Interoute: A smart operator

Interoute: A smart operator

Interoute's strong management has led it to become one of the telecoms' succes stories of the past decade, with a vibrant wholesale business and global reach. Sue Tabbitt reports.

Interoute Communications is widely hailed as one of the telecoms industry’s success stories of the last decade, emerging in 2002 from the ashes of the sector to become a formidable player in today’s international wholesale market.

The company has a knack for making canny decisions, but analysts point to a strong leadership team from the outset, which pays close attention to changing customer needs and to where the next wave is gathering force.

In eight years, the business has gone from a position of having €200 million in costs and no revenues, to turning over more than €260 million a year – revenues which are now cash-profitable. The company has a business model that “works”, according to the current CEO Gareth Williams, who joined the company in early 2002. “It has been hard, and a struggle for us,” he says. “It needed exceptional people, and the backing of a steadfast investor.”

The original organisation was established in 1995 by two former Cable & Wireless managers with a straightforward voice resale licence, challenging BT with cheaper phone calls overseas. It grew to become the largest seller of phone cards in the UK, with similar businesses throughout Europe. In 1996, the business was listed on the Alternative Investment Market, and attracted the attention of the Sandoz Family Foundation. This proved a crucial turning point, bringing significant financial backing as Interoute decided to explore opportunities that extended beyond voice services.

Restructuring the business

Executive chairman Jim Kinsella led the restructuring of the business in 2002. He had previously been chairman of World Online, merging the business with Tiscali to create Europe’s largest independent internet service provider. He is also a one-time CEO of

At Interoute, Kinsella and his team, which included Williams, identified opportunities in providing network-oriented services to enterprise and mobility customers, and developing bespoke connectivity solutions for carriers, service providers and network integrators. The focus on data services provided the impetus to sell off its successful wholesale voice unit to Wavecrest in 2002.

Sandoz ploughed more than €1.2 billion into the construction of a purpose-built European fibre-optic network, i-21, which today covers more than 55,000km, providing long-haul connectivity to 29 countries and 100 cities, and includes 21 metro area networks. The i-21 was the last network of its kind to enter construction, Williams notes. “At the end of the 1990s, there were around 30 co-builds underway, so we were late to the game. Ours was the only one really to finish, but by then all we had was a big empty net,” he says. “In 2002, the telecoms industry was 100% in the doldrums. This is where our people really made a difference. They said: ‘Okay, we have a €180 million cost, and the market doesn’t need another service provider, but we won’t be daunted.’ There was an indomitable spirit. We had a great network, which we have constantly updated. Along with our people, it is our greatest asset. It was the first and largest 100Gb network in Europe – and still is.” 

Bargain acqusitions

With Sandoz’s backing and the timely demise of other providers, the revived company continued to develop its network through a series of bargain acquisitions. Among these were the Ebone internet backbone network from bankrupt KPNQwest, which gave Interoute access to eight high-capacity metro area networks for a fraction of their original value.

Further acquisitions included Virtue Broadcasting’s media services division, bolstering Interoute’s value-added services; Central European Communications Holdings and its subsidiaries in the Czech Republic, Slovakia, Hungary, Austria, Germany, Poland and Romania; the European operations of hosting provider Via Net.Works; PSINet’s European operations in Germany, France, Belgium, the Netherlands and Switzerland; and managed services businesses in Sweden and Bulgaria.

While other telcos have grown their operations through acquisition, this hasn’t always guaranteed success, notes David James, principal analyst for wholesale telecoms at Ovum. They have tried to do too much, or have underestimated the work involved in consolidating the assets. “Thanks to strong management, Interoute has managed to integrate the different parts of the company very successfully in a way that others haven’t always managed,” he says. 

Supplier partners

The same level of attention has been paid to choosing supplier partners, to help get the economics right for customers. After the Alcatel debacle, Interoute signed first Ciena, then Infinera as strategic technology partners. “Jumping onto Infinera technology gave us a tenfold improvement in the utilisation capability of the core network, and we can now test circuits remotely,” notes Jonathan Wright, Interoute’s director of global wholesale. “We’ve also recently introduced Juniper equipment to save money and power.”

Another bold decision was to move the network operation centre to Prague from the UK. “Not only was this cheaper, but the new location was more central for us as we expanded eastwards. It was hard for a year, but we have 300 people there now,” he says.

“All of our innovation has come from people taking risks,” Wright explains. “In 2000 and 2001, a lot of competitors fell by the wayside and people were saying our business model was wrong, but we believed in what we were doing and paid close attention to the detail. The cost bases were not left to the accountants. We have always worked hard to ensure that these have worked for us, and for the customer. We’re business people – that’s the difference.”

