Qwest Communications International, Inc.

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Qwest Communications International, Inc.

1801 California Street
Denver, Colorado 80202
U.S.A.
Telephone: (303) 992-1400
Toll Free: (800) 899-7780
Fax: (303) 992-1724
Web site: http://www.qwest.com

Public Company
Incorporated: 1988 as SP Telecom
Employees: 70,000
Sales: $3.92 billion (1999)
Stock Exchanges: New York
Ticker Symbol: Q
NAIC: 513310 Wired Telecommunications Carriers; 513322 Cellular and Other Wireless Telecommunications; 514191 On-Line Information Services

From its origins as a fiber-optic network-building subsidiary of Southern Pacific Transportation Co., Qwest Communications International, Inc. has grown through acquisitions to offer local and long-distance telephone services, as well as a range of Internet, multimedia, data, and voice services that are sold to business, consumer, and government customers. The company completed construction of its 18,500-mile national fiber-optic network in 1999, and then added 4,300 route miles in Canada and Mexico. At the end of the century, it was also building fiber-optic rings in Europe. In the year 2000 it completed its acquisition of regional Bell operating company (RBOC) US West.

SP Telecom Builds Telecommunications Lines: 1988–95

Qwest Communications International originated as a subsidiary of the giant railroad company Southern Pacific Transportation Co. In 1988, reclusive Denver billionaire Philip Anschutz acquired Southern Pacific from Sante Fe Industries, after the Interstate Commerce Commission ruled that the 1983 merger of the Atchison, Topeka & Santa Fe Railroad with Southern Pacific was anticompetitive. Anschutz, who had gained much of his wealth in the oil industry, first entered the railroad industry with the 1984 purchase of the Rio Grande Railroad for $500 million. His company, Anschutz Corp., paid about $1.8 billion for Southern Pacific, with much of it being leveraged debt.

SP Telecom was established in San Francisco in 1988 as a subsidiary of Southern Pacific Transportation Co. It was founded to construct telecommunications lines along Southern Pacific’s 15,000 miles of railroad right-of-way. It was part of the company when Anschutz acquired it, but he later reorganized it as a subsidiary of Anschutz Corp. In 1992, Anschutz negotiated an easement agreement with Southern Pacific to lay fiber-optic cable along 11,700 miles of its tracks.

It should be noted that SP Telecom was not the first successful telecommunications spin-off from Southern Pacific. Earlier, the railroad giant had created and sold another subsidiary that later became Sprint Corp. (the first two letters in Sprint were taken from its parent’s name).

By 1993, the privately-held SP Telecom had annual revenue of more than $50 million, and employed 410 people. During the early 1990s SP Telecom built fiber-optic linkups for other carriers, sold space on its fiber-optic network, and introduced commercial products—including a video teleconferencing system. In mid-1993 it began offering commercial services such as long-distance, 800-number, calling-card, and debit-card products.

Becoming Qwest and Going Public in the Mid-1990s

In 1995, SP Telecom moved to Denver, after acquiring the Dallas-based firm Qwest Communications Corp. and taking over its name and facilities. Anschutz also expanded his tele-communications holdings in 1995 with the purchase of Interwest Communications C.S. Corp. Around this time he also agreed to sell his interest in Southern Pacific to the Union Pacific Corp. for about $1.6 billion worth of stock, which made him Union Pacific’s largest shareholder.

In May of that year, Qwest reached an agreement with CSX Transportation Inc. to use its rail corridors to install a high-speed, high-volume fiber-optic network. CSX owned 19,000 miles of track in 20 eastern states. Qwest already had a strong presence in the West through agreements with Southern Pacific Rail Corp. and Santa Fe Railway. The agreement with CSX would enable Qwest to build a fiber-optic network from coast to coast.

In laying its fiber-optic cables, Qwest would bury four to six high-density polyethylene pipes at a time, each capable of carrying a separate system. It used a $1 million, 76-ton rail-mounted plow that laid the pipe next to the rail line at a depth of four to five feet. The machine was capable of laying about eight miles per day.

That year, Qwest completed a fiber link between Sacramento and Los Angeles. Other projects ongoing in the first half of 1995 included links between Denver and El Paso, Dallas and Houston, and St. Louis and Kansas City. The company soon planned to build a national fiber-optic network. Four other companies were in the process of doing the same: AT&T, MCI Communications, LDDS WorldCom, and Sprint (WorldCom would acquire MCI in 1997). Later in 1995, Qwest gained permission to link several Mexican cities, including Mexico City, Monterrey, and Guadalajara, with about 5,000 miles of fiber-optic cable. This network was later linked to U.S. long distance carriers at the U.S.-Mexican border.

