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The days of unlimited venture capital and unproven business models are clearly over, a lesson certainly not lost on the players in the murky market of delivering broadband services to the thousands of commercial and residential multi-tenant buildings across the country.
As vital VC financing becomes scarcer for some MTU-oriented service companies, many of the players in that market are finding that to survive they must take a hard look at past business strategies, and turn market promise into real revenue sooner rather than later.
"(The MTU market) is still, I think, viewed as a potentially lucrative market, but the way they're going after it has changed a lot," explains Amy Helland, a multi-tenant industry analyst with research firm Cahners In-Stat Group. "In 2000, we pretty much saw a 'land grab'--companies trying to get in as many buildings as possible, regardless of subscription or penetration rates, to sort of mark their territory. But with the current funding situation, there's been a realization in the financial community that that business model is no longer acceptable," she says.
And what a difference a year makes. Some early leaders in various aspects of the MTU space have been forced into retrenchment mode, revising business plans and limiting capital expenditures in an attempt to conserve precious capital.
Publicly traded Allied Riser, which may have been helped because it has been working its business plan for some time, revised its plan late last year to cut capital spending by $130 million while scaling back a heady deployment schedule. The company instituted a revamped two-phase plan for network buildout, while optimistically expecting that even in a depressed market the best business plans should be able to attract necessary funding.
"I think there will be capital available for good management teams that are executing on their business plan, and have proven themselves in the marketplace," says Todd Doshier, Allied Riser's chief financial officer, adding that he believes the investment capital pendulum likely is swinging back in a positive direction.
But it may be too late for companies like early entrant Onsite Access, which late last year had to pull its plans for a $249 million IPO and was forced to lay off 170 of 400 employees in "reassessing" its business plan. Along with the revised plan, Onsite also announced plans to scale back its market expansion, concentrating on its major centers of operation in New York, Los Angeles and Toronto. At the time, a spokesperson for the company revealed, "The market is calling for profits and we're responding."
Others riding the retrenchment rail: Cypress Communications, an Atlanta-based provider in the market since 1995, scaled back its market expansion plans, has undergone leadership changes from the very top on down, and reduced its targets significantly for business lines, data customers and overall revenue. Market targets have been reduced to 13 from the originally planned 27 for 2001. Its workforce is expected to be reduced by as much as 45 percent by mid-year and capital expenditure targets were reduced by as much as 80 percent.
Adding to the carnage, Palo Alto-based Urban Media recently laid off 90 percent of its workforce, and has laid the groundwork for bankruptcy protection. These major steps were taken just a little more than a month after a new $57 million equity financing round led by Tyco Ventures.
Despite rocky market conditions, though, there has been some positive movement in the market, mostly from younger companies that have avoided the pitfalls suffered by many of the early market leaders.
Bethesda, Maryland-based eLink Communications recently landed $70 million in third round financing, further proving that investors see promise in the smaller company's cautious business plan (eLink serves just six U.S. markets) and service package that sweetens the deal for building owners through revenue sharing and value-added amenities like VPNs, Web hosting and application services.
And newer entrant Everest Broadband, Fort Lee, N.J., inked a similar funding deal, securing $50 million in third round funding early this year. Investors noted that Everest's modest business plan, focused on an "underwriting" model of building selection, could more readily generate revenue than the "land grab" style that has marked the industry over the past year. According to Mike Granieri, spokesman at Everest, the company has succeeded by selecting only the buildings that show promise of generating revenue. They have shied away from large enterprise clients, are working to deploy more POPs in markets across the country, and are even dabbling in the hospitality sector.
Everest has wired a few hotels with broadband services, but has intentionally moved cautiously into the market, saving their resources for the few hotel properties that can immediately generate revenue.
"We're planning for the worst case scenario, but hoping for the best," Granieri says.
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