusted Bell company given their reliance on voice, required steep price discounts. The voice market was a zero-sum game, as revenue was relatively flat. Add this all up and it was nearly impossible to make money as a provider of competitive voice services.
A clear lesson emerged: stay away from voice.
Thankfully, we were able to apply our success in building out the competitive voice networks to the termination of Internet traffic. UUNET and other ISPs relied on MFS’s co-carrier platform and fiber network to terminate Internet modem traffic and keep pace with the rapid growth of AOL, MSN, and others. MFS’s role, enabled by the co-carrier initiative as key supplier to UUNET, led to Sidgmore accepting Crowe’s $2 billion bid to buy his company.
The MFS-UUNET marriage was a match made in heaven. To understand why, it is essential to know that in the early days of the Internet, consumers accessed it through dial-up phone connections. At busy hours in the evening, customers would try over and over again to log in. Once in, they would never log out, which put a huge strain on the phone system.
Co-carrier regulation at the time resulted in Bell companies paying their rivals by the minute to terminate the calls. As a result, modem connections were draining the Bell companies of their cash flow while enriching MFS.
UUNET had an initiative named Project DAN, for dial-up access network, that was supercharging the augmentation network capacity.The Internet was initially accessed through modems attached to phone lines. The expression “dial up” referred to launching a modem connection through a phone line. Dial-up access network was the collection of equipment and data links that supported these modem connections to the Internet. Responsibility for executing Project DAN was assigned to my team, leading most to believe the project was named after me. The undertaking involved network planning, network implementation, and endless pestering of the Bell companies to increase capacity between our network and theirs. It was invigorating as we turned up capacity throughout the United States and glorifying to watch as the revenue poured in. John Sidgmore, though never expressing satisfaction, appreciated our progress.
Despite the excitement of the UUNET acquisition, the ramping up of revenue, the soaring stock price, and the global praise for MFS, something was amiss. The cause of the ruckus was related to MFS’s transition from a simple to a complex organization.
For the first several years of MFS’s existence, its approach was simple, as its only product was private lines.
The organization structure at MFS was centered on business units: MFS Telecom, MFS Intelenet,MFS created MFS Intelenet in 1992. Kirby “Buddy” G. Pickle, a sales executive with Sprint, MCI, and AT&T, was named president. Two years later MFS Intelenet acquired two voice and voice equipment resellers to become one of MFS’s largest units.
After MFS was acquired by WorldCom, Pickle became COO of Teligent, a company similar to MFS Intelenet. He left just before its collapse.
Next, Pickle became CEO of Velocita, the company funded by Koch Industries under the name PF.Net. Interestingly, Bob Annunziata was his chairman. Velocita went bankrupt in June 2002. Velocita’s primary customer was AT&T, which bought the assets out of bankruptcy for pennies on the dollar. To learn more about Velocita, see appendix 3, “More Bandwidth Stories.” and MFS Datanet.When MFS acquired Network Communications in 1989, its co-founder, Scott Yeager, was named city manager of MFS Houston. Yeager developed a new type of data service using customer premises equipment that ran on the Ethernet protocol. He shared his ideas with Rick Adams of UUNET, which sparked the creation of MAE-East, the important interconnect location in the early commercialization of the Internet. Sparked by Yeager, MFS created a new business unit named MFS Datanet to focus on data connectivity.
Yaeger left MFS and became a leader at Enron Broadband, which played a major role in the collapse of Enron. Yaeger struck a deal with the SEC to avoid prosecution. They each had their own sales team, product group, and network organization.
As MFS grew it became clear that having three standalone business units was nonsensical. Customers bought transport, voice, and data services. The sales team needed to be aligned with the customers. Moreover, the higher-layer business units—Intelenet and Datanet—used the network resources of MFS Telecom, yet no mechanism existed for the use of these valuable and expensive assets.
Should the network remain separated by product layer, as is currently the case? If so, should the higher layers purchase services from the lower layers? Or should the network be viewed as a factory that is available for use by all the products? The latter would match up well with the traditional Bell System.
If the network was treated as a factory, the majority of the organization would be reassigned to this cost center. The roles of the presidents of the three business units would be unclear, as most of what would remain were the sales, marketing, and customer service organizations.
Crowe asked Holland to come up with a recommendation. Holland, after consulting with his presidents, recommended only modest changes to the current model. They wanted to preserve the business unit structure while allowing the sales teams to cross-sell products among the business units.
Crowe overrode this recommendation. He decided the network was a factory, and it would be most efficient to collect all network assets, as well as the engineering and operations personnel, in a newly created Global Network Services organization. With that, 1993 marked the year of MFS’s big reorganization.
Crowe put O’Hara in charge, despite O’Hara having no experience in running a large network organization. The three business unit leaders retained their president titles, but their roles were dramatically narrowed.
In early 1995, with this organization in place for less than two years, I received an out-of-the-box request to travel to Omaha for my first one-on-one interaction with Crowe, outside of larger group meetings. Though the topic was unclear, the request was urgent. When I sat with Crowe, he explained the company had an issue, and he couldn’t get his arms around it.
“Revenue is growing, yet the profitability is shrinking,” he fretted. “The business unit executives say they are hitting their revenue numbers, but the network company doesn’t know how to run the network efficiently.”
Crowe continued, “The network executives argue it is the other way around. The business unit executives are making their numbers by selling products that are unprofitable—either because of low prices or misalignment with MFS’s network assets. The network organization blames the shrinking margins on misguided sales execution.”
Crowe told me he couldn’t figure out which perspective was correct. “The only thing both sides agree on is you. They think you have the analytical skill, intellectual honesty, and tenacity to get to the bottom of this.” He told me to do whatever was necessary to figure it out. As a public company CEO, Crowe was under a lot of pressure.
Getting to the bottom wasn’t hard. Doing it without getting fired was the tricky part.
The business units weren’t really business units managing profits and losses. They were revenue units. They were accountable for beating their revenue targets. Most of their costs came from Global Network Services, the network factory outside their control.
The network factory wasn’t really a company; it was a cost center. Global Network Services built and operated networks, spending most of the company’s capital and managing most of the company’s people and expenses. It was accountable for beating its expense and capital budgets, but its workload was driven by the business units. If Global Network Services cut costs to make a budget, it would directly affect the revenue growth and customer experience of the business units.
