Ethernet services

Metro Providers Retrench

Like other metro optical carriers, Sphera Optical Networks Inc. and Yipes Communications Inc. are seeking to cope with a changed economy. And both say survival involves a reversal of former strategy. Both have opted to bulk up their customer base in existing networks instead of expanding into new cities as fast as possible.

"In the boom-or-bust times a year and a half ago, we were geared up to run faster than everyone else," says Jerry Parrick, CEO of Yipes Communications. "Obviously, the market has changed. Frankly, we're finding we're not being chased."

With fewer competitors and an established 21-city network, Yipes has opted to restructure itself and "stick to its knitting," Parrick says. It's refocused sales efforts in key markets such as New York City, Chicago, and San Francisco. Increasing volume in areas where it already has a foothold reduces the company's burn rate while beefing up its balance sheet, officials say.

Projects include installing Ethernet service for a string of retirement communities (see Yipes Launches Geezer Net) and upgrading former San Fransciso customers of Allied Riser Communications Inc., which jettisoned its retail customers after its recent purchase by Cogent Communications Inc. (see Allied Riser Prepares for Merger and Yipes To The Rescue).

Parrick acknowledges Yipes has undergone staff reductions to support its new focus, but he denies rumors of cuts affecting 50 percent of the workforce: "That's not true," he says. Still, he won't give any figures at all -- not even the current employee census.

"Nothing we've done should be apparent to the outside world," he maintains. "Customers and partners won't see any difference in how we do business. We haven't retreated from any cities or customers."

Yipes also won't comment on rumors that it's in the process of seeking over $80 million in new funding. Yipes raised $291 million in three rounds as of January 2001. "We have a firm policy of not commenting on funding until it's completed," a spokesperson says.

Yipes actually announced its C round of funding three times - once on October 23, 2000 ($139 million, see Yipes! Another $139 Million), once in a footnote of a press release on January 3, 2001 ($174 million), and once again on February 6, 2001 ($200 million -- see Yipes Closes $200M C Round). In each case, the announcement was really a sort of progress report.

Although it's still privately held, Yipes recently announced that its revenues for the quarter ended September 2001 grew 87 percent year to year (see Yipes Boasts Q3 Growth). It says the number of its "lit" or in-service customers grew 55 percent sequentially.

Industry sources are skeptical of such news. "Oh, the joys of being private and playing with the numbers," writes a marketing manager for an optical equipment startup, who wished to stay anonymous. He notes that Yipes may have realized an 87 percent increase on 2000 revenues in the mere "low millions."

Yipes isn't alone with its problems -- or solutions. Sphera Optical also is seeking to weather the downturn by cutting its burn rate and increasing its volume on existing networks.

"We're increasing our footprint within existing cities," says spokesman Larry Chesal. New projects include efforts to help long-distance carriers launch bandwidth trading, using links in Sphera's 10-city network. The company is also looking at ways to slice its gigabit-Ethernet offering into smaller segments to compete with the likes of Yipes.

Sphera denies that reversing its aggressive buildout strategy has resulted in any recent layoffs. The company now has 75 employees. But Sphera's been hit with executive changes. Late in October, Lance Boxer took over as CEO, replacing Harold Grossnickle, who has left the company. Sphera also lost its founder and co-chairman, Peter Tierney. Sphera sources can't say where either executive has gone.

Sphera also recently got new funding in what the firm acknowledges as a "slightly down" third round (see Sphera Gets $25 Million). Sphera obtained $74.5 million in its first two funding rounds, which were completed by August 2000.

The measures being taken by both Sphera and Yipes contrast with those of other metro carriers that also are facing changed circumstances. Cogent, for instance, has sought to offset deep losses by gobbling smaller companies (see Cogent's Finances Revealed in Filing). And Telseon Inc. allegedly sought to pad volume with deals that haven't been finalized (see Telseon: Running out of Road?).

— Mary Jander, Senior Editor, Light Reading
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