In 1996 Qwest was negotiating with other long distance providers to buy or lease part of its fiber-optic network. Some analysts felt that the United States already had more fiber-optic cable than it needed. Later in the year, Frontier Corp. joined with Qwest in building its $2 billion fiber-optic network. Lucent Technologies agreed to supply its True Wave fiber cable to the multi-ring SONET-based network, which would connect nearly 100 cities and have more than 13,000 route miles.

The company initiated an IPO on June 23, 1997, renaming itself Qwest Communications International, Inc. The offering raised $297 million on the sale of 13.5 million shares. Only 14 percent of the company was offered to the public, however; the rest was held by Philip Anschutz. The IPO gave the company a market capitalization of $2.1 billion. Joseph Nacchio became Qwest’s new president and CEO in 1997, after leaving the No. 3 post at AT&T, where he had been head of AT&T’s consumer services until late 1996.

Qwest’s strategy in building its nationwide fiber-optic net-work was that a ground-based network would be more reliable for the transmission of data than satellite-based networks. Demand for high-speed networks that could transmit data as well as audio and video were set to explode over the next five years, and this demand would be led by banks and other financial institutions. In addition, deregulation would bring other companies—including the regional Bell operating companies (RBOCs)—into the long-distance market. Also, costs for fiber and equipment were expected to drop dramatically.

At the time it went public, Qwest had already negotiated for nearly 90 percent of the right-of-ways it needed to complete its 13,000-mile network. It planned to complete construction on the fiber-optic network in 1998, and would then reach into 92 cities—representing 65 percent of all long-distance traffic in the United States. Qwest had reached agreements with Frontier Corp., the fifth-largest long-distance carrier in the United States; WorldCom Inc., the fourth-largest long-distance carrier and the largest Internet access provider with its acquisition of UUNet; and GTE Corp., the largest non-Bell local telephone company. Those three companies would together lease about half of the capacity of Qwest’s network for an investment of about $1 billion. Qwest also received $90 million in vendor financing from Nortel. Other potential revenue streams were expected to come from the RBOCs and from Internet service providers (ISPs), for whom Qwest planned to install sophisticated switching equipment.

Later in 1997, Qwest acquired Colorado’s largest ISP, SuperNet Inc., for $20 million. SuperNet was also the state’s oldest ISP, having been originally founded by the Colorado Advanced Institute of Technology and other local universities as a nonprofit venture. Qwest also introduced the first advertising campaign—developed by ad agency Bright Sun Consulting—for its fiber-optic telecommunications network. The print campaign, estimated to cost $5-10 million, employed the tagline, “Ride the light.” Qwest’s network was now projected to reach 125 U.S. cities and several cities in Mexico, have 16,000 miles of fiber-optic cable, and be completed in mid-1999. For 1997, Qwest reported revenue of $697 million.

Acquisitions and Expansion in the Late 1990s

With Internet usage increasing dramatically in 1997, Qwest made plans to take advantage of the expansion of voice-over-Internet protocol (IP) services. In December 1997 Qwest announced it would offer IP-based services to users in nine Western cities. The service was expected to resolve voice-quality problems associated with IP-based telephone services. It was initially offered as a consumer long-distance package at 7.5 cents per minute, with business customers to follow.

In March 1998, Qwest announced it would acquire the Mc-Lean, Virginia-based long-distance carrier LCI International Inc. for $4.4 billion. The deal would create the fourth-largest long-distance carrier in the United States behind AT&T, MCI Worldcom, and Sprint Corp. The combined companies would have about 5,800 employees and revenue of $2.3 billion. The acquisition gave Qwest two million long-distance customers and a well-established sales force. In the same month, Qwest also announced that it would purchase EUNet, a European ISP based in Amsterdam with about 60,000 customers and 1997 revenue of $55 million, for $154 million.

Company Perspectives:

From our first days as a new company, Qwest has been dedicated to harnessing the power of technology to deliver the benefits of the Internet to customers. We have come a long way in a short period of time.

