New Edge Networks offers a range of broadband solutions, including private-line, Frame Relay, ATM and DSL, to the enterprise market - spanning small companies to large corporations. The company markets its services both directly and through agreements with a number of major carrier and ISP partners.

The New Edge Networks name alludes to new solutions at the edge of the network. Dan Moffat considers that the network edge - defined as the last mile - is currently the most interesting and challenging portion of the network. He added that deploying the long-haul is the comparatively easy part of a network installation, one that can be successfully accomplished even by non-telecommunications companies such as utilities. New Edge Networks sees the last mile as the complicated, chaotic, portion of the network, and consequently an area that few companies involve themselves with. New Edge Networks aims to be the one-stop-shop for edge connectivity in the U.S.

New Edge Networks employs approximately 286 staff. Of these around 200 are technical and support staff working in the 'loop factory', described by Mr. Moffat as "highly efficient operations", which are constantly being refined. Sales personnel in the field make up the remainder of the staff.

Mr. Moffat noted that there are no immediate plans to increase employee numbers, although staff will be recruited as and when required. The most likely area for expansion was stated to be the sales and marketing team, which will be augmented as revenue is fed back into developing the company.

New Edge has to date raised funding of approximately $385 million from investors including Goldman Sachs, Accel Partners, Crosspoint Venture Partners and Greylock. Of that total 50% was in the shape of a loan from Wachovia Securities and Alcatel.

New Edge Networks is currently stated to be on target to realise revenues of approximately $100 million for the financial year 2003. With revenue of $8.1 million in August 2003, the current annualised run-rate is already approximately $100 million. The company achieved cash-flow positive status in June 2003 on sales of approximately $7.5 million for that month.

Dan Moffat emphasised that growth on a quarter-to-quarter basis has been in double digits for the preceding twelve quarters, based on organic growth, which is running at a level of between $300,000 and $400,000 per month.

In early 2003 New Edge Networks acquired the U.S. customer base of Cable & Wireless, which served to boost total growth from fourth quarter 2002 to first quarter 2003 to 17%, subsequent growth from first to second quarters 2003 thus appeared lower than the claimed double-digit level.

Mergers and acquisitions are viewed as a legitimate strategy for achieving growth. It was noted that growth targets are based upon organic growth, excluding acquisitions such as the Cable & Wireless business. Mr. Moffat explained that there are three routes to growth: organically; through agreements with carrier partners; and through mergers and acquisitions. Dan Moffat acknowledged that rapid growth could adversely affect the positive EBITDA status of the company, stating that this aspect of the business is being monitored closely as a negative cash flow is not an option at present. He added:

"Maintaining a positive cash flow is now essential. If this position looks set to change, measures will be taken to address it, principally by reducing operational expenditure through improved efficiency. If business took off to the extent of three or four-fold growth, cash would become a problem - in such a case additional sources of funding would be sought. However, we are generating solid cash. Growth takes cash so we must simultaneously watch cash and growth."

Mr. Moffat said that there are a number of investors who would be prepared to offer funding in return for a stake in New Edge Networks. He noted that an IPO has been mooted, and venture capital investors would welcome such a move. On the positive side, floating the company would enable New Edge Networks to clear its debts and raise additional funding at low cost; on the down side going public entails significant expenditure for a small, growing company.

It was noted that New Edge Networks is unusual in revealing detailed financial information. Mr. Moffat remarked that this was initially a step aimed at allaying concerns over the company's financial viability. More generally, there is no reason to conceal the company's accounts - the prime objective is to build a sound company image, in part to assist with any future decision to seek public funding.

Growth by acquisition

New Edge Networks has to date completed three acquisitions - West-Net for the Frame Relay and ATM business in 2000, AtWork in early 2002 for its infrastructure assets and customer base, and, in late 2002, Cable & Wireless's U.S. customer base. Dan Moffat noted that any ISP or CLEC could potentially be a target, where the customer base is adjudged a good fit with New Edge Networks' business. At present the acquisition route is assessed to be a low cost, and quick method of expanding the customer base:

"Generally speaking, the cost of sales in generating new business is calculated to be between three and five times recurring revenue per month; for an acquisition this figure stands at one to two times recurring revenue per month. This situation will change, but today the latter option makes sense."

New Edge Networks operates a national U.S. network, with presence in approximately 400 cities. DSL service encompasses more than 360 small cities and towns across twenty-nine states. Dedicated Internet access service is offered in thirty top metropolitan areas. WAN service is available nationally, coast to coast.

New Edge Networks works in the 'access' portion of the network - from a local central office exchange to a customer's premises. The company has a presence in its own right in 600 central office exchanges across the U.S., augmented by agreements with such partners as Covad Communications and DSL.net. Dan Moffat remarked that, at the far end of the network, connection is usually to the customer's LAN or, in the future, to an IP PBX.

