Its new futuristic facility continues to amaze bargain-hunting SureWest Communications
Sacramento Business Journal | February 28, 2003 print edition | Mark Larson
The legacy of broadband provider WINfirst is a modern-day mother lode of telecom tomorrowland built at McClellan Park with $200 million in venture capital.
But when the venture-capital money dried up at telecom startups here, there and everywhere, Denver-based Western Integrated Networks LLC left its Sacramento-area plant in bankruptcy. As a result, it was a Merry Christmas for Roseville-based SureWest Communications, which bought the supersonic system last year for a used dune buggy price of $12 million.
SureWest’s buy of Winfirst’s assets was a coup, by any standard. It bought itself a telecom services rocket launcher with the potential to bring it a windfall of market share, revenue and profit.
SureWest is working hard to make that happen, devoting 130 employees to this part of the company. SureWest has reorganized Winfirst’s chaotic fiber construction plan into a methodical schedule, drawing on its many years of experience of installing communications systems.
But it’s the building itself that gives the former Roseville Telephone Co. its biggest advantage.
When SureWest got the keys to the McClellan plant, company officials kept learning more about how much they got in the deal. It was a lot.
No tomorrow: The plant occupies 187,000 square feet of a former hangar used by mechanics and machinists to refurbish military jet engines. When the Air Force left McClellan, and the base became a business park, one of the first private lessees to come into the park was WINfirst in September 2000.
The company said at the time it was armed with a half-billion dollars in investor cash. A look at all the equipment it put in at the McClellan plant gives ample evidence that Winfirst definitely wasn’t worried about pinching pennies. It spent $200 million on the plan and the beginning of a fiber system in Sacramento County.
This was during the high-tech boom, when few investors worried about costs. Money was being thrown around like confetti at a hero’s parade. Winfirst completely transformed the massive hangar into a modern telecommunications showcase, giving it a daring futuristic look of Mission Control, Hollywood-style. The plant was designed for big things, to be the nerve center of a fiber-to-the-home system in Sacramento County and 10 other similar markets nationwide.
The plan was that it would eventually employ 600 people either in the building or out in the field. The McClellan plant got built. It is a seamless, ultrafast, fully integrated digital network built to deliver three things at once over one fiber-optic connection: multichannel pay TV, 10 megabits of Internet connectivity speed, and phone service — all for about $100 a month.
Winfirst managed to hook up about 5,000 customers before the cash ran out. And almost to a customer, all are happy to be getting the service. A one-stop shop for communications services is a new model of competition for traditional providers of cable TV, phone service and online connections.
But there weren’t any prospects for profit after hundreds of millions were spent. And that became a big problem. Investors want profit, or at least a prospect of it to justify keeping their money hoses blasting.
As Greg Chamberlain, who worked for WINfirst and who now works for SureWest Broadband, says, it amounts to a simple tenet of business: “You can’t spend capital and not have revenue coming in.” With only a speck of revenue compared to spending, the big-money Winfirst investors cut their money supply and Winfirst went into Chapter 11 bankruptcy reorganization in March 2002.
If ya got it, flaunt it: When you walk through the McClellan facility, it feels like you’re in a futuristic space station: Two stories of multicolored square panels of glass front the modest lobby, separated from the rest of the building by another wall of glass and push-through doors. Long hallways, curved and straight, are paved with new-smelling carpet and lined by bold-colored walls. Just beyond the lobby is a reception area with a large counter and sink, offering ready space for catered food and cocktails.
The doors leading into secure areas have badge scanners. Two floors of sales and marketing offices partially frame a massive ground-floor call center of workstations and operators. We walk into the first-floor conference room where a long, maple-topped table awaits, surrounded by walls with built-in maple cabinets.
A button is pushed and a curtain at the far end of the room raises, revealing a glass window and a view of a two-story room with a massive $35,000 television screen, framed by smaller plasma screens on each side. The side screens monitor various parts of the SureWest network.
Why the big screen? “It’s just for show,” I’m told. Winfirst execs apparently wanted to wow anybody visiting its conference room.
