Texas is one of the country’s biggest and fastest-growing markets in general, and that goes for bandwidth and Internet infrastructure as well. As one of the few remaining independent, regional fiber operators in the Southwest, Alpheus Communications has a unique perspective on that market. Alpheus is owned by the Gores Group today, and has its origins in the El Paso Global Networks business from before the dot-com bubble. With us today to tell us where Alpheus is going and how they do things down in Texas is CEO Scott Widham.
TR: What does Alpheus Communications’ network footprint look like today?
SW: Alpheus has a 6,000-mile fiber network, with 3,000 route miles of regional network from North Texas down to the Mexican border. Our network connects the largest Texas cities as well as a number of Mexican border towns. Alpheus also owns 3,000 miles of dense metro fiber. It was originally built using some of the El Paso Energy right-of-ways and was specifically constructed to build fiber to numerous Bell serving wire centers in Texas.
TR: How has Alpheus leveraged its connectivity into those wire centers over time?
SW: Originally, we connected these serving wire centers with our fiber so we could offer flat rate T1s using the wire center as aggregation points. You can have a T1 circuit from Dallas to Fort Worth for the same price as from Dallas to Corpus Christi -- distance didn’t matter with our postalized pricing. Over time and as bandwidth demands increased, Alpheus deployed equipment in those serving wire centers to offer Ethernet-over-copper (EoC) services. This gave Alpheus the ability to offer to increased bandwidth speeds from 10Mbps to 40Mbps, just as bandwidth demand was increasing. Currently, Alpheus has one of the largest EoC footprints in Texas, operating out of 122 serving wire centers with availability to 129,000 business locations. The next development in our business strategy is to build fiber from those centers.
TR: You have shifted much more investment into building fiber directly to the enterprise over the past year or two, how has that been going?
SW: It’s gone extremely well, and happily, we’ve exceeded our earlier projections on penetration rates. With the metropolitan backbone fiber we’ve built, we are now in front of 17,000 buildings. We are constructing laterals to new buildings at an average of about 20 new buildings per month. By the end of 2015, we will have built 350 miles of new fiber for this initiative. We see that customer demand for bandwidth continues to increase. Not too long ago, customers were happy with T1 and bonded T1 connectivity, then Ethernet-over-copper enabled us to deliver higher bandwidths. There were also alternative technologies in the market, from free-space optics to fixed wireless. But the real gold standard today is fiber facilities directly to the customer. Once we have fiber connectivity to our customer, we can offer incredible scalability and bandwidth options. Our current fiber initiative has us building 432-count fiber to attractive, high-growth business areas. For example, in Houston, we’re building into the Woodlands and the high-growth Energy Corridor. In Dallas, we’re building in Richardson, Plano, and Addison, which are growing quite rapidly as well. In these high-growth suburban areas, we’ll generally see the incumbent cable operator, LEC and maybe one other fiber provider. We’re finding these areas to be much less competitive than what we experienced in the downtown business districts where it’s not unusual to have 10 different carriers in the risers of a building.
TR: Are you selling to the same people or is this a new set of customers?
SW: It is really a new set of customers as they are coming through our enterprise channel. Many of our EoC and T1 customers are coming through our wholesale carrier customers. We are also seeing our carriers interested in fiber last-mile services for their end-user customers. As businesses learn that they can deploy 500Mbps or 1Gbps services at very reasonable rates, they are gravitating toward our fiber solution.
TR: What enterprise verticals are you getting the most traction with? Has the drop in oil prices affected things?
SW: The energy industry in Houston and Dallas is quite large, so oil and gas is a large and growing vertical for us. Most of our energy customers are diversified with upstream, midstream and downstream activities. So far, we have not seen a significant impact. Several other verticals continue to perform well for us. We do a large amount of business with medical facilities, hospitals, and research centers. In fact, just down the street from our headquarters location in Houston is the Texas Medical Center; the largest medical center in the world. 125,000 people a day show up to work there each day. Finally, our financial vertical has been strong with our WAN solutions being used to connect their branch offices in Texas.
