Qwest Communications's December announcement of 7.5-cents-per-minute long distance phone service was the opening shot across the bow of the telecom behemoths. It wasn't so much that the Denver telco had undercut the competition by 50 percent, it was that it was using voice-over-IP (VOIP) technology to do so.
Protesting that the technology just isn't ready yet, AT&T, Sprint, and even WorldCom have taken a cautionary position on the idea of unifying data and voice over a single network. Qwest, on the other hand, went out and did it. While the big guys were captive to their aging networks built for voice, Qwest took advantage of the fact that its network was designed for data.
"What's going on is a revolution in telecom," says Joseph Nacchio, Qwest's CEO and a former AT&T exec. "It's going to be as dramatic as the shift from the telegraph to the telephone," echoes Nayal Shafei, Qwest VP and a graduate of the MIT Media Lab. "We aren't a telco, we're a multimedia carrier."
Tired rhetoric, perhaps. But the fact that a 6-year-old start-up led by an unlikely team of old telephony hands, computer scientists, and construction experts now has a market cap of US$6 billion and its competition on the run is reason enough to listen. And once you learn what lies behind the 7.5-cent solution, it's hard not to believe that Qwest is right.
The Qwest story begins with Philip Anschutz. A billionaire who made his money from oil and railroads, Anschutz bought Southern Pacific Railroad for $1.8 billion in 1988 and sold it eight years later to Union Pacific for $5.4 billion. But the real coup was that he kept the rights-of-way that run parallel to Southern Pacific's tracks. These narrow strips of real estate became the basis for Qwest's network, providing a home for 13,000 miles of fiber-optic cable strung underground across the US.
Buried alongside the train tracks are now two conduits. The first contains state-of-the art cable, called nonzero dispersion-shifted fiber, that can carry far more data than the older fibers laid by companies like Sprint and AT&T during the 1980s. The second conduit lies empty, giving Qwest an open track to lay next-generation technology quickly. Combine Qwest's fiber with the latest in data transmission and you have a network far ahead of the competition. "Our network can't be duplicated by the other carriers," says Nacchio. "It would be like trying to refurbish a 10-year-old PC with a new processor and hard drive rather than buying a brand-new one. It just doesn't make economic sense."
The fast-talking, straight-out-of-New Jersey Nacchio should know. He was the head of AT&T's consumer business. Nacchio maintains that the telephone companies aren't stupid, they're just hamstrung by their shareholders.
"The telcos realize that a revolution is occurring, but what are they going to do?" he asks. "If they say they are going to cut their margins by 50 percent to compete in this new competitive environment, their stock will drop 30 points."
Qwest isn't tied to those old margin structures. The firm's Internet-savvy technology and massive network capacity allow it to achieve with 7.5-cent rates the same margins the other carriers get on tolls twice as high. For the most part, these savings come from lower equipment costs. Instead of using switches from Lucent or Nortel that cost tens of millions of dollars, Qwest uses Cisco routers priced at maybe a million.
The savings also come from the inherent advantages of packet switching over circuit switching. Instead of tying up an entire phone line's capacity no matter how much is actually being sent, IP sends packets only when there are packets to send. Most amazing of all, none of this savings requires a trade-off in voice quality.
This is all part of the plan. Right now, no one is using VOIP, so bandwidth isn't a problem. Still, while Qwest will likely be able to meet the technical challenges, the company is untested when it comes to functions like customer support.
So what's next for Qwest? Shafei says that the company will offer data services like virtual private networks and concurrent engineering, where engineers collaborate over the network using high-bandwidth CAD images. Maybe calling Qwest a multimedia carrier isn't as hackneyed as it sounds.
This article originally appeared in the March issue of Wired magazine.
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