A month later, Qwest activated the portion of its fiber net-work that connected Los Angeles, San Francisco, and New York, giving the company more than 5,400 route-miles of its network in service. The company also joined with Cisco Systems Inc. and Nortel to create a new IP backbone network called Internet2 for use by the academic community. The project was conceived by the University Corporation for Advanced Internet Development (UCAID), which was a consortium of 130 universities. Qwest contributed capacity on its fiber network, while Cisco contributed $4.5 million worth of switch routers and Nortel contributed products used in its SONET interface technology. The project was announced by Vice President Al Gore in a White House Press conference, where he praised Qwest for donating $500 million worth of bandwidth to the project. Later in 1998, Qwest planned to roll out its own ATM, frame relay, and virtual private network (VPN) services at lower costs than its long-distance competitors AT&T, MCI, and others.

Soon thereafter, RBOC Ameritech (which was in the process of being acquired by SBC Communications Inc.—formerly Southwestern Bell) announced that it would begin offering long-distance service through an alliance with Qwest. The plan was challenged by other long-distance carriers, however, who pointed out that the Telecommunication Act of 1996 required the RBOCs, which had virtual monopolies on local phone markets, to prove their local market were open to competition before they could offer long-distance services. Qwest and US West had reached a similar agreement earlier in 1998 that was also challenged. Later in the year the Federal Communications Commission (FCC) ruled against the agreements.

In mid-1998 Qwest announced it would offer long-distance service in Europe. While the acquisition of ISP EUNet gave Qwest data services, it planned to offer voice services by making deals with established carriers in Europe. Meanwhile, back in the United States Qwest sold bandwidth on its fiber network to competitive local exchange carrier (CLEC) Electric Lightwave for $122 million. Qwest also sold $60 million worth of bandwidth to Digital Broadcast Network Corp. for IP-based ATM services.

In September 1998 Qwest acquired Icon CMT of Weehawken, New Jersey, for $185 million in stock. Icon CMT provided Internet-based services, such as web hosting, intranets, online stock trading, and online publications for larger corporations. Qwest also formed a three-year alliance with Netscape Communications to provide Netscape’s web portal, NetCenter, with a range of telecommunications services including Internet access. Qwest was in the process of building 10 CyberCenters around the United States to offer a range of web hosting and multimedia applications to Internet customers. Four centers would open in 1998 in Los Angeles, New York, San Francisco, and Washington, D.C., with six centers slated for 1999.

Before the end of the year, Qwest snared another AT&T executive when John McMaster, acting head of AT&T’s consumer markets division, left the firm to join Qwest and take control of its international operations. At the same time, Qwest announced it would build a fiber-optic network in Europe with Dutch telecommunications company KPN. Qwest’s European network would soon link with its North American network.

In December 1998 Qwest and Microsoft Corp. announced an agreement whereby Microsoft would invest $200 million in Qwest, taking a 1.3 percent minority interest in the company. Qwest, in turn, would use the Microsoft Windows NT Server OS as the basis of its electronic commerce, Web hosting, streaming media, managed software, and virtual private net-working services to be introduced in 1999. Qwest’s 1998 revenue was reported at $2.2 billion.

As part of its national fiber network, Qwest had completed local fiber optic rings in 10 cities in 1998, and planned to add nine more by 2000. The company’s Seattle ring ran through Microsoft’s Redmond, Washington, campus, giving Qwest the ability to provide broadband connectivity directly to Microsoft.

At the beginning of 1999, Qwest invested $1.5 million in CLEC Covad Communications Group Inc. In exchange, Covad provided Qwest customers with high-speed digital subscriber line (DSL) service in 22 markets. Covad also agreed to purchase network capacity from Qwest to interconnect its high-speed local networks. It was Qwest’s first investment in DSL local networks.

Also in January of that year, Qwest introduced its first Internet services for consumers and small businesses, offering flat-rate service for $19.95 a month. Qwest’s long-distance customers, however, would only pay $14.95 a month for the service, which was called Q.home. Qwest also announced it would offer paging, conferencing, and faxing services from its web site. In a move to increase its bandwidth, America Online Inc. selected Qwest to provide it with national Internet connectivity services in a deal valued at $13 million.

Qwest’s first national branding campaign, created by advertising firm J. Walter Thompson, was launched in March 1999. The 30-second television ads opened with a voiceover that said, “The promise of the Internet is not in the future. It is now.” The ads also featured the tagline, “Ride the light,” which was created by the company’s previous agency, Bright Sun Consulting.