CEO Williams also points to what he calls a “healthy insubordination” which still exists in the company today. “It’s a lack of false respect. We avoid scenarios where junior members of staff don’t feel able to express ideas or give feedback,” he says, citing an instance where the business in the Netherlands saved €50,000 thanks to an idea sent directly to him by a field engineer.

Fast forward to today and Interoute Communications remains a privately-held telecommunications company, 70% owned by the Sandoz Family Foundation and 30% by technology partner Tecom, a subsidiary of Dubai Holdings. It employs close to 1,000 people worldwide, yet retains the flat management structure that enables open communication and ideas-pooling. 

A broad portfolio

Interoute’s £2.7 billion next-generation network now offers wholesale customers a broad portfolio of services, both managed and outsourced. The infrastructure boasts eight hosting data centres, 32 co-location centres and nine subsea landing stations which ring the edge of Europe. Coverage extends from London to Warsaw, from Stockholm to Sicily and beyond into Europe’s emerging economies, including Turkey. To the west, the network links to north America’s major telecoms hub. To the east, it connects the Middle East to Europe through Dubai. In the south, it connects Africa – from Cape Town to Tunis – directly to Europe.

Interoute’s ambitions don’t stop there, however. While other network providers are more reserved about continued investment in the current climate, Interoute is intent on further growing its footprint and service offerings. Already, its portfolio extends to the most advanced network-centric solutions, including virtual private networks, security services, voice and content management services and unified ICT.

Interoute has expanded beyond wholesale, too, extending the benefits of its intelligent IP-based infrastructure to Colt’s stomping ground, the enterprise sector, where revenues are growing faster and are potentially a lot more profitable. This side of the business now accounts for close to half of Interoute’s revenues, creating a sustainable business model that will further secure its wholesale activities.

The benefits of this strategy are reflected in the company’s financial performance. Earlier this year, Interoute reported EBITDA of €40 million for 2009, an increase of 62% on 2008. Despite severe recessionary conditions, the company increased its revenues by 9% during the year to report €269 million, while generating net cash surpluses in two of the previous three quarters – liquidity which the company has committed to further growing its market share through targeted acquisitions and continued investment in service innovation. 

Faster, better, cheaper

Owning its own next-generation network helps significantly too, enabling Interoute to launch new services with virtually no increase in its network and operating costs. Wright identifies significant potential in outsourcing. “Some carriers have stopped investing in technology, and are now coming to us instead,” he notes. “We’ve pushed and pushed the technology curve to ensure we’re always offering something faster, better, cheaper.”

Carriers tend to outsource services to Interoute where these meet a geographical need, plug a technology gap or enable the operator to focus more intently on their core services – as they expand into the mobile space, for example. Interoute also sees a role for itself here: “As players come to understand how to reduce costs by using IP bandwidth, we anticipate more mobile business coming our way,” Williams says. “At the moment, they lose money on data connections because the underlying infrastructure has been left in the grass. With the advent of LTE, we see opportunities to link mobile operators across our backbone, whether by giving them fibre or bandwidth, or running the IP for them – giving them a single port to get onto the backbone and enabling unified transport.

“We’ve got the Apple iPhone to thank for this. O2 blocks use abroad as it can’t afford the bandwidth,” he adds. “Our strength is that we know how to make bits faster and cheaper. LTE can’t come quickly enough for us. If the ‘online’ explosion has been the theme of the last 10 years, mobile data will be the key for the next 10.”

If Interoute’s life’s work so far has been designed to put the company at the centre of the global map, it has achieved this in spades. The company predicts that the focus will shift increasingly east from the Atlantic, making Europe an ever more significant hub and generating business which Interoute is “royally placed to pick up”, according to Williams.¦

Interoute's wholesale history

2002: Interoute’s i-21 pan-European network completed and expanded through the acquisition of GTS/Ebone’s metropolitan fibre assets; restructuring led by executive chairman Jim Kinsella; wholesale voice business sold to Wavecrest

2003: Media services assets added

2004: An eastern European fibre network added

2005: PSINet Europe/Via’s managed hosting services added

2006: Addition of managed services company in Bulgaria

2007: 51 Degrees, a London Metro business, and a Swedish hosting company join the portfolio; Gareth Williams becomes CEO of Interoute; 22 countries in which Interoute now operates

2008: The network’s active capacity is doubled

2009: Two new subsea cable systems, east and south Africa’s Seacom cable, and north Africa’s Hannibal cable; expansion into Turkey

2010: Interoute reports EBITDA of €40 million for 2009 – 62% up on 2008. Revenues have grown 9% to €269 million, and a net cash surplus is shown for two of the last three quarters

Future: New liquidity will be invested in growth through targeted acquisitions and continued investment in service innovation and the purchase of cutting-edge, efficient and green transmission technologies 

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