Wild, Wild Qwest--The Gunslinger In Telecom
By Henry Goldblatt

(FORTUNE Magazine) – Driving into Denver from the northeast, the very first thing you see is the iridescent, cobalt-blue logo of Qwest sitting atop a 39-story skyscraper. It heralds the gateway to the Wired West, where bandwidth, not sheriff's badges, now rule. If there's a modern-day Wyatt Earp, it's Qwest CEO Joe Nacchio, who in just 16 months has moved Qwest to the top of a new generation of telcos, including Level 3, IXC, and Williams, that fuse Silicon Valley technology with traditional telecom services. "People ask if we're telecom guys or Silicon Valley guys," says Nacchio, 48. "I like to say we are a Silicon Valley company on the other side of the Rockies."

Formerly the No. 3 executive at AT&T, Nacchio has remade Qwest by combining shrewd financial planning and the best technology in the business with some old railroad rights of way that Qwest has owned for years. Qwest is now a wholesaler to other carriers, a provider to businesses across the country, a supplier of long-distance service to residential customers--and a threat to just about everyone in telecom.

The company had $697 million in revenues last year. So why do big telcos like AT&T (1997 revenues: $53 billion) consider it a menace? Simple. The telecom incumbents are saddled with old networks designed to carry voice calls. When it comes to transmitting E-mail, video or sound clips, or large data files, they're downright clunky. Says Nacchio: "The incumbents are not poised for data growth. They are plagued by proprietary technology and a collapsing pricing structure."

The Qwest state-of-the-art 16,250-mile network, which should be completed early next year, is designed to deliver both voice and data packets at high speed. Building along the company's railroad rights of way, crews lay two plastic tubes about four feet into the ground. One gets filled with fiber-optic cable. The other stays empty, for use in later years when current fiber technology becomes obsolete. According to Nacchio, that will help Qwest fend off future upstarts. "Qwest's network is the one that everyone would love to build if they started with a clean slate," says Mark Bruneau, an executive at the Renaissance Worldwide research firm in Boston.

Wall Street likes what it sees. Investors have put a lot of faith in Nacchio, who ran both the consumer and network businesses at AT&T. Qwest raised $320 million in its June 1997 IPO. Since then, its stock has risen 255%. Despite the fact that the company is heavily leveraged and may lose 25 cents per share this year due to construction costs, almost every analyst recommends it. Joe Noel, an analyst with Hambrecht & Quist in San Francisco, says Nacchio has done a good job preventing startup losses from being even larger. One key trick: Qwest built excess capacity into its network and sold that to Frontier, GTE, and WorldCom, bringing in more than $1 billion to help finance the rest of the network.

Already Nacchio has scored impressive coups. He landed a U.S. government contract to have Qwest's network serve as a backbone for Internet2--a second-generation data network connecting 130 universities. He's made four acquisitions, including his $4.4 billion January purchase of LCI, a juggernaut in McLean, Va. LCI is famous as one of telecom's quirkiest companies--it relies on Amway-style marketing and bills customers down to the last second. But it also has a solid foothold in the corporate market. After buying LCI, Nacchio found himself at the head of the nation's fourth-largest long-distance carrier, trailing just AT&T, Sprint, and MCI WorldCom.

More recently, Nacchio scored innovative marketing deals with US West and then Ameritech. In early May, Qwest started offering long-distance service to US West's 25 million customers. In a single week, says Nacchio, Qwest got 40,000 people to switch phone companies. (Analysts say US West gets a commission of about $30 per person, and Ameritech's take could be similar.) AT&T and MCI have sued, saying the US West deal violates the 1996 Telecom Act.

Even if both deals survive, they raise questions about the consistency of Qwest's consumer strategy. Qwest already offers a scattershot load of services to consumers: cut-rate dial-around long-distance service; a different package sold by LCI's marketing minions; and voice calls sent via the Internet. Add in the US West and Ameritech deals, and you've got a brand-identity headache, says Boyd Peterson, an analyst at the Yankee Group in Boston: "If they dilute the brand by offering any old thing, consumers won't understand what Qwest stands for."

Nacchio demurs, saying that Qwest is in a "sweet spot"--ahead of emerging competitors, more technologically advanced than incumbents, and thus able to attract customers in ever-increasing numbers. Yet sweet spots can turn sour when competition closes in. AT&T will spend $1.2 billion to upgrade its network in an effort to match Qwest's capacity. The combined MCI WorldCom has a huge share of the business market and owns, by some estimates, 60% of the Internet backbone. And the most daunting challenge to Qwest comes from carriers following in its footsteps. Take Level 3, a startup run by James Crowe, the former CEO of MFS Communications, an Omaha telco bought by WorldCom in 1996. Crowe has raised billions of dollars to build another high-bandwidth network. Level 3's network will have a broader reach than Qwest's, with fiber running deep into neighborhoods, so the company will be able to offer local service to complement its long distance. Qwest, on the other hand, will need partnerships to offer widespread local service--and make a profit at it. "It's great to have a network that can handle a lot of capacity, but Qwest will have a problem making sure that there are facilities in and around the last mile that allow them to take advantage of it," says Tom Friedberg, an analyst at Janco Partners in Denver. Nacchio says that building a local network is costly, and that reselling the facilities of the Baby Bell is a sure money loser.

So if Nacchio wants to turn Qwest into a full-service telco, he'll need to buy or merge his way into the local market. But in this era of telecom titans, that may mean he'll be merging himself right out of a job. Many analysts think Qwest would make a great purchase for an industry giant, speculation that's reflected in the stock's surge. Among the likely purchasers, provided they could get regulatory approval: Baby Bells SBC, which recently made a $62 billion play for Ameritech, and Bell Atlantic.

Asked about mergers, Nacchio, normally animated and loose lipped, turns to traditional CEO-speak and preaches about making money for stockholders. He does admit to imagining Qwest as an international player. Given the global ambitions, Nacchio might well court bids from Britain's BT, or Cable & Wireless. One thing's for sure--he's not headed back to New Jersey. "I'm just afraid I'll wake up and this will all be a dream, and I'll still be working for AT&T," he says. Given his history, some would call that a nightmare.

INSIDE: The amazing Arno Penzias, page 258... Zambonis online, page 260... Open standards unmasked, page 262... Alsop makes California safe for E-commerce, page 269