The Cutting Edge: Computing / Technology / Innovation : WilTel ‘Pipe Dream’ Is Now a Model : Telecommunications: Oklahoma energy company’s ingenuity pays off in $2.5-billion sale of subsidiary.
When an Oklahoma energy company began stringing fiber-optic cables inside abandoned natural gas pipelines a decade ago to take on the big phone companies, many dismissed the notion as a pipe dream.
But Williams Co. is having the last laugh. The Tulsa-based company recently struck a deal to sell its telecom subsidiary, WilTel, to rival LDDS Communications for a tidy $2.5 billion in cash.
The story of WilTel is a classic case of new technology opening dramatic--if not always obvious--opportunities for a well-run, forward-thinking company to diversify. A host of others, especially electric utility firms, are now taking a page from WilTel’s book, but they will be hard-pressed to repeat its success.
WilTel’s saga begins in 1984. Roy Wilkens, president of Williams Co.'s pipeline subsidiary, assigned a task force that year to look for new ways to use thousands of miles of pipeline that had been decommissioned because of sluggish demand. Wilkens, an electrical engineer by training, was intrigued by a proposal to string telephone lines through the pipes to upgrade the company’s internal communications.
Further study showed that the idea didn’t make financial sense. But having recently returned from a Harvard University program for mid-career executives fired up with entrepreneurial enthusiasm, Wilkens came up with a bolder idea that did make sense. He asked Williams’ board in 1985 for $200 million to string high-capacity fiber-optic lines as the backbone for a new communications company.
Skeptics scoffed, and consultants advised Williams against making the risky move. “People said, ‘How can a bunch of damn pipeliners compete with the likes of AT&T;?’ ” Wilkens recalls.
The company went ahead with the plan. But Wilkens was asked to take some risks of his own. He stepped down as president of the pipeline company and took six employees with him to start WilTel.
Laying the fiber was simple. Crews attached a line to a “pig,” a cylindrical device used for maintenance, that traveled through the pipe. The line was used to haul the fiber through the pipe. WilTel discovered it could lay fiber at half the cost of Sprint and AT&T;, which had to pay for use of rights of way along railroads and highways, then dig trenches to install the fiber.
“It was a brilliant idea,” says Ashok Rao, president of Midi-Com, a Seattle-based long-distance company and one of WilTel’s biggest customers. “In the early days, Sprint’s line kept getting broken. Here was a line that was cheap and secured by steel pipe.”
WilTel completed much of its western network in early 1987, becoming the first company to string optic fiber into Los Angeles. Where it couldn’t use its own pipelines, it purchased lines from others or leased rights of way and built new lines.
When WilTel acquired an 1800s-vintage oil pipeline to extend fiber cable to New York, “the owners thought they were pulling the pants over some silly Oklahoma boys,” one Williams Co. executive recalls.
To fill out its network, WilTel acquired other regional long-distance companies that had popped up on the East Coast. Williams’ willingness to quickly approve money for such deals enabled WilTel to out-maneuver competitors, often closing deals in as little as 10 days, Wilkens says.
Building an infrastructure wasn’t a problem for a company that had built 27,000 miles of pipeline. And long-distance companies such as MCI that leased capacity from WilTel to supplement their internal networks loved WilTel’s new system. But the more profitable business of selling communications services directly to large national firms was another story.
“If you have a large financial institution with 2,000 people processing checks in the back room, do you want to trust your business to WilTel? A lot of people felt safer with AT&T;,” Wilkens says.
To impress customers, Wilkens packed the company’s headquarters with high-tech wonders, including a multimedia conference room in which the touch of a button would turn the windows opaque, raise a podium and prepare the conference table with special computer screens for presentations.
“We had to show we were a technology leader,” Wilkens says.
Wilkens also took on challenging jobs. In 1990, WilTel became the first to carry a television broadcast over a fiber-optic network when it transmitted coverage of the Super Bowl from New Orleans to New York for CBS. The deal lost the company $30,000 but helped it win long-term agreements with every major network in the country. It now has fiber-optic connections to virtually every baseball and football stadium in the country to “backhaul” images to New York television studios.
WilTel’s success has become a wake-up call to power companies. “It’s caught everyone’s attention,” one power company executive says. “You can’t help but notice.”
Power companies across the country have already installed some 10,000 miles of fiber optics for their own internal use, but they have been slow to take advantage of either the huge excess capacity on their fiber or the rights of way they have established into virtually every home in the country.
Southern Co. of Atlanta, for example, has a 2,000-mile fiber-optic network used to connect Southern’s power stations to computers that determine where power should be generated and distributed. Paul DeNicola, executive vice president at Southern, says the company could save huge sums by extending its network into individual homes in joint ventures with cable and phone companies.
The phone and cable companies would use the network to offer such services as video on demand. Southern would use the network to collect detailed information on power usage so it could vary electricity rates by the hour to discourage electricity use during peak hours.
Steve Rivkin, a communications lawyer who has long championed a more aggressive role by utilities in the communications business, thinks the huge savings of power companies from such systems will be instrumental in financing the construction of the much touted information superhighway.
MPX Systems, a subsidiary of Columbus, S.C.-based utility Scana Corp., also has 2,000 miles of fiber strung throughout the Southeast and is adding new lines as fast as it can. MPX takes down the ground wire that is installed along the top of power transmission towers and telephone poles to prevent lightning from disrupting power lines. A new fiber-optic line is strung atop the towers instead, acting both as a ground wire and a communications line.
MPX has sold its unused fiber capacity to WilTel and AT&T; but wants to follow WilTel up the value chain. “We plan to take a hard look at cable, PCS (personal communications services) and interactive television,” says Mike Blackwell, executive vice president at MPX.
With a host of other companies competing for the same market, the going will be tough. But Blackwell takes courage from WilTel’s pioneering moves.
“Nobody could have prophesied their success,” he says.