Also in March, Microsoft and Qwest teamed to introduce Q-Commerce-Retail, an online storefront service that included Web hosting services, high-speed Internet access, hardware and software, consulting, design and graphics, direct merchandising assistance, and site promotion. The applications ran on Windows software and were hosted on servers on Qwest’s network. Pricing began at $150,000, with a monthly fee of about $10,000.

Key Dates:

1988:: SP Telecom is established as a subsidiary of Southern Pacific Transportation Co.
1995:: SP Telecom assumes the name of Qwest Communications Corp. and goes public later in the year as Qwest Communications International, Inc.
1998:: Qwest acquires long-distance carrier LCI International for $4.4 billion.
1999:: Qwest receives a $3.5 billion investment from Bell-South; initiates takeover bids for US West and Fron-tier Communications.
2000:: Qwest completes acquisition of US West.

The following month, Qwest announced it would be able to expand its high-speed DSL services into more markets through a $15 million agreement with Rhythms NetConnections Inc., a local DSL provider. The agreement involved 31 cities, with some overlap with the 22 cities serviced under Qwest’s agreement with Covad Communications.

A consortium of banks and financial institutions, led by Bank of America, agreed to provide Qwest with a $1 billion revolving credit facility starting in April 1999. Also in April, Bell South Corp. agreed to purchase a 10 percent interest in Qwest for $3.5 billion. The investment would enable BellSouth to bolster its digital data services and use Qwest as its wholesale provider, while Qwest would use BellSouth for local service where possible. The funds also enabled Qwest to reduce the debt it took on for overseas expansion, and helped the company finance construction on the rest of its fiber-optic network.

In May, Qwest president and CEO Joseph Nacchio gave up his title of president to Afshin Mohebbi, who also became Qwest’s chief operating officer in charge of day-to-day operations. Nacchio would remain as CEO and focus on overall corporate performance, development, and long-term strategies. Prior to the change, had most recently been the president and managing director of U.K. markets for British Telecom.

Soon thereafter, Qwest and a group of investment funds put together a $251 million investment in Advanced Radio Telecom Corp. (ART), which was in the process of building a high-speed wireless network. ART planned to build in 40 of the top 50 U.S. during the two years following the deal. Qwest’s share of the investment was $90 million, and the investment gave it a foothold in the broadband wireless market.

By May 1999, Qwest had completed 16,2000 miles of its planned 18,500-mile fiber-optic network. It was planning to introduce more hosted applications, including electronic commerce services that would allow a company to completely outsource its Web sales operations. The company had signed application hosting service agreements with SAP America Inc., Seibel Systems Inc., Hewlett-Packard, and Oracle Corp.

A month later, Qwest teamed with KPMG to launch Qwest Cyber.Solutions, a joint application service provider (ASP) in which Qwest would own 51 percent. The ASP would offer application hosting and application management services. Also, Qwest and Cisco Systems announced a partnership under which they would co-develop applications for Internet-based data, phone, and image services to be sold to businesses and consumers.

Rumors soon surfaced that Qwest might be a long-term acquisition target for BellSouth, which had a 10 percent interest in the company. Those rumors, however, were quickly over-shadowed when Qwest announced hostile takeover bids for US West—a RBOC with local phone customers in 14 Western states, and Frontier Communications—the fifth-largest U.S. long-distance carrier. At the time, US West was already the subject of a $52 billion takeover proposal from Global Crossing Ltd., a Bermuda-based company that was building an undersea fiber-optic network. Wall Street reacted to the announcement by driving Qwest’s stock down more than 20 percent.

At first, US West rejected Qwest’s bid and reaffirmed its commitment to Global Crossing. Qwest responded by increasing its offer to $68 a share for Frontier and $69 a share for US West, or about $48 billion in all. Global Crossing’s offer amounted to about $11 billion for Frontier and $30 billion for Qwest. Following the new offer, both Frontier and US West agreed to discuss the proposal with Qwest. Qwest and US West quickly reached an agreement whereby Qwest would acquire US West for an amount estimated between $35 and $50 billion, according to various sources. As part of the purchase, Qwest agreed to forego providing long-distance service in US West’s territory. Qwest’s acquisition of US West also had the effect of diluting BellSouth’s interest in the new company from 10 percent to about 3.5 percent. Qwest subsequently withdrew its offer for Frontier, and Frontier agreed to be acquired by Global Crossing for $10.9 billion.

