Integra's Kevin O'Hara on transitioning to larger-scale wholesale, retail business services
O'Hara (Image source: Integra)
For much of its 30-plus year existence, Integra Telecom was known for its dedication to the small to medium business (SMB) market through its local touch and good old customer service. But in recent years, the service provider realized that the assets it purchased from Electric Lightwave (ELI) and Eschelon in 2005 gave it a set of long-haul and metro fiber assets it could use to build a set of retail and wholesale services for larger businesses and service providers. Integra's reinvigoration comes from its chief executive officer, Kevin O'Hara. The Level 3 Communications (NYSE: LVLT) co-founder and MFS (Metropolitan Fiber Systems) executive, who took over as the CLEC's CEO last year, has been building a new set of services, including fiber-based Ethernet, Ethernet over Copper (EoC), wholesale Ethernet, wavelength services, and most recently, dark fiber. FierceTelecom Editor Sean Buckley caught up with O'Hara to discuss the CLEC's emerging retail and wholesale service strategies.
FierceTelecom: Kevin, you have been the CEO of Integra for over a year now. Talk about the transition into that role. What else we should expect from the CLEC this year?
Kevin O'Hara: It's a company that had a great heritage; it's a company that had a great reputation for its service model; it's a company that had a great set of assets, and it was those assets that caused the discussion to begin with. When I talk about a discussion, I am talking about a strategic discussion about as you go forward. The question was, do you want to compete where your primary battleground is on the lower end of the market—not just the SMB, but also the lower end of the enterprise market--where you're probably most vulnerable to the cable companies? Competing with guys that print money is a tough place to be. When we looked at the survey of our assets, we realized we had some amazing assets that allowed us to differentiate ourselves.
We began a process a few years ago to get the company moving in a direction that was more facilities-based and moved up-market with a combination of enterprise and wholesale services in a more concerted effort. The pace wasn't particularly aggressive, so that's really what we changed that last year.
The conclusion we reached was that the verticals within the market segments within our particular footprint were really screaming out for someone like Integra to put more time and energy into them. The market opportunity was significant and the products and services to deliver to those will be developed inside the company, but we thought it was possible to do that. Then, we'd have to get a sales force that could after it and our operational team could keep up.
In terms of product development, I don't think there are any more major products to be done. The last big one was hosted voice. I think we have a pretty good portfolio out there now, so it's been a busy year in terms of a product development standpoint.
The initiatives we're announcing now are towards enablement of our customers. Over time, we want to make sure our smaller customers can do more and more self-help. Relative to today, we want to make sure that our wholesale customers--especially when you look at Ethernet over Copper, it means tools like automated loop qualification. This allows us to scan our maps with some location tools to say what capabilities exist in a building. Both of those were important to improve our wholesale customer experience and hopefully drive some more business along the way. The loop qualification tool is available now. This year was about finishing up the product and driving toward customer enablement and making sure we had the right team to see this thing through. I feel good about all of the transitions.
FT: A big part of Integra's growth has been its transition into the medium-sized business market, including some recent wins with the Oregon Health Network and the State of Washington. Are you finding that your new product and service transition is resonating well with these larger customers? Why?
KO: I would say we have made a successful transition in terms of what we're doing, but now we need to just do more of it. Today, about 70 percent of our sales are coming from some flavor of Ethernet services, which includes both wholesale and stuff we're selling directly to businesses. Coincidentally, almost 70 percent of our Ethernet sales are coming from multi-location customers. Today, in excess of half of new sales are coming from customers that spend more than $3,000 a month in initial billing.
Moving up-market, we're getting traction with the products we rolled out, but now it's the case of accelerating the rate. Our wholesale business is good, but we have a lot of opportunity there.
In terms of moving into those other verticals, our business on the commercial side is dominated by healthcare, government, and education; those three segments are dominating our sales. They're not saying, "give me a DSL line," but rather they are saying, "give me a five-location VPN or give me a 40-location VPN" where we can serve a large portion of them with fiber, and some of the others we'll go to EoC or a Type 2 connection.
FT: When we began our conversation, we talked a bit about Ethernet over copper as a method to reach other buildings where you currently don't have fiber. Do emerging innovations like bonding and vectoring have a potential benefit to Integra?
