January 22, 2004 -- (WEB HOST INDUSTRY REVIEW) -- After emerging from chapter 11 reorganization, AboveNet (above.net)
seemed to have driven fiber prices intro the ground, all-but-killed its
managed services business and dramatically stripped down its staff.
But all these signs have been misread as
an effort by the company to recreate its commodity business model minus
debt payments. The new AboveNet is all about premium services, says the
new chief executive.
The new AboveNet is the old Metromedia
Fiber Network, which emerged from bankruptcy reorganization minus its
PAIX peering business (sold to Switch and Data), minus redundant
employees and minus some data centers and customers of SiteSmith, the
managed hosting business MFN bought at the height of the bubble. The
big distinction between the new AboveNet and the old MFN is the debt
the company carries. MFN tanked with almost $3 billion in paper.
AboveNet emerged with just over $70 million in debt, and roughly as
much cash as debt - a hallmark of a stable enterprise.
The departure of chief executive John
Gerdelman, who led the company's reorganization, leaving and his
replacement by long-time operations chief William LaPerch, prompted
speculation that investors are disappointed that the venture seems to
be pursuing the same business model that failed the first go round.
Indeed, a surface glance at AboveNet reveals all kinds of worrisome
trends. First the CEO shuffle. Then the sale of PAIX, which amounted to
a de-facto exit from the peering business. Then what looks like ongoing
disintegration of the managed hosting unit - the SiteSmith power duo
Treb Ryan and Richard Dym are working on another managed services
startup while AboveNet appears to be losing managed customers left and
right. And finally, reports from the fiber trading trenches that
AboveNet prices are competitive to the point of absurd.
"The new AboveNet strategy is not at all
based on us being in a commodity business," says LaPerch, interpreting
each unfavorable indication in a way that supports the idea that
AboveNet has repositioned its business as a more high margin affair.
The CEO shuffle? Gerdelman's job was to
guide the company through a severe financial crisis, he never wanted to
implement the vision for the new company assembled during the
bankruptcy reorganization.
PAIX sale? A non-core unit that did little for company's overall value.
Managed hosting disintegration? Complete
nonsense. The company still retains a "large Seattle-based software
company" (Microsoft, according to well-placed sources) as a managed
hosting customer. Yes, some high-maintenance clients were given the
boot, and the focus placed on automation and hands-off managed
services, but that approach works for the highest margin customers, the
only kind AboveNet wants. And by the way, the company never sold its
London data center. It still has customers in the UK.
Dirt cheap fiber prices? Well yes, in
certain markets where price competition is stiff AboveNet is
competitive, but in fact the company raised its prices upon coming out
of chapter 11.
LaPerch's points make a lot of sense in
the context of AboveNet's new direction. The new AboveNet plans to
compete based on a combination of assets, not just the fact that it
owns fiber and data centers in key telecom markets around the world.
This means AboveNet seeks to win clients that require some combination
of managed services and telecom facilities, but not one or the other.
The company moved away from some of the
excesses of its old corporate policy, in which it saw the managed
services part of its business as a vehicle for securing bits and bytes
to fill its emptyish backbone. That old policy triggered a couple of
situations where enterprise customers looking for redundancy passed
AboveNet for providers that offered them a choice of long distance data
carriers.
The new AboveNet affected almost a complete about-face here, expanding its relationship with Equinix (equinix.com)
specifically to allow for customers to interconnect with third party
providers. While establishing such a policy was AboveNet's choice,
adopting it was a marketplace reality.
"The days where we could run a data center where customers could receive IP transit only from us are over," said LaPerch.
Even though AboveNet no longer owns PAIX
it didn't lose access to the facility, which is now owned by Switch and
Data. However, AboveNet appears to be de-emphasizing peering from its
marketing, offering access to peered bandwidth at Equinix and PAIX
through its colo business, but focusing mostly on selling transit.
The long-term plan for AboveNet is to
re-establish itself in the marketplace as a seller of something other
than commodities like bandwidth and colocation. LaPerch describes
AboveNet's core business as enabling an "unconstrained information
exchange," arguably a pretty vague category but effective for AboveNet
as it fits everything from Gig-E fiber transport to managed load
balancing, as long as the objective is connecting two desktops for an
enterprise client trusting mission critical applications to an IP
network.
It's no wonder this idea has not yet
registered in the marketplace. AboveNet partners at Equinix, for
instance, still see the AboveNet business as fiber-plus-colocation,
assuming the model is inherent for any company with a national backbone
connecting several data centers.
"I don't think the AboveNet of today
should be any different than MFN of yesterday," said Jay Adelson,
Equinix CTO and founder. "But it's a wait and see situation - it's too
early to tell if the company has changed its strategy."
In a sense, AboveNet doesn't have much
time to communicate its new message. Its existing customers were free
to leave as of the company's September emergence from chapter 11. But
the real question is whether AboveNet really needs these customers as
the basis for evolving into an IBM Global Services. If the company can
make money with the assets it has now, selling dirt cheap bandwidth and
colocation in well-placed data centers and picking only high margin
customers, and combine these assets with lightly-staffed managed
services - it would be impractical to reject this business.
LaPerch seems to think that, in the end,
his performance will be judged by the company's balance sheet, not the
latest array of buzzwords.
"Our singular focus is on the EBITDA," says LaPerch. "We need to create value for our shareholders."