Everyone knew this, and that was why the riddle was easy to decipher. However, no one acknowledged the source of the problem. To do so, the business unit leaders would have to admit they were driving their revenue without knowing the underlying costs. The network company would have to admit it didn’t know whether the investments it was making were creating value.
That was why not getting fired was the trick I needed to master. How do you tell the CEO and CFO that the organizational setup of the company was at the core of the problem? How do you tell the business unit leaders that they have no clue whether they were selling the right products to the right customers in the right locations at the right prices? How do you tell the network executives that they have no way of knowing if they are running the network appropriately?
Well, I told them my opinion. I didn’t get fired. Instead, Crowe and Scott decided to take their chips off the table by selling the company to WorldCom in 1996 for the staggering price of $14.3 billion. WorldCom’s CEO, Bernard J. “Bernie” Ebbers, who was rapidly emerging as a darling of Wall Street, bailed us out.
I knew that Crowe was committed to building MFS for the very long term. The decision to sell to WorldCom was only because he knew he was about to disappoint his investors. Losing financial control of the company was the reason. The impression this made would weigh on me throughout my career, eventually leading me into redefining how a large telecom company should be organized and managed. I attribute the future success I had as CEO to the financial discipline I would instill in an organization, which originated with my unique insight into why MFS waved the white surrender flag.
Qwest (SP Telecom)—Philip Anschutz and Joe Nacchio#
While Teleport and MFS were building local fiber networks, Qwest, bankrolled by Philip Anschutz and led by hired gun and CEO Joe Nacchio, took a different approach. They focused on building out intercity fiber networks. With a unique business plan, they got off to a fast start. Qwest attracted many copycats, which, along with undisciplined ambition and industry-shattering missteps, led to a historic collapse. Eventually, the Qwest assets would become part of Lumen.
By the late 1990s, Philip Anschutz had established himself as a Wild West entrepreneurial legend. Already a billionaire and listed as the wealthiest person in Colorado, he turned his attention to fiber networks. His business journey frames how he gave birth to Qwest.
Anschutz’s plans to attend the University of Virginia School of Law were aborted when his father Fred’s illness left the Anschutz family in financial straits. Anschutz the senior was a dealmaker who thrived and dived on risk-taking in the oil market. Fred would make a small fortune when the oil market soared but lose it just as fast as the market plummeted. At times the Anschutz family would struggle to pay their bills. Anschutz recalled, “You never knew what was going to happen next.”
Anschutz characterized the first five years of taking over the family’s troubled business as the hardest of his life. “As a wildcatter, 95 percent of everything you do is a failure. Most holes are dry.”
At the age of twenty-seven, Anschutz’s flirtation with bankruptcy became an early chapter of his legendary story. An exploratory oil well blew up at a site that Anschutz was drilling near Gillette, Wyoming. Anschutz promptly chartered a plane, rented a pickup from a neighboring farmer, and visited the site. The land was ankle-deep in crude oil, and natural gas was thick in the air. Armed with the inside knowledge of the discovery of a big oil field, Anschutz embarked on a buying spree, acquiring oil leases for surrounding land on thirty days of credit.
When Anschutz returned to Denver, the TV news was covering a major oil field fire in Gillette, Wyoming. The land associated with his oil rights was in flames, putting Anschutz at risk of failing to meet his obligations related to his newly acquired leases.
Anschutz tracked down the famed oil firefighter Red Adair. Lacking the money to pay Adair in advance, Anschutz’s first attempt to persuade him didn’t go well. “Kid, I checked you out, and you don’t check out,” Adair responded.
Despite Adair’s initial hesitation, Anschutz persisted and eventually succeeded, though Adair issued a warning: “If you don’t pay me, don’t ever have another oil field fire.”
Serendipitously for Anschutz, Universal Studios was making a movie about Adair, starring John Wayne. Armed with this knowledge, in true entrepreneurial folklore, Anschutz sold Universal the rights to film the crews fighting his Wyoming fire for a fee of $100,000. This windfall provided him the runway to secure bank loans needed to close on the oil rights he had purchased on credit. Anschutz made millions.
Anschutz learned from the financially devastating close call: “It’s important to have your back to the wall. It teaches you how to think outside the box.”
In 1978 the next chapter of the Anschutz legend unfolded when Amoco Corporation discovered a large natural gas reservoir adjacent to an Anschutz ranch. Instead of immediately selling to Amoco, Anschutz waited. Four years later he sold half of his interest in the property to Mobil Oil for $500 million in a $1 billion transaction that also included rights to additional Anschutz properties. This move allowed Anschutz to reduce his debt ahead of the oil market crash of the 1980s.
Following his exit from the oil industry, Anschutz shifted his focus to railroads. He purchased Denver and Rio Grande Western Railroad in 1984, which bolstered his confidence to purchase the significantly larger Southern Pacific Railroad in 1988. Anschutz’s contribution to the $1.8 billion purchase price was only $90 million, with the majority funded through bank loans and junk bonds. His $90 million investment was obtained by merging the Rio Grande with Southern Pacific. Soon thereafter, he sold 25 percent to Morgan Stanley.
Southern Pacific was a distressed railroad that was burning cash and in need of substantial investment to improve its operations. Anschutz capitalized on underlying land rights, monetizing the rights for $2.2 billion, which provided the necessary funds to support the operations and upgrade the facilities. He took the Southern Pacific public in 1993.
Anschutz’s railroad investment thesis centered on consolidation, anticipating that rail properties would increase in value as the number of rivals decreased. The 1985 merger of Burlington Northern with Santa Fe left Union Pacific and Southern Pacific as the only other major railroad operators west of the Mississippi. As a result, Union Pacific was eager for a merger, providing Anschutz the leverage to negotiate a $5.4 billion purchase price in 1996, with Anschutz’s stake worth more than $1 billion.
As it so happens, railroads sell communications companies the rights, known as rights-of-way,Rights-of-way are legal agreements that allow others permission to use the owner’s land for specific purposes. Typically, utilities leverage right-of-way agreements to construct pipelines, bury power or telecommunications cables, and erect cell towers. to use the land alongside their railways. Long-distance telephone companies such as MCI and Sprint acquired right-of-way from railroads to install their microwave towers.Southern Pacific deployed a communications network that it used to provide telegraph services. In the 1970s it began to use this network to offer long-distance calling services that competed with those of AT&T. In the mid-1970s, Southern Pacific selected Sprint, an acronym for “Southern Pacific Railroad Internal Networking Telephony,” as the new name for its communications company.
