Futureway survives CLEC market meltdown

Futureway Communications Inc. provided a sign of life for the competitive local exchange market Monday, announcing it had secured $40 million in senior debt financing from the Canadian Imperial Bank of Commerce.

Richmond Hill, Ont.-based Futureway said the money will be used to continue its expansion plans in the greater Toronto area.

Monday’s announcement brings to $100 million the amount of new financing Futureway has received in the last 12 months, including $60 million in equity financing arranged last fall.

But garnering investment was an easier task last fall, before the collapse of the CLEC market, than it is today. Since February a number of Canadian CLECs have stopped competing, including Cannect Communications Inc., Axxent Inc. and C1 Communications Ltd. of Toronto.

Futureway, which acquired an insolvent C1 last month, claims it has survived because it is an owner rather than a renter.

“The banks look at the value of what you own and what your business plan looks like,” said Futureway president and CEO Steve McCartney. “The fundamental thing is that we have physical infrastructure. We’ve deployed a fibre network around York and Peel regions.”

Since its inception in Sept. 1998, Futureway realized it would be almost impossible to compete directly with Ma Bell. Instead of focusing on the downtown core, Futureway positioned itself as a provider of voice, high-speed data and video services for business and residential customers in the 905 belt, the ring of suburbia surrounding Toronto.

And rather than lease its lines from the incumbent, Futureway forged agreements with land developers, and became, it says, the first company to bring fibre to the home.

“We were in areas that were underserved, so it was a good opportunity,” McCartney said of Futureway, which built only in new subdivisions. “And there was this idea that if you want to be in this for the long haul, you don’t want to compete with incumbents on their cables.”

The acquisition of C1 was attractive, McCartney said, because it came cheap and because of regulatory changes that supported co-location. They changed Futureway’s business model to incorporate co-location services where wider coverage is needed. (Futureway’s business is now 70 per cent commercial and 30 per cent residential.)

Elroy Jopling, Gartner Group Canada’s principal analyst for public services worldwide, questioned expanding outside of Futureway’s successful model.

“Before, they provided their own environment, had a niche, had competitive edge,” Jopling said. “With the acquisition of C1, they seem to be changing the model. Whenever you change the model, it becomes a little more risky.”

Jopling said the expansion means more direct competition with Bell Canada and larger CLEC’s like AT&T Canada Corp., but suggested the bank financing means Futureway has something to offer.

“Someone has some confidence in what they’re doing and it’s pleasantly surprisingly considering the market condition,” he said.

McCartney stressed the importance of CLEC survival, and said he was disappointed by the demise of other small players.

“Without competition, the technology you get is what the incumbent says you can have,” he said.

And McCartney suggested the company would probably need to expand again, with a broadcast distribution undertaking (BDU).

“The intent is that we’re probably going to have to do that,” he said.

Currently, Futureway carries video signals from Rogers Communications Inc. and Look Communications Inc., along with its own data and telephony services.

Gartner’s Jopling approved of the move towards a BDU, so long as it stays within real estate Futureway currently serves.

“If it’s within their own development, I can understand that,” he said. “If they move outside, they’re going directly against Rogers and Bell.”

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Jim Love, Chief Content Officer, IT World Canada

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