Level 3 Co-Founder Starts Zayo Bandwidth
Two of the very first employees of Level 3 Communications Inc. (NYSE: LVLT), Dan Caruso and John Scarano, are taking a different angle on bandwidth with their new startup, Zayo Group Inc. (NYSE: ZAYO) (See Zayo Unveils Services and Startup Profile: Zayo Bandwidth Inc..)
Their plan is to help Tier 1 carriers deliver high-bandwidth services to B- and C-level metropolitan areas, places that don't have extensive build-outs like New York or Boston.
"The goal is to provide good bandwidth services to bandwidth-intensive customers," said Scarano in an interview. To achieve this goal, Zayo owns more than 8,000 miles of fiber lines and several collocation facilities in second- and third-tier cities like Memphis; Harrisburg, Pa.; and Allentown, Pa.
Caruso and Scarano's theory is that this will bring competition to areas where competition doesn’t really exist. That's why, to a certain extent, Scarano feels his new company will only be competing against the very customers that he covets.
"Tier 1 carriers certainly own their own fiber infrastructure, but like any capital-intensive company, they need to prioritize where they spend their capital," says Scarano. "Today's bandwidth needs have outgrown their ability to provide it in certain areas. So we fill in the gaps for them."
Building a high-bandwidth infrastructure in relatively rural areas is often too expensive to be worth a carrier's effort. But if it's too expensive for a Tier 1, how can dinky Zayo do it?
"Dan and I believed that during the telecom meltdown in the early part of this decade, bandwidth continued to grow dramatically, but price compression overshot that growth. All of that investment that was made left a lot of telecom assets available to acquire and build upon. Bandwidth-intensive customers continue to need a lot of bandwidth."
Zayo built its portfolio of fiber assets through four main acquisitions. It recently closed its purchased of PPL Telecom and Memphis Networx. It has two pending acquisitions of Indiana Fiber Works and Onvoy, which it expects to close by the end of this year and bring its headcount from 75 to over 300. In total, these four companies bring in about $125 million in revenues.
To bankroll these buys, Zayo received $225 million in funding from Battery Ventures , Columbia Capital , Centennial Ventures, M/C Venture Partners , and Oak Investment Partners .
Scarano and Caruso first met while working at MFS Communications, a provider of last-mile (nowadays called "first-mile") fiber assets that was later acquired by the friendly folks at WorldCom. Much of the old executive team at MFS, including Caruso, went on to form what we know today as Level 3. Caruso and Scarano would eventually leave Level 3 to take ICG Communications private before, coincidentally enough, it was acquired by Level 3.
Like Level 3, Zayo is building its business through acquisition after acquisition. It's a strategy that Level 3 has struggled with up to this point, but Scarano thinks in the long run it's the right way to go. (See Level 3 Feels Integration Irritation.)
"I think in the long run it'll pay off for them," he says. "They believe that bandwidth continues to grow. They've taken on an enormous integration challenge. Our integration activities are bite sized by comparison."
— Raymond McConville, Reporter, Light Reading