The wall of screens sit above a room of all-black workstations, each with a 19-inch flat-screen monitor. This is a “network operating center” designed to keep constant tabs on the various parts of the network that Winfirst expected would grow to 11 markets.
SureWest has two such network operations centers of its own in Roseville. Because this place has so much capacity, says general manager Terry Perkinson, SureWest will be moving those centers here.
“We saw they did an excellent job with this building,” says Perkinson.
Chamberlain, who went to work for Winfirst after a 20-year career with Pacific Bell, and who now is with SureWest, has been awed by the advanced design and technology of the building.
“I believed then and I believe now, this is just the forefront of what everybody’s going to have to do,” he says. SBC and satellite programming providers like DirectTV are trying the three-in-one bundle, he says. But they’re not there yet.
Among the other big features of the plant are a software lab/air-cooled server room, a satellite dish farm in the back of the building where it imports TV programming, a sound-insulated back-up diesel-powered generator, an inventory control system to keep missing service installation parts at a minimum, and many rows and stacks of unused office furniture from other Winfirst offices closed in Denver and Dallas.
The plan: SureWest plans to drop the coaxial cable part of its TV offering and make it fiber-fed, along with its data and phone options. And it will fold its wireless service into its broadband package for a four-in-one offering.
Meanwhile it is continuing to build the fiber system in Sacramento County that Winfirst only got started on. It now passes 42,000 homes and has about 5,800 subscribers. Over the next year, SureWest will run its fiber network past another 80,000 homes in North Natomas, Sierra Oaks and Carmichael.
While the SureWest Broadband price has been around $100 a month, it will likely go up with the addition of cell-phone service, and observers say that setting a price that will lure a critical mass of takers will be key for SureWest’s success with the service. Because profit is the goal, it can’t afford to give too much away.
In a competitive telecom services market, which Sacramento has become in recent years, price is a major factor in the battle for customers.
Programming price has become a point of competition between Comcast, the biggest Sacramento-area cable provider, and satellite-based pay TV vendors such as Dish Network.
Comcast has about 265,000 subscribers, and satellite vendors have an estimated 105,000 local takers, estimates local cable regulator Rich Esposto. While satellite vendors claim they’ve gotten local cable subscribers to switch because of rate increases, a cable industry spokesman “vehemently disagrees,” with that notion in this market and others.
Brian Dietz, former local manager for AT&T Broadband, prior to its being bought out by Comcast, is now spokesman for the National Cable & Telecommunications Association in Washington, D.C.
Dietz says industry figures show that cable rate increases have been smaller during the deregulation of the industry than they were prior.
Where SureWest lands as a third entrant in the competition has yet to play out.
A good start: Tom Reiman, a Sacramento-based broadband consultant, has familiarized himself with SureWest’s foray into Winfirst. Last September, Reiman wondered how SureWest would fare as a first-time cable programming provider. The business is known for its complex regulatory hurdles and getting programming viewers want can be a challenge.
But Reiman gives good marks to SureWest’s progress. The company has brought in video-on-demand (pay-per-view), which is ahead of Comcast, the local cable provider. Comcast’s regional manager, Ruth Blank, says her company has no prediction as to when it will offer video-on-demand locally.
“They still have a cost-of-infrastructure challenge,” says Reiman of SureWest Broadband. “But I think they are aware of that.”
He believes the company has a superior video and data product to cable offerings. But he believes SureWest Broadband must sell its high-speed Internet connections to businesses, where there’s much more money to be made. The 10-megabyte connection of SureWest is equivalent to a high-end DSL (copper enhanced to be a faster data pipe) costing from $6,000 to $8,000 monthly, he says. He says the SureWest data product is “vastly superior” to those offered by SBC or Comcast.
Such moves, by the way, are in SureWest Broadband’s plans.
With the recent rulings out of the Federal Communications Commission on telecommunications competition, Reiman figures the big phone companies will now pursue broadband development, first through DSL, and eventually fiber.
And SureWest is already well on its way.
“I’m pretty high on SureWest,” says Reiman. “They understand the economics of what they’ve acquired.”
© 2003 American City Business Journals Inc.