In-building providers find new approaches to profitability.
Anne Zwieger Correspondent | asieger@hostingtech.com | www.hostingtech.com

Although the idea of connecting a building full of captive customers sounds ideal, a practical application of the concept has been anything but easy for BLECs (Building Local Exchange Carriers). In recent years, dozens of BLECs ran through cash at a frantic rate to create building-based network infrastructure on speculation. Their hope was that customers would buy both data and voice services, a profitable bundle justifying big cash outlays for equipment. In most cases, the surge of customers they counted on did not materialize and several BLECs tanked.

Despite setbacks, network and access providers have not given up on the multi-tenant market. Today, a host of smaller players including corporate networking specialists, systems integrators, and regional ISPs are taking a fresh look at broadband building access and evolving less expensive and less risky approaches to the problem. This time around, in-building players are focused on customer wins first and infrastructure growth second.

"We don't make large capital expenditures on bets," says David Williams, vice president of marketing and business development for fixed wireless service provider NextWeb (www.nextweb.net). "We connect buildings when we've got the business to justify it. That results in conservative growth, but a much more stable business."

"It's our assessment that a lot of the business modeling that went on in the early stages probably assumed too high a take rate [among tenants]"
Greg Maycio | New Paradigm Resources Group

BLEC collapse
BLECs are a subgroup of the competitive local exchange carrier market focused on voice and data for buildings, and they were some of the telecom's hottest players for a few years. In theory, the idea of selling an entire building full of customers a lucrative voice/data bundle sounded great good enough to attract a long list of carriers into the market. High-flying BLECs attracted huge infusions of capital. OnSite Access, for example, pulled in a whopping $186.5 million in debt and equity financing during its heyday. BLECs rolled the money into infrastructure build-outs and connecting buildings, regardless of whether existing customers were on board.

In early 2001, the market started to fall apart, with many of these formerly high-flying players forced into bankruptcy or selling assets. With competitors squeezing each other and tenant buy-in hovering at a low 20 percent to 30 percent, the profits simply were not there.

OnSite, which had built some of its business with customers of bankrupt broadband provider NorthPoint Communications, declared bankruptcy in May 2001. The bulk of OnSite's assets have since been acquired by still-living BLEC eLink Communications (www.elinkcommunications.com). Other BLECs crashing in mid-2001 included Broadband Office, Winstar Communications, Eziaz, and UrbanMedia.

Looking back, the last wave of BLEC failures does not seem that surprising, suggests Greg Mycio, director of research and analysis for research firm New Paradigm Resources Group. (www.nprg.com)

"It's our assessment that a lot of the business modeling that went on in the early stages probably assumed too high a take rate [among tenants]," Mycio says. "When you sign up a building you have a finite resource of prospective customers."

New approaches
Today, commercial building-oriented players are keeping a tighter grip on their expenses and moving ahead with caution. Some are opting for partnerships with buildings rather than trying to build networks on their own. The network development firm onShore (www.onShore.com), for example, always gets owners to pay at least part of the tab before it will wire a building.

"We don't make large capital expenditures on bets. We connect buildings when we've got the business to justify it"
David Williams | NEXTWEB

"In some cases a management company or developer is putting up all of the money, and we just do the maintenance and support," says onShore President Stelios Valavanis. "In other cases, they invest less ... we just give them a cut and walk away with the lion's share."

onShore keeps its connectivity costs down by connecting entire buildings rather than one customer at a time. For about $200 to $300 per unit, every tenant gets access to onShore's 100Mbps Ethernet network.

"Granted, we may not get every customer," Valavanis admits, "but the economics work out better when we do all of it at once."

To date, onShore has connected 10 Chicago-area buildings and another is on the way. All of onShore's deployments go into newly constructed buildings, making the job easier than retrofitting an existing building. The new players are also keeping their distance from the "one-stop shopping" models, which require them to provide voice and data services themselves. In most cases, if they do offer telecom services, they outsource. NexWeb, for example, offers voice through its local and long-distance partner, GoBeam (www.gobeam.com), a voice over IP-based telecom.

Another group of players is bypassing the commercial in-building market and focusing on residences, particularly as Internet connections become more and more common as a basic amenity in high-end properties. As specialists, they hope to inspire more confidence than telecoms, whose support systems typically do not extend to nontechnical property management types.

One such venture, a joint effort between the technology services firm Corporate Computer (www.cci.net) and the developer Crown Capital (www.crowncompanies.com), plans to take the expertise it gained from its own project to building owners elsewhere. Through joint venture Broadband Digital Services, the two companies wired Morning Run, Crown's property in Seattle. Morning Run, a sprawling 222-unit luxury apartment complex cutting across 11 acres, now offers free 64-Kbps access to every tenant although it allows tenants to upgrade to as much as 1,024Mbps speed for $40 per month. Users also get free access to the complex's complementary 802.11b wireless network.

"We started in the residential market because it's the hardest to connect," says Michael Andrews, co-founder of Broadband Digital Sevices. "We thought if we could do this, anything else would be easier."

As Andrews sees it, Broadband Digital Services is selling its residential experience as much as the actual connection. "Owners are rightfully afraid of providing services if they're not sure they can keep their promises," Andrews says. "They have to be very sure you're a reliable vendor who can support it. The people who get the bad press are the property owners, not the vendors."

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