By the summer of 1999, Qwest had about 8,700 employees, while US West had 55,000 employees. The acquisition not only gave Qwest a huge workforce, but also 25 million US West local phone customers in 14 western states. Before the acquisition was finalized in 2000, US West CEO Solomon Trujillo announced he would not remain with the new company, leaving Joseph Nacchio in charge.

Qwest’s acquisition of US West had to pass several regula-tory hurdles, including approval from the U.S. Department of Justice (DOJ), the Federal Trade Commission (FTC), the Federal Communications Commission, and public service commissions in seven of the 14 states served by US West.

Qwest continued to offer new services, enter into new partnerships, and strengthen existing ones in the latter half of 1999. Together with Microsoft it announced the Qwest Business Partner Program, which would offer a wide range of Internet services using the Windows 2000 platform as well as other plat-forms. Qwest also introduced DSL service for businesses in 13 markets through Rhythms NetConnections and Covad Communications. Qwest also bundled Internet access with long distance services in a package priced at $24.95 a month for consumers. To strengthen its application service provider (ASP) program, Qwest added re venue-sharing incentives to attract national systems integrators and distributors and increase the number of participants from 300 to 1,000 during 2000. One of the applications it would introduce in 2000 was a practice management application for small doctors’ offices.

Meanwhile, the US West acquisition received approval from the U.S. DOJ and the FTC in September. Shareholders of both companies approved the merger in November. State public service commissions were expected to bring up US West’s poor service record during hearings on the merger over the next six months.

Qwest completed its national fiber-optic network with 18,500 route miles in September 1999. In December it added 4,300 route miles in Canada and Mexico. In the first two months of 2000 the company experienced service problems due to the rapid expansion of its customer base, including frame relay service slowdowns and circuit outages lasting up to 11 days. Qwest’s 1999 revenue was $3.92 billion, with net income of $458 million.

Acquisition of US West: 2000

Several developments in the US West acquisition occurred in March 2000. The FCC gave its approval, but six state public service commissions had yet to rule on the merger following Colorado’s approval in 1999. US West CEO Sol Trujillo had announced he would leave once the merger was completed, and rumors surfaced that Deutsche Telekom AG—Europe’s largest telecommunications company—had made a $100 billion bid for both companies. Qwest announced that talks with Deutsche Telekom would not continue, however, following objections from US West.

In April 2000 Qwest announced a new development in its CyberCenter program. The company joined forces with IBM to open 28 CyberCenters, which would provide end-to-end control of applications, services, and network infrastructures in a hosted environment. Qwest would build and own the centers and act as the network provider, while IBM would provide operational support and buy hosting space for its e-commerce clients.

In addition, Qwest was in the process of selling part of its long-distance business to Touch America, a subsidiary of the Montana Power Co. Under federal rules Qwest would not be able to offer long-distance service within states served by US West. In July 2000 the FCC approved the sale of Qwest’s long-distance assets in US West territory to Touch America for $193 million. About 250,000 Qwest subscribers, 1,800 miles of fiber, and 170 Qwest sales agents were involved in the transaction. The operations that were sold represented about six percent of Qwest’s customers and accounted for about $300 million in annual revenue.

By July, the merger with US West had received approval from the state public service commissions and was a “done” deal. In many cases, state approval was gained by agreeing to negotiate new service quality standards. Estimates of the price of the merger ranged from $35 billion to $80 billion. The new company would lose the US West name and continue using the Qwest name. Qwest immediately held a meeting for about 10,000 employees at the Pepsi Center in Denver, where it announced that it was dropping some 17 lawsuits US West had brought against various state public utility commissions. Altogether, the merged companies had about 70,000 employees worldwide. Later in the year Qwest announced it would stream-line its workforce by cutting about 11,000 employee positions and 1,800 contractor positions by the end of 2001.

With the acquisition of US West completed, Qwest announced it would make quality of service its top priority for the local telephone customers it had gained. Other announced goals included doubling its DSL users from 250,000 to 500,000; doubling the number of wireless users from 800,000 to 1.6 million; and doubling its web-hosting space—all by the end of 2001. The company also planned to improve access to its network in order to be able to re-enter the long-distance market again in the 14 western states formerly served by US West.

Principal Competitors

AT&T; MCI Worldcom Inc.; Sprint Corp.; IXC Communications Inc.; Level 3 Communications Inc.; Williams Communications Solutions LLC; Cable & Wireless plc.