In 1983 Southern Pacific sold Sprint to GTE. Starting in 1986 and culminating in 1990, GTE sold its stake in Sprint to United Telecom, which eventually changed its own name to Sprint.
Southern Pacific’s history with Sprint prepared Anschutz well for the fiber-optics revolution and his formation of Qwest. These towers were instrumental in expanding their intercity microwave-based communications networks, enabling them to compete with AT&T. As fiber began to replace microwaves, railroad rights-of-way became even more valuable, as fiber could be laid alongside rail lines more quickly and less costly than most construction alternatives.
Southern Pacific had a small division named SP Telecom, which focused on monetizing its rights-of-way. Additionally, SP Telecom offered fiber construction services to its communications customers. SP Telecom had a long-term agreement with its railroad sibling to lay fiber alongside Southern Pacific railways.
In 1995, one year before the Southern Pacific sale to Union Pacific, Anschutz separated SP Telecom from Southern Pacific. He then acquired Qwest, a small microwave communications company in Dallas, merged it with SP Telecom, and rebranded the combined entity as Qwest. Leveraging his insights and relationships from within the railway industry, Anschutz negotiated rights-of-way agreements with other major railroads.
In its December 1996 article titled “Qwest Sees Itself Rising to Top with Its High-Speed Network,” the Wall Street Journal unveiled Anschutz’s ambitious plan: “In the mad scramble by the nation’s large telecommunications companies to find more network capacity, tiny Qwest Communications seems poised to deliver. Qwest . . . is building a $2 billion high-speed network to transmit voice, video, and data.”
Anschutz said, “There are probably those who would say this isn’t the sexy part of the business. But this is the underlying platform upon which strategies and companies are built.” Fiber networks were sexy to me.
Salomon Smith Barney analyst Jack Grubman proclaimed that, because of the Internet, bandwidth capacity requirements were now doubling every four months, compared with doubling every twelve months just one year earlier.Salomon Brothers was the name of the firm when Grubman joined. The name was changed to Salomon Smith Barney in 1997 as a result of a merger. Travelers Group purchased Salomon in 1997 and retained the brand as its banking division. Citigroup merged with Travelers in 1998 and dropped the Salomon Smith Barney brand in the early 2000s. Grubman was emerging as the highest-profile analyst of the Bandwidth industry, leading to mischievous behavior and ultimately dire consequences.
To offset the costs of the network, Anschutz sold 25 percent of the fiber on the Qwest network in 1997—twenty-four fibers—for $500 million.The fibers were sold to Frontier Corporation, the rebranded name of Rochester Telephone. In 1999 Global Crossing purchased Frontier and took possession of the fibers. With this funding in hand, Anschutz sought a seasoned communications industry leader to execute his vision for Qwest. In late 1996 Grubman introduced AT&T executive Joe Nacchio to Anschutz.
Nacchio described himself as “an entrepreneur trapped inside a big, bureaucratic organization,” which seemed like an odd self-reflection given that he had spent twenty-six years in the AT&T bureaucracy. Perhaps Nacchio’s departure had more to do with him being passed over in the AT&T CEO succession plan.
In any case Nacchio was the executive Anschutz was seeking. Anschutz explained, “Nacchio is certainly one of the best-known guys in the business, plus he’s got a lot of the discipline and background I was looking for,” referring to Nacchio’s engineering, marketing, and sales experience. Nacchio was firmly in the Anschutz companies’ family. On his first day at Qwest, Nacchio found a pair of cowboy boots on his desk. Next to the boots was a note from Anschutz: “Welcome to Denver. Horses and guns to follow.”
Nacchio was excited as well. “This is an industry at an historic inflection point,” he declared.
Shortly after Nacchio joined, Qwest struck two deals to sell fiber on its under-construction network. The transactions infused an additional $600 million of cash on top of the $500 million from Anschutz’s earlier fiber sale.The transactions were with WorldCom and GTE. In 1997 Qwest acquired SuperNet, a Colorado Internet Backbone provider, for $20 million, giving Qwest a chance to dip its toe into the Internet.SuperNet was a nonprofit ISP owned by Colorado Advanced Institute of Technology, the University of Colorado, the Colorado School of Mines, Colorado State University, and the University of Denver.
Nacchio’s vision for Qwest was to rival AT&T as a full-fledged telephone company that offered a full stack of communications services, including voice, data storage, consulting, and website hosting. To fund this vision and reduce debt load, Qwest raised $321 million in a June 1997 public offering. The initial stock price was $22 per share, which valued Qwest’s equity at $2 billion. By the end of 1997, Qwest’s Market Value increased to $6 billion. Anschutz’s 84 percent ownership was valued at $4.9 billion, representing a ninety-fold increase on his $55 million investment.
Nacchio was amazed at how easy it was to raise money. In the fall of 1998, he claimed to have completed a large fund raise in a ten-minute call with bankers while driving to his son’s soccer game. “Before the game was over, we had subscribed for a billion bucks at 8.9 percent interest,” bragged Nacchio.
Nacchio was ready to make his first move toward his big vision; he just needed the right acquisition target. In 1998 Qwest executed a $4.4 billion stock swap to purchase LCI International, turning Qwest into the fourth-largest, long-distance company behind AT&T, MCI, Sprint and WorldCom.LCI International, which was born as LiTel in 1983, was founded by telecommunication industry veteran Lawrence McLernon. LiTel built out a 1,500-mile fiber network in the Midwest. By 1990 LiTel, though tiny in size at $200 million in revenue, was in the top ten of US long-distance companies. However, profitability wasn’t sufficient to keep pace with its debt service.
Warburg Pincus, LiTel’s biggest investor, replaced McLernon with H. Brian Thompson. Under Thompson’s leadership, LiTel shifted its focus from business to residential customers and honed in on more profitable international traffic. In 1992 the company was renamed LCI International. In 1999 Thompson took LCI public, raising $200 million. Throughout the 1990s LCI grew. By 1996 Thompson tripled the revenue to $600 million. Despite its early focus on fiber networks, LCI mostly relied on the networks of other carriers to deliver its service. The acquisition provided Qwest customers and traffic to redirect onto its network as it was completed.
