“Monster” Telecom Network Draining Oceans of Capital
By ANTHONY PALAZZO
Staff Reporter
At an asking price of $1.4 billion, Global Crossing’s 100,000-mile fiber-optic network is either the bargain of the century or the most rapidly devalued product since the Pony Express.
Either way, it’s a marvel. Global Crossing’s network, costing $15 billion to build, was the most ambitious of all the fiber networks built in the cable-laying frenzy of the past several years. It’s the only one that truly spans the globe, delivering access to 85 percent of the world’s telecommunications markets. Through a combination of construction and acquisition, Global Crossing in four years built a network spanning four continents, 27 countries and 200 major cities.
“Basically what you’re looking at is a monster,” said Stephan Beckert, research director at Telegeography.com, a telecommunications consulting firm. “The only thing missing was the Philippines.”
Ultimately, the value of the network built by former junk-bond salesman Gary Winnick will be determined in bankruptcy court. But whatever the outcome, building it was a mighty undertaking, one that likely won’t be repeated anytime soon.
The core of the Global Crossing network is a series of undersea cables that link Asia, North America, South America and Europe. These are attached to terrestrial networks in the U.S., Europe and Asia, which Global Crossing assembled through a combination of acquisitions and joint ventures. This network, established through partnerships, extends the reach of Global Crossing to another 60 countries and 240 cities.
Global Crossing’s first achievement was Atlantic Crossing-1, which opened in May 1998. Spanning 14,000 miles under the Atlantic Ocean, AC-1 connected the East Coast to the U.K. and Germany via a fiber-optic cable.
Typically 1 inch thick, fiber optic cables consist of an inner core of four pairs of fiber-optic strands. These are wrapped with steel sheathing, a copper tube that delivers electricity to light the fiber and polyethylene insulation. The final layer of protection is typically a wrapping of tarred jute except near shore, where additional metal sheathing is layered on for protection.
Constructed in phases
AC-1’s phased opening started in May 1998, boasting capacity of 40 gigabits per second of bi-directional transport 10 gigabits per strand. That is enough to send 8 million one-page e-mails (each way) per second. At the time, AC-1 delivered enough capacity to double the amount of service available across the Atlantic, Global Crossing claimed. Today, though, it’s just a drop in the bucket. (Wavelength division multiplexing can split each strand into up to 160 separate light waves, each delivering 10 gigabits per second, said Gordon Cook, editor and publisher of the Cook Report on Internet, an industry publication.)
While AC-1 was being built, Global Crossing began construction on Pacific Crossing-1, linking the U.S. and Japan, and respective links between the eastern and western U.S. and the Caribbean and Central America.
Global Crossing added to its network with a string of acquisitions. The September 1999 purchase of local-long distance carrier Frontier Corp. brought with it a developing 20,000-mile U.S. fiber-optic network. (Cook said this consisted of a 24-strand share of Qwest Communications’ 96-strand U.S. fiber system.) Racal Telecom, acquired in November 1999, brought a 7,300-mile U.K. network.
On its early routes, Global Crossing hired subcontractors such as Tyco Submarine Systems Ltd., to lay the cable on the sea floor, an expensive process involving submarines, barges and specialized equipment.
In water up to 100 meters deep, fiber-optic cable is placed by ocean-going barges with a mechanized tool called an injector. The injector shoots pressurized water into the seabed to soften it, allowing a large blade to cut a trench. At the rear of the trench, cable is fed into the trench, and settles on the bottom. The sand then settles back upon the cable and re-buries the trench.
Near the shore, the cable must be protected further. Divers are used to help target the water jets and place the cable, which is then contained in heavy metal casings.
In July 1999, the company acquired a cable installation and maintenance operation from Cable & Wireless PLC for $850 million. The acquisition gave Global Crossing the “ability to control the installation and maintenance of our own undersea global network,” said William B. Carter, chairman of the new unit, Global Marine Systems Ltd., at the time. The unit, which included 15 ships, 3 barges and 22 submarines, is now being held for sale. Global Crossing recently wrote down its carrying value by $545 million.
Today, Global Crossing runs two undersea systems connecting the U.S. and Europe; two systems linking the eastern and western U.S., respectively, with points in Latin America and the Caribbean; Pacific Crossing-1, connecting the U.S. to Japan; East Asia Crossing, connecting PC-1 to Hong Kong, Taiwan and Korea; and land-based systems in the U.S., Mexico Europe, South America and Japan. In addition, Global Crossing has partnerships and joint ventures for systems inside Hong Kong, Singapore, Taiwan and Korea. A link to the Philippines is unfinished.
