Over at isp-bw, we spent an evening discussing XO's future. With Icahn as the owner of 60% of the stock, 90% of the debt, and 6 board seats, he has the company and any minor shareholder over the barrel. R2 is a minority shareholder who warned Icahn via open letter that if XO files Bankruptcy, they would sue him personally for dereliction of fiduciary duty. On paper, XO looks good. Assets, cash, EBITA. But in reality, well, not so good. $387M in dent is due to Icahn soon. The company and assets have been re-organized twice. And they have no focus.
PAETEC's CEO, Arunas Chesonis, thinks making the Billion Dollar Club as a CLEC means something. It hasn't meant much so far. Genuity hit it in $1B in 2000 and its $4B in debt made it collapse. ICI (Intermedia) hit $1B and sold out in 2001 to MCI to satisfy the $3B in short term debt. Genuity owned assets (fiber and AS#1); Intermedia had Digex.
XO has fiber and wireless spectrum. PAETEC has Allworx and the McLeod fiber. Neither one has spent time developing a region to the point that they have a 15% share. The problem is the idea that you want to be national so that you can get the big accounts. What are there, maybe 10,000 companies buying enetrprise level services? And they have choice: Ma Bell, VZ, Qwest, Sprint, Level3, GlobalCrossing and on another level Masergy, InterNAP, Savvis, AboveNet and others. That's enough. The key is to be deep, not wide.
It costs money to go wide. It costs less money to go deep. It is also more profitable.
A further point is that Broadwing was at $879M in revenue with about $125M in losses before L3 bought them in 2003 for $1.4B. Half of Broadwing's revenue came from wholesale on its 19000 miles of fiber. I just don't see how BIG makes you better. Sprint is a prime example. Big means you can't take care of your customer properly (which is what Arunas says is how he built Paetec). So how is Bigger better?