TR: Is building fiber in Texas much different than in other parts of the country?
SW: The amount of growth in Texas is staggering. There are numerous high-rise buildings going up right around our corporate office in downtown Houston, highways being widened and new pipelines under construction. With 70,000 people moving to Houston last year, that’s comparable to a medium size city moving here. When it comes to construction, labor is labor, and fiber is fiber, so building fiber here isn’t too much different than elsewhere in the country. Fortunately, we don’t have cold weather issues like they experience in other parts of the country, so we’re able to build year round.
TR: What hurdles do you face when taking on a marketplace that is evolving so rapidly?
SW: Our outside plant people report that the permitting process is getting more difficult than it has been in the past. For example, Austin is booming with fiber construction. In addition to companies like AT&T, Time Warner, and Grande upgrading their access networks, Google is seeking permits for their network construction as well. In addition, there are fiber companies like Zayo, XO, Level 3 and of course Alpheus. Together we’re collectively pressuring the permitting process at the city of Austin, which has limited resources to respond to all these permit requests.
TR: Do you have any plans to expand beyond Texas into neighboring markets?
SW: We’ve looked at opportunities in contiguous states as well as Mexico. We’ve found there’s not a whole lot available to purchase in New Mexico or Oklahoma. We’ve also looked at a few opportunities in Louisiana, but I think our best strategy is to continue to build fiber in high-growth areas in the DASH (Dallas, Austin, San Antonio, Houston) markets. According to Forbes, five of the fastest-growing cities in the country are in Texas -- Houston, Dallas, Fort Worth, Austin, and San Antonio – giving us fertile ground to continue to construct our own fiber and data center infrastructure.
TR: What types of other enterprise services might you add to your portfolio?
SW: We have just launched our newest product which is hosted VoIP, designed to complement our network and managed service offerings. We continue to evaluate other telecom services, but we don’t want to be a mile wide and an inch deep when it comes to providing service. We’ve looked at the virtual data center where we would sell RAM, CPU and storage by the drink. However, due to the price compression we’re seeing from AWS and others, we find it hard to justify the investment to make it a business for us. In terms of other managed services, we’ve looked at various firewalls, PCI compliance offerings and HIPAA solutions, but haven’t found the sweet spot, either home growing a solution or through a partner. This topic is something we discuss a great deal as a senior leadership team and at the board level. For now dedicated Internet, network transport, VoIP, colocation, and the managed network services that we do support are a compelling offering in the marketplace.
TR: What about new technologies like SDN and NFV? Are those on the menu now or in the future?
SW: I think that’s still for the future. We’re always looking for ways to operate more efficiently. If we were building from scratch there would be a lot of SDN in the network. When a network is built over a 12 years period with different vendors, it’s difficult to move to a SDN architecture quickly when there are different network elements from various manufacturers. It’s something we’ll eventually move to, but it won’t happen overnight.
TR: There’s been a lot of consolidation in the industry as a whole over the past few years, what does the Texas M&A landscape look like right now?
SW: We saw a big deal announced in Texas last week when two Houston-based companies, Crown Castle and Sunesys, came together at a healthy valuation. The fiber providers in Texas in large measure have been consolidated. It’s very difficult to find a small, independent fiber provider in San Antonio, Austin, Dallas or Houston. Like many other parts of the US, the Texas market has been rolled up by other acquirers over the past few years.
TR: Is Alpheus interested in M&A from either side?
SW: We are interested in growing by acquisition. In our three years of owning Alpheus, we purchased a CLEC in Houston and a data center in the Energy Corridor. Our partners at The Gores Group understand and like the fiber infrastructure space and have significant funds to put to work for the right opportunity. From my seat in the stands, Alpheus is the fifth company I’ve been CEO of in the telecom industry. All of those have been built through acquisitions so I suppose it's safe to say M&A is part of my DNA.
TR: Thank you for talking with Telecom Ramblings!