April 24, 2001, 9:51 AM — In a most unusual setup, start-up carrier Velocita is readying a nationwide broadband network to be funded in large part by Cisco and based mostly on AT&T's extensive rights-of-way.
The company, which has been operating since 1998, is building a big chunk of AT&T's next generation optical network in return for the rights-of-way, $220 million and other incentives, according to a Velocita 10-Q filed last fall. Cisco may be forking over $485 million in funding and equipment financing, according to an 8-K filed 10 days ago. The Cisco funding still needs approval from the SEC.
Velocita will initially be a carrier's carrier, but may eventually offer an alternative to enterprise customers concerned about using other new carriers that are scrounging around for new funding. A rash of competitive local exchange carriers failed in recent months, stranding customers and leaving unpaid debts on the doorstep of overenthusiastic equipment makers that supplied gear to CLECs on credit.
While Velocita is happy to have AT&T and Cisco supporting it, the company hopes to make a name for itself by delivering a slew of advanced services such as managed wavelengths, VPNs and high-speed private lines.
Cisco, which has proven particularly vulnerable to the CLEC meltdown, seems certain it won't be stung by Velocita. The vendor's equity stake in the new carrier is valued at $200 million and the financing at $285 million.
This is the first time Cisco has taken an equity stake in one of its customers.
"It's unusual, but what Cisco needs is a prototypical network that they can point to and say, 'This is how we believe networking needs to go,' " says Current Analysis analyst Chris Nicoll. "Cisco's got a very different viewpoint than Nortel or Lucent on how an intelligent optical network should be architected. They can't point to a WorldCom, or Broadwing, or someone who's got a network in the field and say, 'This is the implementation of our strategy.'"
Forcing Cisco's hand
Others say today's capital environment is forcing Cisco to invest more if it eventually wants to receive more.
"In the past, Cisco has opted not to purchase equity as it did not want to have an ownership interest in any of its customers," investment firm UBS Warburg stated in a recent report. "We believe Cisco has broken this policy [because] the capital markets are virtually shut for new, emerging carriers. We believe Cisco will only do a small number of such equity investments and only as long as equity markets remain tight."
UBS Warburg added that Velocita's unique arrangement with AT&T and its management team attracted Cisco's unusual investment. But the start-up carrier's relationship with AT&T adds another twist.