H. Brian Thompson, a former MCI executive, was named vice chairman. Reflecting on the sale, Thompson remarked*,* “In some respects it’s a little like watching your mother-in-law drive over a cliff in your new car. You’re not sure what you’re going to feel about it.” Perhaps Thompson was just being nostalgic. Or maybe he was peering into a crystal ball.
Either way, Qwest stock price continued to rise. In April 1999 BellSouth, the Baby Bell of the Southeast, purchased 10 percent of Qwest for $3.5 billion, pushing Qwest’s Market Value to $35 billion. In an SEC filing, BellSouth reported it would eventually consider purchasing all of Qwest.
The rise of Qwest brought attention to the reclusive Anschutz. In 1999 CNN Money published “Billionaire Next Door Philip Anschutz May Be the Richest American You’ve Never Heard Of.”
The intriguing thing about Philip Anschutz is not that he’s worth well over $10 billion. It’s that he’s a genuinely nice guy worth more than $10 billion. He didn’t make his money by being a nasty, grasping, miserly bastard. Once he got rich, he didn’t turn into a twisted, weirdo billionaire like Howard Hughes. . . . As billionaires go, Anschutz is abnormally normal.
Anschutz wasn’t entirely under the radar. After all, he had been recognized as the richest person in Colorado for the previous fifteen years.
The Los Angeles Times piled on in its article titled “One Word for Phil Anschutz: Private.” The focus of its article was not fiber but on the grand opening of LA’s new sports palace, the Staples Center, which Anschutz had built.
Anschutz and Nacchio reached an inflection point. Would they follow the leads of Malone and Annunziata of Teleport, Scott and Crowe of MFS, and Conrades of BBN by taking their billions of dollars off the betting table?
Or would they gamble, like Schrader of PSINet?
In June 1999 Forbes published an article titled “Merger Rumors Surround Qwest,” which opened with “Like a character in a French bedroom farce, Qwest is running from room to room amidst the slamming of doors, looking for love. [Qwest] has been portrayed in various reports as both the suitor . . . and as an object of desire. What is Qwest doing? Buying or being bought out?”
The company that Qwest was rumored to be courting was U S West, the Baby Bell headquartered in Qwest’s hometown of Denver. However, U S West was already committed to selling itself to a different fiber provider—a new upstart named Global Crossing, now run by Annunziata, another castoff of the 1996 AT&T succession debacle, soon to be covered. The Global Crossing-U S West deal was priced at $32 billion. Qwest would have to top that bid and convince U S West to terminate its merger agreement.
The headline in the New York Times on June 15, 1999, was “At Qwest, a Chance to Become Really Big.” Two days earlier, on Sunday, June 13, Nacchio fired off hostile bids to acquire both U S West and Frontier, another company that had agreed to sell itself to Global Crossing. The combined value of the two bids was $55 billion.
The New York Times honed in on the face-off between the AT&T veterans.
In recent years, Mr. Nacchio and Mr. Annunziata have come to be rivals in almost every sense, competing for the same investors, and many of the same customers. Now they are competing for a place at the table with the moguls of communications. . . . So, while Global Crossing is by no means out of the game for U S West and Frontier, given the sharp thumbsdown the market gave Qwest yesterday, a winning deal by Qwest would catapult it into the ranks of the world’s biggest communications companies. That would be an impressive feat for Mr. Nacchio, a personable, engaging, fast-talking salesman who is widely admired for his smarts.
Clearly, Anschutz and Nacchio were ready to double down.
Broadwing (IXC)—Ralph Swett#
The poor man’s version of the Qwest story is the tale of Broadwing.The prior names of Broadwing were IXC Communications and Communications Transmission Inc. (CTI). Its founder, Ralph Swett, had the ambition of Anschutz but not the billionaire bank account. His focus, like Qwest’s, was on the construction of an intercity fiber system. But he didn’t have the railroad land assets to lower his costs. He built out an early intercity fiber network anyway and did quite well for himself. Today, his assets are part of Lumen.
Swett’s story traces its roots to the Times Mirror Company, which was born in 1884 when the Mirror Printing and Binding House was combined with the Los Angeles Times. The media company owned Popular Science, Outdoor Life, Golf Magazine, and Field & Stream; a Cable TV business; and a microwave communications network that, like MCI and Sprint, was an early competitor to AT&T. Times Mirror decided microwave infrastructure no longer fit its business strategy and sold the division in 1985 to a group led by its Cable TV president, Swett, for $175 million.
Through acquisitions and organic buildouts, Swett expanded his Communications Transmission (CTI) microwave network to more than ninety cities. However, CTI lost Western Union, its most important customer, in 1990, causing default on several loan agreements.
Swett rebounded, using loans secured by his personal balance sheet, and restructured the business, now rebadged as IXC Communications. Throughout the first half of the 1990s, IXC remained focused on selling private connections between cities on its hybrid microwave and fiber network. As momentum grew with fiber and the Internet, IXC seized the opportunity through acquisitions, fiber build-out, and the rollout of nationwide data networks.
By 1995 IXC’s revenue jumped to $203 million, enabling the company to raise $93 million in a Nasdaq public offering with its shares trading at $16. Swett described IXC’s competitive position as a wholesale provider to other service providers, stating, “[IXC’s] role in the data communications industry is to supply capacity to companies that resell broadband services to the commercial market. . . . Unlike other carriers, we do not compete with our customers for data communications business.” Though true at the time, this changed quickly in the next two years as acquisitions pushed into providing retail services to commercial customers.
In 1997 and 1998, IXC continued its acquisitions, several of which strayed from its primary business of selling bandwidth. Swett even secured 20 percent ownership of PSINet in exchange for $240 million of capacity on the IXC network.
Yet Swett was frustrated with the company’s stock performance—with IXC’s valuation being 10 percent of rival Qwest’s value—and concluded it was time to sell. In November 1999 Cincinnati Bell announced its purchase of IXC for $3.2 billion.$2.1 billion of the $3.2 purchase price went to IXC shareholders; the other $1.1 billion was associated with IXC’s debt. The combination then changed its name to Broadwing, now consisting of the Cincinnati Bell local phone operations and the former IXC intercity fiber system.
Cincinnati Bell would soon regret this decision.
