Teligent Readies Launch of Telecom Services

Teligent Readies Launch of Telecom Services

By Carolyn Hirschman
Contributing Writer

Teligent Inc. is gearing up to roll out its local, long-distance and high-speed Internet service this year to small and medium-sized businesses in the Washington area and nine other cities across the country.

If all goes as planned, the Vienna, Va.-based wireless communications company will be one of the newest players in the increasingly crowded field of local telephony. About 100 other "competitive local exchange carriers," or CLECs, already compete against the mighty Bells and GTE Corp. for bits and pieces of the $103 billion local calling market.

Alex J. Mandl,
Teligent chairman and CEO
Despite its thin profile today - Teligent has few customers, little revenues and staggering losses - analysts and company executives say the carrier has what it takes to make it in one of the hottest industries around.

"Teligent will be one of the winners," predicts stock analyst W. Jack Reagan of Legg Mason Inc. in Baltimore. "They've got everything in place. They just have to execute."

But don't look for overnight success. Teligent, which has amassed a net loss of more than $92.4 million since its founding as Associated Communications in 1996, must make good on its promise: to deliver high-quality voice and data services quickly and cheaply to businesses through a new fixed-wireless technology.

Teligent plans to launch its service in at least 10 markets this year, starting about mid-year, and in 30 or more markets by the end of 1999. The grand scheme is to spend more than $1 billion by the end of 2001, building out systems in all 74 markets where it holds federal licenses to operate. The entire network would cover a population of 130 million, including 3.85 million in the Washington area.

Teligent executives will target what they view as an underserved market - small to medium-sized businesses with five to 350 phone lines. Government clients are possible, but "it's not our main focus," said Keith Kaczmarek, Teligent's senior vice president of engineering and operations.

They're not the Fortune 500, but these customers constitute a sizable market. About two-thirds of the nation's 55 million business lines are in buildings where it's uneconomical to extend fiber optic lines, according to a recent Salomon Smith Barney report. That adds up to a potential $57 billion "niche" for wireless providers, adds Reagan.

Keith Kaczmarek
of Teligent

Teligent must jump through a number of hoops to get where it wants. There are the tedious tasks of getting licensed to operate as a CLEC (now in 15 states and the District of Columbia), negotiating interconnection agreements with incumbent carriers (finished in seven states and the district) and gaining building access rights.

More important, Teli-gent must face down the competition, or at least some of it. Although the Telecommunications Act of 1996 aimed to crack their long-standing local monopolies, the Bell companies still control 97 percent to 98 percent of the market. The other 2 percent to 3 percent is populated by all manner of CLECs using a variety of strategies and technologies.

Teligent's most direct competitors are a handful of other fixed-wireless carriers. The main one, New York-based WinStar Communications Inc., is already in 17 markets and plans to be in 30 by year's end. Others include Advanced Radio Telecom of Bellevue, Wash., and BizTel, a unit of Teleport Communications Group, a major CLEC based in New York.

In addition, AT&T is testing a fixed-wireless system in Chicago. Another key player will likely emerge from the Federal Communications Commission's current spectrum auction for local multipoint distribution service.

Is Teligent too late to the game? No, experts said, because it's got all the pieces in place to succeed in the long run. Those pieces include a management dream team led by former AT&T president Alex J. Mandl; $1.6 billion in solid equity, debt and vendor financing that will last through the year 2000; and a promising, if little known, technology.

"Teligent is not that much further behind [other] providers. ... So much of it is the skill set of the company's leaders and sales managers," said Michele Farquhar, a partner in the Washington law firm of Hogan & Hartson and former chief of the FCC's wireless bureau.

Teligent's ace in the hole, believers said, is technology. "The chief advantages [of fixed wireless] are speed of deployment and the lower cost of the infrastructure. It's so much more expensive and takes so much longer to install fiber," Farquhar said. Unlike their fiber counterparts, wireless carriers don't have to dig up streets to access buildings and can start services within a matter of days, not weeks.

Teligent's digital point-to-multipoint network operates by sending microwave signals between network access points, such as fiber rings, to small receivers on the rooftops of customers' buildings. Atop each receiver is a round antenna 12 inches in diameter.

This technology, never before used in the 24-GHz frequency of the radio spectrum Teligent occupies, can deliver high-bandwidth services more efficiently and at lower cost than the dominant fiber-based carriers, analysts said. It's been tested on a limited basis in Europe and Japan, but "this is the first time it's been rolled out in a big way," said Kaczmarek.

WinStar's network operates at 38 GHz, a slight disadvantage because this frequency transmits signals for shorter distances and is prone to more interference from rain, experts said.

But "our holdings in bandwidth far exceed theirs. They top out at 400 MHz. We have up to 1,000 MHz in some cities. ... That means we have much more traffic capacity," said Frank Jepson, WinStar senior vice president of capital market relations.

Another advantage is Teligent's ability to control the crucial "last mile" into the customer's premises. Many CLECs install their own switches and lease the Bells' local loops to reach office buildings. In contrast, Teligent will rely strictly on its own facilities.

Early tests of Teligent's system in Richardson, Texas, installed late last year, "are very positive," Kaczmarek said. The company has also tested equipment in the District of Columbia, Dallas and Los Angeles. The company is not actively marketing its services yet but has hired an advertising agency, Detroit-based W.B. Doner & Co.

Teligent now uses its system on a limited basis to sell Internet access in 31 cities, including the district. That's been its sole source of revenue, a total of $4.3 million as of Sept. 30.

The company recently reported a fourth-quarter loss of $59 million in its first annual earnings statement since going public in December. Teligent reported a net loss of $138 million for the year on revenue of $3.3 million.

Analysts said that Teligent won't ever be a big fish but in the huge local phone market, a little bite goes a long way. Legg Mason's Reagan predicts that Teligent, by offering services at discounts of 20 percent to 25 percent, can capture 3 million business lines in 10 years, or a 7.6 percent share in its markets. This year, it may gain 14,000 lines and $2 million in revenues, he estimates.

Losses will widen as Teligent expands its network, but the company could turn a pretax profit in 2003.

In the end, Teligent and its fixed-wireless peers will likely complement, rather than displace, wire line competitors. Reagan said, "The other CLECs are fiber-based and are there to serve large business customers. Teligent and WinStar will serve the small business customer."

Teligent Inc.
Headquarters: Vienna, Va.
Chairman and CEO: Alex J. Mandl
Employees: 400 now, 1,000 by year end
Stock: Nasdaq: TGNT. Went public in November 1997 at $21.50/share; now trading at $32-$34/share
First 10 markets: Washington; Los Angeles; Orlando and Tampa, Fla.; Dallas, Houston, San Antonio and Austin, Texas; Chicago; and Denver.
Owners: Associated Group (40.8%), Telcom Ventures (32.7%), Nippon Telephone & Telegraph (11%), public (15.5%)
Sources: company documents, Legg Mason

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