Funding received by New Edge Networks has been invested in two key areas. Mr. Moffat stated that foremost was the construction of a national Frame Relay and ATM network in the U.S.

This network is based on multi-service switches from Alcatel/Newbridge Networks - sited in the 600 central office exchanges. He noted that this is a true carrier-class network, akin to that deployed by the RBOCs or MCI. The multi-service switches are linked over a leased backbone network - the running of which New Edge Networks is not involved in - utilising OC-3 and DS-3 network connections. Mr. Moffat said that numerous different carriers provide this backbone network, the main providers being AT&T, Broadwing, Level 3 and WilTel Communications. It was noted that these carriers are constantly offering better pricing deals: "basically, the long-distance carriers cannot sell capacity quickly enough before the price falls again".

The second major area of investment by New Edge Networks has been developing the customer base - signing up customers to get traffic onto the network.

Customer base

Mr. Moffat stated that New Edge Networks realises approximately 80% of its revenue through its carrier partners, which currently number in the region of 400. Enterprise customers total around 40,000, ranging from single-site operations to major banks, and including roughly 1,000 large corporations utilising more than one hundred nodes. It was stated that New Edge Networks is now aiming to expand its customer base at both the top and bottom ends of the enterprise sector.

Leasing agreements

Mr. Moffat outlined New Edge Networks' approach to leasing agreements for increasing network coverage. Agreements are formulated on a contract-by-contract basis, generally running for between one and three years. He added that long-term contracts are avoided due to the ever-decreasing price of network capacity.

A deal with Covad Communications is seen as a straightforward extension to the company's network capabilities, complementing as it does its non-metro area coverage. Covad Communications has a large metro area footprint, over which it offers DSL services - mainly Synchronous DSL and Asynchronous DSL. A similar agreement in place with DSL.net covers the northeastern seaboard area of the U.S.

Mr. Moffat noted that a deal with MCI is about to be announced, which will largely duplicate coverage provided by Covad Communications, and that a number of further agreements are in process. He emphasised that New Edge Networks wishes to have a choice of carrier partner for each region of the country.

Delivering last-mile solutions

Utilising the network facilities, New Edge Networks is able to deliver a range of services to enterprise customers. Dan Moffat said that a variety of technologies may be deployed in the access network, ranging from private-line to ATM to DSL to wireless to optical. New Edge Networks considers itself to be 'technology agnostic', and able to deliver a choice of services, subject to customer Quality of service requirements, the main constraints being availability of a technology in a particular area and economic considerations.

New Edge Networks currently offers a variety of DSL solutions - the core offering being SDSL. ISDL (ISDN DSL) is another important solution, primarily due to the ability to provision service anywhere within an incumbent local exchange carrier's (ILEC) footprint using the technology.

ADSL is offered, although Mr. Moffat remarked that the company is moving away from this solution wherever possible as there is no wish to compete against the RBOCs and cable modem players in the residential sector.

Frame Relay, ATM and private-line services are also offered, as are wireless solutions - which the company views as the optimum choice in the long-term. Mr. Moffat commented that a viable wireless solution has been on the cards for over ten years, but has yet to arrive. The prime revenue generating solutions for New Edge Networks today are DSL, Frame Relay, ATM and private-line.

Commenting on the provision of wireless services, it was stated that, while Wi-Fi is offered, New Edge Networks restricts its involvement to the backhaul connections, i.e. the 'wired' portion of the service - from the radio node at the customer site back to either a central office exchange or an Internet connection. Dan Moffat stated that the Wi-Fi business model per se is not one that the company wishes to be concerned with.

One solution not currently offered is Free-Space Optics (FSO). Mr. Moffat said that this is viewed as falling into the same group as directional wireless offerings such as Local Multipoint Distribution Service (LMDS). For New Edge Networks the issue is one of economics, in that a base level of business must be signed up to justify the capital expenditure entailed in deploying the system. FSO solutions have been considered, although applications for the technology are currently believed to be limited.

Describing a typical scenario where New Edge Networks could simplify life for an enterprise customer, Dan Moffat said that, for example, if Starbucks required Wi-Fi service in its stores nationwide this would traditionally involve many issues - from how to implement solutions technically, in addition varying from city to city, to engaging with numerous carriers across the country as a whole. By going to New Edge Networks, Starbucks would not need to tangle with these challenges as the company would take on all issues relating to technology and geography. Starbucks involvement would start and end with the request for Wi-Fi service.

NB: New Edge Networks is the underlying service provider for Starbucks, which is an AT&T customer. AT&T turned to New Edge Networks to provide local access to Starbucks stores within the New Edge footprint.