WilTel—Roy Wilkens#
Kiewit wasn’t the only multigenerational industrial company from heartlands that saw fiber as its next big frontier. The Williams Companies of Tulsa, Oklahoma, mobilized behind Roy Wilkens, the president of its oil pipeline division. Like Anschutz, Williams planned to connect NFL cities, and they, too, had a shortcut. Whereas Qwest had railroad rights-of-way to leverage, Williams had empty oil and gas pipes as its edge. Williams’s brass called their fiber sortie WilTel. Today, Verizon is home to those assets.
Wilkens, who is twenty years my senior, grew up fifteen miles from my hometown. When I met him in 1996, I was living in Orland Park, Illinois, the town immediately adjacent to his hometown of Tinley Park.
Wilkens left Illinois to attend University of Missouri-Rolla, known now as Missouri University of Science and Technology, and received an electrical engineering degree. His career path led to Tulsa, where he became an executive of Williams Companies, which was among the largest transporters of natural gas and petroleum in the country through its network of pipelines.
In the early 1980s, Wilkens, then president of Williams Pipeline Co., attended a Harvard University program for midcareer executives. Inspired, he returned to Williams with a proposed solution to its vexing problem.
At the time, we were heavy into the energy sector, real estate, and production. All three of those sectors of business were on the down side. . . . So what Williams did is try to look for an additional industry to get into that was either non-cyclical or counter-cyclical. And we found communications had no cycle at all. . . .
. . . the telecommunications industry [was] exploding, and Williams Pipeline had a vast network of decommissioned oil and gas pipelines doing nothing.
Wilkens’s idea was that Williams should use the pipeline infrastructure to build out a network of fiber cables and offer wholesale bandwidth services to long-distance carriers such as AT&T, MCI, Sprint, and their emerging rivals.
Wilkens pitched the idea to Joe Williams, the chairman and CEO of Williams, who was the son of Williams’s co-founder, David Williams.Williams was founded as Williams Brothers in 1908 by Miller and David Williams. In 1949 John H. Williams, a nephew of the founders, teamed up with his brother, Charles Williams, and David’s son, David Williams Jr., to buy out his uncles. They took Williams public in 1957 and, in 1966, purchased Great Lakes Pipe Line Company, the largest petroleum pipeline network at the time. In the 1970s they rebranded to the Williams Companies. In 1982 they expanded into natural gas transport with the purchase of Northwest Energy Company. The business plan was approved, $50 million funding was allocated, and the business unit named WilTel Communications was created, with Wilkens named CEO.
A 1990 article in the Oklahoman titled “Firm Combines Fiber Optics with Pipelines” described the process WilTel used to build out the fiber network.
In 1985, Williams Cos. shot pipeline “pigs” through a sector of tubing in the Midwest, much of it with an eight-inch diameter. The plastic balls acted like bullets in a gun barrel, cleaning the pipes.
Then the crews blew a thousand gallons of alcohol through the lines, flushing the residue.
Fiber optics followed. The glass filaments, sheathed, and bundled, slid inside pipes that were nestled beside as many as a half-dozen other tubes in the Williams Cos. rights of way.
The elapsed time to build out the fiber network was reduced from more than four years to less than two years. The pipelines reduced the capital investment by more than 80 percent. Moreover, the oil and gas pipes provided a hardened environment that provided protection to the fiber that was far superior to competitors’ fiber, which often was directly buried into the ground. These factors provided WilTel enormous advantages in cost structure, speed to market, and service quality.
By 1989 WilTel had eleven thousand miles of fiber network that stretched from the Atlantic to the Pacific, covering most major US cities.WilTel constructed most of its network. However, it also acquired companies with fiber networks. In 1987 WilTel acquired LDX NET, which owned 1,295 miles of fiber in Texas, Louisiana, Oklahoma, Missouri, and Kansas. In 1989 WilTel purchased LIGHTNET, which had 4,500 miles of fiber network, linking thirty-eight major cities in the eastern United States for $365 million. The business posted revenue of $300 million and an operating profit of $60 million.
In 1990 MCI announced plans to invest $1.1 billion to upgrade its network from an analog to a digital system, with WilTel selected as a major supplier. In a powerful endorsement of WilTel’s carrier strategy, Bert C. Roberts Jr., MCI’s COO, said, “The agreement with WilTel . . . will permit us to provide fully digital communications while giving us the flexibility to most efficiently invest our own capital.”
WilTel was seen as an acquisition target by MCI and others. Wilkens enjoyed the attention: “I think we are probably one of the most sought-after telecommunications businesses in the country. I think we make the Big 3 a little nervous.”
Surprisingly, the bidder for WilTel was not one of the Big 3—AT&T, MCI, or Sprint. It was a fast-growing reseller of long-distance services—WorldCom. “We have a very large customer base that would fit very well on their network,” said WorldCom CEO Ebbers. In May 1994 Ebbers offered Williams $2 billion to buy its WilTel subsidiary. In an attempt to pressure the bid’s acceptance, Ebbers pointed out that the $2 billion was 76 percent of Williams’s total Market Value.
An analyst at Merrill Lynch endorsed the WorldCom bid, noting that WorldCom did not own a nationwide fiber network: “It’s an excellent fit—more than most other mergers.”
Williams cavalierly rejected the WorldCom offer. “They met, they talked, they considered,” explained a Williams spokesperson. At the same time, the Williams board indicated that WilTel was in play, directing management to explore several other alternatives, including possible alliances with one or more partners.
In July 1994 Ebbers increased his offer to $2.5 billion, and the offer was accepted. “It was a time of enormous opportunity,” reflected Wilkens. “Technology was moving extremely fast, and lots of people jumped into the industry. It was the wild, wild west for five to ten years.”
This transaction hinted that the industry might soon enter a new stage. Was a Bandwidth Boom Gold Rush beginning to build momentum?
Nice job, Wilkens! You sold at the right time.
XO (Nextlink)—Craig McCaw#
Craig McCaw, similar to Anschutz, overcame adversity at a young age. He, too, had extraordinary prowess as a tech entrepreneur in infrastructure businesses. Like Anschutz, his love of business kept him going even after achieving incredible financial success. Instead of oil and railroads, McCaw’s pre-Bandwidth exploits were in Cable TV and mobile communications.