Global value
More than any of the specific lines or cables, Global Crossing contends that the biggest remaining asset is its global reach. Thus, by keeping the pieces together, it stands a better chance of maximizing value in a sale than by liquidating them piecemeal. “The net effect of a restructuring will enable Global Crossing to continue to fund and develop the network, to expand its customer base, and present to the market the world’s most extensive and advanced IP-based fiber network,” the company said in a recent filing with the bankruptcy court.
Not addressed are the costs of operating such an extensive network. The cost of operating Global Crossing has exceeded $1 billion per quarter. Any buyer would obviously reduce these costs, but operating the network at a profit will be a challenge.
Whole or in pieces, Global Crossing faces a brutal supply-demand equation that’s making it impossible for long-haul providers to make a profit. Optical technologies have improved so rapidly that the transmission capacity of each strand of fiber already in the ground is theoretically infinite, said Cook, thus increasing the overall supply.
Meanwhile, the use of bandwidth-hogging peer-to-peer applications such as Napster which only one year ago were clogging up university networks has been tempered.
“We were all expecting prices to go down,” said David Isenberg, a telecommunications consultant with Isen.com. The expectation, Isenberg said, was that lower prices would spur more demand. “That’s what we were all expecting, and to an extent it did happen, but it didn’t happen fast enough to kick the service providers into positive financial territory, especially given the level of debt they had.”
That missing demand may yet materialize, and make a genius of Li Ka-shing or whoever else ends up with Global Crossing.
Then again, history buffs will remember that the flamboyant entrepreneur who founded the Pony Express, William H. Russell, dreamed up the idea in the hopes of landing a $1 million government mail contract. Like Global Crossing, the Pony Express had its successes, cutting to 10 days from 24 the amount of time it took to get a letter across the country. But it ran only 18 months, until Oct. 24, 1861 the day the transcontinental telegraph line was completed. Russell and his partners lost $500,000, and the contract was awarded to a rival firm. Russell died broke in 1872.
Trouble in Telecom Land
Forget Global Crossing. Try to find any telecom company out there that’s not having severe problems.
Two years ago, AT & T; Corp. stock was worth an adjusted $40 a share. Today it hovers around $15. JDS Uniphase was worth over $100; today it trades for $7. WorldCom was worth $45, now it’s worth $10.
No one has escaped the fallout not Cisco Systems Inc. (down 60 percent), not Lucent Technologies (down 87 percent), not WorldCom (down 78 percent). PSINet Inc., 360Networks Inc., WinStar Communications Inc., NorthPoint Communications Group, Teligent Inc. all filed for bankruptcy in 2001.
What’s happened? Call it a hangover. Throughout the 1990s, the telecommunications industry went on a capital-spending spree fueled by deregulation, the Internet and a crowd of Wall Street bankers eager for deals. Huge amounts of money were borrowed or raised from investors, and then spent, but the markets they were targeting didn’t live up to the expected growth.
“In this kind of nightmare scenario, nobody wins,” said former Wall Street analyst Roxane Googin in comments published on the isen.com Web site in December. “It is just a big mess because the attackers are going under. Meanwhile they have crippled the incumbents.”
Now, each sector of the telecommunications industry is feeling pain. Many companies piled on debt to purchase assets at high prices. Others made stabs into new markets, only to find that breaking in wasn’t easy.
Global Crossing operates in probably the most cutthroat part of the business wholesale market long-distance. Here, capacity is far outstripping demand, and several companies have already filed for bankruptcy, including Global Crossing and 360Networks. Williams Communications and Level 3 Communications have announced plans to sell off assets.
Another hard-hit group has been the CLEC’s, or competitive local exchange carriers. These companies sprung up after the Telecommunications Act of 1996 to compete with incumbent Baby Bells. However, many of them filed for bankruptcy, such as McLeod USA and Excel Telecommunications.
The former Baby Bells, called regional Bell operating companies, include SBC Communications, Verizon Communications and BellSouth Corp. They are in the strongest position, and many expect them to begin purchasing ailing long-distance companies, such as AT & T; and Worldcom, as soon as access requirements of deregulation laws are met. (Qwest is a hybrid, owing to its ownership both a long-distance backbone network and a former Baby Bell, U S West. Markets are valuing the backbone operation, at less than zero due to its negative free cash flow, one analyst said.)
Anthony Palazzo
