EUROPE - Brief Article

At a time when most wholesale bandwidth providers are talking about enhanced services as a way to stand out from the crowd, Laurent Grimaldi, president and CEO of Nets, is beating a different drum. His view is not to digress into such areas as telehousing and managed web hosting -- that's the job for specialists, he says -- but simply to focus on price and enable standardised contracts with customers (as opposed to the time-consuming 'hand-crafted' contracts that are prevalent today. He is also a fervent believer in pushing costs down to an absolute minimum.

"There are a lot of commodity markets out there in which companies make a good business," says Grimaldi. "Why should telecommunications be any different? And if you keep costs down, then you have every chance of survival."

Nets was founded in 1997 by a group of French telecoms engineers. And with US$5 m ([euro]5.5 m) of venture capital funding from a Japanese bank, the company's ambition was to build out a pan-European DWDM fibre-optic network.

But there's only so much you can do with US$5 m. To realise its goal, Nets sought out a new partner with deeper pockets and in mid-1999 signed a deal with the Tiscali Group. Tiscali, which now fully owns and funds Nets, claims to be the second largest ISP in Europe with seven million active subscribers last month. It intends to invest a total of ([euro]150 m in Nets over a three-year period from the time of acquisition and by June 2001, [euro]90 m of that sum had already been spent. From Nets' point of view, Tiscali is a 'captive customer' and will roll out its network across Europe to match the geographical requirements of its ISP owner.

"The level of investment that we're talking about here might seem small compared with announcements made by other operators in the past," says Grimaldi, "but it has never been our strategy to measure the success of the company on how much our assets are worth. We're focused completely on being cash-flow positive."

If you accept the validity of EBITDA as an accurate barometer of financial health, Nets can claim that it has been successful in what is, after all, a low-margin business. For its 2000 fiscal year, Nets posted a positive EBITDA of [euro]1 m on revenues of [euro]9.5 m. The objectives for 2001 are revenues of [euro]30 m with an improved EBITDA to revenue ratio compared with last year. This is in spite of the fact that bandwidth prices are coming down at a rate of 50 per cent a year in Europe and, according to Grimaldi, will continue to fall at that pace for 'at least the next three years'. "Falls in bandwidth prices are nothing to be scared of if you keep costs down and keep very focused," stresses Grimaldi again. "There is a danger of placing too much emphasis on making big announcements on how much is being spent on the network -- which some of our competitors have done -- as well as offering too many different types of service. From the very beginning, we were only interested in selling bandwidth."

As part of the effort to keep costs down, Nets maintains a comparatively small payroll of around 40 employees. Grimaldi claims that the nature of optical technology, which allows network management from one central point, does away with the need for a large workforce. It also uses online bandwidth exchanges as sales outlets and leases dark fibre pairs on long-term IRUs (indefeasible rights of use). But doesn't the IRU option increase costs rather than reduce them as it locks the company into rental arrangements on a long-term basis? Not so, according to Grimaldi. "The prices of IRUs are coming down so that to lease fibre for ten to 15 years is now roughly the same price as leasing lines for three to four years."

Running over those IRUs is DWDM equipment from Lucent, which provides up to 400Gbps on each fibre strand -- that's either 80 wavelengths x 2.5Gbps or 40 wavelengths x 10Gbps. The Lucent equipment has an upgrade path to 800Gbps and then to 1.6Tbps on each fibre strand. Grimaldi doesn't envisage that bandwidth demand will be sufficient to justify the first upgrade to 800Gbps until the end of 2002, although he does report that demand for 2001 has increased by 150 per cent compared with the same period last year.

By mid-2001, Nets had 23 long-distance PoPs across Europe and is now focusing on establishing connections to southern Europe (Italy and Spain). By the end of this year, the company aims to deploy an additional 50 long-distance PoPs -- it has also built seven MANs across Europe (Paris, London, Madrid, Amsterdam, Brussels, Frankfurt and Milan).

Nets offers two types of bandwidth services. One at the DWDM layer where customers manage the optical signal themselves with their own equipment, and the other at the SDH layer. "We would prefer to serve only DWDM [greater margins] but there's still a lot of demand for SDH. It's going to be around for another five years. The future is undoubtedly IP over DWDM but we've got to be able to serve current demand." -- Ken Wieland

COPYRIGHT 2001 Horizon House Publications, Inc.
COPYRIGHT 2001 Gale Group