Whereas Anschutz’s fiber focus was on connecting cities, McCaw vied with Teleport and MFS on metro fiber networks. The company he created was initially named Nextlink and later rebranded as XO Communications. The company bobbed and weaved until eventually becoming part of Verizon. Along the way, the famed financier Carl C. Icahn would jump into the XO drama.
Craig McCaw was nineteen years old when he walked into his parents’ bedroom to find his father dead from a massive stroke. Elroy, his entrepreneurial old man, left behind a significant estate, including several radio and TV stations, investments in fifty-four companies, money in twenty-five bank accounts, a seven-bedroom mansion on five wooded acres in the Highlands community near Seattle, go-karts, motorcycles, vintage cars, a Learjet, and a sixty-three-foot yacht.
Elroy also left the McCaw family with a ton of debt. Bill Gates’s father, William Gates Sr., served as the McCaw family estate attorney for over ten years. When all the dust settled, only $20,000 of value remained from the original estate valuation of $12 million. The only asset that survived was a small cable company in Centralia, Washington.
No doubt, McCaw gained a lifetime’s worth of entrepreneurial lessons by sorting through his family’s collapsed empire.
“My father was a visionary who did not hire great people. . . . I’m picky about the people I do business with. He wasn’t picky. I learned to be fastidious about accounting, to be careful about the ethical nature of people. And to keep things simple, to focus on quality,” McCaw reminisced.
Craig McCaw was one of four brothers. Though all became wealthy, it was only Craig who focused long term on work. A 1993 Seattle Times article characterized the contradictions that described McCaw:
He’s a fierce competitor with no ego. A dyslexic who sees things others miss. A visionary who communicates clumsily. A fitness nut who looks frail. A wallflower bold enough to wager billions on risky business deals. A person who avoids people, yet has powerful insights into personal motivations. A man who is worth half a billion dollars, owns planes, and yachts, yet wears a cheap digital watch. A strategist who plots his steps but tries to be spontaneous. A man with the subdued persona of a seminarian who shoots Nerf balls at visitors to his office.
To some, a genius. To others, mainly unwitting rivals later left in his wake or outsmarted in a deal, a crazy fool.
McCaw was a student at Stanford when Elroy passed. During his senior year, McCaw became CEO of the Centralia Cable TV company. Using junk bonds, he spent the next fifteen years buying cheap, fixer-upper cable systems; raising quality and prices; and generating cash flow. By the 1980s McCaw Cablevision was the twentieth-largest cable carrier in the United States. In 1987 he sold it for $755 million, of which $250 million stayed with McCaw.
In 1979 the FCC established its cellular policy and began the process of issuing spectrum licenses. In 1980 AT&T hired McKinsey & Company to assess the opportunity. McKinsey estimated the market would grow to only nine hundred thousand subscribers by the year 2000, leading AT&T to conclude that the cell phone market was simply too small for the company. McKinsey’s estimate turned out to be less than 1 percent of the actual subscriber number. This massive miscalculation blows my mind. Did AT&T get a refund from McKinsey for this multibillion-dollar mistake?
McCaw’s conclusion was the opposite of McKinsey’s, which led him to enter FCC’s lottery for spectrum licenses. He was granted licenses in six of the top thirty markets in the United States in 1983. He used his proceeds from the sale of the Cable TV company along with debt from the junk bond king Michael Milken to gather up additional licenses from other FCC spectrum awardees.
On a 2020 podcast, Milken reflected (paraphrasing), “As hard as it is to believe today, of all the industries that I financed, the most difficult was mobile. People couldn’t understand why they needed mobile. I had seen Captain Kirk tell Scotty to beam him up. Both Craig and I believed the future was mobile.”
Milken and McCaw convinced the capital markets of the value of the spectrum licenses, which they used as collateral to raise $1.25 billion in junk bonds for their new venture, McCaw Cellular. Additional cash was raised by selling 22 percent of McCaw Cellular to British Telecom. His acquisition spree culminated in 1989 with a $3.5 billion acquisition of another mobile provider. By the early 1990s, McCaw Cellular was the largest mobile phone network in the United States.
Like his father, Elroy, McCaw accumulated a significant amount of debt to the tune of $5 billion. Unlike his Pop, McCaw cashed out. AT&T purchased McCaw Cellular for $12.6 billion, making McCaw a billionaire.
The value of McCaw Cellular, rebranded as AT&T Wireless, rose dramatically. Six years after the sale, AT&T took AT&T Wireless public in the then-biggest IPO in US history, resulting in a valuation of $73 billion. McCaw may have compounded his earlier mistake of holding investments too long by prematurely selling his cellular business. Perhaps he’d get another bite at the apple.
McCaw launched his family office in 1993, with a grand ambition around global communications. McCaw explained in 1996,
The revolution is here. People need high-capacity networks to homes, to remote locations, to farms, to villages that have never had fiber and won’t for a long time. It’s pretty obvious that there’s a need, and that demand will build.
You arrive at moments in time when an entrepreneur, a technology, and the needs of people coincide. You get serendipity every once in a while. You try to be willing to accept it when it works on your behalf.
McCaw invested $1.1 billion in another wireless venture to turn a mobile dispatch company into a unique new entrant into the mobile provider space. Nextel partnered with Motorola to provide a “push to talk” phone feature that was well suited for truckers, taxi cabs, construction workers, and other service industries. Nextel grew to serve 3.6 million customers. In 2005 Sprint purchased Nextel for $35 billion.In 1994 McCaw partnered with Bill Gates to form Teledesic, a satellite venture aimed at operating a constellation of three hundred low-Earth-orbit broadband communications satellites. He made the cover of Fortune magazine with the headline “Craig McCaw’s Cosmic Ambition.” The venture failed; Teledesic halted satellite production in 2002 and sold its spectrum licenses in 2003. However, the success of SpaceX’s Starlink and perhaps Amazon’s Project Kuiper validate that Teledesic’s concept was the right idea, just way ahead of its time.
In 1994 McCaw also launched XO, under the original name Nextlink, with a mission to mimic MFS and Teleport by building local fiber networks to compete with the Baby Bells. Initially, XO focused on second-tier cities, such as Nashville and Spokane. Soon thereafter, it targeted the Tier-One markets.