The New Edge Networks' business model is founded on opening up the bottleneck at the network edge - differentiating through delivering access solutions that no other service provider is able to implement. Mr. Moffat commented that this is regarded as a healthy sector to be in, and one that is difficult for other companies to penetrate.

New Edge Networks considers that the foremost challenge that it faces today is 'selling the story' - its value proposition - in a clear and concise way, particularly to end-users in the key enterprise sector.

As noted earlier, a large proportion of the company's business is conducted through carrier and ISP partners, notably AT&T, MCI, SBC and BellSouth. Mr. Moffat noted that these customers understand what New Edge Networks can offer, and also have the resources to market the solution. Addressing businesses directly presents a number of issues.

Firstly, New Edge Networks must explain who the company is, what it does and how it can meet the communications needs of the customer, plus convince the potential customer that it is a reputable service provider. This task is made harder by the risk-averse nature of companies with regards to small telecommunications companies in the current market environment. Dan Moffat added:

"The managers taking the decisions over their company's telecoms requirements are currently very nervous about going with small, unknown, service providers. The safe option is to go with AT&T or similar, if only so that, if the service does not meet expectations, they can simply state that they went to the biggest and best provider and still had problems - the 'nobody ever got fired for buying IBM' mentality. On the plus side, if the company goes to AT&T they will quite possibly finish up with New Edge Networks' solution anyway, the disadvantage is that our margins will be less, we have less customer control and the customer pays a higher price."

A lynch pin of New Edge Networks' strategy is maintaining focus on the enterprise sector by utilising economically viable technologies to deliver access solutions. Mr. Moffat remarked that technologies including Wi-Fi and VoIP are seen as distractions from the main thrust of what New Edge Networks is aiming to achieve.

Commenting further on the market for communications services, Mr. Moffat said that, with the boom in deployment of DWDM networks in the late 1990s, a drop in bandwidth pricing was seen as inevitable. Illustrating this phenomenon he noted that four years ago, the price for DSO per mile for DS-3 service was five cents, today the price is 0.0027 cents. Similarly, IP pricing has fallen from approximately $300 per megabyte to between $60 and $70 per megabyte today. Generating revenue from commodity transport or IP services is viewed as an extremely challenging business to be in.

New Edge Networks is currently conducting a two-pronged marketing strategy - local marketing, designed to own the markets in which the company has already established a presence, and secondly, targeting multi-site clients.

Dan Moffat said there is perceived to be an area of unmet demand in the enterprise market, with the major service providers such as AT&T and MCI struggling with lower margins, while the RBOCs are concentrating on their home regions. This scenario can lead to a multi-site company having difficulty in finding a suitable service provider for its communications needs. New Edge Networks is hoping to tap this market, building a presence through meeting customer requirements and also undercutting the established players by as much as 50%.

Mr. Moffat commented that New Edge Networks could promote itself as a four-year old company that has attained cash-flow positive status, is backed by Goldman Sachs and can claim Wells Fargo Bank as a satisfied customer.

Reaching the market

Bearing in mind the company strategy, Dan Moffat stated that New Edge Networks markets only to the enterprise sector through its carrier partners and through the brand TransEdge. It was pointed out that in the publication DSL Reports the third-party ratings of service providers rank TransEdge at number one. This status is viewed as a prerequisite due to the company's emphasis on service as a key differentiator in the market.

It was noted that New Edge Networks is currently offering a free sixty-day trial to potential enterprise customers, this offer has been running for approximately one month - from the beginning of August 2003 - and is adjudged a success so far. Mr. Moffat said that the purpose of the offer is first to familiarise companies with what services are available, with an emphasis on Frame Relay over DSL, but also act as a showcase for the quality and efficiency of New Edge Networks' operations and customer service.

An expanding market

In the present market environment, the carrier's carriers - almost every carrier according to Mr. Moffat - are increasingly approaching enterprise customers directly. These customers will not generally require only a backbone or an IP network that the carrier can deliver, but an end-to-end solution - the carriers will then tap New Edge Networks to supply the last-mile solution. New Edge Networks is witnessing increasing demand for the services that these carriers provide.

Mr. Moffat said that the shift to broadband connectivity in the enterprise sector is continuing apace as small businesses in particular - for example insurance brokers and real-estate agents - upgrade from dial-up to broadband access. But as well as an expanding customer base, existing subscribers are seen to be seeking ways to reduce the cost of services received.

Dan Moffat said that 'traditional' Frame Relay service costs from $300 to $400 per node; New Edge Networks is able to provide Frame Relay over DSL that will be three to four times faster than the existing service at $150 per node. Alternatively, New Edge Networks can offer a layer 3 VPN solution at a similar price. The Frame Relay market in the U.S. is considered to be worth approximately $12 billion annually.

