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Telseon: Running out of Road?

Telseon is scaling back its metro Ethernet plans and may be running out of money. Sound familiar?

November 2, 2001

3 Min Read
Telseon: Running out of Road?

Telseon, a Colorado-based startup carrier that had raised $260 million in funding (see Telseon Scores $175M in Funding), has laid off up to half its staff, is scaling back its activity in certain areas, and is looking for more money to fund its business plan.

According to the tales of former employees, the scenario looks eerily familar to what went down at ICG Communications Inc., the Colorado competitive local exchange carrier (CLEC) where Telseon CEO John Kane was formerly president (see ICG's Dark Cloud). ICG filed for bankruptcy earlier in the year and is in reorganization.

Telseon officials acknowledge that it has undergone a series of layoffs designed to “restructure the company around areas of growth.” But ex-employees, speaking under condition of anonymity, describe a more dire situation -– one in which aggressive marketing and sales tactics have resulted in the company giving away free services and creating an unsustainable cash burn.

A sales promotion launched earlier in the year, called "Connect Your World," gave potential customers free Ethernet services until the end of the year, at which time they would have to start paying. Now it’s unclear how many of those customers will start paying, say the sources. One source, who worked in support of the promotion, said that in some cases the “customers” that Telseon claimed were never even hooked up to live Ethernet connections.

"They were counting all of these people as customers [even though they weren't paying] and paying out [sales] commissions on them," says one former employee. "I left because if I had done everything they asked me I would be in jail."

According to the press release about the promotion issued in April, the "promotion offers businesses a typical savings of $20,000 with a complimentary [sic] connection of up to 10 Mbps of bandwidth per month -- equivalent to 6 T1 lines - through December 31, 2001."

Telseon officials say they have more than 1,000 connections and 165 customers, but they would not confirm how many of those customers are paying for the service. They said that all 165 customers are running live traffic over their connections.

The metropolitan telecom services startup is still operating in 20 metro areas, but officials say it is now focusing the bulk of its efforts on the largest of those -- Chicago, New York, Los Angeles, San Francisco, and Washington.

The company will not confirm the scale of the layoffs or its current headcount. “The number we are laying off is not definitive, yet,” said Jennifer Castro, a spokeswoman for Telseon. She said the company is currently seeking more financing.

Former employees say the company has laid off approximately 40 percent to 50 percent of its workforce. At one time Telseon had more than 300 employees, but it now has fewer than 150, say the sources.

"A lot of people have walked out, and they've eliminated anybody that would help them," says one former employee. "If you're not contributing to the bottom line, you're gone."

Among those hardest hit are the marketing and sales support departments, according to the sources.

This is the latest in a series of setbacks for metro-area services startups, which are struggling to sell inexpensive optical Ethernet and, in some cases, Sonet services. Launching such services is expensive, and the service revenues are still relatively small. For example, recent public filings by Cogent Communications Inc., a Telseon competitor, revealed that it has only brought in $90,000 in revenue and burned through $28 million so far (see Cogent's Finances Revealed in Filing). Telseon itself recently changed its marketing strategy by selling Sonet services alongside Ethernet (see Telseon's Mixed Metro Message).

Telseon's downsizing may in fact have consequences for some of its equipment vendors. Two of those are Riverstone Networks Inc. (Nasdaq: RSTN) and ONI Systems Inc. (Nasdaq: ONIS) (see Telseon, Dynegy in Metro Deal).

-- R. Scott Raynovich, Executive Editor, Light Reading
http://www.lightreading.com

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