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Level 3 Co-Founder Starts Zayo Bandwidth

Raymond McConville
News Analysis
Raymond McConville
8/30/2007
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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

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Mark Sebastyn
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Mark Sebastyn,
User Rank: Light Beer
12/5/2012 | 3:03:22 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth
Informative and outside the mainstream. Thanks.
Raymond McConville
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Raymond McConville,
User Rank: Light Beer
12/5/2012 | 3:03:21 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth
Why thank you. We've got a startup profile of them up now as well. Mostly the same info from the story, just more concise and a slide for all you powerpoint fans.

http://www.lightreading.com/do...
rahat.hussain
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rahat.hussain,
User Rank: Light Beer
12/5/2012 | 3:03:20 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth
This actually sounds good - I don't think this is another "consolidate so we can sell to L3" angle. Good investors, good heritage - with consolidations at VZ and AT&T, it is time some CLECs got back together and created real competition.

Does anyone know if they can directly connect to some enterprises as well?

odo
billy_fold
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billy_fold,
User Rank: Light Beer
12/5/2012 | 3:03:20 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth
Another startup CLEC carrier's carrier trying to get enough customers to sell out to Level 3

ZZZZZZZZZZZZ........ZZZZZZZZZ


-billy
Raymond McConville
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Raymond McConville,
User Rank: Light Beer
12/5/2012 | 3:03:17 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth
re: "Does anyone know if they can directly connect to some enterprises as well?"

Yes they can. Their network currently reaches about 830 buildings.
American Indian
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American Indian,
User Rank: Light Beer
12/5/2012 | 3:03:17 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth

What is left to buy? Level 3 bought 7 companies. TWTC bought a company. Both will be back to buy more.

For $225 million of alleged investment money -- they better start building.

Onsey, twosy buying of markets is not exciting. The PPL footprint goes no where and c0onnects nothing.

Based o n what they have bought, they don't have a platform to operate from and lever sales as a one stop shop for tier 1 carriers.

These guys will buy and flip to Level 3 ... nothing more, nothing less. It's their track record.
American Indian
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American Indian,
User Rank: Light Beer
12/5/2012 | 3:03:16 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth

If Level 3 can buy a fiber-based metro company that has a unique asset footprint, they will jump all over it.

They won't buy a company with fiber whose routes are over built.

One thing is for certain, fiber based assets are in short supply and Level 3 and others will only buy fiber based companies.
Raymond McConville
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Raymond McConville,
User Rank: Light Beer
12/5/2012 | 3:03:16 PM
re: Level 3 Co-Founder Starts Zayo Bandwidth
re: "These guys will buy and flip to Level 3 ... nothing more, nothing less. It's their track record"

It doesnt sound like Level 3 is looking to make any significant acquisitions any time soon though. They're struggling as it is to integrate what they currently have on their plate and some of their recent comments seem to indicate that they're looking to focus on building out their metro networks on their own rather than through acquisition.

I don't disagree with anyone who says that these guys might be looking to sell to Level 3 - they've got the relationship with the company and would turn a nice profit. I just question whether or not Level 3 would be in a position to buy another company.
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