How to stay in the black by lighting up

Broadband, which offers fast, always-on internet connection, is a concept whose time is far from passed, say its proponents. Adam Tinworth profiles three providers supplying occupiers with “the fifth utility” Its proponents call it the fifth utility, joining the ranks of gas, electricity, telephone and water. Most large companies already use it. The papers have been full of the role of BT in providing it to homes. But what is broadband? “Broadband” is one of those buzzwords that people associate with the dot.com era of 18 months ago. Everyone was going to need this mysterious thing, and landlords were going to make a small fortune out of providing it to their tenants. Like so many buzzwords of that era, it seems to have since dropped off most people’s radar. However, with the government still pushing hard for broadband Britain, is there something in this concept? Broadband is nothing more than ahigh-speed, always-on connection to the internet. It is many times faster than the dial-up modems that most people used to connect to the internet initially. It is always connected to the internet and access is charged at a flat rate, rather than by the minute as with most dial-up and IDSN services (see table below for a comparison of the different forms of internet connection). The major problem with getting broadband to paying customers is the so-called “last mile”. The major international telecoms carriers already have networks spanning the UK, but the “last mile” is the job of connecting an individual building to one or more of those networks. Three major companies have survived the implosion in would-be “last mile” broadband providers to buildings, and all three have learned serious lessons as a result. The first, Intellispace, has hit the property headlines recently after striking a deal to “light” – a term used to describe connecting a building to the internet – Tower 42 in the City. “We’ve survived for many reasons, but one of them is that we’re data-centric; we just do the connection, not voice services,” says managing director (UK) Charles Shaw. He also points out that the US parent company has been in business for seven years, which might not seem like long, but is an age in internet terms. Revamp the business model However, like many of the players in the field, the company has had to radically reassess its business model since it entered the market. It was originally hoping to light a significant number of large buildings and then try to sell broadband services to the tenants within. It rapidly became apparent that such an approach wasn’t going to work in the UK. “If you look at Tower 42, it has 35 floors, which is very small compared to New York buildings but is huge for us,” he says. The volume of big buildings and the number of them that had single tenants has meant a change of approach. Just signing a deal with a landlord and getting an introduction to the tenants is not enough, so the firm has focused on dealing more with companies as well as landlords. Capital-intensive Intellispace’s competitor, HighSpeed Office, is financed by a consortium of property owners, much to the relief of chief executive officer Chris Butchers. “Venture capitalists want return too quickly. After 15 months they’re saying ‘you haven’t doubled my money’. This is a capital-intensive business.” Running cables to buildings and then putting the IT infrastructure in place costs money, and the expenditure can be recovered only over a period of time. HSO’s patient partners include British Land, Canary Wharf, Legal & General, Morley Fund Management, the Prudential Property Investment Managers, Aberdeen Asset Managers, Helical Bar and Haslemere. “As CEO, with those guys on the board I can’t get away with much,” Butchers laughs. Much, but not all, of HSO’s customer base can be attributed to the holdings of the parent investors. “A lot of US guys just came over here expecting to do what worked there,” he says. “It’s a different time scale here. For landlords, 10 years is short term.” It took until March last year for the company to be funded to the tune of £25m, and it is now steadily building its business. Like Shaw, he has had to shift his thinking. “We realise that customers are now more important than the buildings,” says Butchers. “We’re targeting occupiers as well as landlords now. We originally targeted small and medium-sized firms, thinking that the big corporations would have their own arrangements with the big carriers, but it’s turned out that companies of all sorts want our help.” Centric Telecom, meanwhile, had a troubled history until it was refinanced last summer by venture capitalists, who installed a new management team. “We’ve taken the parts of the business model that make sense, and have abandoned overly ambitious grand plans,” says Marc Glosserman, CEO of Centric. His previous experience in this area is with eLink Communications, a company he founded in the US with broadly the same business model as Centric. Now the firm is looking to expand by selling not just the IT infrastructure but the possibilities that extra bandwidth brings. Like the other firms, it offers a range of additional services, but Glosserman is looking at higher-tech ideas, too, such as wiring the whole building’s – or estate’s – CCTV system through the broadband network to save on costs. Broadband with a voice “Voice-over IP is coming, too,” he says, referring to the ability to use the internet as a building’s or estate’s telephone system. This idea has long been mooted, but as Butchers points out, it has yet to have its day. Glosserman suggests that the three main benefits of broadband are making buildings more competitive, reducing costs and possibly revenue-sharing opportunities. Shaw also warms to the idea of broadband making a building more attractive. “It’s more important in today’s market, when you’re looking to attract or retain tenants,” he says. “If two buildings are broadly similar, the one with broadband is likely to win.” Two advantages However, for all three companies, the ability to offer two things seems to be at the heart of their businesses: the first is resiliency – the guarantee that the internet connection will not be broken (see diagram, left); and the second is additional services sold on top of the internet connection. These range from simple functions, such as firewalls to protect against malicious attacks from the internet and scans to prevent viruses coming through the e-mail, to the more complex services, such as e-mail servers, web design and hosting, and data storage and back up. Through the revenue generated by these services, landlords can make extra money by allowing the broadband companies to set up shop in their buildings. All three companies freely admit that the attitude to broadband has changed in the past 18 months. “For property owners, the sense of urgency has waned,” says Glosserman. “They understand it more and the impetus will come when the occupiers want it.” Like his two competitors, he’s finding that building owners have a whole range of attitudes to the technology. “Some want to be at the leading edge and promote it to their tenants, others don’t,” he says. “The technology is here to stay,” says Shaw. “Would people really want to go back to the old days before e-mail? It allows people to do business more quickly, and that’s important.” The broadband network Conventional internet connections work through a single ISP per company (top). With building broadband (bottom), the connection to the building passes through two points of presence (POPs), which means that if one fails, there will still be a working connection Internet connection types Using broadband, buildings are “lit up” using fibre optic cabling Method Connection Cabling Max Speed Modem link (dial up) Telephone line (analogue) Copper 56Kbps ISDN Telephone line (digital) Copper 64 Kbps ADSL Telephone line (digital) Copper Up to 2 Mbps Broadband Special cabling/Lease circuits Fibre optic 2 Mbps to 10 Gbps Source: Intellispace Three building broadband providers that survived the dot.com bust www.centrictelecom.com Centric Telecom, recently refinanced by venture capitalists, is looking to exploit the market for extra services that broadband offers, such as CCTV and internal telephone services www.intellispace.net HighSpeed Office has avoided the pressure of quick returns to venture capitalists because it is backed by a consortium of property owners, allowing it to concentrate on installing the ITinfrastructure www.highspeedoffice.net Intellispace, which recently won the contract to “light” Tower 42 in the City, is aiming for companies, as well as landlords, because the number of buildings in London makes VS models unusable.