By 1997 XO was operational in twenty-three markets. The company announced plans to expand to the MFS stronghold of Chicago and the Teleport home turf of New York—perhaps in an attempt to lure WorldCom and AT&T into acquisition offers. Neither took the bait. In September 1997 XO went public, raising $258 million at $17 per share. By the end of its first day of trading, the stock rose to $28. McCaw retained 80 percent of XO’s super-voting Class B shares.
Salomon analyst Grubman characterized XO as “the best opportunity ever in telecom history. . . . All the ducks are aligned for success. . . . XO has superb people running it and has already shown that it can get markets up and running with paying customers.”
In stark contrast to Grubman’s beaming optimism, Forbes expressed skepticism. In a June 1998 feature titled “Craig McCaw: The Wireless Wizard of Oz,” Forbes grappled with the uncertainty of XO’s prospects: “[XO] is no investment for the faint-hearted either. Building a competitive fiber network in the most populous sectors of the country is very expensive. In the past year XO has raised a billion dollars in bonds, and another $191 million through an initial public offering, all to be used for the buildout. And this fact hasn’t escaped the market’s eyes: The stock is trading . . . well below its 52-week high of $38.”
Clearly, McCaw was doubling down.
AboveNet (MFN)—John Kluge and Steve Garofalo#
AboveNet Communications, like MFS, Teleport, and XO, focused on metropolitan fiber. However, AboveNet’s strategy was unique, as it focused squarely on fiber as a shared infrastructure, and company leaders stayed true to this focused approach for many years. When they strayed from it through untimely and poorly conceived acquisitions, they dug a deep hole that had bankruptcy as the only way out.
The AboveNet story begins with two key individuals, media mogul John W. Kluge and Steve Garofalo, the CEO of a New York City construction contractor. Let’s start with Kluge.
John W. Kluge’s fortune building began in the 1940s when he launched the radio station WGAY in Silver Spring, Maryland. He added radio stations in cities such as Buffalo, Dallas, Nashville, Orlando, and St. Louis. In 1959 Kluge acquired a controlling 24 percent interest in Metropolitan Broadcasting Corporation, which owned both television and radio stations, from Paramount Pictures for $4 million. Soon thereafter he took the company public and became the largest network of independent television stations in the country.
In the early 1980s, Kluge focused on the emerging mobile phone industry. Instead of buying spectrum licenses, Metromedia spent $300 million to acquire paging companies, which then applied for cellular spectrum licenses.
When the reaction from Metromedia’s public shareholders was unsettled, Kluge took Metromedia private at a price of $1.6 billion, funding the buyout with $1.3 billion in junk bonds. However, instead of building up the business, he decided to sell. The Washington Post’s 1986 article titled “Parts Worth More Than a Whole Metromedia” detailed how the exits generated over $4.5 billion in cash.The $4.5 billion included $2 billion from Rupert Murdoch’s purchase of the television stations, which became the backbone of the Fox News Network; $285 million from a management buyout of nine radio stations, funded by Morgan Stanley; a $710 million prize from the sale of the outdoor billboard advertising business; and the sale of the entertainment division, which owned the Harlem Globetrotters and the Ice Capades featuring Olympic Champion Dorothy Hamill, for $30 million. Finally, SBC bought the paging assets for $1.65 billion.
“There’s not anything left but a big fat bank balance,” commented an analyst.
Metromedia’s exit tsunami resulted in Kluge replacing Ben Walton, the heir of Walmart, in the top slot of *Forbes’*s richest person in America. Kluge, now a septuagenarian, was in no mood to retire. So he bought more businesses.
Metromedia built up a controlling interest in Orion Pictures. Under Kluge, Orion produced Platoon, Hoosiers, RoboCop, Dances with Wolves, and Silence of the Lambs. Alongside these successes were a larger string of disappointments. Kluge gave up in 1992, allowing Orion to declare bankruptcy.
Metromedia Restaurant Group acquired Bennigan’s, Steak and Ale, and Ponderosa Steakhouse in 1988 and Bonanza Steakhouse in 1989. This business also went bankrupt, resulting in the closure of Steak and Ale and many of the Bennigan’s.
In 1994 Metromedia backed the formation of a professional soccer team named MetroStars. This, too, ended badly. In the team’s first home game, a MetroStars defender handed the opponent a 1–0 victory by diverting a cross kick into his own net. The play was dubbed the “Curse of Caricola,” and despite much hype, the MetroStars never won a title. Pelé played his final professional game for the team. MetroStars was eventually sold in 2006 and renamed the New York Red Bulls.
In its 1997 article titled “Rich, 82, and Starting Over,” the New York Times characterized Metromedia’s communications division as the crown jewel in Mr. Kluge’s empire. They noted that “Kluge’s strategy rests on a beguilingly simple premise: More than half the people in the world have not yet made their first telephone call.”
Kluge formed partnerships to provide communications services in China, Russia, and several eastern European countries such as Latvia and Georgia. The article questioned the risky nature of Kluge’s strategy, asking, “Why would one of the world’s richest men choose this forbidding business landscape for what is very likely to be the last stand of his career?”
Some of Kluge’s explanations made sense: “Every country needs two things to develop economically: transportation and communications. Communications is not a luxury in emerging markets; it is a necessity.”
Though it also seemed to be another chapter in Kluge’s fondness for dice throwing, who once said, “I don’t really get comfortable when I haven’t got something at risk.”
Clearly, the stock market wasn’t buying it, as Metromedia’s stock dropped 33 percent of its value. Foreign ownership restrictions in these historically communist countries did not bode well for a US businessperson.
Domestically, Kluge continued to focus on communications. When Kluge did his 1986 fire sale, he retained ownership of a regional long-distance communications service called Metromedia Long Distance. In 1993 he merged Metromedia Long Distance into WorldCom for a value of $440 million. The resultant entity became the fourth-largest, long-distance company behind AT&T, MCI, and Sprint. Kluge was named chairman.
Kluge was playing multiple Bandwidth hands. He found one of those hands in the sewers of Gotham City, in the form of a true New Yorker named Steve Garofalo.
I owe a chunk of my fame and fortune to my paisano Garofalo, an individual I have yet to meet. To explain, as the calendar approached 2020, I was best known for two things: Zayo’s acquisition of AboveNet and being the inventor of the product referred to as Dark Fiber. Without Garofalo, there would not have been an AboveNet for me to acquire. And the truth is I didn’t invent Dark Fiber. Garofalo did. Thank you for both!
