Free Spacey CLEC?

Red Spectrum is targeting London businesses with a network based on free-space optics: 'We're not insane!'

August 13, 2002

4 Min Read
Free Spacey CLEC?

A new service provider? In this day and age? Are they crazy?!

"Probably," chuckles Craig Jung, director of sales and marketing at Red Spectrum, a shiny new service provider that today launched its Ethernet service based on free-space optics technology to small and medium-sized business customers in central London.

“When we first started telling people what we were doing, they said, ‘Are you guys out of your minds? Don’t you know what is happening to the telecom sector?’ " Jung says. "But then we told them our story, and they didn’t think we were so crazy after all.”

Well. Let's see.

The company is using fiberless optical gear from LightPointe Communications Inc., which also supplies Qwest Communications International Inc. (NYSE: Q) and Telkom South Africa (see Red Spectrum Deploys LightPointe FSO, LightPointe Wins Qwest Contract, and Lightpointe Wins Telkom South Africa).

This is certainly not LightPointe's biggest contract win to date, however. In fact, Red Spectrum might well qualify as "smallest service provider" in the Guinness Book of World Records; the company has only received angel funding to date and employs just nine people.

Still, David Jenkins, managing director of Red Spectrum says that it actually doesn’t need the cash. In fact, he says that the 15-month-old startup will likely be cash-flow positive within three months (a claim that could kick off more questions about whether this company is seriously deranged).

Some venture capitalists say that Red Spectrum might be onto something. Naser Partovi, managing director at Enterprise Partners Venture Capital, and Fred Wang, a partner with Trinity Ventures, say now could be the perfect time for startup service providers to target small business customers.

“I don't know Red Spectrum's business model, so I can't comment on that," says Partovi. "However, I will not dismiss a new service provider for high-speed access addressing small and mid-sized businesses. I believe there are actually tremendous opportunities to create a new class of service providers to fill the void that's being created.”

Red Spectrum with its nine employees is going head to head with incumbents British Telecom (BT) (NYSE: BTY) and its 137,000 employees and Cable & Wireless PLC (NYSE: CWP) with 48,000, to offer small and mid-sized business customers an alternative to copper-based DSL services.

Other companies that have plowed the same field have generally ended up in a world of hurt. Allied Riser, Teligent, and WinStar Communications have been acquired, gone out of business, or filed for Chapter 11 bankruptcy protection (see Teligent Goes Chapter 11 and Qwest: No WinStar Deal).

But Red Spectrum says it is different from these others, for a slew of reasons, including managing to keep its costs down significantly and avoiding debt.

Typical FSO or RF deployments require each building receiving service to have at least one laser or radio unit deployed on site. But Red Spectrum’s network uses one set of FSO lasers to serve an entire city block. One building is used as the hub and houses the LightPointe gear. Then fiber originating at the hub is strung from rooftop to rooftop.

A year ago this approach would have been too expensive to deploy on a large scale, says Jenkins. Older connector kits, which contain gear to do the fiber fusion and splicing required, cost between £50,000 (US$75,000) and £100,000 ($150,000). But now, Corning Inc. (NYSE: GLW) and other fiber vendors are selling low-cost MTRJ connector kits. These connectors, which are roughly the same size as a standard RJ45 connector, do not require fiber fusion, can be installed in the field, and cost only about £1,000 ($1,500) per kit, Red Spectrum says. What’s more, the new connectors are much smaller, so that twice as many fibers can be attached to one switch.

Another key differentiator is that the company hasn’t had to build out an expensive network before it signs up customers [ed. note: no customers... no network... no costs! It's a kind of magic!]. Because the LightPointe gear and the fiber is easy to install, the company claims it can get new services up and running in a new area within 48 hours, at data rates between 2 Mbit/s and 1 Gbit/s. Also, FSO spectrum is unlicensed and, because roof rights are much cheaper in Europe than in the U.S., the company hasn’t had to dish out millions of dollars to acquire spectrum or roof rights.

“I think it's a decent time to be starting up a service provider assuming you have access to some startup capital,” says Trinity's Wang. “The competition is on the ropes for the most part, and the incumbents are starting to raise rates again. The biggest challenge is convincing potential customers to use you if they think there's a chance of you going out of business in the next six or 12 months.”

— Marguerite Reardon, Senior Editor, Light Reading

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