Mr. Moffat noted that the situation today with offerings such as Frame Relay over DSL is comparable to that in the 1980s when Frame Relay began to replace private-line service - when AT&T put its weight behind Frame Relay the market took off.

Discussing the small business sector of the market that New Edge Networks addresses - traditional dial-up subscribers - Dan Moffat described a common scenario as one where a small chain of restaurants or take-away establishments wish to replace a dial-up connection for credit card verification with a broadband solution that can, additionally, enable networked video surveillance of the cash registers. It was noted that at this level of the enterprise market, customers are on a par with high-end residential subscribers.

Mr. Moffat stated that although New Edge Networks markets specifically to the business sector, no distinction is drawn from a sales perspective - if a residential subscriber requests service and is prepared to pay $79 per month for the 'entry level' DSL solution the company will be happy to provide it. He added that this business-class solution offers twenty-four hour per day, seven days a week, personalised customer service, plus a router allowing the customer to operate a LAN, a static IP address, anti-spam firewall and virus protection. This package is marketed to the business sector as 'better business broadband' - or 'B3'. It was reiterated, however, that the residential market - where it would be competing against cable modem offerings at around $40 per month - is not one that New Edge Networks is chasing.

Localised competition

New Edge Networks believes itself to be the sole player in its core market. The activities of other service providers are seen to touch on specific areas of the company's target market, but none competes across the entire market. With low-cost solutions, cable modem and DSL services offered by the RBOCs are considered a potential threat, although these carriers focus on the residential sector.

Dan Moffat remarked that there are numerous niche players that compete in certain geographic locations or specific market sectors - for example wireless service providers. There are also resellers that compete with New Edge Networks in certain sectors, although many of these are also customers, for example Megapath, a supplier of layer 3 access solutions.

The company does not find the fact that it is out on its own a concern. Mr. Moffat is confident that a profitable market opportunity has been identified, and that duplicating New Edge Networks' operation would be extremely difficult, particularly for a large service provider. He remarked that South West Airlines is seen as a model - this airline began as a niche player focused on cost; it has now become a major operator and is being emulated by the established airlines.

The case against fibre

The subject of fibre-to-the-home was raised, with reference to estimates of 38,000 U.S. homes connected to fibre. Mr. Moffat commented that the main issue is price, combined with technical factors associated with carrying voice, data and entertainment services over fibre:

"The bottom line is that the consumer has no interest in the method used to deliver services, whether it is over copper, coaxial cable, wireless or optical fibre. The primary - or only - concerns in this market are with regards to the reliability of service, pricing and customer service."

The key issue for service providers is seen to be currently the cost of deploying fibre to every home. Mr. Moffat views claims that the RBOCs will install fibre on a large scale as unrealistic. He added that the carriers are using the same tactics with fibre-to-the-home as with previous technologies, including the introduction of ISDN, wireless and digital switching during the 1980s - none of which saw wide scale deployment without the advent of competition - basically blaming the regulator for hampering their efforts. Dan Moffat concluded that fibre is an elegant but expensive and ultimately impractical solution for the residential market.

Riding the downturn

Commenting on causes of the collapse of the telecommunications industry in the U.S., Mr. Moffat said that any one of a number of factors might lead to a company failure. Taking the long-distance and international carriers, problems stemmed from a combination of rapid and excessive infrastructure deployment in tandem with the introduction of DWDM technology, which together acted to take unitary pricing through the floor.

Considering specific companies, Covad Communications is seen to face difficulties as a result of addressing too broad a range of sectors, encompassing as it does the metro space, the network edge and the residential market. The residential market in particular, competing against the RBOCs and cable companies is, as already noted, seen to be a very testing sector due to the low profit margins and high churn levels.

In New Edge Networks' chosen enterprise market, pricing is believed to be less of an issue - key is the ability to deliver quality solutions that live up to customer expectations. Here churn is viewed to be less of an issue, if only due to the difficulty in changing service provider where multiple sites are served - in New Edge Networks' case, particularly, as no other single service provider is able to deliver access solutions nationally.

Overall the downturn is believed to have had a beneficial rather than a detrimental effect on New Edge Networks' development, although, Mr. Moffat pointed out, customer churn has increased as a result of company bankruptcies. However, the same economic conditions that have lead to bankruptcies have prompted surviving companies to seek ways to reduce costs - including expenditure on telecommunications services - which often results in their approaching New Edge Networks.

Regarding the falling cost of transporting traffic, Dan Moffat acknowledged that New Edge Networks has benefited to a degree, although emphasising that a fall in price due to technological advances was anticipated, and so has been no more than a minor boost. He noted that more important has been the experience that New Edge Networks has garnered over the past four years, which has enabled the company to improve operational efficiency and lower its costs - a trend that is seen to be continuing.