KO: I think when you've got as much embedded plant that exists out there in the copper world, all of that is not going to get replaced overnight. There are going to be some places where you will replace copper with fiber. I don't want to get into a regulatory discussion, but looking at how much copper is out there, there's going to be a lot of people asking: how do you extend the life of that? It may not be optimal or how you would want to build something today, but since you have the embedded base, there will continue to be innovations to extend it. We're now pushing 60 Megs out of a good portion of our plant, and 60 Megs starts to get interesting. We're pushing 60 Mbps safely at 2,500 feet, which brings in a substantial footprint when you look at our enabled COs.
FT: Along with expanding your EoC coverage, you have been expanding your on-net fiber connections as of the end of Q3 2012. How has the progress gone there, and does that put you in a better competitive position?
KO: We are. Our preference is that the rate of on-net buildings would accelerate. We have come up with some location tools that are much less interesting to customers, but are more interesting to me as a CEO and the sales team. We have prequalified literally thousands of near-net locations, so if you're a wholesale or an enterprise customer, you can roll over the map and it will give you three colors: Green, Yellow or Red.
A "Red" does not mean we would not do it, but it means that the percentage of available spending in that particular building is very high. Let's say one building has $10,000 in total spending and it is an expensive build. It's a high hurdle, but if you're in a tall shiny building that's got $200,000 in telecom spending and it's a cheap build, we've got rules to preapprove it.
We have thousands of buildings that are populated on that map that synch together market demand, estimates on capital, and you roll your mouse over and find out what's available. It's very, very powerful. We'll be making this tool available to the majority of our customers over the next few months, particularly on the wholesale side.
FT: You mentioned wholesale. How are you leveraging the assets that you purchased from Electric Lightwave in 2005 been used to craft your wholesale offerings?
KO: What ELI brought was a great heritage in the wholesale space, great relationships, and great assets. Then, I would say that the company sub-optimized that over time. A lot of those assets got redirected over time toward interoffice transport in support of the more traditional customer base.
One of the things we really wanted push on was reenergizing our focus in the wholesale space. We realized had a lot of capabilities, but we weren't well positioned to take advantage of them. Carrier Ethernet was not a product, even though we already deployed the technology for it in the network. We inherently had wavelength technology, but we never productized it. We had dark fiber in the network, but we never productized it. What we have been spending a lot of time on this year is productizing what we think the wholesale community likes to buy and wants to buy and establishing Network to Network Interconnection (NNI) agreements. Those are all part and parcel with our strategy to figure out what we need to do in order to be successful in wholesale and recently getting the right leadership.
We announced that Martha Tate joined the company. Martha is a wholesale veteran, who has for the last three years been at Comcast (Nasdaq: CMCSA) serving the Western region. Prior to that she was at Level 3, and prior to that she was at MFS. She has a heritage of fiber-based wholesale activities, but for the past three years she's been with Comcast Business, which has been the most aggressive cable MSO in how they are rolling out services. So it is kind of a nice bridge.
FT: Integra has been building out a sizeable EoC and on-net fiber network, but no service provider, even the largest ones, can reach everywhere. Can you elaborate about your External-Network to Network Interconnection (E-NNI) strategy?
KO: It is very targeted in terms of going to very specific carriers individually rather than any of the exchanges, working on those relationships with those carriers, and really getting those carriers to use our network where possible. Rather than going into an exchange and being one of many--because, as you can imagine, many of the carriers we're interconnecting with have their own standards, not just technology standards, but also their business standards--we have been matching up with pretty much all of the big guys where we can leverage our footprint, which tends to be unique. Our network is concentrated out West and most of our competitors are concentrated out East.
On the buy side, we have never sold off-net, at least not intentionally. Now, we have business rules around it, and to the extent we serve 10 locations and three or four of them are off-net. We now have NNIs going the other way that enable us to serve some of those. Our customers feel good about that, because they see it as a two-way versus a one-way street. It's very targeted towards specific carriers, and that list of carriers is going to grow over time, but right now it's focused who we are doing a bunch of business with in this area.
FT: No conversation about wholesale is complete without a discussion around Fiber to the Tower (FTTT) and wireless backhaul. Do you see that as a growing opportunity for your wholesale division?
KO: We have been pretty selective with Fiber to the Tower. I was on the board of Integra for two years before becoming CEO, so we saw the all of the big RFPs come through. We used to get super excited about them until we saw the economics. With a lot of the tower opportunities, particularly the larger ones, the Individualized Rate of Return (IRR) looked great, but the cash and cash payback was measured in four to six years.
For Integra, we thought there was higher and better uses than pursuing those towers. Today, we have about 200 towers we're serving, but I would say we're pretty selective about not only about the IRR, but also the cash profile. We'll thread the needle, but something with a great IRR and a six-year payback doesn't fit our profile.