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Optical/IP

Next Gen Carriers Cash In

Yipes Communications Inc. proved earlier this week that funding for competitive local exchange carriers (CLECs) hasn’t dried up completely.

The company, which has already rolled out service in 16 different markets, announced another $139 million in funding, bringing the total amount raised since it began 14 months ago to $230 million.

Leading the new investment was Charter Growth Capital with past investors like Norwest Venture Partners and New Enterprise Associates also joining the second round.

Not only is that good news for Yipes, but it sends a message to the industry that next-generation service providers are still worthy of funding despite a slew of failing CLECs (see ICG's Sinking Ship). Other next-generation carriers using Ethernet technology have also raised significant amounts of cash. Cogent Communications Inc., one of Yipes’s closest competitors, has raised a total of $396 million. This includes $116 million in venture funding, as well as $280 million in vendor financing from Cisco Systems Inc. (Nasdaq: CSCO).

"It certainly validates what we are all trying to do here,” says Dave Schaeffer, CEO of Cogent.

Why are these companies scoring huge amounts of cash from VCs and vendors willing to finance their buildouts, when other CLECs are barely staying afloat? Unlike traditional CLECs, which are building the same kind of networks as the incumbents, Yipes and Cogent are looking toward fiber and Ethernet to more quickly provide data-centric services to customers at much less expense than the traditional model.

“The DSL [digital subscriber line] business was a natural progression for the RBOCs [regional Bell operating companies],” says Rob Coneybeer, general partner of New Enterprise Associates, one of Yipes’s original investors. “They know how to roll out the trucks and condition the copper. But they don’t have any idea how to handle fiber or how to turn up live IP services.”

As fiber becomes more readily available to businesses, the prospect of increasing capacity and cutting costs by using a more inexpensive infrastructure based on Ethernet makes sense, adds Coneybeer.

While the two companies share the same basic belief in Ethernet as the best way to connect to customers, they have very different approaches. Cogent has built its own backbone by purchasing fiber from Williams Communications Group (NYSE: WCG). Building this infrastructure from the ground up with next-generation equipment has helped the company cut capital and management costs. Also, it offers one service for a flat price: 100 Mbit/s for $1,000 a month. This approach helps cut billing costs by 90 percent, says Schaeffer.

Yipes leases its backbone from different providers and provides not one service but three. It provides bandwidth from 1 Mbit/s to 1 Gbit/s, offering customers greater flexibility at much lower costs than traditional providers can offer, but charges significantly more than Cogent for a 100-Mbit/s Ethernet connection.

Who's ahead in the race to deployment? That's a tricky question. Yipes says its service is operational in 16 regions with another four slated to go online by the end of the year, and it has over 200 customers signed up for service. But so far, it only numbers its lit customers in the dozens. Cogent has four regions of its deployment rolled out, and says that it has signed up over 400 customers with service to begin within the next few months. But it hasn’t yet released the names of any of them.

“The real proof will be what happens in six months,” says Mark Lutkowitz, VP of optical networking research for Communications Industry Researchers Inc. “I wonder if any of these guys will make much money. It’s hard to know which one has the better strategy.”

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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