Building the Last Mile, Patiently

By ANTHONY PALAZZO

Staff Reporter

Even as the ashes of bankrupt Global Crossing Ltd. still smolder, another local fiber-optic upstart is launching the cycle all over again.

Last month in Arcadia, Altrio Communications Inc. lit up the first few neighborhoods in a fiber-optic network that the company envisions will bring video, voice and data services to most of metropolitan Los Angeles.

Unlike Global Crossing and other long-haul providers, however, Altrio is focused on the elusive “last mile,” the missing piece of the broadband puzzle that brings blazing-fast services into residents’ homes.

“We’re going to force PacBell to rebuild their network,” said David Rozzelle, Altrio’s president and chief executive.

It’s a bold stance for a company with only a few hundred customers and enough funding to take it past perhaps 10 percent of L.A.’s 3 million homes.

In truth, Altrio will be taking on PacBell (an SBC Communications unit) in some areas and Verizon in others. At the same time, it’s picking a fight with cable providers like Adelphia Communications and Charter Communications and at a time when capital markets have shied away from telecommunications.

Already, Altrio has been forced to mortgage its existing equipment, raising $65 million in senior debt from a group of banks in January. “Back when things were booming, we might have gone to some form of high-yield or mezzanine (non-collateral) debt,” Rozzelle said. “Those markets were not open to us.”

Altogether, Altrio has raised $180 million, including a late 2000 round of venture capital led by Frontenac Co. and Bessemer Holdings.

The fact that Altrio had access to capital at all, at a time when established companies like Sprint and Qwest Communications International are having trouble, is a testament to the management team. Besides Rozzelle, other key members are Chief Financial Officer Ted Liebst and Chief Technical Officer Dave Large.

“These guys have been inside the cable industry for decades and are now competing against it,” said Gary Arlen, president of Arlen Communications Inc., a research firm in Bethesda, Md., specializing in digital media. “They are the ultimate insiders who are now outsiders.”

Cable veterans

The trio first worked together at InterMedia Partners, a cable-company roll-up that wound up being sold to TeleCommunications Inc. and others for $4 billion in 1999. They left in 1994 and formed their own consulting firm, drawing clients from telecom equipment makers, service providers and municipalities.

“(Altrio) allowed us to take all of what we’d learned, put it together and build the most modern telecommunications system in the U.S., and that’s what we’re putting in L.A.,” Rozzelle said.

By appearances, Altrio couldn’t be more different from Global Crossing. Rozzelle, a lawyer by training, is low-key and casual, and during an interview didn’t even mention that he once worked with Leo Hindery, a former Global Crossing chief executive, at InterMedia. Also, Altrio’s L.A. headquarters a warehouse-like building that also houses its central switching operation pales in comparison with Global Crossing’s elegant Beverly Hills digs.

And Altrio’s business plan is more modest. The first phase of construction, lasting through 2003, covers 250,000-300,000 homes in the San Gabriel and San Fernando valleys, along with some beach communities.

In 500-home nodes, Altrio is laying fiber to points from which coaxial cables are run into the customers’ homes. The neighborhoods were chosen carefully, Rozzelle said, to minimize construction costs (such as digging under streets) and to avoid taking on one large competitor. “We are a very young company and a very flexible company,” he said.

To go further, Altrio will have to raise more money. Doing so will depend in part on Altrio’s ability to hit the milestones it sets, said Rod Royse, a telecommunications executive who worked with Rozzelle, Liebst and Large at InterMedia.

Expensive proposition

Bringing fast broadband services to homes is a crucial part of the tattered telecommunications revolution, but it’s the biggest challenge precisely because it’s so expensive to build.

Telephone and cable companies have made partial attempts to bundle these services in one package, but existing systems have proved inadequate. At DSL-level speeds insufficient for real-time video copper telephone wires are up against the limits of their capacity. Coaxial cable has its own drawbacks, including reliability and mismatches between equipment placed in the ground by hundreds of companies 20 or 30 years ago.

“Every time you hear more about these capabilities, you hear the sound of vendors backing up with big trucks full of equipment to upgrade these networks,” said John Ryan, an analyst with telecommunications research firm RHK Inc. in South San Francisco.

AT & T; Corp. just retreated from an ambitious plan to offer voice, video and data services to homes throughout the U.S.

In some cases, Ryan said, it’s more cost effective to build from scratch. “The chance to come in and offer brand new technology and shiny new equipment, that gives you terrific operational advantages,” he said.

In competitively priced bundles, Altrio is offering the same cable-TV choices as the other providers, plus true video-on-demand from Culver City-based Intertainer, a baseline Internet service that’s faster than DSL, and local and long distance telephone service. The company also is striving to offer better customer-service response.

“Where we will differentiate ourselves in the long run is clearly by the quality of service that we provide,” Rozzelle said.

Initial returns are promising. Rozzelle said that Altrio needs to pick up 15 percent of the first 250,000-300,000 homes it will pass through the third quarter of 2003. In the first two nodes, penetration rates have exceeded 20 percent, and several more nodes were recently lit.

“The package they offered us was by far better than we’d ever seen before,” said Thomas Mew, 72, a semi-retired businessman in Arcadia who couldn’t get through in three attempts to order DSL service. “By consolidating all our services with them we’re saving $30 to $35 a month.”

Packages start at $98 and run as high as $140 depending upon level of service.

Another Arcadia resident, Travis Townsend, will end up paying a bit more for telephone, Internet access and cable after a promotional period ends, but he doesn’t mind since he’s so thankful for Altrio’s responsive customer service. Townsend, a 30-year-old advertising salesman, became fed up when cable provider Adelphia failed to show up at a scheduled installation. “They called me three days later and asked me why I wasn’t home. I just laughed,” he said.

Arlen said the real test is whether Altrio can maintain service levels as it grows, and whether it can withstand the counter-attacks that will inevitably come its way. RCN Corp., the publicly held company that most closely resembles Altrio, has run up huge losses and seen its stock price fall to about $1.50 from as high as $74.88 in February 2000. Its more ambitious nationwide rollout is concentrated in New York and Chicago.

One of the challenges Altrio will face, Ryan said, is a near complete absence of customer loyalty. Incumbents have learned to ward off new entrants with special deals tied to long-term contracts, for instance. “You can do all sorts of promotional games to starve the new guy,” he said.

Also, new companies must navigate a thicket of governmental approvals. Denver-based Western Integrated Communications last year won permission to build in L.A., but it has since slowed the pace of building its WINfirst-branded systems. RCN once planned an ambitious L.A.-area build-out but is largely inactive.

The customers Altrio’s currently targeting are “low-hanging fruit,” said Arlen. “It’s easy to get the first wave, the question is going to be how do you get past it.”