Forbes’s 2000 article titled “Sewer Rats and Billionaires” reported Garofalo “grew up working beneath the streets of Manhattan working for his father’s company, a Brooklyn-based electrical contractor. There he learned the tricks of the trade: negotiating manholes, placating regulators, wooing unions.” Garofalo served as CEO of F. Garofalo Electric Company for over fourteen years.
The Garofalos placed cables for power companies, phone networks, and Cable TV. By the early 1990s, placing fiber cable emerged as a new opportunity. And it wasn’t just communications companies requesting fiber. One of Garofalo’s enterprise clients paid him to install fiber to link up its nearby offices, allowing the client to treat its multiple locations as if they were all in the same building. Once these enterprises had fiber links, they could bypass the phone companies for interbuilding communications.
Fiber construction, particularly in highly congested geographies, wasn’t easy. “If anyone knows the difficulties of laying optical fiber,” Forbes noted, “it’s the Garofalo family.”
Nor was it cheap. Often, streets had to be cracked open and then restored.
Yet Garofalo knew there was money to be made, as Forbes described, “No question, laying fiber-optic cables under city streets . . . is dirty work. But glittering riches lie beneath the subterranean muck. Urban fiber networks are one of the least-developed pieces of Internet infrastructure, a market of vast potential.”
Garofalo was among the first to apply when New York City announced it would grant a limited number of construction franchises to communications companies looking to build fiber networks within Manhattan. When awarded a franchise in 1993, he launched National Fiber Networks, which changed its name to Metromedia Fiber Network (MFN) before later settling on the name AboveNet. Garofalo raised $3 million by mortgaging his house and borrowing against Garofalo Electric. The Manhattan fiber network, which was built largely in ducts owned by the Empire City Subway (ECS), was open for business in 1995.
Garofalo saw the opportunity differently than others. He did not seek to offer competitive voice and data services like the other communications upstarts. In fact, he avoided investing in electronics altogether. Instead, his plan was to simply construct fiber networks and lease out fiber strands to incumbents such as Verizon and AT&T; their rivals WorldCom, XO, and others; and Cable TV companies. Enterprise customers, such as large media and financial institutions, were also targeted.
Garofalo’s product was Dark Fiber.
“You could buy anything else in New York—anything. The one thing you couldn’t get was a fiber-optic cable under a public street,” Garofalo explained.
When I oversaw network development for MFS, we would typically put between 48 and 144 fiber stands in each of our fiber cables. Nearly all our rivals deployed similar fiber counts. The engineering justification was that optical electronics (optronics) allowed vast capacity on each fiber. As such, the smaller fiber counts seemed more than sufficient.
AboveNet took a different approach and maximized the number of fiber strands in each of its fiber cables—864 fiber strands or more. The cost of building a fiber network was mostly tied to construction. The incremental cost associated with running higher fiber strands was modest in comparison. As such, for a 20 percent increase in overall costs, AboveNet ended up with ten times the number of fibers.
Garofalo would carve out these fiber strands for sale to other carriers. “When carriers decide whether to build or buy their own fiber,” Forbes explained, “Garofalo wants to offer a price that’s just a bit less than it would cost to build a smaller network from scratch.” This was AboveNet’s pricing strategy and differentiation. “The key is not to get too greedy,” Garofalo said.
Howard Finkelstein, who later became AboveNet’s COO, explained the strategy: “AboveNet [competes] against infrastructure alternatives, rather than other companies.” Before AboveNet, communications companies had only two choices: build their own networks or lease bandwidth capacity from the telephone company. Constructing a fiber network is expensive, time consuming, and hard. Leasing bandwidth from a telephone company makes it difficult to earn a profit or differentiate the service.
Finkelstein added, “A typical competitive telecom carrier builds their fiber because there was no other alternative. There wasn’t Dark Fiber for them to purchase. AboveNet gives these companies the opportunity to focus not on being in the construction business, which most of them don’t really want to be in.”
The conventional wisdom was that once a customer purchased Dark Fiber, they would use optronics to avoid the need to purchase additional fiber. “Construction is just a one-time business. Selling services provides you with a recurring monthly business,” said Teleport CEO Annunziata, which echoed the critique of most in the industry.
AboveNet’s experience was different. If Dark Fiber was priced appropriately, customers would buy more—to reach new locations and to reduce their need for expensive optronics.
Beyond that, AboveNet recognized it wasn’t just carriers that would purchase Dark Fiber. Enterprises were also interested. Hospitals and libraries desired to connect their various locations. Financial institutions wanted connections to the trading hubs. Tech companies sought direct links to their servers located in data centers.
Dark Fiber had a dark side, especially for the incumbent telephone companies. Nicholas Tanzi, Metromedia’s president, explained to Forbes, “It breaks—absolutely destroys—the pricing of bandwidth. You buy the cow instead of the milk.” This cannibalization was a great way for newcomers to create value for themselves, but it was undoubtedly harmful to the incumbents.
Kluge was drawn to AboveNet’s Dark Fiber strategy. “We understood [Garofalo’s] vision. You build it and they’ll come, and they’ll come for more, and then they’ll come for more,” Finkelstein explained.
Metromedia invested $33 million for 26 percent of the company, along with enough super voting shares to control the board.John Kluge was in his eighties when Metromedia invested in AboveNet. Stuart Subotnick, who represented Kluge in all aspects of Kluge’s business, led the AboveNet investment. Craig McCaw, who formed a relationship with Kluge when McCaw Cellular purchased Metromedia’s paging business in 1990, invested alongside Kluge.
In October 1997 AboveNet raised $125 million in its IPO. It announced plans to expand to Boston, Chicago, Philadelphia, and Washington, DC, with additional targets, including Atlanta, Dallas, Houston, Los Angeles, San Francisco, and Seattle. To fund these expansions, $650 million in debt was raised.
The stock soared. Kluge’s stake reached a value of $2.7 billion, second only to Garofalo’s $3.8 billion.
Enwrapping Earth in a communications web of optical glass threads is “the largest infrastructure project in the history of the world,” declared Garofalo. When Forbes pondered whether AboveNet might get stuck with more capacity than it can sell, Garofalo scoffed, “We’ll never run out of customers.”
Garofalo likely didn’t consider the scenario that his customers would run out of money.